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 September 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)
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 |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of November 7, 2005, the issuer had outstanding 199,242,671 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 Nine Months ended September 30, 2005
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2005 (unaudited) and
December 31, 2004 (audited)..........................................3
Consolidated Statements of Operations
Three and Nine months ended September 30, 2005 and
2004 (unaudited).....................................................4
Consolidated Statements of Cash Flows
Nine months ended September 30, 2005 and
2004 (unaudited).....................................................5
Consolidated Statement of Changes in Shareholders' Deficit
Nine months ended September 30, 2005
(unaudited)..........................................................6
Notes to Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004.....................7-13
Item 2. Management's Discussion and Analysis or
Plan of Operation.......................................................14
Item 3. Controls and Procedures.................................................19
Part II - Other Information
Item 1. Legal Proceedings.........................................................20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ..............20
Item 3. Defaults Upon Senior Securities...........................................20
Item 4. Submission of Matters to a Vote of Security Holders.......................20
Item 5. Other Information ........................................................20
Item 6. Exhibits .................................................................21
Signatures.........................................................................22
- 2 -
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAID, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2005 2004
------------- ------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 661,345 $ 43,558
Accounts receivable 541,372 45,739
Inventories, net 1,327,661 624,082
Investment in call options 390,000 --
Prepaid expenses 70,183 125,180
Due from employees 59,651 55,656
Other current assets 9,073 9,073
------------ ------------
Total current assets 3,059,285 903,288
Property and equipment, net 223,495 172,706
Other intangible assets, net 103,111 688,872
------------ ------------
Total assets $ 3,385,891 $ 1,764,866
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 180,000 $ 290,000
Loan payable 200,000 --
Accounts payable 252,859 164,829
Accrued expenses 855,368 991,196
Deferred revenues 1,152,794 --
------------ ------------
Total current liabilities 2,641,021 1,446,025
------------ ------------
Convertible debt 1,137,319 2,398,021
------------ ------------
Shareholders' deficit:
Common stock, $.001 par value, 350,000,000 shares authorized; 198,009,256
and 173,320,731 shares issued and outstanding at September 30, 2005
and December 31, 2004, respectively 198,009 173,321
Additional paid-in capital 25,252,647 21,166,334
Accumulated deficit (25,843,105) (23,383,835)
Unearned compensation -- (35,000)
------------ ------------
Total shareholders' deficit (392,449) (2,079,180)
------------ ------------
Total liabilities and shareholders' deficit $ 3,385,891 $ 1,764,866
============ ============
See accompanying notes to consolidated financial statements
- 3 -
PAID, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Nine months Three months Nine months
ended ended ended ended
September September September September
30, 2005 30, 2005 30, 2004 30, 2004
------------- ------------- ------------- -------------
Revenues $ 492,367 $ 1,985,376 $ 401,753 $ 1,151,039
Cost of revenues 354,594 1,140,715 257,694 624,407
------------- ------------- ------------- -------------
Gross profit 137,773 844,661 144,059 526,632
------------- ------------- ------------- -------------
Operating expenses:
Selling, general, and administrative expenses 969,282 2,982,120 787,141 2,253,182
Web site development costs 138,774 426,551 227,401 603,733
------------- ------------- ------------- -------------
Total operating expenses 1,108,056 3,408,671 1,014,542 2,856,915
------------- ------------- ------------- -------------
Loss from operations (970,283) (2,564,010) (870,483) (2,330,283)
------------- ------------- ------------- -------------
Other income (expense):
Interest expense (80,383) (252,695) (129,262) (385,058)
Gain (loss) on call options 32,385 (113,115) -- --
Other income 2 470,550 -- 67
------------- ------------- ------------- -------------
Total other income (expense), net (47,996) 104,740 (129,262) (384,991)
------------- ------------- ------------- -------------
Loss before income taxes (1,018,279) (2,459,270) (999,745) (2,715,274)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net loss $ (1,018,279) $ (2,459,270) $ (999,745) $ (2,715,274)
============= ============= ============= =============
Loss per share (basic and diluted) $ (0.01) $ (0.01) $ (0.01) $ (0.02)
============= ============= ============= =============
Weighted average shares 183,403,606 178,878,154 164,952,477 162,424,772
============= ============= ============= =============
See accompanying notes to consolidated financial statements
- 4 -
PAID, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2005 2004
---- ----
Operating activities:
Net loss $(2,459,270) $(2,715,274)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 704,964 822,376
Bad debt expense 340 --
Settlement Agreement and Mutual Release - call options (470,500) --
Amortization of unearned compensation 35,000 --
Beneficial conversion feature 91,190 240,164
Loss on call options 113,115 --
Common stock issued in payment of professional
and consulting fees 1,043,891 730,014
Issuance of common stock pursuant to exercise of
stock options granted to employees for services 228,110 76,617
Common stock issued in payment of interest 137,161 82,614
Changes in assets and liabilities:
Accounts receivable (495,973) 1,258
Inventories 176,922 7,546
Prepaid expense and other current assets 51,002 (49,785)
Accounts payable 88,030 (71,595)
Accrued expenses (135,828) 310,782
Deferred revenue 1,152,794 --
----------- -----------
Net cash provided by (used in) operating activities 260,948 (565,283)
----------- -----------
Investing activities:
Proceeds from assignment of call options 96,885 --
Property and equipment additions (169,993) (1,634)
----------- -----------
Net cash used in investing activities (73,108) (1,634)
----------- -----------
Financing activities:
Net proceeds (repayment) of notes payable 50,000 (15,000)
Proceeds from loan payable 200,000 --
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 99,611 478,000
Proceeds from exercise of stock options 336 176
----------- -----------
Net cash provided by financing activities 429,947 529,102
----------- -----------
Net increase (decrease) in cash and equivalents 617,787 (37,815)
Cash and equivalents, beginning 43,558 104,397
----------- -----------
Cash and equivalents, ending $ 661,345 $ 66,582
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ -- $ --
=========== ===========
Interest $ 1,041 $ 1,125
=========== ===========
See accompanying notes to consolidated financial statements
- 5 -
PAID, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 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 1,063,031 1,063 227,047 -- -- 228,110
Common stock issued in payment of
professional and consulting fees 5,366,911 5,367 1,038,524 -- -- 1,043,891
Common stock issued in payment of
interest 1,057,966 1,058 136,103 -- -- 137,161
Common stock issued in payment of note
payable 761,905 761 159,239 -- -- 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 9,469,227 9,470 1,342,422 -- -- 1,351,892
Amortization of unearned compensation -- -- -- -- 35,000 35,000
Common stock issued for inventory 6,433,121 6,433 1,003,567 -- -- 1,010,000
Proceeds from sale of warrants -- -- 50,000 -- -- 50,000
Proceeds from assignment of call options -- -- 99,611 -- -- 99,611
Net loss -- -- -- (2,459,270) -- (2,459,270)
----------- -------- ----------- ------------ -------- -----------
Balance, September 30, 2005 198,009,256 $198,009 $25,252,647 $(25,843,105) $ -- $ (392,449)
=========== ======== =========== ============ ======== ===========
See accompanying notes to consolidated financial statements
- 6 -
PAID, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 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 September 30,
2005 and December 31, 2004 the Company has provided for reserves totaling
$125,000 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 sales of fan experiences, 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.
The Company sells fan experiences which include tickets and related experiences
at concerts and other events conducted by performing artists. Revenues
associated with these fan experiences are deferred until the related event is
concluded, at which time the revenues and related direct costs are recognized.
Advertising Costs
Advertising costs totaling approximately $84,000 in 2005 and $86,300 in 2004 are
charged to expense when incurred.
- 8 -
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
6,571,429 as of September 30, 2005 and 11,204,532 as of September 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 September 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 nine
months ended September 30, 2005 the Company capitalized approximately $165,000
of website development costs. There was no such capitalization during the nine
months ended September 30, 2004.
Note 2. Notes and Loan Payable
At September 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 $7,900 for each of the nine month
periods ended September 30, 2005 and 2004.
At September 30, 2005 the Company was also obligated on demand notes payable
totaling $50,000, bearing interest at 10%.
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.
At September 30, 2005 the Company was obligated on a demand loan from Augustine
Fund, L.P. in the amount of $200,000, bearing interest at 8%.
Note 3. Accrued Expenses
Accrued expenses are comprised of the following:
- 9 -
September 30, December 31,
2005 2004
------------- ------------
Interest $144,187 $129,635
Payroll and related costs 233,237 172,120
Professional and consulting fees 160,745 378,210
Consignments 172,782 173,626
Due to K Sports 62,500 62,500
Commissions 10,000 40,000
Other 71,917 35,105
-------- --------
$855,368 $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 $.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 gain 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 nine months ended September 30, 2005 and 2004 the Company assigned
options to purchase 394,565 and 1,475,000 shares of stock from CSEI to certain
individuals in exchange for $99,611 and $478,000, respectively, which was added
to the paid in capital of the Company. In addition, during the nine months ended
September 30, 2005 the Company assigned options to purchase 375,000 shares of
stock from Leslie Rotman to certain individuals in exchange for $96,885.
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 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
- 10 -
grant. During the nine months ended September 30, 2005 the Company granted
options for 5,366,911 shares at various dates aggregating $1,043,891 under this
plan. During the nine months ended September 30, 2004 the Company granted
options for 2,814,464 shares at various dates aggregating $806,631 under this
plan. All options granted during these periods were exercised.
During the nine months ended September 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:
Nine Months Ended September 30,
-------------------------------
2005 2004
---- ----
Net loss
As reported $ (2,459,270) $ (2,715,274)
Stock based compensation cost,
as reported (net of tax) 35,000 --
Stock based compensation cost
that would have been included
in the determination of
net income had the fair value
method been applied (net of tax) (35,000) (202,950)
------------ ------------
Pro forma (2,459,270) $ (2,918,224)
============ ============
Loss per share (basic and diluted)
as reported $ (.01) $ (.02)
============ ============
Proforma loss per share (basic
and diluted), as adjusted $ (.01) $ (.02)
============ ============
- 11 -
Three Months Ended September 30,
--------------------------------
2005 2004
---- ----
Net loss
As reported $ (1,018,279) $ (999,745)
Stock based compensation cost,
as reported (net of tax) 5,000 --
Stock based compensation cost
that would have been included
in the determination of
net income had the fair value
method been applied (net of tax) (5,000) (67,650)
------------ ------------
Pro forma $ (1,018,279) $ (1,067,395)
============ ============
Loss per share (basic and diluted)
as reported $ (.01) $ (.01)
============ ============
Proforma loss per share (basic
and diluted), as adjusted $ (.01) $ (.01)
============ ============
Note 5. Income Taxes
There was no provision for income taxes for the nine months ended September 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 September 30, 2005, the Company has federal and state net operating loss
carry forwards of approximately $21,000,000 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 September 30, 2005 the Company has outstanding $1,150,000 of convertible
debt, which is presented net of unamortized beneficial conversion discounts of
$12,681.
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 September 30, 2005 this note has been paid in full through
a series of conversions to common stock. During the nine months ended September
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 in
October 2005, whereby it issued an 8% convertible note in the amount of
$2,250,000, due November 7, 2006 (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 September 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
- 12 -
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
$30,733 and $91,190 during the three and nine months ended September 30, 2005,
respectively. The beneficial conversion feature that was charged to interest
expense totaled $80,605 and $240,164 during the three and nine months ended
September 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.
Note 7. Related party transactions
During the nine months ended September 30, 2005 the Company purchased
approximately $1,010,000 of memorabilia for sale from Leslie Rotman, the mother
of Richard and Greg Rotman in exchange for 6,433,121 shares of restricted stock
valued at $.157.
During the nine months ended September 30, 2004 the Company purchased
approximately $104,000 of memorabilia for sale from Steven Rotman, the father of
Richard and Greg Rotman.
- 13 -
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.
Results of Operations
Three Months ended September 30, 2005 and 2004
The following discussion compares the Company's results of operations for the
three months ended September 30, 2005 with those for the three months ended
September 30, 2004. The Company's financial
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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 September 30, 2005, revenues were $492,400,
60% 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 $289,800. Fan club membership and related merchandise sales
revenues were $153,200, 32% of gross revenues, sports marketing revenues were
$42,500, 9% of gross revenues, and advertising and web hosting fees were $3,300
or less than 1% of gross revenues during the three months ended September 30,
2005.
The Company's 2005 revenues represent an increase of $90,600, or 23%, from the
three months ended September 30, 2004, in which revenues were $401,800. For the
three months ended September 30, 2004, sales of Company owned product through
the Rotman Auction operations were $392,000, or 94% of gross sales, and
advertising and web hosting fees were $6,900, or 2% of gross revenues.
The reason for the increase in revenues was $195,800 of revenues from our
recently established sports marketing and fan club membership services offset by
lower sales of Company owned product of approximately $102,200 from the same
period in 2004. Gross profit from Company owned product sales for the three
months ended September 30, 2005 was approximately $9,300, $126,700 less than in
2004. Since gross margin percentages on Company owned product decreased from 35%
to 3%, and sales of Company owned product were $102,200 lower in the three
months ended September 30, 2005, the Company produced $126,700 fewer gross
margin dollars in 2005. The decrease in sales of Company owned product is
attributable to a strategic shift away from eBay to new distribution channels,
including the Company's own distribution channels, where higher price point
goods can be sold with lower associated selling costs. The decrease in gross
profit margin is attributable to the beginning of a bulk sale program of lower
price point inventories. 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 $195,700 of revenues in 2005.
Operating Expenses. Total operating expenses for the three months ended
September 30, 2005 were $1,108,100, compared to $1,014,500 for the corresponding
period in 2004, an increase of $93,500. Sales, general and administrative
("SG&A") expenses for the three months ended September 30, 2005 were $969,300,
compared to $787,100 for the three months ended September 30, 2004. The increase
of $182,100 in SG&A costs includes increases in payroll of $96,300, and other
costs of $96,000 offset by a decrease in advertising of $22,100. The additional
SG&A costs are attributable to additional personnel, 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 September 30, 2005 decreased $88,600 from 2004.
This decrease is due primarily to lower consulting associated with maintenance
related to AuctionInc. and amortization, as web site development costs become
fully amortized in 2005.
Other income. For the three months ended September 30, 2005 other income
increased by $32,400 from the comparable 2004 period. This increase is
attributable to realized and unrealized gains on the fair value of the
investment in call options.
Interest Expense. For the three months ended September 30, 2005, the Company
incurred interest charges of approximately $80,400 principally associated with
one convertible note, compared to interest charges of $129,300 for the
corresponding period in 2004. The decrease of $48,900 is attributable to lower
amortization of beneficial conversion features in 2005, offset by interest on
short term debt.
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Net Loss. The Company realized a net loss for the three months ended September
30, 2005 of $1,018,300, or $.01 per share, as compared to a loss of $999,700, or
$.01 per share for the three months ended September 30, 2004.
Inflation. The Company believes that inflation has not had a material effect on
its results of operations.
Nine Months ended September 30, 2005 and 2004
The following discussion compares the Company's results of operations for the
nine months ended September 30, 2005 with those for the nine months ended
September 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 nine months ended September 30, 2005, revenues were
$1,985,400, 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 $1,122,900. Fan club membership and related
merchandise sales revenues were $558,900, 28% of gross revenues, sports
marketing revenues were $272,500, 14% of gross revenues, and advertising and web
hosting fees were $14,300, 1% of gross revenues, during the nine months ended
September 30, 2005.
The Company's 2005 revenues represent an increase of $834,300, or 72%, from the
nine months ended September 30, 2004, in which revenues were $1,151,000. For the
nine months ended September 30, 2004, sales of Company owned product through the
Rotman Auction operations were $1,122,600, or 95% of gross sales, and
advertising and web hosting fees were $13,100, or 1% of gross revenues.
The reason for the increase in revenues was $831,400 from our recently
established sports marketing and fan club membership services. Sales of Company
owned product were unchanged. Gross profit from Company owned product sales for
the nine months ended September 30, 2005 was approximately $326,800, $175,600
less than in 2004. Since gross margin percentages on Company owned product
dropped from 45% to 29%, the Company produced $175,600 fewer gross margin
dollars in 2005. The drop in gross profit margin is attributable to the
beginning of a bulk sale program of lower price point inventories 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 $831,400 of revenues in 2005.
Operating Expenses. Total operating expenses for the nine months ended September
30, 2005 were $3,408,700, compared to $2,856,900 for the corresponding period in
2004, an increase of $551,800. Sales, general and administrative ("SG&A")
expenses for the nine months ended September 30, 2005 were $2,982,100, compared
to $2,253,200 for the nine months ended September 30, 2004. The increase of
$728,900 in SG&A costs includes increases in payroll of $365,100, professional
fees of $183,500, and other costs of $229,000 offset by a decrease in
depreciation and amortization of $46,400 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
nine months ended September, 30, 2005 decreased $177,200 from 2004. This
decrease is due primarily to lower depreciation as certain website development
costs became fully amortized in 2005 and lower consulting costs associated with
maintenance related to AuctionInc.
- 16 -
Other income. For the nine months ended September 30, 2005 other income
increased by $357,400 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 nine months ended September 30, 2005, the Company
incurred interest charges of approximately $252,700 principally associated with
one convertible note, compared to interest charges of $385,100 for the
corresponding period in 2004. The decrease of $132,400 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 nine months ended September
30, 2005 of $2,459,300, or $.01 per share, as compared to a loss of $2,715,300,
or $.01 per share for the nine months ended September 30, 2004.
Inflation. The Company believes that inflation has not had a material effect on
its results of operations.
Assets
At September 30, 2005, total assets of the Company were $3,385,900, compared to
$1,764,900 at December 31, 2004. The increase was primarily due to the
acquisition of a large collection of movie poster inventories totaling
$1,010,000, cash and accounts receivable balances associated with sales of
tickets to entertainment events to be held during the fourth quarter of 2005
totaling $1,000,000, offset by depreciation and amortization totaling $704,900.
Operating Cash Flows
A summarized reconciliation of the Company's net losses to cash used in
operating activities for the nine months ended September 30, 2005 compared to
September 30, 2004, is as follows:
2005 2004
---- ----
Net loss $(2,459,300) $(2,715,300)
Depreciation and amortization 704,900 822,400
Amortization of beneficial conversion
discount and debt discount 91,200 240,200
Common stock issued in payment
of services 1,272,000 806,600
Common stock issued in payment
of interest 137,200 82,600
Net current assets and liabilities
associated with advance ticketing 686,700 --
Changes in other current assets
and liabilities (171,800) 198,200
----------- -----------
Net cash provided by (used in)
operating activities $ 260,900 $ (565,300)
=========== ===========
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Working Capital and Liquidity
The Company had cash and cash equivalents of $661,300 at September 30, 2005,
compared to $43,600 at December 31, 2004. The Company had a $418,300 of working
capital at September 30, 2005, compared to a working capital deficit of $542,700
at December 31, 2004. At September 30, 2005 current liabilities were $2,641,000
compared to $1,446,000 at December 31, 2004. During the nine months ended
September 30, 2005 current liabilities increased primarily due to deferred
revenue of $1,152,800 associated with events to be conducted during the fourth
quarter of 2005.
As discussed in greater detail in Note 6 of the Financial Statements, included
in Part I of the this quarterly report and incorporated by reference herein, the
Company an outstanding convertible note held by Augustine Fund, L.P. The note
has a principal amount outstanding as of September 30, 2005 of $1,150,000.
The Company's independent auditors have issued a going concern opinion on the
Company's consolidated financial statements for the year ended December 31,
2004. The Company may need an infusion 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 and ticketing, appearances, and
merchandise sales. In addition, "AuctionInc" which hosts a suite of management
tools and enhanced shipping calculator solutions for small ecommerce
enterprises, sales of movie posters, both from inventory and on consignment, and
web hosting are expected to increase revenues and result in higher total 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 1,625,000 shares of
common stock, which, once assigned by the Company, can generate between $73,000
and $527,000 (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.
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.
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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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the third quarter of 2005, the Company received conversion requests from
Augustine Fund, L.P. for $1,050,000 of the November 7, 2001 convertible note,
into 7,725,400 shares of common stock of the Company. The remaining balance on
the November 7, 2001 convertible note as of September 30, 2005 is $1,150,000.
328,731 shares were issued on July 26, 2005 at $.1521 per share, and 7,396,669
shares were issued on September 26, 2005 at $.135196 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 $1,150,000, 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,
2006. 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.
On September 8, 2005, the Company entered into an Asset Purchase Agreement for
the purchase of approximately $1,010,000 of memorabilia for sale from Leslie
Rotman, the mother of Richard and Greg Rotman, in exchange for 6,433,121 shares
of restricted common stock valued at $.157. The shares are not registered under
the Securities Act of 1933. Leslie Rotman is an accredited investor. The
issuance of the securities is exempt from registration under Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
10 Asset Purchase Agreement dated September 8, 2005, by and
between Paid, Inc., and Leslie Rotman
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
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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: November 11, 2005 PAID, INC.
Registrant
/s/ Gregory Rotman
----------------------------------------
Gregory Rotman, President
/s/ Richard Rotman
----------------------------------------
Richard Rotman, Chief Financial Officer,
Vice President and Secretary
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LIST OF EXHIBITS
Exhibit No. Description
----------- -----------
10 Asset Purchase Agreement dated September 8, 2005, by and between
Paid, Inc., and Leslie Rotman
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
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