UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
COMMISSION FILE NUMBER 0-28720
PAID, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 73-1479833
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4 Brussels Street, Worcester, Massachusetts 01610
(Address of Principal Executive Offices)
(508) 791-6710
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of August 3, 2004, the issuer had outstanding 164,068,227 shares of its
Common Stock, par value $.001 per share.
Transitional Small Business Disclosure Format
Yes |_| No |X|
Paid, Inc.
and Subsidiary
Form 10-QSB
For the Three and Six Months ended June 30, 2004
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2004 (unaudited) and December 31, 2003 (audited)......3
Consolidated Statements of Operations
Three and Six months ended June 30, 2004 and 2003 (unaudited)..4
Consolidated Statements of Cash Flows
Six months ended June 30, 2004 and 2003 (unaudited)...........5
Consolidated Statement of Changes in Shareholders' Deficit
Six months ended June 30, 2004 (unaudited) ....................6
Notes to Consolidated Financial Statements
Six months ended June 30, 2004 and 2003........................7-11
Item 2. Management's Discussion and Analysis or
Plan of Operation..............................................12
Item 3. Controls and Procedures.........................................16
Part II - Other Information
Item 1. Legal Proceedings...............................................17
Item 2. Changes in Securities and Small Business Issuer
Purchases of Equity Securities ............................17
Item 3. Defaults Upon Senior Securities.................................17
Item 4. Submission of Matters to a Vote of Security Holders.............17
Item 5. Other Information...............................................17
Item 6. Exhibits and Reports on Form 8-K................................17
Signatures..............................................................18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAID INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 2004 2003
---- ----
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 22,770 $ 104,397
Accounts receivable 5,651 3,529
Inventories, net 756,229 702,078
Prepaid expenses 117,076 57,364
Other current assets 19,767 22,331
------------ ------------
Total current assets 921,493 889,699
Property and equipment, net 223,499 397,950
Other intangible assets, net 1,018,282 1,414,737
------------ ------------
Total assets $ 2,163,274 $ 2,702,386
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 130,000 $ 145,000
Accounts payable 143,377 204,698
Accrued expenses 899,694 663,993
------------ ------------
Total current liabilities 1,173,071 1,013,691
------------ ------------
Convertible debt 2,717,066 3,001,573
------------ ------------
Contingencies -- --
------------ ------------
Shareholders' deficit:
Common stock, $.001 par value, 350,000,000 shares
authorized; 163,849,528 and 159,100,218 shares issued
and outstanding at June 30, 2004
and December 31, 2003, respectively 163,849 159,100
Additional paid-in capital 19,128,918 17,832,123
Accumulated deficit (21,019,630) (19,304,101)
------------ ------------
Total shareholders' deficit (1,726,863) (1,312,878)
------------ ------------
Total liabilities and shareholders' deficit $ 2,163,274 $ 2,702,386
============ ============
See accompanying notes to consolidated financial statements
3
PAID INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Six months Three months Six months
ended June ended June ended June ended June
30, 2004 30, 2004 30, 2003 30, 2003
------------- ------------- ------------- -------------
Revenues $ 363,304 $ 749,286 $ 461,225 $ 887,125
Cost of revenues 165,799 366,713 278,997 491,594
------------- ------------- ------------- -------------
Gross profit 197,505 382,573 182,228 395,531
------------- ------------- ------------- -------------
Operating expenses:
Selling, general, and administrative expenses 705,909 1,466,041 853,176 1,657,194
Web site development costs 228,729 376,332 174,317 356,908
------------- ------------- ------------- -------------
Total operating expenses 934,638 1,842,373 1,027,493 2,014,102
------------- ------------- ------------- -------------
Loss from operations (737,133) (1,459,800) (845,265) (1,618,571)
------------- ------------- ------------- -------------
Other income (expense):
Interest expense (127,558) (255,796) (92,345) (180,822)
Other income 23 67 19 26
------------- ------------- ------------- -------------
Total other expense, net (127,535) (255,729) (92,326) (180,796)
------------- ------------- ------------- -------------
Loss before income taxes (864,668) (1,715,529) (937,591) (1,799,367)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net loss $ (864,668) $ (1,715,529) $ (937,591) $ (1,799,367)
============= ============= ============= =============
Loss per share (basic and diluted) $ (0.01) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
Weighted average shares 162,288,948 161,139,972 136,287,217 133,516,738
============= ============= ============= =============
See accompanying notes to consolidated financial statements
4
PAID INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
2004 2003
---- ----
Operating activities:
Net loss $(1,715,529) $(1,799,367)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 572,540 742,445
Amortization of unearned compensation -- 44,619
Beneficial conversion feature 159,559 106,696
Common stock issued in payment of professional
and consulting fees 486,450 465,180
Issuance of common stock pursuant to exercise of
stock options granted to employees for services 57,926 37,174
Changes in assets and liabilities:
Accounts receivable (2,122) (574)
Inventories (54,151) 106,502
Prepaid expense and other current assets (57,148) 13,648
Accounts payable (61,321) 74,015
Accrued expenses 235,701 78,954
----------- -----------
Net cash used in operating activities (378,095) (130,708)
----------- -----------
Investing activities:
Property and equipment additions (1,634) --
----------- -----------
Financing activities:
Net proceeds from (repayment of) notes payable (15,000) 65,000
Proceeds from convertible debt 65,926 56,700
Proceeds from assignment of call options 247,000 --
Proceeds from exercise of stock options 176 --
----------- -----------
Net cash provided by financing activities 298,102 121,700
----------- -----------
Net decrease in cash and equivalents (81,627) (9,008)
Cash and equivalents, beginning 104,397 41,283
----------- -----------
Cash and equivalents, ending $ 22,770 $ 32,275
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ -- $ --
=========== ===========
Interest $ 1,125 $ 2,250
=========== ===========
See accompanying notes to consolidated financial statements
5
PAID INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(Unaudited)
Common stock Additional
---------------------- Paid-in Accumulated
Shares Amount Capital deficit Total
------------ -------- ------------ ------------ ------------
Balance, December 31, 2003 159,100,218 $159,100 $ 17,832,123 $(19,304,101) $ (1,312,878)
Common stock issued pursuant to exercise of stock
options granted to employees for services 224,162 224 57,702 -- 57,926
Common stock issued in payment of
professional and consulting fees 1,692,553 1,693 484,757 -- 486,450
Stock options exercised 176,250 176 -- -- 176
Conversions of notes payable 2,656,345 2,656 482,952 -- 485,608
Beneficial conversion discount -- -- 24,384 -- 24,384
Proceeds from assignment of call options -- -- 247,000 -- 247,000
Net loss -- -- -- (1,715,529) (1,715,529)
------------ -------- ------------ ------------ ------------
Balance, June 30, 2004 163,849,528 $163,849 $ 19,128,918 $(21,019,630) $ (1,726,863)
============ ======== ============ ============ ============
See accompanying notes to consolidated financial statements
6
PAID, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 1. Organization and Summary Of Significant Accounting Policies
Line of business
Paid, Inc. and subsidiary (the "Company") operates and maintains an internet
portal dedicated to collectibles in a variety of categories. The Company
conducts person-to-person online auctions of its own merchandise and items
posted under consignment arrangements by third party sellers.
General
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the United States Securities
and Exchange Commission for interim financial reporting and include all
adjustments (consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation). These financial
statements have not been audited.
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 for interim reporting. The Company believes that the
disclosures contained herein are adequate to make the information presented not
misleading. However, these financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's annual
report for the year ended December 31, 2003, which are included in the Company's
Form 10-KSB.
Principles of consolidation
The accompanying financial statements include the accounts of Paid, Inc. and its
wholly-owned subsidiary, Rotman Collectibles, Inc.
Inventories
Inventories consist of collectible merchandise for sale and are stated at the
lower of average cost or market on a first-in, first-out (FIFO) method.
On a periodic basis management reviews inventories on hand to ascertain if any
is slow moving or obsolete. In connection with this review, at both June 30,
2004 and December 31, 2003 the Company has provided for reserves totaling
$270,000.
Revenue Recognition
The Company generates revenue on sales of its purchased inventories, from fees
and commissions on sales of merchandise under consignment type arrangements,
from web hosting services, from appraisal services and from advertising and
promotional services.
For sales of merchandise owned and warehoused by the Company, the Company is
responsible for conducting the auction, billing the customer, shipping the
merchandise to the customer, processing customer returns and collecting accounts
receivable. The Company recognizes revenue upon verification of the credit card
transaction and shipment of the merchandise, discharging all obligations of the
Company with respect to the transaction.
7
For sales of merchandise under consignment-type arrangements, the Company takes
physical possession of the merchandise, but is not obligated to, and does not
take title or ownership of merchandise. When an auction is completed, consigned
merchandise that has been sold is shipped upon receipt of payment. The Company
recognizes the net commission and service revenues relating to the consigned
merchandise upon receipt of the gross sales proceeds and shipment of the
merchandise. The Company then releases the net sales proceeds to the Consignor,
discharging all obligations of the Company with respect to the transaction.
The Company provides web hosting services under two types of arrangements.
Revenue is recognized on a monthly basis as the services are provided for those
where payment is to be received in cash. Professional athletes' web sites are
hosted under arrangements that are settled by the athlete providing a certain
number of autographs on merchandise to be sold by the Company. Revenue related
to player websites is recognized upon sale of the autographed merchandise.
Appraisal revenues are recognized when the appraisal is delivered to the
customer.
Advertising revenues are recognized at the time the advertisement is initially
displayed on the Company's web site. Sponsorship revenues are recognized at the
time that the related event is conducted.
Advertising Costs
Advertising costs totaling approximately $48,000 in 2004 and $55,000 in 2003 are
charged to expense when incurred.
Earnings Per Common Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate to convertible
debt and outstanding stock options and warrants. The number of common shares
that would be issued upon conversion of the convertible debt would have been
10,660,188 as of June 30, 2004, and 30,671,907 as of June 30, 2003. The number
of common shares that would be included in the calculation of outstanding
options and warrants is determined using the treasury stock method. The assumed
conversion of outstanding dilutive stock options and warrants would increase the
shares outstanding but would not require an adjustment of income as a result of
the conversion. Stock options and warrants applicable to 25,466,000 at June 30,
2004 and 25,642,250 at June 30, 2003 have been excluded from the computation of
diluted earnings per share, as have the common shares that would be issued upon
conversion of the convertible debt, because they are antidilutive. Diluted
earnings per share have not been presented as a result of the Company's net loss
for each period.
Web Site and Software Development Costs
The Company accounts for web site development costs in accordance with the
provisions of EITF 00-2, "Accounting for Web Site Development Costs" ("EITF
00-2"), which requires that costs incurred in planning, maintaining, and
operating stages that do not add functionality to the site be charged to
operations as incurred. External costs incurred in the site application and
infrastructure development stage and graphic development are capitalized. Such
capitalized costs are included in "Property and equipment."
8
Note 2. Notes and Loan Payable
At June 30, 2004 and December 31, 2003, the Company was obligated on short-term
notes payable totaling $130,000 and $145,000, respectively. At both June 30,
2004 and December 31, 2003 $130,000 was to a related party. The related party
notes bear interest at 8%, while the remainder bear interest at 18%. All of the
short-term debt is due in 2004. Interest expense charged to operations in
connection with the related party notes totaled $5,258 and $5,129 for the six
months ended June 30, 2004 and 2003 respectively.
Note 3. Common Stock
Call Option Agreements
The Company was granted call options for 2,283,565 unregistered common shares
held by ChannelSpace Entertainment, Inc. ("CSEI") at an exercise price of $.001
per share. The call options expire on January 31, 2005.
During 2004 the Company assigned options to purchase 525,000 shares of stock
from CSEI to certain individuals in exchange for $247,000, which was added to
the paid in capital of the Company.
Stock Options
On February 1, 2001 the Company adopted the 2001 Non-Qualified Stock Option Plan
(the "2001 Plan") and has filed Registration Statements on Form S-8 to register
60,000,000 shares of its common stock. Under the 2001 Plan employees and
consultants may elect to receive their gross compensation in the form of options
to acquire the number of shares of the Company's common stock equal to their
gross compensation divided by the fair value of the stock on the date of grant.
During the six months ended June 30, 2004, the Company granted options for
1,916,715 shares at various dates aggregating $544,376 under this plan. During
the six months ended June 30, 2003 the Company granted options for 11,542,481
shares at various dates aggregating $502,354 under this plan. All options
granted during each period were exercised.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly,
compensation cost has been recognized based on the difference between the fair
market value of the common stock at the grant date and the exercise price. The
following table reflects proforma net loss and loss per share had the Company
elected to adopt the fair value approach for SFAS No. 123, as amended by SFAS
No. 148.
For the six months ended
-------------------------------
June 30, 2004 June 30, 2003
------------- -------------
Net loss, as reported ($1,715,529) ($1,799,367)
Add stock compensation costs -- 44,619
on options granted below
fair market value
Less stock compensation costs (135,300) (529,571)
had option expense been ------------- -------------
measured at fair value
Proforma net loss, as adjusted ($1,850,829) ($2,284,319)
============= =============
Weighted average shares 161,139,972 133,516,738
============= =============
Loss per share (basic and diluted), as ($.01) ($.01)
reported ============= =============
Proforma loss per share (basic ($.01) ($.02)
and diluted), as adjusted ============= =============
9
For the three months ended
--------------------------
June 30, 2004 June 30, 2003
------------- -------------
Net loss, as reported ($864,668) ($937,591)
Add stock compensation costs -- --
on options granted below
fair market value
Less stock compensation costs (67,650) (189,684)
had option expense been ------------- -------------
measured at fair value
Proforma net loss, as adjusted ($932,318) ($1,127,275)
============= =============
Weighted average shares 162,288,948 136,287,217
============= =============
Loss per share (basic and diluted), as ($.01) ($.01)
reported ============= =============
Proforma loss per share (basic ($.01) ($.01)
and diluted), as adjusted ============= =============
These proforma amounts may not be representative of future disclosures since the
estimated fair value of stock options is amortized to expense over the vesting
period, and additional options may be granted in future years.
Note 4. Income Taxes
There was no provision for income taxes for the periods ended June 30, 2004 and
2003 due to the Company's net operating loss and its valuation reserve against
deferred income taxes.
The difference between the provision for income taxes from amounts computed by
applying the statutory federal income tax rate of 34% and the Company's
effective tax rate is due primarily to the net operating loss incurred by the
Company and the valuation reserve against the Company's deferred tax asset.
At June 30, 2004, the Company has federal and state net operating loss carry
forwards of approximately $16,600,000 available to offset future taxable income.
The state carry-forwards will expire intermittently through 2009, while the
federal carry forwards will expire intermittently through 2024.
Note 5. Convertible Debt Financing
As of June 30, 2004 the Company has issued $2,952,872 of convertible debt, which
is presented net of unamortized beneficial conversion discounts of $235,806.
10
On March 23, 2000, the Company entered into a Securities Purchase Agreement (the
"Agreement") whereby the Company sold an 8% convertible note in the amount of
$3,000,000 (the "Series A Note") due in shares of common stock on March 31, 2002
to Augustine Fund, L.P. (the "Buyer"). The Series A Note, as most recently
modified on May 21, 2002, is convertible into common stock at a conversion price
equal to the lesser of: (1) $.375 per share, or (2) seventy-three percent (73%)
of the average of the closing bid price for the common stock for the five (5)
trading days immediately preceding the conversion date. In connection with the
agreement, the Company also issued warrants to the Buyer and Delano Group
Securities to purchase 300,000 and 100,000 shares of common stock, respectively.
The purchase price per share of common stock is equal to $2.70, one hundred and
twenty percent (120%) of the lowest of the closing bid prices for the common
stock during the five (5) trading days prior to the closing date. The warrants
will expire on March 31, 2005. A May 21, 2002 modification agreement extended
the maturity date of the note until September 30, 2002, provided for additional
ninety-day extensions, the most recent of which was exercised on June 30, 2004,
beyond that date until March 31, 2005, waived interest for periods after March
31, 2002, and released the Company from all requirements to register any common
shares issuable under the note or to keep any existing registration statements
effective. As of June 30, 2004 the outstanding balance of this note was
$702,872, since $2,297,128 has been converted into 23,087,658 shares of the
Company's common stock at conversion prices ranging from $.028 to $.375 per
share.
On November 7, 2001, the Company entered into a Loan Agreement, whereby it
issued an 8% convertible note in the amount of $1,000,000, due November 7, 2003
(the "Series B Note") to Buyer. This note was modified most recently on October
31, 2003, to, among other things, allow the Company to borrow up to $2,250,000.
The Series B Note, as modified, is convertible into common stock at a conversion
price equal to the lesser of: (1) $.25 per share, or (2) seventy-three percent
(73%) of the average of the closing bid price for the common stock for the five
(5) trading days immediately preceding the conversion date. Based upon advances
through June 30, 2004, had the Buyer converted the Series B Note at issuance,
Buyer would have received $3,082,193 in aggregate value of the Company's common
stock upon conversion of the convertible note. As a result, in accordance with
EITF 00-27, the intrinsic value of the beneficial conversion feature of $832,193
is being charged to interest expense over the term of the related note. The
beneficial conversion feature that was charged to interest expense totaled
$79,428 and $159,559 during the three and six months ended June 30, 2004,
respectively. The beneficial conversion feature that was charged to interest
expense totaled $54,023 and $106,696 during the three and six months ended June
30, 2003, respectively. The total beneficial conversion discount related to this
note has been recorded as an increase in additional paid in capital and the
unamortized portion as a reduction in the related note. In addition, the Company
entered into a Registration Rights Agreement whereby the Company agreed to file
a Registration Statement with the Securities and Exchange Commission (SEC)
within sixty (60) days of a request from the Buyer ("Filing Date"), covering the
common stock to be issued upon conversion of the Series B Note. If this
Registration Statement is not declared effective by the SEC within sixty (60)
days of the filing date the conversion percentage shall decrease by two percent
(2%) for each month that the Registration Statement is not declared effective.
One of the modification agreements extended the maturity date of the Series B
Note to November 7, 2004, provided the opportunity to extend the maturity date
to November 7, 2005, required that principal and interest be payable in shares
of common stock, or cash, at the discretion of the Company, and provided that
any fees or expenses related to any registration of the common stock will be
borne equally by the Company and the Buyer.
Note 6. Issuance of Common Stock
During the six months ended June 30 2004 and 2003 the Company issued 1,692,553
and 10,746,459 shares of common stock respectively, in connection with the
payment of approximately $486,450 and $465,180 of professional and consulting
fees, respectively.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Our innovative products and services are utilized in online auction
management, e-commerce and web site development. AuctionInc. provides auction
management tools and services to sellers and buyers. The technology is based on
our patent-pending process that streamlines back-office and shipping processes
for online auctions and e-commerce. Our new celebrity services offer famous
people official web sites and fan-club services including, e-commerce
storefronts, articles, polls, message boards, contests, biographies and custom
features to attract tens of thousands of visitors daily. Our primary business,
based on our revenues, is the purchase and sale of collectibles and memorabilia
through our Rotman Auction brand. Rotman Auction is an eBay Platinum Powerseller
that sells thousands of items each week on eBay and provides consignment
services, authentication and public and private autograph events. We also build
and maintain large database-driven portals across a broad array of industries,
including CollectingChannel.com, which is home to our online appraisal service,
Ask the Appraiser.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 1 to
our financial statements. However, certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management; as a result, they are subject to an inherent degree of uncertainty.
In applying these policies, our management makes estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures. Those estimates and judgments are based upon our historical
experience, the terms of existing contracts, our observance of trends in the
industry, information that we obtain from our customers and outside sources, and
on various other assumptions that we believe to be reasonable and appropriate
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our critical accounting
policies include:
Inventories: Inventories are stated at the lower of average cost or market
on a first-in, first-out method. On a periodic basis we review inventories on
hand to ascertain if any is slow moving or obsolete. In connection with this
review, we establish reserves based upon our experience and management's
assessment of current product demand.
Property and Equipment and Intangible Assets: Property and equipment and
intangible assets are stated at cost. Depreciation and amortization are computed
over estimated useful lives that are reviewed periodically. In connection with
this review we consider changes in the economic environment, technological
advances, and management's assessment of future revenue potential.
Results of Operations
Three Months ended June 30, 2004 and 2003
The following discussion compares the Company's results of operations for
the three months ended June 30, 2004 with those for the three months ended June
30, 2003. The Company's financial statements and notes thereto included
elsewhere in this quarterly report contain detailed information that should be
referred to in conjunction with the following discussion. As discussed in
further detail below, gross margin percentages on Company owned product were
approximately 17% higher for the second quarter of 2004 than in 2003 (54% for
the second quarter of 2004 versus 37% for the second quarter of 2003), and sales
of Company owned product were approximately $88,400 lower in the quarter ended
June 30, 2004, resulting in approximately $26,800 more gross margin dollars.
12
Revenue. For the three months ended June 30, 2004, revenue was $363,300,
97% of which is attributable to sales of the Company's own product and fees from
buyers and sellers through the Rotman Auction operations. Gross sales of the
Company's own product were approximately $352,100. Advertising and web hosting
fees were approximately $5,800 or 2% of gross revenues during the quarter ended
June 30, 2004.
The Company's 2004 second quarter revenues represent a decrease of
approximately $97,900, or 21%, from the three-month period ended June 30, 2003,
in which revenue was approximately $461,200. For the three month period ended
June 30, 2003, sales of the Company's product were approximately $440,600, or
96% of gross sales, and advertising and web hosting fees were $19,000, or 4% of
gross revenues.
The reason for the decrease in revenues was lower sales of Company owned
product of approximately $88,400 from the same period in 2003. Lower sales of
Company owned product are a result of a strategic management decision to
accumulate autograph memorabilia in order to position the Company to enter into
additional distribution channels. Gross profit from Company owned product sales
for the three months ended March 31, 2004 was approximately $188,600, which
represents an increase of $26,800 from the comparable quarter in 2003, in which
gross profit from Company owned product sales was $161,800. As a result of more
strategic purchasing and an effort to list product more selectively, from both a
product and timing perspective, gross margin percentages increased by
approximately 17% in the second quarter of 2004 compared to those in the second
quarter of 2003. This improvement in gross margin, coupled with approximately
$88,400 lower sales of Company owned product during those same periods, resulted
in approximately $26,800 more gross margin dollars.
Operating Expenses. Total operating expenses for the three months ended
June 30, 2004 were approximately $934,600, compared to $1,027,500 for the
corresponding period in 2003, a decrease of $92,900. Sales, general and
administrative ("SG&A") expenses for the three months ended June 30, 2004 were
approximately $705,900, compared to $853,200 for the three months ended June 30,
2003. The decrease of $147,300 in SG&A costs includes decreases in depreciation
and amortization of $49,200 due to certain assets becoming fully depreciated
during 2004, professional fees of $89,200, and payroll and related costs of
$21,000. Costs associated with planning, maintaining and operating our web sites
for the three months ended June 30, 2004 increased approximately $54,400 from
the corresponding period in 2003. This increase is due primarily to increases in
payroll of $28,200, consulting of $60,100, and computer expense of $14,800
offset by a decrease in depreciation of $17,800.
Interest Expense. For the quarter ended June 30, 2004, the Company
incurred interest charges of approximately $127,600 principally associated with
one convertible note, compared to interest charges of $92,300 for the
corresponding period in 2003. The increase of $35,200 is attributable to higher
balances of interest-bearing debt in 2004 as well as greater amortization of
beneficial conversion features.
Net Loss. The Company realized a net loss for the three months ended June
30, 2004 of approximately $864,700, or $.01 per share, as compared to a loss of
$937,600, or $.01 per share for the three months ended June 30, 2003.
Inflation. The Company believes that inflation has not had a material
effect on its results of operations.
Six Months ended June 30, 2004 and 2003
The following discussion compares the Company's results of operations for
the six months ended June 30, 2004 with those for the six months ended June 30,
2003. The Company's financial statements and notes thereto included elsewhere in
this quarterly report contain detailed information that should be referred to in
conjunction with the following discussion. As discussed in further detail below,
gross
13
margin percentages on Company owned product were approximately 7% higher for the
first six months of 2004 than in 2003 (50% for the first six months of 2004
versus 43% for the first six months of 2003), and sales of Company owned product
were approximately $125,600 lower in the six months ended June 30, 2004,
resulting in approximately the same gross margin dollars in both periods.
Revenue. For the six months ended June 30, 2004, revenue was $749,300, 98%
of which is attributable to sales of the Company's own product and fees from
buyers and sellers through the Rotman Auction operations. Gross sales of the
Company's own product were approximately $730,600. Advertising and web hosting
fees were approximately $8,800 or 1% of gross revenues during the six months
ended June 30, 2004.
The Company's 2004 revenues represent a decrease of approximately
$137,800, or 16%, from the six-month period ended June 30, 2003, in which
revenue was approximately $887,100. For the six month period ended June 30,
2003, sales of the Company's product were approximately $856,200, or 97% of
gross sales, and advertising and web hosting fees were $25,300, or 3% of gross
revenues.
The reason for the decrease in revenues was lower sales of Company owned
product of approximately $125,600 from the same period in 2003. Lower sales of
Company owned product are a result of a strategic management decision to
accumulate autograph memorabilia in order to position the Company to enter into
additional distribution channels and lower availability of product at attractive
prices. Gross profit from Company owned product sales for the six months ended
June 30, 2004 was approximately $366,400, nearly the same as in the comparable
quarter in 2003. Since gross margin percentages on Company owned product were
approximately 7% higher for the first six months of 2004 than in 2003, and sales
of Company owned product were approximately $125,600 lower in the six months
ended June 30, 2004, the Company produced approximately the same gross margin
dollars in both periods.
Operating Expenses. Total operating expenses for the six months ended June
30, 2004 were approximately $1,842,400, compared to $2,014,100 for the
corresponding period in 2003, a decrease of $171,700. Sales, general and
administrative ("SG&A") expenses for the six months ended June 30, 2004 were
approximately $1,466,000, compared to $1,657,200 for the six months ended June
30, 2003. The decrease of $191,200 in SG&A costs includes decreases in
depreciation and amortization of $87,600 due to certain assets becoming fully
depreciated during 2004, professional fees of $91,400, and payroll and related
costs of $22,500. Costs associated with planning, maintaining and operating our
web sites for the six months ended June 30, 2004 increased approximately $19,400
from the corresponding period in 2003. This increase is due primarily to an
increase in consulting costs of $71,900 offset by decreases in depreciation and
amortization of $32,300 and compensation costs of $17,900.
Interest Expense. For the six months ended June 30, 2004, the Company
incurred interest charges of approximately $255,800 principally associated with
one convertible note, compared to interest charges of $180,800 for the
corresponding period in 2003. The increase of $75,000 is attributable to higher
balances of interest-bearing debt in 2004 as well as greater amortization of
beneficial conversion features.
Net Loss. The Company realized a net loss for the six months ended June
30, 2004 of approximately $1,715,500, or $.01 per share, as compared to a loss
of $1,799,400, or $.01 per share for the six months ended June 30, 2003.
Inflation. The Company believes that inflation has not had a material
effect on its results of operations.
14
Assets
At June 30, 2004, total assets of the Company were $2,163,300, compared to
$2,702,400 at December 31, 2003. The decrease was primarily due to depreciation
and amortization totaling $572,500.
Operating Cash Flows
A summarized reconciliation of the Company's net losses to cash used in
operating activities for the six months ended June 30, 2004 compared to June 30,
2003, is as follows:
2004 2003
----------- -----------
Net loss $(1,715,500) $(1,799,400)
Depreciation and amortization 572,500 742,400
Amortization of beneficial conversion
Discount and debt discount 159,600 106,700
Common stock issued in payment services 544,400 502,400
Changes in current assets and 60,900 317,200
liabilities -- --
Net cash used in operating activities $(378,100) $(130,700)
=========== ===========
Working Capital and Liquidity
The Company had cash and cash equivalents of $22,800 at June 30, 2004,
compared to $104,400 at December 31, 2003. The Company had a $251,600 deficit in
working capital at June 30, 2004, compared to working capital deficit of
$124,000 at December 31, 2003. At June 30, 2004 current liabilities were
$1,173,100 compared to $1,013,700 at December 31, 2003. During the six months
ended June 30, 2004 current liabilities increased primarily due to larger
interest, consignment and compensation accruals, offset by reductions in
accounts payable. As discussed in greater detail in Note 5 of the Financial
Statements, included in Part I of this quarterly report and incorporated by
reference herein, the Company has two outstanding convertible notes held by
Augustine Fund, L.P. The Series A Note, in the original principal amount of
$3,000,000, has been reduced to $702,872 as of June 30, 2004 through the
conversion of principal into common stock. The Series B Note has a principal
amount outstanding as of June 30, 2004 of $2,250,000.
The Company's independent auditors have issued a going concern opinion on
the Company's consolidated financial statements for the year ended December 31,
2003. The Company needs an infusion of $600,000 to $800,000 of additional
capital to fund anticipated operating costs over the next 12 months. However,
management anticipates growth in gross profit, that its suite of management
tools, called "AuctionInc", sales of movie posters, both from inventory and on
consignment, and celebrity web hosting will increase revenues and result in
higher gross profit. Subject to the discussion below, management believes that
the Company has sufficient cash commitments to fund operations during the next
12 months. These commitments include call options for approximately 1.8 million
shares of common stock, which, once assigned by the Company, can generate
between $150,400 and $1,266,200 (based solely upon the 52 week high and low
closing prices of the Company's common stock) of cash.
Management believes that these plans should result in obtaining sufficient
operating cash through the next 12 months. However, there can be no assurance
assignment of the call options can be concluded on reasonably acceptable terms.
If assignments are not made, management may need to seek alternative sources of
capital to support operations.
15
Forward Looking Statements
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements (within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934) regarding the Company and
its business, financial condition, results of operations and prospects. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions or variations of such words are intended to
identify forward-looking statements in this report. Additionally, statements
concerning future matters such as the development of new services, technology
enhancements, purchase of equipment, credit arrangements, possible changes in
legislation and other statements regarding matters that are not historical are
forward-looking statements.
Although forward-looking statements in this quarterly report reflect the
good faith judgment of the Company's management, such statements can only be
based on facts and factors currently known by the Company. Consequently,
forward-looking statements are inherently subject to risks, contingencies and
uncertainties, and actual results and outcomes may differ materially from
results and outcomes discussed in this report. Although the Company believes
that its plans, intentions and expectations reflected in these forward-looking
statements are reasonable, the Company can give no assurance that its plans,
intentions or expectations will be achieved. For a more complete discussion of
these risk factors, see Exhibit 99, "Risk Factors", in the Company's Form 10-KSB
for the fiscal year ended December 31, 2003.
For example, the Company's ability to achieve positive cash flow and to
become profitable may be adversely affected as a result of a number of factors
that could thwart its efforts. These factors include the Company's inability to
successfully implement the Company's business and revenue model, the
collectibles community not accepting the services the Company offers, higher
costs than anticipated, the Company's inability to sell its products and
services to a sufficient number of customers, the introduction of competing
products by others, the Company's failure to attract sufficient interest in and
traffic to its sites, the Company's inability to complete development of its
sites, the failure of the Company's operating systems, and the Company's
inability to increase its revenues as rapidly as anticipated. If the Company is
not profitable in the future, it will not be able to continue its business
operations.
ITEM 3. CONTROLS AND PROCEDURES
The Company's management, including the President of the Company and the
Chief Financial Officer of the Company, has evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Based upon their evaluation, the principal executive officer
and principal financial officer concluded that, as of the end of the period
covered by this report, the Company's disclosure controls and procedures were
effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission is recorded, processed,
summarized and reported within the time period specified by the Securities and
Exchange Commission's rules and forms, and is accumulated and communicated to
the Company's management, including its principal executive and financial
officers, as appropriate to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
(c) During the second quarter of 2004, Augustine Fund, L.P. converted
$485,608 of the March 23, 2000 convertible note into 2,656,345 shares of common
stock of the Company. The features of this convertible note are described in
Note 5 of the Notes to Consolidated Financial Statements, which are included in
Part I of this quarterly report. Augustine Fund, L.P. is an accredited investor
that represented that it acquired the convertible notes and the warrants issued
in connection with the note for its own account. The issuance of the securities
is exempt from registration under Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder. The Company did not issue any shares of its
common stock, par value $.001 per share, to Augustine Fund, L.P., for interest
due pursuant to the eight percent convertible note issued by the Company to the
Augustine Fund, L.P. on November 7, 2001.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 CEO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
31.2 CFO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
32.1 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 13, 2004 PAID, INC.
Registrant
/s/ Gregory Rotman
----------------------------------------
Gregory Rotman, President
/s/ Richard Rotman
----------------------------------------
Richard Rotman, Chief Financial Officer,
Vice President and Secretary
18
LIST OF EXHIBITS
Exhibit No. Description
31.1 CEO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
31.2 CFO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
32.1 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
19