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, 2005
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, 2005, the issuer had outstanding 182,943,870 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, 2005
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2005 (unaudited) and December 31, 2004 (audited)..........3
Consolidated Statements of Operations
Three and Six months ended June 30, 2005 and
2004 (unaudited)...................................................4
Consolidated Statements of Cash Flows
Six months ended June 30, 2005 and
2004 (unaudited)...................................................5
Consolidated Statements of Changes in Shareholders' Deficit
Six months ended June 30, 2005
(unaudited)........................................................6
Notes to Consolidated Financial Statements
Six months ended June 30, 2005 and 2004.........................7-14
Item 2. Management's Discussion and Analysis or
Plan of Operation...................................................15
Item 3. Controls and Procedures.............................................20
Part II - Other Information
Item 1. Legal Proceedings...................................................21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ........21
Item 3. Defaults Upon Senior Securities.....................................21
Item 4. Submission of Matters to a Vote of Security Holders.................21
Item 5. Other Information ..................................................21
Item 6. Exhibits ...........................................................22
Signatures..................................................................23
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAID INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 2005 2004
------ ---- ----
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 32,357 $ 43,558
Accounts receivable 35,007 45,739
Inventories, net 483,070 624,082
Investment in call options 427,500 --
Prepaid expenses 36,150 125,180
Due from employees 52,099 55,656
Other current assets 9,073 9,073
------------ ------------
Total current assets 1,075,256 903,288
Property and equipment, net 227,009 172,706
Other intangible assets, net 298,365 688,872
------------ ------------
Total assets $ 1,600,630 $ 1,764,866
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 130,000 $ 290,000
Loan payable 100,000 --
Accounts payable 234,953 164,829
Accrued expenses 851,805 991,196
------------ ------------
Total current liabilities 1,316,758 1,446,025
------------ ------------
Convertible debt 2,156,586 2,398,021
------------ ------------
Shareholders' deficit:
Common stock, $.001 par value, 350,000,000 shares
authorized; 181,155,377 and 173,320,731 shares issued
and outstanding at June 30, 2005
and December 31, 2004, respectively 181,155 173,321
Additional paid-in capital 22,775,957 21,166,334
Accumulated deficit (24,824,826) (23,383,835)
Unearned compensation (5,000) (35,000)
------------ ------------
Total shareholders' deficit (1,872,714) (2,079,180)
------------ ------------
Total liabilities and shareholders' deficit $ 1,600,630 $ 1,764,866
============ ============
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, 2005 30, 2005 30, 2004 30, 2004
------------- ------------- ------------- -------------
Revenues $ 633,356 $ 1,493,009 $ 363,304 $ 749,286
Cost of revenues 258,612 786,121 165,799 366,713
------------- ------------- ------------- -------------
Gross profit 374,744 706,888 197,505 382,573
------------- ------------- ------------- -------------
Operating expenses:
Selling, general, and administrative expenses 907,448 2,012,838 705,909 1,466,041
Web site development costs 175,876 287,777 228,729 376,332
------------- ------------- ------------- -------------
Total operating expenses 1,083,324 2,300,615 934,638 1,842,373
------------- ------------- ------------- -------------
Loss from operations (708,580) (1,593,727) (737,133) (1,459,800)
------------- ------------- ------------- -------------
Other income (expense):
Interest expense (78,523) (172,312) (127,558) (255,796)
Loss on call options (145,500) (145,500) -- --
Other income 470,547 470,548 23 67
------------- ------------- ------------- -------------
Total other income (expense), net 246,524 152,736 (127,535) (255,729)
------------- ------------- ------------- -------------
Loss before income taxes (462,056) (1,440,991) (864,668) (1,715,529)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net loss $ (462,056) $ (1,440,991) $ (864,668) $ (1,715,529)
============= ============= ============= =============
Loss per share (basic and diluted) $ (0.00) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
Weighted average shares 178,777,729 176,565,145 162,288,948 161,139,972
============= ============= ============= =============
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)
2005 2004
---- ----
Operating activities:
Net loss $(1,440,991) $(1,715,529)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 458,333 572,540
Bad debt expense 340 --
Settlement Agreement and Mutual Release-call options (470,500) --
Amortization of unearned compensation 30,000 --
Beneficial conversion feature 60,457 159,559
Loss on call options 145,500 --
Common stock issued in payment of professional
and consulting fees 831,870 486,450
Issuance of common stock pursuant to exercise of
stock options granted to employees for services 135,748 57,926
Common stock issued in payment of interest 8,000 --
Changes in assets and liabilities:
Accounts receivable 10,392 (2,122)
Inventories 11,512 (54,151)
Prepaid expense and other current assets 92,587 (57,148)
Accounts payable 70,124 (61,321)
Accrued expenses (139,391) 235,701
----------- -----------
Net cash used in operating activities (196,019) (378,095)
----------- -----------
Investing activities:
Proceeds from assignment of call options 27,000 --
Property and equipment additions (122,129) (1,634)
----------- -----------
Net cash used in investing activities (95,129) (1,634)
----------- -----------
Financing activities:
Net repayment of notes payable -- (15,000)
Proceeds from loan payable 100,000 --
Proceeds from sale of warrants 50,000 --
Proceeds from sale of common stock 30,000 --
Proceeds from convertible debt -- 65,926
Proceeds from assignment of call options 99,611 247,000
Proceeds from exercise of stock options 336 176
----------- -----------
Net cash provided by financing activities 279,947 298,102
----------- -----------
Net decrease in cash and equivalents (11,201) (81,627)
Cash and equivalents, beginning 43,558 104,397
----------- -----------
Cash and equivalents, ending $ 32,357 $ 22,770
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ -- $ --
=========== ===========
Interest $ -- $ 1,125
=========== ===========
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, 2005
(Unaudited)
Common stock Additional
---------------------- Paid-in Accumulated Unearned
Shares Amount Capital deficit Compensation Total
----------- -------- ----------- ------------ ------------ -----------
Balance, December 31, 2004 173,320,731 $173,321 $21,166,334 $(23,383,835) $(35,000) $(2,079,180)
Common stock issued pursuant to exercise of stock
options granted to employees for services 576,463 576 135,172 -- -- 135,748
Common stock issued in payment of
professional and consulting fees 4,177,992 4,178 827,692 -- -- 831,870
Common stock issued in payment of
interest on note payable 38,095 38 7,962 -- -- 8,000
Common stock issued in payment of note payable 761,905 762 159,238 -- -- 160,000
Issuance of common stock 200,000 200 29,800 -- -- 30,000
Stock options exercised 336,364 336 -- -- 336
Common stock issued for payment of
convertible debt 1,743,827 1,744 300,148 -- -- 301,892
Amortization of unearned compensation -- -- -- -- 30,000 30,000
Proceeds from sale of warrants -- -- 50,000 -- -- 50,000
Proceeds from assignment of call options -- -- 99,611 -- -- 99,611
Net loss -- -- -- (1,440,991) -- (1,440,991)
----------- -------- ----------- ------------ -------- -----------
Balance, June 30, 2005 181,155,377 $181,155 $22,775,957 $(24,824,826) $ (5,000) $(1,872,714)
=========== ======== =========== ============ ======== ===========
See accompanying notes to consolidated financial statements
6
PAID, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 and 2004
Note 1. Organization and Summary of Significant Accounting Policies
Line of business
During the fourth quarter of 2004 Paid Inc. and subsidiary ("the "Company")
acquired the operating assets of K Sports & Entertainment LLC ("K Sports"), a
company that operated as a sports agency business. In addition, Paid's celebrity
services operations host a number of celebrity websites and has begun the
electronic management of performing artists' fan clubs and related services.
The Company also provides other services for celebrities and sports
personalities including autograph signings, appearances, marketing opportunities
and event ticketing. The Company continues to sell sports collectibles and
merchandise through a variety of outlets, including online auctions and
wholesale and distribution outlets.
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, 2004, which are included in the Company's
Form 10-KSB.
Principles of consolidation
The accompanying consolidated 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. When a
purchase contains multiple copies of the same item, they are stated at average
cost.
On a periodic basis management reviews inventories on hand to ascertain if any
is slow moving or obsolete. In connection with this review, at June 30, 2005 and
December 31, 2004 the Company has provided for reserves totaling $175,000 and
$300,000, respectively.
7
Investment in call options
The Company accounts for investment in call options in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services".
Accordingly, call options are recorded at fair value on the date they are
received and adjusted to fair value at the balance sheet date. Any realized or
unrealized gains or losses are recorded in other income (expense).
Revenue Recognition
The Company generates revenue from sales of its purchased inventories, from fees
and commissions on sales of merchandise under consignment type arrangements,
from web hosting services, from fan club membership fees, 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.
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.
Fan club membership fees are recognized when the member joins and all direct
costs associated with the membership have been incurred.
Advertising Costs
Advertising costs totaling approximately $68,000 in 2005 and $48,000 in 2004 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
8
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 13,414,634 as of June 30, 2005 and 10,660,188 as of June
30, 2004. The number of common shares that would be included in the calculation
of outstanding options 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 27,365,054
shares and 25,466,000 shares at June 30, 2005 and 2004, respectively, 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 were antidilutive. Diluted earnings per share have not been presented as a
result of the Company's net loss for each period.
Website and Software Development Costs
The Company accounts for website 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." During the six
months ended June 30, 2005 the Company capitalized approximately $119,000 of
website development costs. There was no such capitalization during the six
months ended June 30, 2004.
Note 2. Notes and Loan Payable
At June 30, 2005 and December 31, 2004 the Company was obligated on short-term
demand notes payable to a related party totaling $130,000 bearing interest at
8%. Interest expense charged to operations in connection with these related
party notes totaled approximately $5,200 for each of the six months ended June
30, 2005 and 2004.
In addition, at June 30, 2005 the Company was obligated on a demand loan from
Augustine Fund, L.P. in the amount of $100,000, bearing interest at 8%.
At December 31, 2004 the Company was also obligated on a $160,000 short-term
note payable, bearing interest at 18%, and due on March 1, 2005. In addition,
the Company issued 125,000 unregistered shares of stock valued at $17,500 as an
origination fee which was amortized over the life of the note. This note and all
related accrued interest was repaid through the issuance of 800,000 shares of
common stock on March 1, 2005.
9
Note 3. Accrued Expenses
Accrued expenses are comprised of the following:
June 30, December 31,
2005 2004
-------- ------------
Interest $224,739 $129,635
Payroll 165,282 141,818
Professional & Consulting fees 132,696 378,210
Consignments 172,782 173,626
Due to K Sports 62,500 62,500
Commissions 10,000 40,000
Other 83,806 65,407
-------- --------
$851,805 $991,196
======== ========
Note 4. Common Stock
Call Option Agreements
In connection with a settlement agreement with CSEI, the Company was granted
call options for 2,283,565 unregistered common shares held by CSEI at an
exercise price of $.001 per share. All remaining call options were assigned
during January 2005.
On May 9, 2005, the Company entered into a Settlement Agreement and Mutual
Release with Leslie Rotman ("Seller") to settle all outstanding disputes
regarding the value paid and the value received in the 2001 transaction in which
Seller, Rotman Collectibles, Inc., and the Company entered into an Agreement and
Plan of Merger (the "Merger Agreement"), pursuant to which Rotman Collectibles,
Inc., a Massachusetts corporation, was merged into the Company's Delaware
subsidiary, now named Rotman Collectibles, Inc. Seller is the mother of Gregory
Rotman, President of the Company, and Richard Rotman, CFO/Vice
President/Secretary of the Company. To settle any possible differences or
disputes between the value paid and the value received, Seller delivered
2,000,000 shares of the Company's common stock into escrow, with a fair market
value of $600,000 based on the closing bid price of $0.30 on May 6, 2005 (as set
forth in the Settlement Agreement and Mutual Release) and granted the Company an
option to purchase the shares for $.001 per share. The option is assignable by
the Company and expires one year from the date of grant. The related $600,000
settlement has been apportioned between other income in the amount $340,500,
representing the amount attributable to goods sold in prior years and $259,500
as reductions of inventory cost at January 1, 2005. Also included in other
income is the effect of reducing the $130,000 reserve related to the movie
poster inventory at January 1, 2005.
During the six months ended June 30, 2005 and 2004 the Company assigned options
to purchase 394,565 and 525,000 shares of stock from CSEI to certain individuals
in exchange for $99,611 and $247,000, respectively, which was added to the paid
in capital of the Company. In addition, during the six months ended June 30,
2005 the Company assigned options to purchase 100,000 shares of stock from
Leslie Rotman to certain individuals in exchange for $27,000.
Stock Options and Warrants
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
70,000,000 shares of its common stock. Under the 2001 Plan, employees and
consultants may elect to receive their gross compensation in the
10
form of options, exercisable at $.001 per share, 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, 2005 the Company granted options for 4,754,455 shares at various dates
aggregating $967,618 under this plan. 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. All options granted during these periods were
exercised.
During the six months ended June 30, 2005 the Company entered into an Agreement
and sold a warrant to purchase common stock ("Warrant") to an investor. The
investor paid the Company $50,000 as a deposit ("Deposit") for the right to
acquire up to 2,000,000 shares of unregistered common stock at any time within
one year of the Agreement at $.15 per share. If exercised, the $50,000 will be
applied as partial payment of the exercise price. If the Warrants are not
exercised within one year the Deposit will be forfeited. The Deposit has been
recorded as an addition to Paid in Capital.
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 only to the extent described above. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under the plan consistent with the
method prescribed by FASB Statement No. 123, the Company's net income and
earnings per share would have been adjusted to the pro forma amounts indicated
below:
11
Six Months Ended June 30,
-------------------------
2005 2004
---- ----
Net loss
As reported 1,440,991 $ (1,715,529)
Stock based compensation cost,
as reported (net of tax) 30,000 --
Stock based compensation cost
that would have been included
in the determination of net
net income had the fair value
method been applied (net of tax) (30,000) (135,300)
Pro forma -- --
(1,440,991) (1,850,829)
============= =============
Loss per share (basic and diluted)
as reported $ (.01) $ (.01)
============= =============
Proforma loss per share (basic
and diluted), as adjusted $ (.01) $ (.01)
============= =============
Three Months Ended June 30,
---------------------------
2005 2004
---- ----
Net loss
As reported $ (462,056) $ (864,668)
Stock based compensation cost,
as reported (net of tax) 15,000 --
Stock based compensation cost
that would have been included
in the determination of net
net income had the fair value (15,000) (67,650)
method been applied (net of tax) -- --
$ (462,056) $ (932,318)
Pro forma ======== ========
Loss per share (basic and diluted)
as reported $ (.00) $ (.01)
============= =============
Proforma loss per share (basic
and diluted), as adjusted $ (.00) $ (.01)
============= =============
12
Note 5. Income Taxes
There was no provision for income taxes for the six months ended June 30, 2005
and 2004 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, 2005, the Company has federal and state net operating loss carry
forwards of approximately $20,000,000 available to offset future taxable income.
The state carry-forwards will expire intermittently through 2010, while the
federal carry forwards will expire intermittently through 2025.
Note 6. Convertible Debt Financing
As of June 30, 2005 the Company has outstanding $2,200,000 of convertible debt,
which is presented net of unamortized beneficial conversion discounts of
$43,414.
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, provided for the extensions of the maturity date until
March 31, 2005. As of June 30, 2005 this note has been paid in full through a
series of conversions to common stock. During the six months ended June 30, 2005
the Company received conversion requests for the remaining $251,892 balance into
1,412,942 common shares at prices ranging from $.149 to $.213 per share. During
2004, 2003, and 2002 $2,748,108 had been converted into 25,314,096 shares of the
Company's common stock at conversion prices ranging from $.028 to $.375 per
share.
The Company entered into a second Loan Agreement, most recently modified on
October 31, 2003, whereby it issued an 8% convertible note in the amount of
$2,250,000, due November 7, 2005 (the "Series B Note") to Buyer. The Series B
Note 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, 2005
totaling $2,250,000, 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
$30,395 and $60,457 during the three and six months ended June 30, 2005,
respectively. 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 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.
The modified Series B Note requires that principal and interest be payable in
shares of common stock, or cash, at the discretion of the Company, and provides
that any fees or expenses related to any registration of the common stock will
be borne equally by the Company and the Buyer.
13
Note 7. Related Party Transactions
During the six months ended June 30, 2004 the Company purchased approximately
$40,000 of memorabilia for sale from Steven Rotman, the father of Richard and
Greg Rotman. There were no such purchases during the six months ended June 30,
2005.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Paid's celebrity services offer famous people official web sites and fan-club
services including event ticketing, e-commerce storefronts, articles, polls,
message boards, contests, biographies and custom features to attract tens of
thousands of visitors daily. 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 autograph signing
events, working in conjunction with our new sports agent marketing services,
known as K Sports, have created more services and opportunities for our sports
clientele. Rotman Auction leverages the relationships from celebrity services
and K Sports to sell products through distribution and retail outlets. We
purchase and sell collectibles and memorabilia through our Rotman Auction brand.
Rotman Auction continues to sell thousands of items each week and provides other
services such as 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 management's experience and 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 and a review
of the estimated useful lives of the various assets.
15
Results of Operations
Three Months ended June 30, 2005 and 2004
The following discussion compares the Company's results of operations for the
three months ended June 30, 2005 with those for the three months ended June 30,
2004. 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.
Revenues. For the three months ended June 30, 2005, revenues were $633,400, 57%
of which is attributable to sales of the Company's own product, including
products obtained through live autograph signings, and fees from buyers and
sellers through the Rotman Auction operations. Gross sales of the Company's own
product were $366,000. Fan club membership and related merchandise sales
revenues were $137,800, 21% of gross revenues, sports marketing revenues were
$108,800, 17% of gross revenues, and advertising and web hosting fees were
$8,100 or less than 1% of gross revenues during the three months ended June 30,
2005.
The Company's 2005 revenues represent an increase of $270,100, or 74%, from the
three months ended June 30, 2004, in which revenues were $363,300. For the three
months ended June 30, 2004, sales of Company owned product through the Rotman
Auction operations were $352,100, or 94% of gross sales, and advertising and web
hosting fees were $5,800, or 2% of gross revenues.
The reason for the increase in revenues was higher sales of Company owned
product of approximately $13,800 from the same period in 2004 and $246,600 of
revenues from our recently established sports marketing and fan club membership
services. Gross profit from Company owned product sales for the three months
ended June 30, 2005 was approximately $226,700, $38,100 more than in 2004. Since
gross margin percentages on Company owned product increased from 53% to 62%, and
sales of Company owned product were $13,800 higher in the three months ended
June 30, 2005, the Company produced $38,100 more gross margin dollars in 2005.
The increase in sales is attributable to listing higher priced goods in 2005
than in 2004. The increase in gross profit margin is attributable to the effect
on cost of sales of the settlement with Leslie Rotman with respect to the movie
poster inventory offset by a continuing decline in traffic on eBay, resulting in
less competitive bidding. In addition, during the fourth quarter of 2004 the
Company acquired the operating assets of K Sports & Entertainment LLC ("K
Sports"), a sports marketing business and entered into a contract to host and
manage the fan club website for a major performing artist. Revenues from these
two sources accounted for $246,600 of revenues in 2005.
Operating Expenses. Total operating expenses for the three months ended June 30,
2005 were $1,083,300, compared to $934,600 for the corresponding period in 2004,
an increase of $148,700. Sales, general and administrative ("SG&A") expenses for
the three months ended June 30, 2005 were $907,400, compared to $705,900 for the
three months ended June 30, 2004. The increase of $201,500 in SG&A costs
includes increases in payroll of $118,800, professional fees of $63,000, and
other costs of $25,700 offset by a decrease in depreciation and amortization of
$18,000 as older assets become fully depreciated and amortized. The additional
SG&A costs are attributable to additional personnel, professional fees, travel,
and shipping and postage related to the integration and development of K Sports
and fan club services. Costs associated with planning, maintaining and operating
our web sites for the three months ended June, 30, 2005 decreased $53,000 from
2004. This decrease is due primarily to lower depreciation as certain website
development costs became fully depreciated in 2005.
Other Income. For the three months ended June 30, 2005 other income increased by
$325,000 from the comparable 2004 period. This increase is attributable to a
portion of the settlement with Leslie Rotman offset by realized and unrealized
losses on the fair value of the investment in call options.
16
Interest Expense. For the three months ended June 30, 2005, the Company incurred
interest charges of approximately $78,500 principally associated with one
convertible note, compared to interest charges of $127,600 for the corresponding
period in 2004. The decrease of $49,000 is attributable to lower amortization of
beneficial conversion features in 2005 offset by interest on short term debt.
Net Loss. The Company realized a net loss for the three months ended June 30,
2005 of $462,100, or less than $.01 per share, as compared to a loss of
$864,700, or $.01 per share for the three months ended June 30, 2004.
Inflation. The Company believes that inflation has not had a material effect on
its results of operations.
Six Months ended June 30, 2005 and 2004
The following discussion compares the Company's results of operations for the
six months ended June 30, 2005 with those for the six months ended June 30,
2004. 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.
Revenues. For the six months ended June 30, 2005, revenues were $1,493,000, 56%
of which is attributable to sales of the Company's own product, including
products obtained through live autograph signings, and fees from buyers and
sellers through the Rotman Auction operations. Gross sales of the Company's own
product were $833,000. Fan club membership and related merchandise sales
revenues were $405,700, 27% of gross revenues, sports marketing revenues were
$229,900, 15% of gross revenues, and advertising and web hosting fees were
$11,000 or less than 1% of gross revenues during the six months ended June 30,
2005.
The Company's 2005 revenues represent an increase of $743,700, or 99%, from the
six months ended June 30, 2004, in which revenues were $749,300. For the six
months ended June 30, 2004, sales of Company owned product through the Rotman
Auction operations were $730,600, or 96% of gross sales, and advertising and web
hosting fees were $8,800, or 1% of gross revenues.
The reason for the increase in revenues was higher sales of Company owned
product of approximately $102,400 from the same period in 2004 and $635,700 of
revenues from our recently established sports marketing and fan club membership
services. Gross profit from Company owned product sales for the six months ended
June 30, 2005 was approximately $317,400, $48,900 less than in 2004. Since gross
margin percentages on Company owned product dropped from 50% to 38%, and sales
of Company owned product were $102,400 higher in the six months ended June 30,
2005, the Company produced $48,900 fewer gross margin dollars in 2005. The
increase in sales is attributable to listing higher priced goods in 2005 than in
2004. The drop in gross profit margin is attributable to a continuing decline in
traffic on eBay, resulting in less competitive bidding, offset by the effect on
cost of sales of the settlement with Leslie Rotman with respect to the movie
poster inventory. In addition, during the fourth quarter of 2004 the Company
acquired the operating assets of K Sports & Entertainment LLC ("K Sports"), a
sports marketing business and entered into a contract to host and manage the fan
club website for a major performing artist. Revenues from these two sources
accounted for $635,700 of revenues in 2005.
Operating Expenses. Total operating expenses for the six months ended June 30,
2005 were $2,300,600, compared to $1,842,400 for the corresponding period in
2004, an increase of $458,200. Sales, general and administrative ("SG&A")
expenses for the six months ended June 30, 2005 were $2,012,800, compared to
$1,466,000 for the six months ended June 30, 2004. The increase of $546,800 in
SG&A costs includes increases in payroll of $268,800, advertising of $20,000,
professional fees of $181,800, and other costs of $116,500 offset by a decrease
in depreciation and amortization of $49,600 as older
17
assets become fully depreciated and amortized. The additional SG&A costs are
attributable to additional personnel, professional fees, travel, and shipping
and postage related to the integration and development of K Sports and fan club
services. Costs associated with planning, maintaining and operating our web
sites for the six months ended June, 30, 2005 decreased $88,600 from 2004. This
decrease is due primarily to lower depreciation as certain website development
costs became fully depreciated in 2005.
Other income. For the six months ended June 30, 2005 other income increased by
$325,000 from the comparable 2004 period. This increase is attributable to a
portion of the settlement with Leslie Rotman offset by realized and unrealized
losses on the fair value of the investment in call options.
Interest Expense. For the six months ended June 30, 2005, the Company incurred
interest charges of approximately $172,300 principally associated with one
convertible note, compared to interest charges of $255,800 for the corresponding
period in 2004. The decrease of $83,500 is attributable to lower amortization of
beneficial conversion features in 2005 offset by interest on short term debt.
Net Loss. The Company realized a net loss for the six months ended June 30, 2005
of $1,441,000, or $.01 per share, as compared to a loss of $1,715,500, or $.01
per share for the six months ended June 30, 2004.
Inflation. The Company believes that inflation has not had a material effect on
its results of operations.
Assets
At June 30, 2005, total assets of the Company were $1,600,600, compared to
$1,764,900 at December 31, 2004. The decrease was primarily due to depreciation
and amortization totaling $458,300 offset by receipt of call options from Leslie
Rotman.
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, 2005 compared to June
30, 2004, is as follows:
2005 2004
---- ----
Net loss $(1,440,000) $(1,715,500)
Depreciation and amortization 458,300 572,500
Amortization of unearned compensation 30,000 --
Amortization of beneficial conversion
discount and debt discount 60,500 159,600
Common stock issued in payment
of services 967,600 544,400
Common stock issued in payment
of interest 8,000 --
Receipt of call options, net of related
losses (454,500) --
Changes in current assets
and liabilities 174,100 60,900
----------- -----------
Net cash used in operating activities $ (196,000) $ (378,100)
=========== ===========
18
Working Capital and Liquidity
The Company had cash and cash equivalents of $32,400 at June 30, 2005, compared
to $43,600 at December 31, 2004. The Company had a $241,500 deficit in working
capital at June 30, 2005, compared to a working capital deficit of $542,700 at
December 31, 2004. At June 30, 2005 current liabilities were $1,316,800 compared
to $1,446,000 at December 31, 2004.
As discussed in greater detail in Note 6 to the Financial Statements, the
Company has outstanding convertible debt held by Augustine Fund, L.P. The Series
A Note, in the original principal amount of $3,000,000, has been completely
retired as of June 30, 2005 through the conversion of principal into common
stock. The Series B Note has a principal amount outstanding as of June 30, 2005
of $2,200,000, since $50,000 was converted to common stock during 2005.
The Company's independent auditors have issued a going concern opinion on the
Company's consolidated financial statements for the year ended December 31,
2004. The Company needs an infusion of $400,000 to $600,000 of additional
capital to fund anticipated operating costs over the next 12 months. Management
anticipates growth in revenues and gross profits from its celebrity services
products and websites, including memberships, fan experiences, ticketing,
appearances, agency commissions, and merchandise sales. In addition, the Company
hosts a suite of management tools and enhanced shipping calculator solutions for
small e-commerce enterprises. These services, coupled with sales of movie
posters, both from inventory and on consignment, and web hosting are expected to
increase revenues and result in higher gross profit. Subject to the discussion
below, management believes that the Company has sufficient commitments to fund
operations during the next 12 months. These commitments include call options for
approximately 1,900,000 shares of Company common stock valued at between
$265,000 and $580,000 (based solely upon the 52 week high and low closing price
of the Company's stock). Finally, management believes that it has identified
several potential funding sources for additional financing. Management believes
that these plans should result in obtaining sufficient operating cash through
the next 12 months. However, there can be no assurance that the above mentioned
potential financing can be completed on terms reasonably acceptable to the
Company.
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, 2004.
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
19
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, 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.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the first quarter of 2005, the Company received conversion requests from
Augustine Fund, L.P. for $251,892 of the March 23, 2000 convertible note, into
1,412,942 shares of common stock of the Company. The remaining balance on the
March 23, 2000 convertible note is $0. The shares were issued on April 19, 2005
at prices ranging from $.149 to $.213 per share. The shares are freely tradable
pursuant to Rule 144 of the Securities Act of 1933. Augustine Fund, L.P. is an
accredited investor that represented that it acquired the convertible 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.
During the second quarter of 2005, the Company received conversion requests from
Augustine Fund, L.P. for $50,000 of the November 7, 2001 convertible note, into
330,885 shares of common stock of the Company. The remaining balance on the
November 7, 2001 convertible note is $2,200,000. The shares were issued on April
19, 2005 at $.151 per share. The shares are freely tradable pursuant to Rule 144
of the Securities Act of 1933. Augustine Fund, L.P. is an accredited investor
that represented that it acquired the convertible 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 November 7, 2001 convertible note, as amended on May 21, 2002, which has a
remaining balance of $2,200,000, is convertible into common stock at a
conversion price equal to the lesser of (1) $.25 per share, or (2) 73% of the
average of the closing bid price for the common stock for the five (5) trading
days immediately preceding the conversion date. The note bears an 8% interest
rate, and its original principal amount was $2,250,000. The Company may elect to
pay interest in cash or common stock. Pursuant to the terms of the note,
Augustine Fund, L.P. has elected to extend the maturity date to November 7,
2005. Any amount that remains unconverted as of the maturity date automatically
converts into shares of Company common stock at the same conversion rate
calculation described for conversions, except that the five (5) trading day
calculation is a thirty (30) trading day calculation, and Augustine Fund, L.P.
may not beneficially own shares in excess of 4.99% of the total issued and
outstanding shares of the Company. The note is secured by substantially all of
the assets of the Company and its subsidiary. The note may be prepaid in cash at
the election of the Company, except within 90 days of a reorganization.
Augustine Fund, L.P. has a right to demand prepayment upon a change in control.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
21
ITEM 6. 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 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
22
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 12, 2005 PAID, INC.
Registrant
/s/ Gregory Rotman
----------------------------------------
Gregory Rotman, President
/s/ Richard Rotman
----------------------------------------
Richard Rotman, Chief Financial Officer,
Vice President and Secretary
23
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 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
24