10-Q

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

10-Q 1 d237492d10q.htm 10-Q 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

¨	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: 001-33405

DREAMS, INC.

(Exact name of registrant as specified in its charter)

Utah

87-0368170

State or other jurisdiction of

incorporation or organization

(I.R.S. Employer

Identification No.)

2 South University Drive, Suite 325, Plantation, Florida 33324

(Address of principal executive offices)

Registrant’s telephone number, including area code: (954) 377-0002

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 report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

As of November 1, 2011 there were 44,662,579 shares outstanding of the registrant’s Common Stock.

DREAMS, INC.

INDEX


		PAGE

Part I.	Financial Information		1

Item 1.	Financial Statements (Unaudited)		1

	Condensed Consolidated Balance Sheets		1

	Condensed Consolidated Statements of Operations		2

	Condensed Consolidated Statements of Cash Flows		3

	Notes to Condensed Consolidated Financial Statements		4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		20

Item 4.	Controls and Procedures		20

Part II.	Other Information		21

Item 1.	Legal Proceedings		21

Item 1A.	Risk Factors		21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		21

Item 3.	Defaults upon Senior Securities		21

Item 4.	(Removed and Reserved)		21

Item 5.	Other Information		21

Item 6.	Exhibits		21

Part I. Financial Information

Item 1.

Financial Statements.

Dreams, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets


	September 30, 2011			December 31, 2010
(Dollars in Thousands, except share amounts)	(un-audited)
ASSETS
Current assets:
Cash	$	239		$	440
Accounts receivable, net		4,544			9,898
Note receivable, current		138			—
Inventories		47,320			32,609
Prepaid expenses and deposits		3,158			2,166
Deferred tax asset		1,599			1,340

Total current assets	$	56,998		$	46,453
Property and equipment, net		5,552			5,538
Deferred loan costs		162			234

Note Receivable		153			—

Other intangible assets, net		5,792			5,821
Goodwill, net		8,650			8,650
Other assets		9			9

Total assets	$	77,316		$	66,705


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,650		$	14,477
Accrued liabilities		6,692			9,264
Current portion of long-term debt		300			323
Borrowings against line of credit		23,276			1,128
Deferred credits		541			1,622

Total current liabilities	$	43,459		$	26,814
Long-term debt, less current portion		1,443			1,694
Capital lease obligation		119			168
Long-term deferred tax liability		801			2,887

Total Liabilities	$	45,822		$	31,563

Stockholders’ equity:
Preferred stock authorized 10,000,000, issued and outstanding -0- shares		—			—
Common stock and additional paid-in capital, no par value; authorized 100,000,000 shares; shares issued and outstanding 44,662,579 and 44,107,464 shares as of September 30, 2011 and December 31, 2010, respectively		44,149			43,814
Treasury stock 38,400 issued as of September 30, 2011 and December 31, 2010		(46	)		(46	)
Accumulated deficit		(12,489	)		(8,588	)
Non-controlling interest in subsidiaries		(120	)		(38	)

Total stockholders’ equity		31,494			35,142

Total liabilities and stockholders’ equity	$	77,316		$	66,705

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

Dreams, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations - Unaudited

(Dollars in Thousands, except share amounts and earnings per share amounts)


	Nine Months Ended September 30,						Three Months Ended September 30,
	2011			2010			2011			2010
Revenues:
Manufacturing/Distribution	$	6,929		$	7,462		$	1,798		$	2,794
Retail		59,532			42,831			22,566			16,844
Other – Fees		105			407			25			153

Total Revenues	$	66,566		$	50,700		$	24,389		$	19,791
Expenses:
Cost of sales-mfg/distribution	$	4,066		$	4,383		$	1,103		$	1,635
Cost of sales-retail		32,240			22,840			12,043			8,711
Operating expenses		34,362			25,689			12,079			9,913
Depreciation and amortization		2,000			1,356			685			456

Total Expenses	$	72,668		$	54,268		$	25,910		$	20,715

(Loss) from operations		(6,102	)		(3,568	)		(1,521	)		(924	)
Interest (expense), net		(591	)		(984	)		(268	)		(225	)
Other income		71			—			—			—

(Loss) before income taxes		(6,622	)		(4,552	)		(1,789	)		(1,149	)
Provision for income tax benefit		2,642			1,792			735			430

Net (loss)	$	(3,980	)	$	(2,760	)	$	(1,054	)	$	(719	)
Loss attributable to non controlling interest		79			17			8			17
Net (loss) attributable to Dreams, Inc	$	(3,901	)	$	(2,743	)	$	(1,046	)	$	(702	)

(Loss) per share:
Basic: (Loss) per share	$	(0.09	)	$	(0.07	)	$	(0.02	)	$	(0.02	)
Weighted average shares outstanding – Basic		44,593,397			39,604,650			44,651,971			42,848,303
Diluted: (Loss) per share	$	(0.09	)	$	(0.07	)	$	(0.02	)	$	(0.02	)
Weighted average shares outstanding – Diluted		45,092,893			40,513,216			45,090,267			43,683,982

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

Dreams, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2011 and September 30, 2010 (unaudited)


(Dollars in Thousands)	9 months ended Sept. 30, 2011			9 months ended Sept. 30, 2010

Cash Flows from Operating Activities
Net (Loss) attributable to Dreams, Inc.	$	(3,901	)	$	(2,743	)
Adjustments to reconcile net (loss) to net cash used in operating activities:
Loss attributable to non controlling interest		(79	)		(17	)
Depreciation		1,571			1,247
Amortization		429			106
Loan cost amortization		80			246
Warrants issued for services		—			40
Stock based compensation		52			—
Deferred tax benefit, net		(2,344	)		(1,821	)
(Increase) decrease in:
Accounts receivable		5,354			1,600
Inventories		(14,711	)		(8,916	)
Prepaid expenses and deposits		(992	)		(572	)
Increase (decrease) in:
Accounts payable		(1,833	)		(1,680	)
Accrued liabilities		(2,572	)		391
Deferred revenues		(1,081	)		(644	)

Net cash (used in) operating activities	$	(20,027	)	$	(12,763	)
Cash Flows from Investing Activities
Purchase of intangibles		(200	)		—
Purchase of property and equipment		(1,585	)		(1,525	)
Proceeds received from note receivable		38			—

Net cash (used in) investing activities	$	(1,747	)	$	(1,525	)
Cash Flows from Financing Activities
Proceeds from Line of Credit - Regions	$	92,388		$	32,851
Pay down on Line of Credit - Regions		(70,768	)		(18,732	)
Proceeds from Line of Credit-Comerica		—			48,029
Pay down on Line of Credit - Comerica		—			(54,799	)
Deferred loan costs		(8	)		(473	)
Proceeds from stock option exercise		283			84
Proceeds from stock & warrant issuance		—			8,000
Repayment of Capital lease		(48	)		(42	)
Repayment of Notes payable		(274	)		(800	)

Net cash provided by financing activities	$	21,573		$	14,118
Net (decrease) in cash		(201	)		(170	)
Cash at beginning of period		440			582

Cash at end of period	$	239		$	412


Cash paid for interest during the period		467			601
Cash paid for taxes during the period		0			—

Supplemental Disclosure of Non Cash Financing Activity
Borrowings on Capital Lease		—			93
Advances to athlete client converted to note receivable		328			—
Intangibles purchased through notes payable		200			—
Inventory acquired through purchase of Comet acquisition		—			27

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

Dreams, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements - Unaudited

Dollars in Thousands, Except per Share Amounts

1.	Management’s Representations

The condensed consolidated interim financial statements included herein have been prepared by Dreams, Inc. (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated interim financial statements and notes thereto should be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K, for the calendar year ended December 31, 2010, filed with the SEC on March 30, 2011.

The accompanying condensed consolidated interim financial statements have been prepared, in all material respects, in conformity with the standards of accounting measurements set forth in FASB Accounting Standards Codification, ASC Topic 270 – Interim Reporting and reflect, in management’s opinion, all adjustments, which are of a normal recurring nature, necessary to summarize fairly the financial position and results of operations for such periods. Due to the seasonality of our business, the results of operations for such interim periods are not necessarily indicative of the results expected for future quarters or the full calendar year.

2.	Description of Business and Summary of Significant Accounting Policies

Description of Business

Dreams, Inc. and its subsidiaries (collectively the “Company”) are principally engaged in the manufacturing, distribution and retailing of licensed sports products, sports & celebrity memorabilia and acrylic display cases through multiple distribution channels; including internet, brick & mortar, catalogue, kiosks, and trade shows. The Company is also in the business of athlete representation and corporate marketing of individual athletes. The Company’s customers are located throughout North America.

Principals of Consolidation

The accompanying condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and accounts have been eliminated in consolidation.

Earnings per Share

For the nine months ended September 30, 2011, weighted average shares outstanding for basic earnings per share purposes was 44,593,397. For the nine months ended September 30, 2011, weighted average shares outstanding for diluted earnings per share purposes was 45,092,893. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.

For the nine months ended September 30, 2010, weighted average shares outstanding for basic earnings per share purposes was 39,604,650. For the nine months ended September 30, 2010, weighted average shares outstanding for diluted earnings per share purposes was 40,513,216. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.

For the three months ended September 30, 2011, weighted average shares outstanding for basic earnings per share purposes was 44,651,971. For the three months ended September 30, 2011, weighted average shares outstanding for diluted earnings per share purposes was 45,090,267. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.

For the three months ended September 30, 2010, weighted average shares outstanding for basic earnings per share purposes was 42,848,303. For the three months ended September 30, 2010, weighted average shares outstanding for diluted earnings per share purposes was 43,683,982. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.

Stock Compensation

Effective April 1, 2006, the Company adopted the provisions of, and accounted for stock-based compensation in accordance with FASB Accounting Standards Codification, Topic 718 Compensation – Stock Compensation. Under the fair value recognition provisions of Topic 718, stock-based compensation cost is measured at the grant date based on the fair value of the award over the requisite service period, which is the vesting period. The Company elected the modified-prospective method of adoption, under which prior periods are not revised for comparative purposes. The Company has elected the graded-vesting attribution method for recognizing stock-based compensation expense over the requisite service period for each separately vesting tranche of awards as though the awards were, in substance, multiple awards. The valuation provisions of Topic 718 apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified.

For the nine months ended September 30, 2011 and September 30, 2010, the Company recorded $52 and $2 of pre-tax share-based compensation expense under Topic 718, recorded in operating expenses in the Condensed Consolidated Statement of Operations, respectively. This expense was offset by approximately a $21 and $1 in a deferred tax benefit for non-qualified share-based compensation, respectively.

Share-Based Compensation Awards

The following disclosure provides information regarding the Company’s share-based compensation awards, all of which are classified as equity awards in accordance with FASB Accounting Standards Codification, Topic 718 Compensation – Stock Compensation:

Stock Options - The Company grants stock options to employees that allow them to purchase shares of the Company’s common stock. Options are also granted to outside members of the Board of Directors of the Company as well as independent contractors. The Company determines the fair value of stock options at the date of grant using the Black-Scholes valuation model. Options generally vest immediately, however, the Company has granted options that vest over three to five years. Awards generally expire three to five years after the date of grant.

As of September 30, 2011, vested options totaled 558,069 with an average price of $1.24. Unvested options totaled 278,000. Total outstanding options that were “in the money” at September 30, 2011 were 489,069 with an average price per option of $.45. Of those options, the vested “in the money” options totaled 489,069 with an average price of $.45 and the “in the money” unvested options totaled 0.

During the nine months ended September 30, 2011; there were 360,001 options granted, 46,746 options expired, no options cancelled, and 555,115 options exercised.

The following table summarizes the stock option activity from January 1, 2011, through September 30, 2011:


	Options			Exercisable Price		Weighted Av. Exercise Price
January 1, 2011		1,077,929
Granted		360,001		$	.60 - 2.35	$	2.29
Expired		(46,746	)		.41-2.75		1.21
Cancelled		—			—		—
Exercised		(555,115	)	$	.41-.60	$	.55


September 30, 2011		836,069		$	.41 -2.75	$	1.21

The following table breaks down the number of outstanding options with their corresponding contractual life as well as the exerciseable weighted average (WA), outstanding exercise price, number of vested options with the corresponding exercise price by price range.

Options Breakdown by Range at 9/30/2011


	Outstanding				Exercisable
Range	Outstanding Options		Remaining Contractual Life		WA Outstanding Exercise Price		Vested Options		WA Vested Exercise Price
$0.41 to $1.19		489,069		.7	$	.45		489,069	$	.45
$1.20 to $2.75		347,000		4.6	$	2.35		69,000	$	2.35

$ .41 to $2.75		836,069		2.3	$	1.21		558,069	$	1.24

At September 30, 2011, exercisable options had aggregate intrinsic values of $737.

Income Taxes

Effective January 1, 2007, the Company adopted the provisions of FASB Accounting Standards Codification Topic 740-10-65, “Accounting for Uncertainty in Income Taxes”. The Interpretation provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with “Accounting for Income Taxes.” The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the Company’s evaluation, no significant income tax uncertainties were identified.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Significant estimates underlying the accompanying consolidated financial statements include: the determination of the lower of cost or market adjustment for inventory; sales returns; the allowance for doubtful accounts; the recoverability of long-lived and intangible assets; the determination of deferred income taxes, including related valuation allowances; the accrual for actual, pending or threatened litigation, claims and assessments; and assumptions related to the determination of stock-based compensation

In an on-going basis, the Company reviews its outstanding customer receivables for collectability. Adjustments to the allowance account are made according to current knowledge. Additionally, management reviews the composition of its inventory no less than annually. Reserves are adjusted accordingly. On a quarterly basis, the Company also evaluates its ability to realize its deferred tax assets and whether or not a valuation allowance is necessary.

The Company has both Goodwill and other long-lived intangible assets which are not amortized. As prescribed by the FASB, the Company evaluates the carrying value of these assets for impairment. Significant economic changes may require the Company to recognize impairment. As of September 30, 2011, no impairment has been necessary.

3.	Business Segment Information

The Company has two reportable segments as identified by information reviewed by the Company’s chief operating decision makers (CODM), our CEO and SVP Finance. The divisions whose customers are reseller’s of our goods have their results reflected in the manufacturing/distribution segment. The retail segment is made up of many locations for our inventory. Revenues are achieved by moving inventory through our sales channels to reach and expand our customer base. These channels include the Internet, stores and our catalogues. Hence, customers who are the end users of our goods have their results reflected in our retail segment.

The Manufacturing/Distribution segment represents the manufacturing and wholesaling of sports memorabilia products and acrylic display cases. Sales are handled primarily through in-house salespersons that sell to specialty retailers and other distributors in the United States. The Company’s manufacturing and distributing facilities are located in the United States. The majority of the Company’s products are manufactured in these facilities.

The Retail Operations segment is multi-channel and features numerous Internet sites, catalogues, stadium and some traditional brick and mortar stores:

All of the Company’s revenue generated during the nine and three months ended September 30, 2011 and September 30, 2010, was derived in the United States and all of the Company’s assets are located in the United States.

Summarized financial information concerning the Company’s reportable segments is shown in the following tables. Corporate related items, results of insignificant operations and income and expenses not allocated to reportable segments are included in the reconciliations to consolidated results table.

Segment information for the nine and three month periods ended September 30, 2011 and September 30, 2010 was as follows:


Nine Months Ended:	Manufacturing/ Distribution			Retail Operations			Total
September 30, 2011
Net sales	$	9,829		$	59,532		$	69,361
Intersegment net sales		(2,900	)		—			(2,900	)
Operating (loss)		(1,217	)		(2,018	)		(3,235	)
Total assets	$	18,831			52,367		$	71,198

September 30, 2010
Net sales	$	9,692		$	42,831		$	52,523
Intersegment net sales		(2,230	)		—			(2,230	)
Operating (loss)		(740	)		(280	)		(1,020	)
Total assets	$	18,959		$	39,089		$	58,048

Reconciliation to consolidated amounts is as follows:


	Nine-Months Ended
	9/30/11			9/30/10
Revenues:
Total revenues for reportable segment	$	69,361		$	52,523
Other revenues		105			407
Eliminations of intersegment		(2,900	)		(2,230	)

Total consolidated revenues	$	66,566		$	50,700

Pre-tax (loss):
Total operating (loss) for reportable segments	$	(3,235	)	$	(1,020	)
Other (loss)*		(2,796	)		(2,548	)
Less: Interest expense		591			984

Total consolidated (loss) before taxes	$	(6,622	)	$	(4,552	)


Three Months Ended:	Manufacturing/ Distribution			Retail Operations			Total
September 30, 2011
Net sales	$	2,653			22,566		$	25,219
Intersegment net sales		(855	)		—			(855	)
Operating (loss)		(457	)		(310	)		(767	)
Total assets	$	18,831			52,367		$	71,198

September 30, 2010
Net sales	$	3,484		$	16,844		$	20,328
Intersegment net sales		(690	)		—			(690	)
Operating (loss) / income		(296	)		409			113
Total assets	$	18,959		$	39,089		$	58,048

Reconciliation to consolidated amounts is as follows:


	Three-Months Ended
	9/30/11			9/30/10
Revenues:
Total revenues for reportable segment	$	25,219		$	20,328
Other revenues		25			153
Eliminations of intersegment		(855	)		(690	)

Total consolidated revenues	$	24,389		$	19,791

Pre-tax (loss):
Total operating income for reportable segments		(767	)		113
Other (loss)*		(1,290	)		(1,037	)
Less: Interest expense		268			225

Total consolidated (loss) before taxes	$	(1,789	)	$	(1,149	)

These are “unallocated” costs and expenses that have not been allocated to the reportable segments. Some examples of these unallocated overhead costs which are consistent with the Company’s internal accounting policies are executive salaries and benefits, corporate office occupancy costs, NYSE Amex listing fees, professional fees, bank charges, certain insurance policy premiums, public relations/investor relations expenses.

4.	Note Receivable

On April 1, 2011 the Company converted advances totaling $328 to an athlete client into a note receivable maturing on December 31, 2013. The terms of the note call for repayments of $84 through December 31, 2011 and $122 in years two and three. These amounts can be repaid in the form of services, receipt of autographed products and player appearances. At September 30, 2011 the current portion of the note receivable balance was $138 and the long-term portion was $153.

5.	Inventories

The components of inventories are as follows:


	Sept 30, 2011		December 31, 2010
Raw materials	$	389	$	397
Work in process		100 66		66
Finished goods, net		46,831		32,146

Total	$	47,320	$	32,609

6.	Goodwill and Unamortized Intangible Assets

In accordance with FASB Accounting Standards Codification Topic 350-20-35 Intangibles – Goodwill and Other > Goodwill > Subsequent Measurement, the Company evaluates the carrying value of goodwill as of December 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair value. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds it implied fair value.

The Company’s evaluations of the carrying amount of goodwill were completed as of December 31, 2010 and resulted in no impairment losses. There has been no subsequent event that resulted in evaluation adjustments as of September 30, 2011.

7.	Acquisitions

Upon the closing of an acquisition, management estimates the fair values of assets and liabilities, acquired and consolidates the acquisition as quickly as possible. However, it routinely takes time to obtain all of the pertinent information to finalize the acquired company’s balance sheet and supporting schedules and to adjust the acquired company’s accounting policies, procedures, books and records to the Company’s standards. As a result, it may take several quarters before the Company is able to finalize those initial fair value estimates. Accordingly, it is not uncommon for initial estimates to be subsequently revised.

On April 18, 2011, the Company through its 51% owned subsidiary, executed an Asset Purchase Agreement (“APA”) to acquire the trademarks and web domain of the “Zubaz” brand name. The total purchase price stated in the APA was $400, of which $200 was paid upon execution and the remainder shall be paid on January 6, 2012. The Company is the guarantor for the remaining balance to be paid on behalf of the subsidiary. The unpaid balance of $200 is included in accrued expenses at September 30, 2011.

Management has determined the value of the trademarks to be $300 and the value of the domain name to be $100. The domain name was estimated to have a useful life of five years.

8.	Commitments and Contingencies

The Company has certain contracts with several athletes which will require the Company to make minimum payments to these athletes over the next two years. The payments are in exchange for autographs and licensing rights on inventory items to be received in the future.

The Company leases its corporate offices, manufacturing, warehouse and distribution facilities along with its company-owned stores under operating leases with varying terms and lengths. Rent expense under these leases for the nine and three months ended September 30, 2011 and September 30, 2010 were $3,921, $3,574 and $1,320, $1,226, respectively.

The Company leases certain computer and warehouse equipment under capital leases. The leases collectively require monthly payments of $8 and expire through 2014. Interest rates on the capital leases range from 3% to 10%.

The Company was a named party in a breach of contract suit brought by a former landlord. The Company believes the claim is without merit and has defended itself vigorously. The parties are scheduled to go to trial in February 2012. No outcome can be determined at this time.

9.	New Accounting Pronouncements

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to our consolidated financial statements.

10.

Line of Credit

Effective July 7, 2011, the Company executed a Second Amendment to its Loan and Security Agreement with its senior lender, Regions Bank. As a result, the Company filed a form 8-K on Monday, July 11, 2011 whereby it disclosed that its credit facility was increased immediately to $25,000, with the facility increasing to $27,500 for the months October thru December. In addition, the interest rate was reduced from libor plus a 3.00% margin, to libor plus a 2.50% margin.

By way of background, on July 23, 2010, the Company successfully re-financed its senior debt with Comerica Bank as a result of a newly issued $20,000 senior secured credit facility provided by Regions Bank. At closing, $11,200 from the new line of credit was used to pay-off the outstanding balance with Comerica Bank. The interest rates on outstanding loan balances were reduced from 6.5% from the previous lender, to libor plus a 3.00% margin, or 3.34% for the new line of credit. The advance rates on the credit facility are 80% for eligible accounts receivable and 50% for eligible inventory for January, February and March; 55% for eligible inventory for April and May; and 60% for eligible inventory for June through December. The new 3-year loan and security agreement is secured by all of the assets of the Company and its divisions. The Regions credit facility requires that certain performance financial covenants be met on a monthly and or quarterly and or yearly basis. These financial covenants consist of a Fixed Charge Coverage Ratio and a Funded Debt to EBITDA Ratio.

The F.C.C. Ratio is defined as EBITDA, plus Rent Expense, minus all unfinanced Capital Expenditures, plus taxes paid, and any restricted payments made (over a rolling 12 month period ending in the current quarter). This amount is then divided by Interest Expense, Rent expense, and the current maturities of funded debt (over a rolling 12 month period ending in the current quarter). For the quarter ended September 30, 2011, the minimum required ratio is 1.05 to 1.00. The actual ratio was 1.12 to 1.00.

The Funded Debt to EBITDA ratio includes: debt for borrowed funds, subordinated debts, the principal component of all capital leases, any deferred payment by one year or more , and all other debt instruments (other than checks drawn in the ordinary course of business), divided by EBITDA. For the quarter ended September 30, 2011, the required ratio needs to be less than 5.25 to 1.0. The actual ratio was 5.10 to 1.00.

11.

Non-Controlling Interest

Non-controlling interest represents the portion of equity that we do not own in the entity that we consolidate. We account for and report our non-controlling interest in accordance with the provisions under the Consolidation Topic of the FASB ASC 810. The Company has a 51% equity interest in The Comet Clothing Company, LLC, hence a 49% non-controlling interest. The Company has a controlling interest because of its management of The Comet Clothing Company, LLC.

As a result of our Asset Purchase Agreement with Pro-Stars, Inc. effective December 26, 2006, Dreams received 86.5% of the Caesars Forum Shops Field of Dreams store; 89% of the Rio Hotel Field of Dreams store; 90.5% of the Smith & Wollensky Field of Dreams store; and 88.125% of the marketing venture known as “Stars Live 365”. The Company records all of the revenues generated from these operations and then records a “minority interest expense” representing the limited partners’ earned pro-rata share of the actual profits. Dreams will have an on-going obligation to make quarterly distributions on a pro-rata basis depending on the actual profitability of each of the three stores and Stars Live 365.

12.

Subsequent Events

In preparing the interim consolidated financial statements, the Company has evaluated, for the potential recognition or disclosure, events or transactions subsequent to the end of the most recent quarterly period through the date of issuance of the financial statements. There were no material subsequent events that were identified that required recognition or disclosure in these financial statements.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-Q under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such statements are indicated by words or phrases such as “anticipates,” “projects,” “management believes,” “Dreams believes,” “intends,” “expects,” and similar words or phrases. Such factors include, among others, the following: competition; seasonality; success of operating initiatives; new product development and introduction schedules; acceptance of new product offerings; advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; availability and terms of capital including the continuing availability of our credit facility with Regions Bank or a similar facility with another financial institution; labor and employee benefit costs; changes in government regulations; and other factors particular to the Company.

Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, actual results, performance, or achievements of Dreams may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements. All subsequent written and oral forward-looking statements attributable to Dreams or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. Dreams disclaims any obligation to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Management’s Overview

Dreams, Inc., headquartered in Plantation, Florida, is a Utah Corporation formed on April 9, 1980, since our formation we have evolved into a technology driven, vertically integrated, multi-channel retailer focused on the sports licensed products industry. This has previously been accomplished, in part, via organic growth and strategic acquisitions. We believe our senior management and corporate infrastructure is well suited to acquire both large and small industry competitors, especially online.

Specifically, we are engaged in multiple aspects of the licensed sports products and autographed memorabilia industry through a variety of distribution channels.

We generate revenues principally from:

•

Our e-commerce component featuring www.FansEdge.com and others; (reported in retail segment)

•

Our web syndication sites; (reported in retail segment)

•

Our ten (10) company-owned FansEdge stores; (reported in retail segment)

•

Our five (5) company-owned Field of Dreams stores; (reported in retail segment)

•

Our catalogues; (reported in retail segment)

•

Our running of game-day/stadium operations; (reported in retail segment)

•

Our manufacturing/distribution of sports memorabilia products, custom acrylic display cases and framing; (reported in mfg/wholesale segment)

•

Our running of sports memorabilia /collectible trade shows; (reported in mfg/wholesale segment)

•

Our franchise program through the four (4) Field of Dreams franchise stores presently operating*; (reported in other income) and

•

Our representation and corporate marketing of individual athletes* (reported in other income).

*	revenues not material to the overall consolidated results.

Organic Growth (dollar amounts in thousands)

Key components of our organic growth strategy include building brand recognition; improving sales conversion rates both on our web sites and in our stores; continuing our execution of multi-channel retailing under our flagship brand, FansEdge; aggressively marketing our web syndication services, exploring additional distribution channels for our products; and cross pollinating corporate assets among our various operating divisions. Management believes that there remain significant benefits to cross pollinating the various corporate assets and leveraging the vertically integrated model that has been constructed over the years.

In particular, we have had success with the marketing of our products on-line via FansEdge.com and the complement of each of our web properties. The Company’s sales associated with these e-commerce initiatives have grown from $4,000 in 2004 to $84,728 in 2010, placing us at number 181ranking of the largest Internet retailers in the nation.

For the nine and three months ended September 30, 2011, our online sales grew 43.4% to $48,380 and 39.0% to $18,720, respectively over the same nine and three month periods in 2010. This remains the fastest growing area of the Company and will remain its primary focus. This Internet growth has re-defined our Company as we have completed a transformation to a technology company, operating in the sports licensed products industry, generating a majority of our revenues via the eCommerce channel.

The Company has drawn on a complete spectrum of competencies it has developed over the years to support its flagship online brand, FansEdge. This has allowed the Company to leverage the investments made during the past several years by marketing a proven range of services to third parties that include; managed hosting, custom site design and development, customer service, order fulfillment, purchasing, inventory management, marketing, merchandising, and analytics and reporting. The Company calls the compilation of e-commerce services described above, Web Syndication and believes there are significant growth opportunities that exist in the marketplace. Our current web syndication portfolio consists of some of the best known brands and properties in the country, including JC Penney, the Chicago Bulls, Majestic Athletic, Comcast Sports, NBC Sports and the Philadelphia Eagles, to name a few.

With the continued growth of our Web Syndication business model, we are leveraging the Company’s investment in its broad inventory by adding additional distribution channels for our products through our partner’s sites. This concurrent marketing effort is improving our inventory turns, increasing our absorption rates, and reducing overall inventory carrying costs. Our web syndication revenues for the nine months ended September 30, 2011, were up 38.0% to $17,202, with sixty (60) sites contributing, versus $12,458 in web syndication revenues for the same nine month period in 2010 when we ran fifty-three (53) sites. (The web syndication revenues illustrated here are included in our total Internet sales of $48,380 for the first nine months of 2011.) For the three months ended September 30, 2011, our web syndication revenues were up 25.1% to $6,885, with sixty (60) sites contributing, versus $5,503 for the same three month period in 2010 with fifty-three (53) sites. (The web syndication revenues illustrated here are included in our total Internet sales of $18,720 for the third quarter ended September 30, 2011.) Furthermore, our organic growth online for the Company-owned brands was 46.5% for the nine months ended September 30, 2011 and 48.5% for the three months ended September 30, 2011.

Commencing in June 2008, we opened (6) six FansEdge stores in the greater Chicago, IL area. Our FansEdge store count is currently ten (10). This was in support of our Multi-channel Retailing strategy; whereby we market a single brand via multiple channels. We are pleased with the results to date of our FansEdge brick & mortar stores. They have performed well as we believe they offer approachable price points for the consumer. They cross market with the on-line Fansedge.com site and benefit by a high-tech inter-active kiosk used in each of the FansEdge stores. We are continuing to enhance the merchandise offerings and make overall operational improvements to these stores. We have begun to offer this suite of Multi-channel Retailing services to third parties who are seeking to add one or more distribution channels to their retail model.

Our proprietary eCommerce platform has also enabled us to fuel a state-of-the-art interactive Kiosk for ordering products. These Kiosks are in each of our FansEdge stores and are providing a unique shopping experience for our customers by allowing them to access the entire Company portfolio of more than 200,000 product offerings. In 2010, and continuing through our first nine months of 2011, we experienced a range of 10% to 20% lift in our store sales attributed to the Kiosk. The Company is exploring joint venture deals with other retailers who could benefit by adding a broader range of merchandising options to their patrons by placing our Kiosks within their store footprint or integrating our technology feed into their own hardware. In fact, on February 7, 2011, JC Penney announced that they rolled out its Findmore^® smart fixture (kiosk) to over 120 select stores across the country, featuring our Sports Fan Shop.

We believe this expansion of our revenue producing footprint will serve us well as we navigate our business models and look to distinguish ourselves from our competitors.

Objective

Our overall objective is twofold: to become the premier multi-channel retailer in the team licensed products industry under our FansEdge brand; and become the leading online syndicator for sports related properties.

Analysis

We review our operations based on both our financial results and various non-financial measures. Management’s focus in reviewing performance begins with growth in sales, margin integrity and operating income. On the expense side, with a majority of our sales being achieved as an on-line retailer of licensed sports products, we spend a disproportionate amount of our operating expenses in internet marketing. Therefore, we continuously monitor the return on investment of these particular expenses. Non-financial measures which management reviews include: unique visitors to our web sites, foot traffic in our stores, sales conversion rates and average sold unit prices.

We believe the implementation of our Multi-channel Retailing strategy will strengthen our FansEdge brand in the marketplace, and that we are well positioned to capture increased activity of on-line retail purchases. Industry experts and analysts state that currently, only 7-8% of all retail sales are being conducted on-line and are anticipated to increase.

With the continued growth of our Web Syndication business model, which grew from 50 clients in 2009, to 60 currently and revenues from syndication growing from $3,000 in 2008 to over $34,000 in 2010 and 2011 projected to be considerably higher, we are leveraging the Company’s investment in its broad inventory by offering the items to multiple sites simultaneously. This should improve our inventory turnover, increase our absorption rates and reduce inventory carrying costs.

On the mChannel front, we plan to continue to invest in various initiatives to leverage mobile opportunities to acquire customers online and offline, conduct mobile commerce, enhance the in-store experience and connect with our customers even when they are not shopping. Currently, our e-commerce platform is mobile capable and with revenues transacted from mobile devices growing exponentially, this will become a more material part of our overall revenue stream. Prior to the 2011 holiday season, we will launch our first fully optimized mobile experience with the Philadelphia Eagles. Leveraging the knowledge gained from the Philadelphia Eagles mobile site, we will continue to expand our mobile optimized experience to our other brands in Q1 2012.

Additionally, we plan to continue to expand our various mobile oriented marketing programs that we use to acquire new customers and stimulate repeat purchasing from existing programs. Currently, we use programs such as local search, text alerts and other mobile oriented promotions. We also plan to use mobile to enhance our in-store experience such as using QR codes to allow in-store shoppers to access customer reviews, quickly see what other teams we have available in a particular style and to quickly see what sizes we might have online that we may not have in the store.

With the continued growth of our Web Syndication portfolio, we are leveraging the Company’s investment in its broad inventory by offering the items to multiple sites simultaneously. This should improve our inventory turnover, increase our absorption rates and reduce inventory carrying costs. We believe there is significant opportunity in the marketplace to grow this model. However, with the success we are experiencing with our web syndication model, we will be seeking a more quality client and have and may continue to not-renew smaller accounts. Nevertheless, we were pleased to sign the MLS franchise Chicago Fire and the NBA franchises Charlotte Bobcats and Golden State Warriors, along with Purdue University, the Miami Dolphins and Comcast during the first nine months of 2011.

Towards the end of 2010, we acquired a 51% ownership stake in The Comet Clothing Company, LLC. This entity owns the rights to the Zubaz^® brand, a line of casual sportswear with unique designs. Also, we consummated a purchase agreement for certain assets previously owned by Collegiate Marketing Services (CMS). The principal asset is the retail contract with the University of Texas for the management of both the official online store and all campus event sales. Both of these initiatives were strategic in nature for the Company. We have now added the ability to manufacture soft goods (apparel) within the organization and will seek to produce some of the items that will be featured on many of our online shops and our partners’ eCommerce sites. In time, this should improve our overall gross margins. In addition, with our team providing game-day/stadium sales for the University of Texas, and effective March 26, 2011 for the Chicago Fire, we are able to deliver a comprehensive retail solution to current and prospective clients that are looking for a provider who excels at eCommerce and in-stadium operations and merchandising.

Historically, the fourth quarter of the fiscal year (October to December) has accounted for a greater proportion of our operating income than have each of the other three quarters of our fiscal year. This is primarily due to increased activities as a result of the holiday season. We expect that we will continue to experience quarterly variations and operating results principally as a result of the seasonal nature of our industry. Management continues to seek ways to shift expenses from the non-holiday quarters to the busier holiday quarter in order to improve cash flow. Other factors also cause a significant fluctuation of our quarterly results, including the timing of special events, the general popularity of a specific team that plays in a championship or an individual athlete who enters their respective sports’ Hall of Fame, the amount and timing of new sales contributed by new web syndication accounts, new stores, the timing of personal appearances by particular athletes and general economic conditions. Additional factors may cause fluctuations in expenses, including the costs associated with the opening of new stores, the integration of acquired businesses and stores into our operations , the general health of the economy, and corporate expenses needed to support our expansion and growth strategy.

Conclusion

We set ourselves apart from other companies with our diversified product and services line, our proprietary e-commerce platform, our plethora of sports leagues and celebrity licenses, as well as our relationships with sports leagues, agents and athletes. Management believes we can continue to capture market share, especially on-line.

GENERAL

As used in this Form 10-Q “we”, “our”, “us”, “the Company” and “Dreams” refer to Dreams, Inc. and its subsidiaries unless the context requires otherwise.

Use of Estimates and Critical Accounting Policies

The Company has both Goodwill and other long-lived intangible assets which are not amortized. As prescribed by the FASB, the Company evaluates the carrying value of these assets for impairment. Significant economic changes may require the Company to recognize impairment. As of December 31, 2010, no impairment has been necessary. As of September 30, 2011 there have been no circumstances that would yield impairment.

Management believes that the following may involve a higher degree of judgment or complexity:

Collectibility of Accounts Receivable

The Company’s allowance for doubtful accounts is based on management’s estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be an amount sufficient to respond to normal business conditions. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact upon the Company’s operations. The Company’s current allowance for doubtful accounts is $35.


	(Unaudited)
	Sept. 30, 2011		December 31, 2010
Accounts receivable	$	4,579	$	9,924
Allowance for doubtful accounts		35		26

Accounts receivable, net	$	4,544	$	9,898

Reserves on Inventories

The Company establishes a reserve based on historical experience and specific reserves when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to operations results when the estimated net realizable value of inventory items declines below cost. Management regularly reviews the Company’s investment in inventories for declines in value. Adjustments are made to the reserve based on a number of factors, such as, players changing teams, falling out of favor with the public, incurring an injury, etc. These negative situations may impact valuation. However, dynamics that could increase inventory value, like the death of an athlete, do not result in writing up of inventory values. The Company’s current reserve for inventory obsolescence is $530.


	(Unaudited)
	Sept. 30, 2011		December 31, 2010
Inventory	$	47,850	$	33,139
Reserves for inventory obsolescence		530		530

Inventory, net	$	47,320	$	32,609

Income Taxes

Significant management judgment is required in developing the Company’s provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. The Company evaluates quarterly its ability to realize its deferred tax assets and adjusts the amount of its valuation allowance, if necessary.

Goodwill and Unamortized Intangible Assets

In accordance with FASB Accounting Standards Codification Topic 350-20-35 Intangibles-Goodwill and Other > Goodwill > Subsequent Measure, the Company evaluates the carrying value of goodwill as of December 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair value. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds it implied fair value.

The Company’s evaluations of the carrying amount of goodwill were completed as of December 31, 2010 in accordance with Topic 350-20-35, resulted in no impairment losses. As of September 30, 2011, there was no impairment to goodwill.

Revenue Recognition

The Company recognizes retail (including e-commerce sales and web syndication sales) and wholesale/distribution revenues at the later of (a) the time of shipment or (b) when title passes to the customers, all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Retail revenues and wholesale/distribution are recognized at the time of sale. Return allowances, which reduce gross sales, are estimated using historical experience.

Management fee revenue related to the representation and marketing of professional athletes is recognized when earned and is reflected net of its related costs of sales. The majority of the revenue generated from the representation and marketing of professional athletes relates to services as an agent. In these arrangements, the Company is not the primary obligor in these transactions but rather only receives a net agent fee.

Revenues from industry trade shows are recognized at the time of the show when tickets are submitted for autographs or actual product purchases take place. In instances when the Company receives pre-payments for show autographs, the Company records these amounts as deferred revenue.

The Company had approximately $316 in orders not yet shipped as of September 30, 2011.

Nine Months Ended September 30, 2011 versus the Nine Months Ended September 30, 2010 (dollars amounts in thousands)

Revenue. Total revenues increased 31.2% to $66,566 for the nine months ended September 30, 2011, compared to $50,700 for the nine months ended September 30, 2010. This increase was attributed to considerably higher retail sales, especially on-line.

Manufacturing/Distribution revenues increased 1.4% to $9,829 for the nine months ended September 30, 2011, compared to $9,692 for the nine months ended September 30, 2010. Net revenues (after eliminating intercompany sales) decreased 7.1% to $6,929 for the nine months ended September 30, 2011, from $7,462 for the nine months ended September 30, 2010. The decrease in reportable manufacturing/distribution revenues for the period was a result of more sales being consummated to our retail divisions, therefore, eliminated for reporting purposes. Also, the Company ran a Sports Collectibles trade show in Chicago in July 2010 that yielded about $500 in sales. There was no July Chicago show this year.

Retail channel revenues increased 39.0% to $59,532 for the nine months ended September 30, 2011, from $42,831 for the nine months ended September 30, 2010. The increase was principally driven by higher revenues generated online.

•

E-Commerce - Retail revenues from our internet division increased 43.4% to $48,380 during the first nine months of 2011, versus $33,736 for the nine months ended September 30, 2010. The increase is a result of organic growth with our owned sites featuring www.FansEdge.com and our growing web syndication portfolio. In fact, organic growth for the current nine month period was 46.5% with $31,178 in revenues, versus $21,277 for the same nine month period in 2010. Syndication sales growth was 38.0% with $17,203 in revenues for the current nine month period, versus $12,458 in syndication sales for the same nine month period in 2010.

•

FansEdge stores - Retail revenues generated through our ten (10) FansEdge stores increased 29.3% to $4,120 for the first nine months of 2011, from $3,184 for the nine months ended September 30, 2010 when we had six (6) stores operating. Same store sales for locations operating more than 1-year were up 4.3%. These stores were comping against the robust Chicago Blackhawks Championship sales last year.

•

Field of Dreams stores - Retail revenues generated through our five (5) company-owned Field of Dreams stores decreased 7.5% to $5,222 for the first nine months of 2011, from $5,647 for the nine months ended September 30, 2010 when we had nine (9) stores operating. However, same store sales were up 14.1% in the first nine months of September 30, 2011, with $4,758 in sales, versus $4,167 in sales for the comparable period in 2010.

•

Stadium sales - Retail revenues generated through stadium sales was $1,810 for the first nine months of 2011. This is a new channel for the Company and currently consists of stadium/venue sales at the University of Texas; and as of March 26, 2011, the MLS franchise Chicago Fire at their home stadium, Toyota Park.

Costs and expenses. Total cost of sales for the nine months ended September 30, 2011, increased 33.3% to $36,306, versus $27,223 in the same period last year. The increase is attributed to higher overall sales. However, as a percentage of total sales, cost of sales was 54.5% for the nine months ended September 30, 2011, versus 53.6% for the same period last year.

Cost of sales of manufacturing/distribution products decreased 7.2% to $4,066 for the nine months ended September 30, 2011, from $4,383 for the nine months ended September 30, 2010. The decrease is a result of lower sales. As a percentage of manufacturing/distribution revenues, cost of sales was 58.6% for the first nine months of 2011, versus 58.7% for the nine months ended September 30, 2010. As a percentage of manufacturing/distribution revenues before elimination of inter-company sales, costs were 70.8% for the nine months ended September 30, 2011, compared to 68.2% for the nine months ended September 30, 2010.

Cost of sales of retail products increased 41.1% to $32,240 for the nine months ended September 30, 2011, from $22,840 for the nine months ended September 30, 2010. The increase is a result of higher overall retail sales. As a percentage of total retail sales, costs were 54.1% for the nine months ended September 30, 2011, versus 53.3% for the same period last year.

Operating expenses increased 33.7% to $34,362 for the nine months ended September 30, 2011, versus $25,689 for the same period last year. The increase in operating expenses was related to an overall increase in sales. Although, the Company incurred approximately $1,384 in one-time, non-core, and or non-cash related expenses during the first nine months of 2011, versus $795 in one-time, non-core related expenses in the first nine months of 2010 related to its $2,000 private placement, the preparation and filing of its S-3 registration statement, a proposed acquisition and it’s refinancing of its senior lender. Also, the Company has made investments in its infrastructure, specifically an increase in its head count to support its aggressive retail growth. So far, approximately 100 new hire requisitions have been filled, including additional SEO analysts, programmers, graphic designers, QA/CSR and database administrators. As a percentage of sales, operating expenses were 51.6% for the nine months ended September 30, 2011, compared to 50.7% for the nine months ended September 30, 2010. For analysis purposes, backing out the one-time, none core charges, operating expenses would have been 49.5%, versus 49.1% for the same nine month period in 2010.

Interest expense, net. Net interest expense was $591 for the nine months ended September 30, 2011, versus $984 for the nine months ended September 30, 2010. In July 2010, the Company re-financed its credit facility with a new Bank at reduced rates.

Provision for income taxes. The Company recognized an income tax benefit of $2,642 for the nine months ended September 30, 2011, versus $1,792 for the nine months ended September 30, 2010. Each quarter, the Company evaluates whether the realizability of its net deferred tax assets is more likely than not. Should the Company determine that a valuation reserve is necessary, it would have a material impact on the Company’s operations. The Company has prepared an analysis based upon historical data and forecasted earnings projections to determine its ability to realize its net deferred tax asset. The Company believes that it is more likely than not that the net deferred tax asset will be realized. Therefore, the Company has determined that a valuation allowance was not necessary as of September 30, 2011 and September 30, 2010. The effective tax rate for both periods was approximately 40.0%.

Three Months Ended September 30, 2011 versus the Three Months Ended September 30, 2010 (dollar amounts in thousands)

Revenue. Total revenues increased 23.2% to $24,389 for the three months ended September 30, 2011, compared to $19,791 for the three months ended September 30, 2010. This increase was attributed to considerably higher retail sales, especially on-line.

Manufacturing/Distribution revenues decreased 23.8% to $2,653 for the three months ended September 30, 2011, from $3,484 for the three months ended September 30, 2010. Net revenues (after eliminating intercompany sales) decreased 35.6% to $1,798 for the three months ended September 30, 2011, from $2,794 for the three months ended September 30, 2010. The Company ran a Sports Collectibles trade show in Chicago in July 2010 that yielded about $500 in sales. There was no July Chicago show this year.

Retail channel revenues increased 34.0% to $22,566 for the three months ended September 30, 2011, from $16,844 for the three months ended September 30, 2010. The increase was principally driven by higher revenues generated online, off-set by contraction at our Field of Dreams stores due to a lower store count.

•

E-Commerce - Retail revenues from our internet division increased 39.0% to $18,720 during the three months ended September 30, 2011, versus $13,469 for the three months ended September 30, 2010. The increase is a result of our organic growth with our owned sites featuring www.FansEdge.com and our growing web syndication portfolio. In fact, organic growth for the current three month period was 48.5% with $11,835 in revenues, versus $7,966 for the same three month period in 2010. Syndication sales growth was 25.1% with $6,885 in revenues for the current three month period, versus $5,503 in syndication sales for the same three month period in 2010.

•

FansEdge stores - Retail revenues generated through our ten (10) FansEdge stores increased 29.7% to $1,515 for the three months ended September 30, 2011, from $1,168 for the three months ended September 30, 2010 when we had six (6) stores operating. Same store sales for locations operating more than 1-year were constant at about $1,030. These stores were comping against the robust Chicago Blackhawks Championship sales last year.

•

Field of Dreams stores - Retail revenues generated through our five (5) company-owned Field of Dreams stores decreased 10.7% to $1,734 for the three months ended from 30, 2011, from $1,942 for same period last year when we had nine (9) stores operating. However, same store sales were up 11.6% with $1,641 in store revenues for the current quarter, versus $1,470 in same store sales generated in the same quarter in 2010.

•

Stadium sales- Retail revenues generated through stadium sales was $597 for the quarter ended September 30, 2011. This is a new channel for the Company and currently consists of stadium/venue sales at the University of Texas; and as of March 26, 2011, the MLS franchise Chicago Fire at their home stadium, Toyota Park.

Costs and expenses. Total cost of sales for the three months ended September 30, 2011, increased 27.0% to $13,146, versus $10,346 in the same period last year. The increase is attributed to higher overall sales. However, as a percentage of total sales, cost of sales was 53.9% for the three months ended September 30, 2011, versus 52.2% for the three months ended September 30, 2010.

Cost of sales of manufacturing/distribution products decreased 32.5% to $1,103 for the three months ended September 30, 2011, from $1,635 for the three months ended September 30, 2010. The decrease is a result of lower sales. As a percentage of manufacturing/distribution revenues, cost of sales was 61.3% versus 58.5% for the three months ended September 30, 2010. As a percentage of manufacturing/distribution revenues before elimination of inter-company sales, costs were 73.8% for the three months ended September 30, 2011, compared to 66.6% for the three months ended September 30, 2010.

Cost of sales of retail products increased 38.2% to $12,043 for the three months ended September 30, 2011, from $8,711 for the three months ended September 30, 2010. The increase is a result of higher overall retail sales. As a percentage of total retail sales, costs were 53.3% for the three months ended September 30, 2011, versus 51.7% for the same period last year.

Operating expenses increased 21.8% to $12,079 for the three months ended September 30, 2011, compared to $9,913 for the three months ended September 30, 2010. The increase in operating expenses was related to an increase in overall sales. Also, the

Company has made investments in its infrastructure by adding a second distribution facility to increase capacity and increasing its head count to support its aggressive retail growth. So far, approximately 100 new hire requisitions have been filled, including additional SEO analysts, programmers, graphic designers, QA/CSR and database administrators. The Company incurred $44 in one-time, non-core and or non-cash related expenses during the quarter ended September 30, 2011, versus approximately $485 in one -time expenses in the same quarter in 2010, related to its preparation and filing of its S-3 registration statement that provided the Company with a $6,000 equity raise and the refinancing of its senior credit facility. As a percentage of sales, operating expenses were 49.5% for the three months ended September 30, 2011, compared to 50.0% for the three months ended September 30, 2010. For analysis purposes, backing out the one-time, non-core and or non-cash charges, operating expenses were 49.3% for the quarter ended September 30, 2011, versus 47.6% for the same quarter in 2010.

Interest expense, net. Net interest expense was $268 for the three months ended September 30, 2011, versus $225 for the three months ended September 30, 2010. The slight increase in interest expense for the period was due to the Company carrying higher average outstanding line balances.

Provision for income taxes. The Company recognized an income tax benefit of $735 for the three months ended September 30, 2011, versus an income tax benefit of $430 for the three months ended September 30, 2010. Each quarter, the Company evaluates whether the realizability of its net deferred tax assets is more likely than not. Should the Company determine that a valuation reserve is necessary, it would have a material impact on the Company’s operations. The Company has prepared an analysis based upon historical data and forecasted earnings projections to determine its ability to realize its net deferred tax asset. The Company believes that it is more likely than not that the net deferred tax asset will be realized. Therefore, the Company has determined that a valuation allowance was not necessary as of September 30, 2011 and September 30, 2010. The effective tax rate for both periods was approximately 40.0%.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity during the nine months ended September 30, 2011, were the cash flows generated daily from our operating subsidiaries, availability under our $25,000 senior revolving credit facility and available cash.

The balance sheet as of September 30, 2011 reflects working capital of $13,539 versus working capital of $19,639 at December 31, 2010. At September 30, 2011, the Company’s cash was $239, compared to a cash balance of $440 at December 31, 2010. The Company is not negatively impacted by the cash balance of $239 at September 30, 2011, as it has sufficient access to capital under its $25,000 revolving credit facility with its senior lender. The credit facility increased to $27,500 on October 1, 2011. Net accounts receivable at September 30, 2011 were $4,544, compared to $9,898 at December 31, 2010.

Use of Funds

Cash used in operations amounted to $20,027 for the nine months ended September 30, 2011, compared to $12,763 cash used in operations during the same period of 2010. The increase in cash used in operations was mainly attributable to the Company decreasing its accrued liabilities, decreasing its accounts payables, and increasing its inventory levels to support its growth.

Cash used in investing activities was $1,747 for the nine months ended September 30, 2011, compared to $1,525 cash used in investing activities for the same period of 2010. In both periods, the Company used these funds towards lease-hold improvements at its new FansEdge stores and distribution centers.

Cash provided by financing activities was $21,573 for the nine months ended September 30, 2011, versus $14,118 cash provided by financing activities for the same period in 2010. The increase in cash provided by financing activities was due to the Company accessing additional funds from its revolving credit facility in order to decrease its accrued liabilities, decrease its accounts payables, and increase its inventory levels to support its growth.

Other Activity

By way of background, on July 23, 2010, the Company entered into a 3-year loan and security agreement with Regions Bank who provided the Company with a $20,000 Senior Secured Credit Facility, of which $11,200 was used at closing to pay-off its previous loan balances with Comerica Bank. The interest rate on the loan balance is the 30-day libor rate plus a 3.00% margin. The interest rates on outstanding loan balances were reduced from 6.5% from the previous lender, to libor plus a 3.00 margin, or 3.34% for the new line of credit. The new 3-year loan and security agreement is secured by all of the assets of the Company and its divisions. The Regions credit facility requires that certain performance financial covenants be met on a monthly and or quarterly and or yearly basis. These financial covenants consist of a Fixed Charge Coverage Ratio and a Funded Debt to EBITDA Ratio.

The Funded Debt to EBITDA ratio includes: debt for borrowed funds, subordinated debts, the principal component of all capital leases, any deferred payment by one year or more , and all other debt instruments (other than checks drawn in the ordinary course of business), divided by EBITDA. For the nine months ended September 30, 2011, the required ratio needs to be less than 5.25 to 1.00. The actual ratio was 5.10 to 1.00.

On July 16, 2010, the Company entered into a Subscription Agreement with a group led by William Blair & Company, LLC whereby the Company agreed to sell and issue to the investors a total of 4,615,384 shares of the Company’s common stock for $6,000. The shares had been registered on a Form S-3 filed by the Company with the Securities and Exchange Commission.

On May 18, 2010, the Company entered into a Securities Purchase Agreement with three accredited investors, pursuant to which the Company raised $2,000 through the issuance of 1,428,570 shares of the Company’s common stock and warrants to purchase 285,714 shares of the Company’s common stock at an exercise price of $1.80 per share. The offering was exempt from registration pursuant to exemption under section 4(2) of the Securities Act of 1933.

In an effort to align expenses more closely with anticipated revenues at our Sports & Celebrity Manufacturing division, the Company has closed its Chicago, IL based satellite facility effective April 1, 2011. The associated expense savings will be about $500 on an annual basis. In addition, the Company closed its satellite office in Denver, CO yielding approximately another $50 in savings on an annual basis.

In order to support its considerable online growth, the Company has executed a 1-year lease with an option for an additional year for a satellite warehouse/distribution facility in the Chicago market to increase capacity. The new space is approximately 120,000 sq ft with a monthly occupancy cost of about $35.

In 2010, in order to properly fund our growth and leverage each of the opportunities that the Company is delivering to its environment, it was determined that a strengthening of the balance sheet through a $2,000 private placement and subsequently, a $6,000 sale of newly issued common shares was prudent. These equity raises were completed in May 2010 and July 2010, respectively. The Company was also successful in re-financing its senior debt on July 23, 2010 that has significantly reduced its cost of capital, thus, providing the Company with meaningful interest expense savings.

Summary

Management believes that future funds generated from our operations and available borrowing capacity will be sufficient to fund our debt service requirements, working capital requirements and our budgeted capital expenditure requirements for the foreseeable future.

Off-balance sheet arrangements

We have not created and are not a party to any special purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. Except as described herein, our management is not aware of any known trends or demands, commitments, events or uncertainties, as they relate to liquidity which could negatively affect our ability to operate and grow as planned, other than those previously disclosed.

NEW ACCOUNTING PRONOUNCEMENTS

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting companies.

Item 4.

Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We carried out an evaluation as required by paragraph (b) of Rule 13a-15 and 15d-15 of the Exchange Act, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2011. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting.

There have been no changes in our internal controls over financial reporting that occurred during the third fiscal quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1.

Legal Proceedings.

None.

Item 1A.

Risk Factors.

Not required for smaller reporting companies.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults upon Senior Securities.

None.

Item 4.

Removed and Reserved

None.

Item 5.

Other Information.

None.

Item 6.

Exhibits.


No.

31.1		Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed incorporated by reference into any other filing under the Security Act of 1933, as amended, or by the Security Exchange Act of 1934, as amended.)

32.2		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 as amended or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed incorporated by reference into any other filing under the Security Act of 1933, as amended, or by the Security Exchange Act of 1934, as amended.)

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase

101.DEF**		XBRL Taxonomy Extension Definition Linkbase

101.LAB**		XBRL Taxonomy Extension Label Linkbase

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

SIGNATURE

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.


DREAMS, INC.

By:		/s/ Ross Tannenbaum
		Ross Tannenbaum, Chief Executive Officer,
		Principal Executive Officer

November 14, 2011.


By:		/s/ Dorothy Sillano
		Dorothy Sillano, Chief Financial Officer,
		Principal Accounting Officer

Exhibit Index


Exhibit No.		Description

31.1		Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed incorporated by reference into any other filing under the Security Act of 1933, as amended, or by the Security Exchange Act of 1934, as amended.)

32.2		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 as amended or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed incorporated by reference into any other filing under the Security Act of 1933, as amended, or by the Security Exchange Act of 1934, as amended.)

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase

101.DEF**		XBRL Taxonomy Extension Definition Linkbase

101.LAB**		XBRL Taxonomy Extension Label Linkbase

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company