Form 10-Q

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10-Q 1 d10q.htm FORM 10-Q Form 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, 2010

¨	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 ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer”, “large 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, 2010 there were 43,980,175 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

	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		12

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		19

Item 4.	Controls and Procedures		20

Part II.	Other Information		20

Item 1.	Legal Proceedings		20

Item 1A.	Risk Factors		20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		20

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, 2010			December 31, 2009
(Dollars in Thousands, except share amounts)	(unaudited)
ASSETS
Current assets:
Cash		412		$	582
Accounts receivable, net		3,743			5,342
Inventories		35,536			26,593
Prepaid expenses and deposits		2,902			2,331
Deferred tax asset		1,068			1,068

Total current assets	$	43,661		$	35,916
Property and equipment, net		5,013			4,654
Deferred loan costs		249			21
Other intangible assets, net		5,220			5,329
Goodwill, net		8,650			8,650
Deferred tax asset		823			823
Other assets		9			9

Total assets	$	63,625		$	55,402

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,834		$	9,516
Accrued liabilities		4,976			4,583
Current portion of long-term debt		269			1,116
Borrowings against line of credit		16,521			9,066
Borrowings against bank term note		—			444
Deferred credits		645			1,288

Total current liabilities	$	30,245		$	26,013
Long-term debt, less current portion		1,294			913
Capital lease obligation		189			137
Long-term deferred tax liability		859			2,681

Total Liabilities	$	32,587		$	29,744

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 43,972,928 and 37,615,786 shares as of September 30, 2010 and December 31, 2009, respectively		43,758			35,635
Treasury stock 38,400 issued as of September 30, 2010 and December 31, 2009		(46	)		(46	)
Accumulated deficit		(12,677	)		(9,931	)

Total stockholders’ equity of Dreams Inc and Subsidiaries		31,035			25,658
Non-controlling Interest		3			—

Total stockholders’ equity		31,038			25,658

Total liabilities and stockholders’ equity	$	63,625		$	55,402

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,
	2010			2009			2010			2009
Revenues:
Manufacturing/Distribution	$	7,462		$	8,042		$	2,794		$	2,583
Retail		42,831			33,979			16,844			12,582
Other - Fees		407			242			153			61

Total Revenues	$	50,700		$	42,263		$	19,791		$	15,226
Expenses:
Cost of sales-mfg/distribution	$	4,383		$	3,909		$	1,635		$	1,396
Cost of sales-retail		22,840			18,263			8,711			6,676
Operating expenses		25,689			22,668			9,913			7,583
Depreciation and amortization		1,356			1,363			456			451

Total Expenses	$	54,268		$	46,203		$	20,715		$	16,106

(Loss) before interest and taxes		(3,568	)		(3,940	)		(924	)		(880	)
Interest expense, net		984			785			225			413

(Loss) before income taxes		(4,552	)		(4,725	)		(1,149	)		(1,293	)
Income tax benefit		1,792			1,877			430			507

Net (loss)		(2,760	)		(2,848	)		(719	)		(786	)
Net income /(loss) attributable to non controlling interest		17			—			17			—

Net income /(loss) attributable to Dreams Inc	$	(2,743	)	$	(2,848	)	$	(702	)	$	(786	)


(Loss) per share:
Basic: (Loss) per share	$	(0.07	)	$	(0.07	)	$	(0.02	)	$	(0.02	)
Weighted average shares outstanding – Basic		39,604,650			37,530,471			42,848,303			37,534,911
Diluted: (Loss) per share	$	(0.07	)	$	(0.07	)	$	(0.02	)	$	(0.02	)
Weighted average shares outstanding – Diluted		40,513,216			37,530,471			43,683,982			37,775,895

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

Dreams, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2010 and September 30, 2009


	2010			2009
Cash Flows from Operating Activities
Net (Loss) attributable to Dreams Inc	$	(2,743	)	$	(2,848	)
Adjustments to reconcile net (loss) to net cash used in operating activities:
Loss attributable to non-controlling interest		(17	)		—
Depreciation		1,247			1,256
Amortization		106			107
Loan cost amortization		246			81
Net loss from sale of property and equipment		—			188
Write down of goodwill		—			64
Warrants Issued for Services		40			—
Minority interest in net income of consolidated subsidiary		(2	)		4
Stock based compensation		—			149
Deferred tax benefit, net		(1,821	)		(1,885	)
(Increase) decrease in:
Accounts receivable		1,600			1,288
Inventories		(8,916	)		835
Prepaid expenses and deposits		(572	)		(272	)
Increase (decrease) in:
Accounts payable		(1,680	)		(2,891	)
Accrued liabilities		393			(882	)
Deferred revenues		(644	)		(1,432	)

Net cash (used in) operating activities	$	(12,763	)	$	(6,238	)
Cash Flows from Investing Activities
Purchase of property and equipment		(1,525	)		(744	)

Net cash (used in) investing activities	$	(1,525	)	$	(744	)
Cash Flows from Financing Activities
Proceeds from Line of Credit-Regions		32,851			32,227
Paydown on Line of Credit-Regions		(18,732	)		(24,558	)
Proceeds from Line of Credit-Comerica		48,029			(89	)
Paydown on Line of Credit-Comerica		(54,799	)		11
Deferred loan costs		(473	)		—
Proceeds from stock option exercise		84			—
Proceeds from private placement		8,000			—
Repayment of Capital lease		(42	)		(20	)
Repayment of Notes payable		(800	)		(903	)

Net cash provided by financing activities	$	14,118		$	6,668
Net (decrease) increase in cash		(170	)		(314	)
Cash at beginning of period		582			498

Cash at end of period	$	412		$	184


Cash paid for interest during the period		601			729

Supplemental disclosure of Non-cash financing Activity

Borrowings on Capital Lease		93			91
Inventory acquired through purchase of Comet acquisition		27			—

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, 2009, filed with the SEC on March 29, 2010.

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 Accounting Principles Board Opinion No. 28 and reflect, in management’s opinion, all adjustments, which are of 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 sports memorabilia and licensed sports products 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, 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 nine months ended September 30, 2009, weighted average shares outstanding for basic earnings per share purposes was 37,530,417. For the nine months ended September 30, 2009, weighted average shares outstanding for diluted earnings per share purposes was 37,530,417. 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, 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.

For the three months ended September 30, 2009, weighted average shares outstanding for basic earnings per share purposes was 37,534,911. For the three months ended September30, 2009, weighted average shares outstanding for the diluted earnings per share purposes was 37,775,895. 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, 2010 and September 30, 2009, the Company recorded $.2 and $149 of pre-tax share-based compensation expense under Topic 718, recorded in selling and administrative expense in the Condensed Consolidated Statement of Operations, respectively. This expense was offset by approximately a $.1 and $60 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, 2010, vested options totaled 1,212,466 with an average price of $.53. Unvested options totaled 0. Total outstanding options that were “in the money” at September 30, 2010 were 1,184,133 with an average price per option of $.48. All outstanding options that are “in the money”, are vested.

During the nine months ended September 30, 2010; there were 0 options granted, 50,000 options expired, 0 options cancelled, and 203,179 options exercised.

The following table summarizes the stock option activity from January 1, 2010, through September 30, 2010:


	Options		Exercisable Price		Weighted Av. Exercise Price
January 1, 2010		1,465,645	$	.41-2.75	$	.57
Granted		0		—	$	—
Expired		50,000	$	1.05	$	1.05
Cancelled		0		—	$	—
Exercised		203,179	$	.41	$	.41


September 30, 2010		1,212,466	$	.41-2.75	$	.53

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 9/30/2010

Outstanding

Exerciseable

Range

Outstanding
Options

Remaining
Contractual
Life

WA
Outstanding
Exercise Price

Vested
Options

WA Vested
Exercise
Price

$0.41 to $1.19

1,184,133

1.4

.48

1,184,133

.48

$1.20 to $2.75

28,333

2.67

28,333

2.67

$.41 to $2.75

1,212,466

1.4

.53

1,212,466

.53

At September 30, 2010, exercisable options had aggregate intrinsic values of $1,730

Warrants

In May 2010, the Company issued 285,714 warrants as part of a private common stock placement. The warrants are exercisable within 3 years of issuance at a strike price of $1.80 per share. Upon completion of the private placement the Company issued 50,000 additional warrants exercisable within three years of issuance at a strike price of $1.80 per share to a consultant for services rendered in connection with the procurement of funding. The warrants were valued at approximately $40. The fair value of the warrants at the grant date was estimated using the Black Scholes models with the following assumptions made:


Risk free Rate		.45%
Dividend yield		0%
Volatility factor		100%
Expected life		1.8 years

Income Taxes

FASB Accounting Standards Codification, Topic 740-Income Taxes, requires a valuation allowance to reduce the deferred tax assets reported, if based on the weight of evidence, it is more likely than not that some portion or the entire deferred tax asset will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance of $187 as of December 31, 2009, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current fiscal year is $0.

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, 2010, 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, and some traditional brick and mortar stores:

Internet

The Company’s e-commerce components feature FansEdge.com and ProSportsMemorabilia.com along with a complement of athlete and syndicated web sites including, but not limited to: www.aol.com, www.jcp.com, and www.philadelphiaeagles.com. These e-commerce retailers sell a diversified selection of sports licensed products and autographed memorabilia on the web. These e-commerce operations have provided for the fastest growing area of our retail segment.

Catalogues

The Company publishes and distributes a FansEdge catalogue, a Baseball Hall of Fame catalogue and a Philadelphia Eagles catalogue two times per year.

Brick and Mortar

As of September 30, 2010, the Company owned and operated (9) nine Field of Dreams^® stores offering a selection of sports & entertainment memorabilia and collectibles and (7) seven FansEdge stores offering an array of sports licensed products. The Company has multiple stores in the Chicago and Las Vegas markets.

All of the Company’s revenue generated during the nine and three months ended September 30, 2010 and September 30, 2009, 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.

3.	Business Segment Information

Segment information for the nine and three month periods ended September 30, 2010 and September 30, 2009 was as follows:


Nine Months Ended:	Manufacturing/ Distribution			Retail Operations			Total
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

September 30, 2009
Net sales	$	10,864		$	33,979		$	44,843
Intersegment net sales		(2,822	)		—			(2,822	)
Operating (loss)		(29	)		(1,756	)		(1,785	)
Total assets	$	19,382		$	31,806		$	51,188

Reconciliation to consolidated amounts is as follows:


	Nine-Months Ended
	9/30/10			9/30/09
Revenues:
Total revenues for reportable segment	$	52,523		$	44,843
Other revenues		407			242
Eliminations of intersegment		(2,230	)		(2,822	)

Total consolidated revenues	$	50,700		$	42,263

Pre-tax (loss):
Total operating (loss) for reportable segments	$	(1,020	)	$	(1,785	)
Other (loss)*		(2,548	)		(2,155	)
Less: Interest expense		984			785

Total consolidated (loss) before taxes	$	(4,552	)	$	(4,725	)

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; professional fees, bank charges; certain insurance policy premiums, public relations/investor relations expenses.


Three Months Ended:	Manufacturing/ Distribution			Retail Operations		Total
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

September 30, 2009
Net sales	$	3,307		$	12,582	$	15,889
Intersegment net sales		(724	)		—		(724	)
Operating (loss) / earnings		(239	)		135		(104	)
Total assets	$	19,382		$	31,806	$	51,188

Reconciliation to consolidated amounts is as follows:


	Three-Months Ended
	9/30/10			9/30/09
Revenues:
Total revenues for reportable segment	$	20,328		$	15,889
Other revenues		153			61
Eliminations of intersegment		(690	)		(724	)

Total consolidated revenues	$	19,791		$	15,226

Pre-tax (loss):
Total operating income / (loss) for reportable segments		113			(104	)
Other (loss)*		(1,037	)		(776	)
Less: Interest expense		225			413

Total consolidated (loss) before taxes	$	(1,149	)	$	(1,293	)

4.	Inventories

The components of inventories are as follows:


	September 30 2010		December 31, 2009
Raw materials	$	373	$	393
Work in process		78		80
Finished goods, net		35,085		26,120

Total	$	35,536	$	26,593

5.	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, 2009 and resulted in no impairment losses. There has been no subsequent event that resulted in evaluation adjustments as of September 30, 2010.

6.	Acquisition of Business

On September 2, 2010 the Company entered into an agreement with The Comet Clothing Company, LLC to become a 51% member. The Company did not pay any proceeds for their equity interest. The Company includes Comet as part of its financial statements as a result of the Company’s majority ownership and its control over the activities of Comet that most significantly impact its economic performance.

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.

Effective September 1, 2010, the Company entered into a management agreement with Collegiate Marketing Services, Inc. (“CMS”). CMS appointed the Company as the manager of its operations until such time that a definitive asset purchase agreement takes place. Said agreement requires approval by its Board of Director’s and it’s Senior Lender. The principal assets of CMS’s operations are a retail contract with the University of Texas and a retail store operating in Norman, OK.

7.	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 months ended September 30, 2010 and 2009 were $3,574 and $3,726, respectively.

The Company leases certain computer and warehouse equipment under capital leases. The leases collectively require monthly payments of $8 and expire through 2013. Interest rates on capital leases range from 5% to 12%.

8.	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.

9.	Line of Credit

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 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, 2010, the required ratio is 1.2 to 1.0. The actual ratio was 1.2 .

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, 2010, the required ratio needs to be less than 5.25 to 1.00. The actual ratio was 3.75.

10.

Equity

On July 16, 2010, the Company issued 4,615,384 shares of common stock to an unrelated group of investors at a per share value of $1.30 for total consideration of $6 million.

As a result of the above transaction, the Company was required to issue additional shares under a price protection provision to the (3) three shareholders who participated in a private placement transaction in May of 2010. The total amount of new shares issued was 109,891.

Approximately 200,000 shares of common stock were issued in connection with stock options exercised during the nine months ended September 30, 2010.

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.

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; franchise sales; advertising and promotional efforts; adverse publicity; expansion of the franchise chain; availability, locations and terms of sites for franchise development; 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 which was formed on April 9, 1980, and has evolved into the premier vertically integrated licensed sports products firm in the industry. This has previously been accomplished, in part, via organic growth and strategic acquisitions. Our continuing pursuit of this dual strategy should result in our becoming a principal leader and a consolidator in this highly fragmented industry. We believe our senior management and corporate infrastructure is well suited to acquire both large and small industry competitors.

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 athlete and web syndication sites; (reported in retail segment)

•

Our seven (7) company-owned FansEdge stores; (reported in retail segment)

•

Our nine (9) company-owned Field of Dreams stores; (reported in retail segment)

•

Our catalogues; (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 five (5) Field of Dreams franchise stores presently operating*; (reported in fees) and

•

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

*	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 in our stores and web sites; continuing our execution of multi-channel retailing under our FansEdge brand; aggressively marketing our web syndication services, which has met with great success, 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 $60,000 in 2009, placing it at number 363 in 2005, number 289 in 2006, number 216 in 2007, number 217 in 2008, and number 198 in 2009 of the largest Internet retailers in the nation. For the nine and three months ended September 30, 2010, our on-line sales grew 38.5% to $33,736 and 40.5% to $13,469, respectively, as compared to the same period in 2009. This remains the fastest growing area of the Company and will remain its primary focus. This Internet growth has re-defined our Company. In fact, an ever growing percentage of our overall revenues are being generated online. We are a technology company, operating in the sports licensed products industry, driving a majority of our revenues via the eCommerce channel.

The Company has drawn on a complete spectrum of competencies it has developed 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, AOL Sports, Majestic Athletic, NBC Sports and the Philadelphia Eagles, to name a few.

With the continued growth of our Web Syndication business model, which grew from 50 clients in 2009, to 70 currently; and revenues from syndication growing from $3,000 in 2008 to over $17,000 in 2009 and 2010 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.

Commencing in June 2008, we opened six (6) FansEdge stores in the greater Chicago, IL area. This was in support of our Multi-channel Retailing strategy; whereby we market a single brand via multiple channels. We are able to deliver this fully-branded multi-channel solution to other parties that seek a comprehensive retail strategy as well.

Our proprietary e-commerce platform has also enabled us to fuel a state-of-the-art in-store interactive Kiosk for ordering products. These Kiosks are in each of the new 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 fact, for 2009 and continuing through the first nine months of 2010, we saw an average of 18% contribution to the individual store sales from the Kiosks. The Company will seek joint venture deals with national retailers who are seeking to add a broader range of merchandising options to their customers by placing our kiosks within their store footprint or integrating our technology feed into their own hardware.

We believe this expansion of our revenue producing footprint will serve us well as we 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.

During the nine months ended September 30, 2010, the Company closed three (3) under-performing Field of Dreams stores as their lease terms came due and we chose not to renew. We will continue to monitor the results of the existing stores to ensure that they are providing us with the desired results. Although, the Company is targeting additional Field of Dreams store closings in the future.

We believe that we are well positioned to capture increased activity of on-line retail purchases with our ever growing web syndication portfolio. Industry experts and analysts state that currently, only 7-8% of all retail sales are being conducted on-line and are anticipated to increase.

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 and 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 and become a consolidator in the highly fragmented licensed sports products industry, 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

In a 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 December 31, 2009, no impairment has been necessary. As of September 30, 2010 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 $34.


	Sept 30, 2010		December 31, 2009
Accounts receivable	$	3,777	$	5,377
Allowance for doubtful accounts		34		35

Accounts receivable, net	$	3,743	$	5,342

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 $446.


	Sept 30, 2010		December 31, 2009
Inventory	$	35,982	$	27,063
Reserves for inventory obsolescence		446		470

Inventory, net	$	35,536	$	26,593

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. The Company provides a valuation allowance against its deferred tax assets when it believes that it is more likely than not that the asset will not be realized. 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. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance of $187 as of December 31, 2009 and $187 as of December 31, 2008, was 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, 2009 in accordance with Topic 350-20-35, resulted in no impairment losses. As of September 30, 2010, 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. Return allowances, which reduce gross sales, are estimated using historical experience.

Revenues from the sale of franchises are deferred until the Company fulfills its obligations under the franchise agreement and the franchised unit opens. The franchise agreements provide for continuing royalty fees based on a percentage of gross receipts.

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 $526 in orders not yet shipped as of September 30, 2010.

Nine Months Ended September 30, 2010 versus the Nine Months Ended September 30, 2009

Revenue. Total revenues increased 20.0% to $50,700 for the nine months ended September 30, 2010, compared to $42,263 for the nine months ended September 30, 2009. This increase was attributed to considerably higher on-line sales, off-set by contraction at our Company owned Field of Dreams stores due to fewer stores operating in the comparable period.

Manufacturing/Distribution revenues decreased 10.7% to $9,692 for the nine months ended September 30, 2010, compared to $10,864 for the nine months ended September 30, 2009. Net revenues (after eliminating intercompany sales) decreased 7.2% to $7,462 for the nine months ended September 30, 2010, from $8,042 for the nine months ended September 30, 2009. The decrease in manufacturing/distribution revenues for the period was attributed to the Company’s participation last year with a national consumer goods retailer. The program resulted in $762 being recorded as revenues for the first quarter of last year.

Retail channel revenues increased 26.0% to $42,831 for the nine months ended September 30, 2010, from $33,979 for the nine months ended September 30, 2009. The increase was principally driven by higher revenues generated online with an increase in sales activity at our FansEdge stores, off-set by contraction at our Field of Dreams stores due to a lower store count.

•

E-Commerce - Our internet retail division revenues increased 38.5% to $33,736 during the first nine months of 2010, versus $24,358 for the nine months ended September 30, 2009. The increase is a result of our FansEdge.com and web syndication growth.

•

FansEdge stores - Retail revenues generated through our six (6) FansEdge stores increased 35.1% to $3,184 for the first nine months of 2010, from $2,356 for the first nine months ended September 30, 2009. The stores experienced higher sales activity due to the Chicago Blackhawks Stanley Cup victory this year. Also, there was an additional FansEdge store operating for 30-days during the period.

•

Field of Dreams stores - Retail revenues generated through our company-owned Field of Dreams stores decreased 22.2% to $5,647 for the first nine months of 2010, from $7,265 for the first nine months ended September 30, 2009. We had nine stores operating during the current period, versus twelve last year.

•

Stadium Sales - Retail revenues generated in stadium was $264 for the period.

Costs and expenses. Total cost of sales for the nine months ended September 30, 2010, increased 22.7% to $27,223, versus $22,172 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 53.6% for the nine months ended September 30, 2010, versus 52.7% for the same period last year.

Cost of sales of manufacturing/distribution products increased 12.1% to $4,383 for the nine months ended September 30, 2010, from $3,909 for the nine months ended September 30, 2009. As a percentage of manufacturing/distribution revenues, cost of sales was 58.7% versus 48.6% for the nine months ended September 30, 2009. During the first quarter of 2009, the Company recorded revenues of $762 associated with a national consumer goods retailer project with higher than historical gross profits. As a percentage of manufacturing/distribution revenues before elimination of inter-company sales, costs were 68.2% for the nine months ended September 30, 2010, compared to 62.0% for the nine months ended September 30, 2009.

Cost of sales of retail products increased 25.0% to $22,840 for the nine months ended September 30, 2010, from $18,263 for the nine months ended September 30, 2009. The increase is a result of higher overall retail sales. As a percentage of total retail sales, costs were 53.3% for the nine months ended September 30, 2010, versus 53.7% for the same period last year.

Operating expenses increased 13.3% to $25,689 for the nine months ended September 30, 2010, versus $22,668 for the same period last year. The increase in operating expenses was related to increased legal and accounting fees associated with M & A activity and financings. Also, the Company incurred approximately $620 in one-time expenses related to its $2,000 private placement, the filing of a S-3 registration statement that provided for the Company’s $6,000 equity raise and the refinancing of its senior debt. As a percentage of sales, operating expenses were 50.7% for the nine months ended September 30, 2010, compared to 53.6% for the nine months ended September 30, 2009.

Interest expense, net. Net interest expense was $984 for the nine months ended September 30, 2010, versus $785 for the nine months ended September 30, 2009. Effective June 30, 2009, the Company’s senior lender increased our interest rate on outstanding loan balances from our credit facility. This was the impetus for the Company to seek a new credit facility at more competitive rates.

Provision for income taxes. The Company recognized an income tax benefit of $1,792 for the nine months ended September 30, 2010, versus $1,877 for the nine months ended September 30, 2009. 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, 2010 and September 30, 2009. The effective tax rate for both periods was approximately 40.0%.

Three Months Ended September 30, 2010 versus the Three Months Ended September 30, 2009

Revenue. Total revenues increased 30% to $19,791 for the three months ended September 30, 2010, compared to $15,226 for the three months ended September 30, 2009. The increase was attributed to considerably higher on-line sales, off-set by contraction at our Company owned stores due to fewer stores operating in the comparable period.

Manufacturing/Distribution revenues increased 5.3% to $3,484 for the three months ended September 30, 2010, compared to $3,307 for the three months ended September 30, 2009. The Company recorded $125 in revenues associated with the Comet Clothing and CMS arrangements. Net revenues (after eliminating intercompany sales) increased 8.1% to $2,793 for the three months ended September 30, 2010, from $2,583 for the three months ended September 30, 2009.

Retail channel revenues increased 33.8% to $16,843 for the three months ended September 30, 2010, from $12,582 for the three months ended September 30, 2009. The increase was principally driven by higher revenues generated online with an increase in sales activity at our FansEdge stores, off-set by contraction at our Field of Dreams stores due to a lower store count.

•

E-Commerce - Our internet retail division revenues increased 40.5% to $13,469 during the three months ended September 30, 2010, versus $9,583 for the three months ended September 30, 2009. The increase is a result of our FansEdge.com and web syndication growth.

•

FansEdge stores - Retail revenues generated through our six (6) FansEdge stores increased 22.5% to $1,168 for the three months ended September 30, 2010, from $953 for the three months ended September 30, 2009. There was an additional FansEdge store operating for 30-days during the period.

•

Field of Dreams stores - Retail revenues generated through our company-owned Field of Dreams stores decreased 5% to $1,942 for the three months ended September 30, 2010, from $2,046 for same period last year. We had nine stores operating during the current period, versus twelve last year.

•

Stadium Sales - Retail revenues generated in stadium was $264 for the period.

Costs and expenses. Total cost of sales for the three months ended September 30, 2010, increased 28.1% to $10,346, versus $8,072 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 52.2% for the three months ended September 30, 2010, versus 53.0% for the three months ended September 30, 2009.

Cost of sales of manufacturing/distribution products increased 17.1% to $1,635 for the three months ended September 30, 2010, from $1,396 for the three months ended September 30, 2009. As a percentage of manufacturing/distribution revenues, cost of sales was 58.5% versus 54.0% for the three months ended September 30, 2009. As a percentage of manufacturing/distribution revenues before elimination of inter-company sales, costs were 66.6% for the three months ended September 30, 2010, compared to 64.1% for the three months ended September 30, 2009.

Cost of sales of retail products increased 30.4% to $8,711 for the three months ended September 30, 2010, from $6,676 for the three months ended September 30, 2009. The increase is a result of higher overall retail sales. As a percentage of total retail sales, costs were 51.7% for the three months ended September 30, 2010, versus 53.0% for the same period last year.

Operating expenses increased 30.7% to $9,913 for the three months ended September 30, 2010, compared to $7,583 for the three months ended September 30, 2009. The increase in operating expenses was related to increased legal and accounting fees associated with M & A activity and financings. Also, the Company incurred approximately $485 in one-time expenses related to its filing of a S-3 registration statement that provided for the Company’s $6,000 equity raise and the refinancing of its senior debt. As a percentage of sales, operating expenses were 50.0% for the three months ended September 30, 2010, compared to 49.8% for the three months ended September 30, 2009.

Interest expense, net. Net interest expense was $225 for the three months ended September 30, 2010, versus $413 for the three months ended September 30, 2009. On July 23, 2010, the Company refinanced its senior credit facility at a significantly lower interest rate.

Provision for income taxes. The Company recognized an income tax benefit of $430 for the three months ended September 30, 2010, versus $507 for the three months ended September 30, 2009. 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, 2010 and September 30, 2009. 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, 2010, was the cash flows generated daily from our operating subsidiaries, availability under our $20,000 senior revolving credit facility and available cash.

The balance sheet as of September 30, 2010 reflects working capital of $13,358 versus working capital of $9,903 at December 31, 2009. At September 30, 2010, the Company’s cash was $412, compared to $582 at December 31, 2009. The Company is not negatively impacted by the cash balance of $412 as it has sufficient access to capital under its revolving credit facility with its senior lender. Net accounts receivable at September 30, 2010 were $3,743, compared to $5,342 at December 31, 2009.

Use of Funds

Cash used in operations amounted to $12,763 for the nine months ended September 30, 2010, compared to $6,238 cash used in operations during the same period of 2009. The increase in cash used in operations was mainly attributable to the Company increasing its inventory levels to support our growth.

Cash used in investing activities was $1,525 for the nine months ended September 30, 2010, compared to $744 cash used in investing activities for the same period of 2009. The increase was attributable to additional fixed asset acquisitions, including racking at our main distribution center and new kiosks.

Cash provided by financing activities was $14,118 for the nine months ended September 30, 2010, versus $6,668 cash provided by financing activities for the same period in 2009. In May, the Company completed a $2,000 private equity placement with three accredited investors. In July, the Company completed a $6,000 equity raise with a group led by the William Blair Small Cap Growth Fund.

Other Activity

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.

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 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.

Analysis

We are continuing to review our operational expenses and examining ways to reduce costs on a going-forward basis. With the slow economy, we are managing our capital conservatively and analyzing each of our commitments to identify areas where we can improve the profitability and/or cash flow of our business.

In addition, 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. The Company was also successful in re-financing its senior debt in July 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.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting companies.

Foreign Currency Exchange Rate Risk.

None.

Commodity Price Risk.

None.

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, 2010. 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 2010 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.)

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 15, 2010.

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

Exhibit Index


Exhibit No.		Description

10.1		Regions Bank Loan and Security Agreement, filed on form 8-K on July 27, 2010, herein incorporated by reference.

10.2		Regions Bank Revolving Note filed on form 8-K on July 27, 2010, herein incorporated by reference.

10.3		William Blair & Company, LLC subscription agreement filed on form 8-K on July 20, 2010, herein incorporated by reference.

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.)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company