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, 2004
COMMISSION FILE NUMBER 0-28720
PAID, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 73-1479833
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4 Brussels Street, Worcester, Massachusetts 01610
(Address of Principal Executive Offices)
(508) 791-6710
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of November 4, 2004, the issuer had outstanding 167,504,383 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, 2004
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2004 (unaudited) and December 31, 2003 (audited).........3
Consolidated Statements of Operations
Three and Nine months ended September 30, 2004 and 2003 (unaudited)....4
Consolidated Statements of Cash Flows
Nine months ended September 30, 2004 and 2003 (unaudited).............5
Consolidated Statement of Changes in Shareholders' Deficit
Nine months ended September 30, 2004 (unaudited) ......................6
Notes to Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003..........................7-12
Item 2. Management's Discussion and Analysis or
Plan of Operation......................................................13
Item 3. Controls and Procedures.................................................17
Part II - Other Information
Item 1. Legal Proceedings.......................................................18
Item 2. Changes in Securities and Small Business Issuer
Purchases of Equity Securities ....................................18
Item 3. Defaults Upon Senior Securities.........................................18
Item 4. Submission of Matters to a Vote of Security Holders.....................18
Item 5. Other Information.......................................................18
Item 6. Exhibits and Reports on Form 8-K........................................18
Signatures......................................................................19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAID INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 66,582 $ 104,397
Accounts receivable 2,271 3,529
Inventories, net 694,532 702,078
Prepaid expenses 109,713 57,364
Other current assets 19,767 22,331
------------ ------------
Total current assets 892,865 889,699
Property and equipment, net 162,720 397,950
Other intangible assets, net 829,225 1,414,737
------------ ------------
Total assets $ 1,884,810 $ 2,702,386
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 130,000 $ 145,000
Accounts payable 133,103 204,698
Accrued expenses 974,775 663,993
------------ ------------
Total current liabilities 1,237,878 1,013,691
------------ ------------
Convertible debt 2,545,091 3,001,573
------------ ------------
Contingencies -- --
------------ ------------
Shareholders' deficit:
Common stock, $.001 par value, 350,000,000 shares
authorized; 166,976,946 and 159,100,218 shares issued
and outstanding at September 30, 2004
and December 31, 2003, respectively 166,977 159,100
Additional paid-in capital 19,954,239 17,832,123
Accumulated deficit (22,019,375) (19,304,101)
------------ ------------
Total shareholders' deficit (1,898,159) (1,312,878)
------------ ------------
Total liabilities and shareholders' deficit $ 1,884,810 $ 2,702,386
============ ============
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, 2004 30, 2004 30, 2003 30, 2003
------------- ------------- ------------- -------------
Revenues $ 401,753 $ 1,151,039 $ 304,680 $ 1,191,805
Cost of revenues 257,694 624,407 112,878 604,472
------------- ------------- ------------- -------------
Gross profit 144,059 526,632 191,802 587,333
------------- ------------- ------------- -------------
Operating expenses:
Selling, general, and administrative expenses 787,141 2,253,182 809,524 2,466,718
Web site development costs 227,401 603,733 176,534 533,442
------------- ------------- ------------- -------------
Total operating expenses 1,014,542 2,856,915 986,058 3,000,160
------------- ------------- ------------- -------------
Loss from operations (870,483) (2,330,283) (794,256) (2,412,827)
------------- ------------- ------------- -------------
Other income (expense):
Interest expense (129,262) (385,058) (107,417) (288,239)
Other income -- 67 28 54
------------- ------------- ------------- -------------
Total other expense, net (129,262) (384,991) (107,389) (288,185)
------------- ------------- ------------- -------------
Loss before income taxes (999,745) (2,715,274) (901,645) (2,701,012)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net loss $ (999,745) $ (2,715,274) $ (901,645) $ (2,701,012)
============= ============= ============= =============
Loss per share (basic and diluted) $ (0.01) $ (0.02) $ (0.01) $ (0.02)
============= ============= ============= =============
Weighted average shares 164,952,477 162,424,772 149,659,365 139,069,209
============= ============= ============= =============
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)
2004 2003
---- ----
Operating activities:
Net loss $ (2,715,274) $ (2,701,012)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 822,376 1,075,775
Amortization of unearned compensation -- 44,619
Beneficial conversion feature 240,164 170,785
Stock issued in payment of interest 82,614 --
Common stock issued in payment of professional
and consulting fees 730,014 835,473
Issuance of common stock pursuant to exercise of
stock options granted to employees for services 76,617 58,366
Changes in assets and liabilities:
Accounts receivable 1,258 (630)
Inventories 7,546 130,720
Accounts payable (71,595) (113,879)
Accrued expenses 310,782 148,668
Prepaid expense and other current assets (49,785) 12,090
------------ ------------
Net cash used in operating activities (565,283) (339,025)
------------ ------------
Investing activities:
Property and equipment additions (1,634) (1,864)
------------ ------------
Financing activities:
Net proceeds from (repayment of) notes payable (15,000) 50,000
Proceeds from loan payable -- 48,474
Proceeds from convertible debt 65,926 387,226
Proceeds from assignment of call options 478,000 --
Proceeds from exercise of stock options 176 --
------------ ------------
Net cash provided by financing activities 529,102 485,700
------------ ------------
Net decrease in cash and cash equivalents (37,815) 144,811
Cash and cash equivalents, beginning 104,397 41,283
------------ ------------
Cash and cash equivalents, ending $ 66,582 $ 186,094
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ -- $ --
============ ============
Interest $ 1,125 $ 4,500
============ ============
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, 2004
(Unaudited)
Common stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital deficit Total
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 159,100,218 $ 159,100 $ 17,832,123 $(19,304,101) $ (1,312,878)
Common stock issued pursuant to exercise of stock
options granted to employees for services 288,379 289 76,328 -- 76,617
Common stock issued in payment of
professional and consulting fees 2,526,085 2,526 727,488 -- 730,014
Common stock issued in payment of interest
on convertible debt 1,229,669 1,230 81,384 82,614
Stock options exercised 176,250 176 -- -- 176
Conversions of notes payable 3,656,345 3,656 734,532 -- 738,188
Beneficial conversion discount -- -- 24,384 -- 24,384
Proceeds from assignment of call options -- -- 478,000 -- 478,000
Net loss -- -- -- (2,715,274) (2,715,274)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2004 166,976,946 $ 166,977 $ 19,954,239 $(22,019,375) $ (1,898,159)
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
6
PAID, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
Note 1. Organization and Summary Of Significant Accounting Policies
Line of business
Paid, Inc. and subsidiary (the "Company") operates and maintains an internet
portal dedicated to collectibles in a variety of categories. The Company
conducts online auctions of its own merchandise and items posted under
consignment arrangements by third party sellers.
General
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the United States Securities
and Exchange Commission for interim financial reporting and include all
adjustments (consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation). These financial
statements have not been audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations for interim reporting. The Company believes that the
disclosures contained herein are adequate to make the information presented not
misleading. However, these financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's annual
report for the year ended December 31, 2003, which are included in the Company's
Form 10-KSB.
Principles of consolidation
The accompanying financial statements include the accounts of Paid, Inc. and its
wholly-owned subsidiary, Rotman Collectibles, Inc.
Inventories
Inventories consist of collectible merchandise for sale and are stated at the
lower of average cost or market on a first-in, first-out (FIFO) method.
On a periodic basis management reviews inventories on hand to ascertain if any
is slow moving or obsolete. In connection with this review, at both September
30, 2004 and December 31, 2003 the Company has provided for reserves totaling
$270,000.
Revenue Recognition
The Company generates revenue on sales of its purchased inventories, from fees
and commissions on sales of merchandise under consignment type arrangements,
from web hosting services, from appraisal services and from advertising and
promotional services.
For sales of merchandise owned and warehoused by the Company, the Company is
responsible for conducting the auction, billing the customer, shipping the
merchandise to the customer, processing customer returns and collecting accounts
receivable. The Company recognizes revenue upon verification of the credit card
transaction and shipment of the merchandise, discharging all obligations of the
Company with respect to the transaction.
7
For sales of merchandise under consignment-type arrangements, the Company takes
physical possession of the merchandise, but is not obligated to, and does not
take title or ownership of merchandise. When an auction is completed, consigned
merchandise that has been sold is shipped upon receipt of payment. The Company
recognizes the net commission and service revenues relating to the consigned
merchandise upon receipt of the gross sales proceeds and shipment of the
merchandise. The Company then releases the net sales proceeds to the Consignor,
discharging all obligations of the Company with respect to the transaction.
The Company provides web hosting services under two types of arrangements.
Revenue is recognized on a monthly basis as the services are provided for those
where payment is to be received in cash. Professional athletes' web sites are
hosted under arrangements that are settled by the athlete providing a certain
number of autographs on merchandise to be sold by the Company. Revenue related
to player websites is recognized upon sale of the autographed merchandise.
Appraisal revenues are recognized when the appraisal is delivered to the
customer.
Advertising revenues are recognized at the time the advertisement is initially
displayed on the Company's web site. Sponsorship revenues are recognized at the
time that the related event is conducted.
Advertising Costs
Advertising costs totaling approximately $86,300 in 2004 and $86,600 in 2003 are
charged to expense when incurred.
Earnings Per Common Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate to convertible
debt and outstanding stock options and warrants. The number of common shares
that would be issued upon conversion of the convertible debt would have been
11,204,532 as of September 30, 2004, and 24,197,698 as of September 30, 2003.
The number of common shares that would be included in the calculation of
outstanding options and warrants is determined using the treasury stock method.
The assumed conversion of outstanding dilutive stock options and warrants would
increase the shares outstanding but would not require an adjustment of income as
a result of the conversion. Stock options and warrants applicable to 25,466,000
at September 30, 2004 and 25,642,250 at September 30, 2003 have been excluded
from the computation of diluted earnings per share, as have the common shares
that would be issued upon conversion of the convertible debt, because they are
antidilutive. Diluted earnings per share have not been presented as a result of
the Company's net loss for each period.
Web Site and Software Development Costs
The Company accounts for web site development costs in accordance with the
provisions of EITF 00-2, "Accounting for Web Site Development Costs" ("EITF
00-2"), which requires that costs incurred in planning, maintaining, and
operating stages that do not add functionality to the site be charged to
operations as incurred. External costs incurred in the site application and
infrastructure development stage and graphic development are capitalized. Such
capitalized costs are included in "Property and equipment."
8
Note 2. Notes and Loan Payable
At September 30, 2004 and December 31, 2003, the Company was obligated on
short-term notes payable totaling $130,000 and $145,000, respectively. At both
September 30, 2004 and December 31, 2003 $130,000 was to a related party. The
related party notes bear interest at 8%, while the remainder bear interest at
18%. All of the short-term debt is due in 2004. Interest expense charged to
operations in connection with the related party notes totaled $7,900 and $7,800
for the nine months ended September 30, 2004 and 2003 respectively.
Note 3. Common Stock
Call Option Agreements
The Company was granted call options for 2,283,565 unregistered common shares
held by ChannelSpace Entertainment, Inc. ("CSEI") at an exercise price of $.001
per share. The call options expire on January 31, 2005.
During 2004 the Company assigned options to purchase 1,475,000 shares of stock
from CSEI to certain individuals in exchange for $478,000, which was added to
the paid in capital of the Company.
Stock Options
On February 1, 2001 the Company adopted the 2001 Non-Qualified Stock Option Plan
(the "2001 Plan") and has filed Registration Statements on Form S-8 to register
60,000,000 shares of its common stock. Under the 2001 Plan employees and
consultants may elect to receive their gross compensation in the form of options
to acquire the number of shares of the Company's common stock equal to their
gross compensation divided by the fair value of the stock on the date of grant.
During the nine months ended September 30, 2004, the Company granted options for
2,814,464 shares at various dates aggregating $806,631 under this plan. During
the nine months ended September 30, 2003 the Company granted options for
15,347,803 shares at various dates aggregating $893,839 under this plan. All
options granted during each period were exercised.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly,
compensation cost has been recognized based on the difference between the fair
market value of the common stock at the grant date and the exercise price. The
following table reflects proforma net loss and loss per share had the Company
elected to adopt the fair value approach for SFAS No. 123, as amended by SFAS
No. 148.
For the nine months ended September 30,
---------------------------------------
2004 2003
Net loss, as reported ($2,715,274) ($2,701,012)
Add stock compensation costs
on options granted below
fair market value -- 44,619
Less stock compensation costs
had option expense been
measured at fair value (202,950) (637,254)
------------- -------------
Proforma net loss, as adjusted ($2,918,224) ($3,293,647)
============= =============
Weighted average shares 162,424,772 139,069,209
============= =============
Loss per share (basic and diluted),
as reported ($.02) ($.02)
============= =============
Proforma loss per share (basic
and diluted), as adjusted ($.02) ($.02)
============= =============
9
For the three months ended September 30,
2004 2003
------------- -------------
Net loss, as reported ($999,745) ($901,645)
Less stock compensation costs
had option expense been
measured at fair value (67,650) (107,684)
------------- -------------
Proforma net loss, as adjusted ($1,067,395) ($1,009,329)
============= =============
Weighted average shares 164,952,477 149,659,365
============= =============
Loss per share (basic and diluted),
as reported ($.01) ($.01)
============= =============
Proforma loss per share (basic
and diluted), as adjusted ($.01) ($.01)
============= =============
These proforma amounts may not be representative of future disclosures since the
estimated fair value of stock options is amortized to expense over the vesting
period, and additional options may be granted in future years.
Note 4. Income Taxes
There was no provision for income taxes for the periods ended September 30, 2004
and 2003 due to the Company's net operating loss and its valuation reserve
against deferred income taxes.
The difference between the provision for income taxes from amounts computed by
applying the statutory federal income tax rate of 34% and the Company's
effective tax rate is due primarily to the net operating loss incurred by the
Company and the valuation reserve against the Company's deferred tax asset.
At September 30, 2004, the Company has federal and state net operating loss
carry forwards of approximately $17,400,000 available to offset future taxable
income. The state carry-forwards will expire intermittently through 2009, while
the federal carry forwards will expire intermittently through 2024.
Note 5. Convertible Debt Financing
As of September 30, 2004 the Company has issued $2,700,292 of convertible debt,
which is presented net of unamortized beneficial conversion discounts of
$155,201.
On March 23, 2000, the Company entered into a Securities Purchase Agreement (the
"Agreement") whereby the Company sold an 8% convertible note in the amount of
$3,000,000 (the "Series A Note") due in shares of common stock on March 31, 2002
to Augustine Fund, L.P. (the "Buyer"). The Series A Note, as most recently
modified on May 21, 2002, is convertible into common stock at a conversion price
10
equal to the lesser of: (1) $.375 per share, or (2) seventy-three percent (73%)
of the average of the closing bid price for the common stock for the five (5)
trading days immediately preceding the conversion date. In connection with the
agreement, the Company also issued warrants to the Buyer and Delano Group
Securities to purchase 300,000 and 100,000 shares of common stock, respectively.
The purchase price per share of common stock is equal to $2.70, one hundred and
twenty percent (120%) of the lowest of the closing bid prices for the common
stock during the five (5) trading days prior to the closing date. The warrants
will expire on March 31, 2005. A May 21, 2002 modification agreement extended
the maturity date of the note until September 30, 2002, provided for additional
ninety-day extensions, the most recent of which was exercised on September 30,
2004, beyond that date until March 31, 2005, waived interest for periods after
March 31, 2002, and released the Company from all requirements to register any
common shares issuable under the note or to keep any existing registration
statements effective. As of September 30, 2004 the outstanding balance of this
note was $450,292, since $2,549,708 has been converted into 24,087,658 shares of
the Company's common stock at conversion prices ranging from $.028 to $.375 per
share.
On November 7, 2001, the Company entered into a Loan Agreement, whereby it
issued an 8% convertible note in the amount of $1,000,000, due November 7, 2003
(the "Series B Note") to Buyer. This note was modified most recently on October
31, 2003, to, among other things, allow the Company to borrow up to $2,250,000.
The Series B Note, as modified, is convertible into common stock at a conversion
price equal to the lesser of: (1) $.25 per share, or (2) seventy-three percent
(73%) of the average of the closing bid price for the common stock for the five
(5) trading days immediately preceding the conversion date. Based upon advances
through September 30, 2004, had the Buyer converted the Series B Note at
issuance, Buyer would have received $3,082,193 in aggregate value of the
Company's common stock upon conversion of the convertible note. As a result, in
accordance with EITF 00-27, the intrinsic value of the beneficial conversion
feature of $832,193 is being charged to interest expense over the term of the
related note. The beneficial conversion feature that was charged to interest
expense totaled $80,605 and $240,164 during the three and nine months ended
September 30, 2004, respectively. The beneficial conversion feature that was
charged to interest expense totaled $64,089 and $170,785 during the three and
nine months ended September 30, 2003, respectively. The total beneficial
conversion discount related to this note has been recorded as an increase in
additional paid in capital and the unamortized portion as a reduction in the
related note. In addition, the Company entered into a Registration Rights
Agreement whereby the Company agreed to file a Registration Statement with the
Securities and Exchange Commission (SEC) within sixty (60) days of a request
from the Buyer ("Filing Date"), covering the common stock to be issued upon
conversion of the Series B Note. If this Registration Statement is not declared
effective by the SEC within sixty (60) days of the filing date the conversion
percentage shall decrease by two percent (2%) for each month that the
Registration Statement is not declared effective. One of the modification
agreements extended the maturity date of the Series B Note to November 7, 2004,
provided the opportunity to extend the maturity date to November 7, 2005,
required that principal and interest be payable in shares of common stock, or
cash, at the discretion of the Company, and provided that any fees or expenses
related to any registration of the common stock will be borne equally by the
Company and the Buyer.
Note 6. Issuance of Common Stock
During the nine months ended September 30, 2004 and 2003 the Company issued
2,526,085 and 14,399,868 shares of common stock respectively, in connection with
the payment of approximately $730,000 and $835,500 of professional and
consulting fees, respectively.
In addition, during the nine months ended September 30, 2004 the Company issued
1,229,669 shares of common stock in connection with the payment of approximately
$82,600 of interest due on its convertible debt.
11
Note 7. Subsequent Event
In October 2004 the Company acquired operating assets of K Sports &
Entertainment LLC ("K Sports") comprised of accounts receivable, property and
equipment, and intangible assets comprised of contract rights. The purchase
price, totaling approximately $175,000, is payable $50,000 in cash and 390,625
unregistered shares of Company common stock. K Sports operated as a sports
agency business. Concurrent with the acquisition, the Company entered into
employment contracts with several of K Sports key personnel.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Our innovative products and services are utilized in online auction
management, e-commerce and web site development. AuctionInc. provides auction
management tools and services to sellers and buyers. The technology is based on
our patent-pending process that streamlines back-office and shipping processes
for online auctions and e-commerce. Our new celebrity services offer famous
people official web sites and fan-club services including e-commerce
storefronts, articles, polls, message boards, contests, biographies and custom
features to attract tens of thousands of visitors daily. Our primary business,
based on our revenues, is the purchase and sale of collectibles and memorabilia
through our Rotman Auction brand. Rotman Auction is an eBay Platinum Powerseller
that sells thousands of items each week on eBay and provides consignment
services, authentication and public and private autograph events. We also build
and maintain large database-driven portals across a broad array of industries,
including CollectingChannel.com, which is home to our online appraisal service,
Ask the Appraiser.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 1 to
our financial statements. However, certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management; as a result, they are subject to an inherent degree of uncertainty.
In applying these policies, our management makes estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures. Those estimates and judgments are based upon our historical
experience, the terms of existing contracts, our observance of trends in the
industry, information that we obtain from our customers and outside sources, and
on various other assumptions that we believe to be reasonable and appropriate
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our critical accounting
policies include:
Inventories: Inventories are stated at the lower of average cost or market
on a first-in, first-out method. On a periodic basis we review inventories on
hand to ascertain if any is slow moving or obsolete. In connection with this
review, we establish reserves based upon 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.
Results of Operations
Three Months ended September 30, 2004 and 2003
The following discussion compares the Company's results of operations for
the three months ended September 30, 2004 with those for the three months ended
September 30, 2003. The Company's financial statements and notes thereto
included elsewhere in this quarterly report contain detailed information that
should be referred to in conjunction with the following discussion.
Revenue. For the three months ended September 30, 2004, revenue was
$401,800, 98% of which is attributable to sales of the Company's own product and
fees from buyers and sellers through the Rotman Auction operations. Gross sales
of the Company's own product were approximately $392,000.
13
Advertising and web hosting fees were approximately $4,400 or 1% of gross
revenues during the quarter ended September 30, 2004.
The Company's 2004 third quarter revenues represent an increase of
approximately $97,000, or 32%, from the three-month period ended September 30,
2003, in which revenue was approximately $304,700. For the three month period
ended September 30, 2003, sales of the Company's product were approximately
$295,800, or 97% of gross sales, and advertising and web hosting fees were
$3,600, or 1% of gross revenues.
The reason for the increase in revenues was higher sales of Company owned
product of approximately $96,200 from the same period in 2003. Higher sales of
Company owned product are a result of a strategic management decision to list
more product during the third quarter of 2004 than during the comparable quarter
of 2003. Gross profit from Company owned product sales for the three months
ended September 30, 2004 was approximately $136,000, which represents a decrease
of $47,900 from the comparable quarter in 2003, in which gross profit from
Company owned product sales was $183,900. In an effort to convert inventories to
cash, management made a strategic decision to sell product at lower gross
margins during the third quarter of 2004. This diminishment in gross margin,
coupled with approximately $96,200 higher sales of Company owned product during
those same periods, resulted in approximately $47,800 less gross margin dollars.
Operating Expenses. Total operating expenses for the three months ended
September 30, 2004 were approximately $1,014,500, compared to $986,100 for the
corresponding period in 2003, an increase of $28,500. Sales, general and
administrative ("SG&A") expenses for the three months ended September 30, 2004
were approximately $787,100, compared to $809,500 for the three months ended
September 30, 2003. The decrease of $22,400 in SG&A costs includes decreases in
depreciation and amortization of $76,200 due to certain assets becoming fully
depreciated during 2004, and professional fees of $27,000, offset by increases
in payroll and related costs of $38,600 and other costs of $42,200. Costs
associated with planning, maintaining and operating our web sites for the three
months ended September 30, 2004 increased approximately $50,900 from the
corresponding period in 2003. This increase is due primarily to increases in
payroll of $21,700, and consulting of $37,600, offset by a decrease in
depreciation of $7,300.
Interest Expense. For the quarter ended September 30, 2004, the Company
incurred interest charges of approximately $129,300 principally associated with
one convertible note, compared to interest charges of $107,400 for the
corresponding period in 2003. The increase of $21,800 is attributable to higher
balances of interest-bearing debt in 2004 as well as greater amortization of
beneficial conversion features.
Net Loss. The Company realized a net loss for the three months ended
September 30, 2004 of approximately $999,700, or $.01 per share, as compared to
a loss of $901,700, or $.01 per share for the three months ended September 30,
2003.
Inflation. The Company believes that inflation has not had a material
effect on its results of operations.
Nine Months ended September 30, 2004 and 2003
The following discussion compares the Company's results of operations for
the nine months ended September 30, 2004 with those for the nine months ended
September 30, 2003. The Company's financial statements and notes thereto
included elsewhere in this quarterly report contain detailed information that
should be referred to in conjunction with the following discussion.
14
Revenue. For the nine months ended September 30, 2004, revenue was
$1,151,000, 98% of which is attributable to sales of the Company's own product
and fees from buyers and sellers through the Rotman Auction operations. Gross
sales of the Company's own product were approximately $1,122,600. Advertising
and web hosting fees were approximately $13,100 or 1% of gross revenues during
the nine months ended September 30, 2004.
The Company's 2004 revenues represent a decrease of approximately $40,800,
or 3%, from the nine-month period ended September 30, 2003, in which revenue was
approximately $1,191,800. For the nine month period ended September 30, 2003,
sales of the Company's product were approximately $1,152,000, or 97% of gross
sales, and advertising and web hosting fees were $28,900, or 2% of gross
revenues.
The reason for the decrease in revenues was slightly lower sales of
Company owned product of approximately $29,400 from the same period in 2003.
Gross profit from Company owned product sales for the nine months ended
September 30, 2004 was approximately $502,400, approximately $47,900 less than
the same quarter in 2003. In an effort to convert inventories to cash,
management made a strategic decision to sell product at lower gross margins
during the third quarter of 2004. Since gross margin percentages on Company
owned product were approximately 3% lower for the first nine months of 2004 than
in 2003, and sales of Company owned product were approximately $29,400 lower in
the nine months ended September 30, 2004, the Company produced approximately
$47,900 lower gross margin dollars in 2004.
Operating Expenses. Total operating expenses for the nine months ended
September 30, 2004 were approximately $2,856,900, compared to $3,000,200 for the
corresponding period in 2003, a decrease of $143,300. Sales, general and
administrative ("SG&A") expenses for the nine months ended September 30, 2004
were approximately $2,253,200, compared to $2,466,700 for the nine months ended
September 30, 2003. The decrease of $213,500 in SG&A costs includes decreases in
depreciation and amortization of $163,800 due to certain assets becoming fully
depreciated during 2004, and professional fees of $118,300, offset by increases
in other costs of $60,100. Costs associated with planning, maintaining and
operating our web sites for the nine months ended September 30, 2004 increased
approximately $70,300 from the corresponding period in 2003. This increase is
due primarily to an increase in consulting costs of $109,500 offset by decreases
in depreciation and amortization of $39,600.
Interest Expense. For the nine months ended September 30, 2004, the
Company incurred interest charges of approximately $385,100 principally
associated with one convertible note, compared to interest charges of $288,200
for the corresponding period in 2003. The increase of $96,800 is attributable to
higher balances of interest-bearing debt in 2004 as well as greater amortization
of beneficial conversion features.
Net Loss. The Company realized a net loss for the nine months ended
September 30, 2004 of approximately $2,715,300, or $.02 per share, as compared
to a loss of $2,701,000, or $.02 per share for the nine months ended September
30, 2003.
Inflation. The Company believes that inflation has not had a material
effect on its results of operations.
15
Assets
At September 30, 2004, total assets of the Company were $1,884,800,
compared to $2,702,400 at December 31, 2003. The decrease was primarily due to
depreciation and amortization totaling $822,400.
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, 2004 compared to
September 30, 2003, is as follows:
2004 2003
----------- -----------
Net loss $(2,715,300) $(2,701,000)
Depreciation and amortization 822,400 1,120,400
Amortization of beneficial conversion
discount and debt discount 240,200 170,800
Common stock issued in payment
of services 806,600 893,800
Common stock issued in payment
of interest 82,600 --
Changes in current assets and
liabilities 198,200 177,000
----------- -----------
Net cash used in operating activities $ (565,300) $ (339,000)
=========== ===========
Working Capital and Liquidity
The Company had cash and cash equivalents of $66,600 at September 30,
2004, compared to $104,400 at December 31, 2003. The Company had a $345,000
deficit in working capital at September 30, 2004, compared to a working capital
deficit of $124,000 at December 31, 2003. At September 30, 2004 current
liabilities were $1,237,900 compared to $1,013,700 at December 31, 2003. During
the nine months ended September 30, 2004 current liabilities increased primarily
due to larger interest, consignment and compensation accruals, offset by
reductions in accounts payable. As discussed in greater detail in Note 5 of the
Financial Statements, included in Part I of the this quarterly report and
incorporated by reference herein, the Company has two outstanding convertible
notes held by Augustine Fund, L.P. The Series A Note, in the original principal
amount of $3,000,000, has been reduced to $450,292 as of September 30, 2004
through the conversion of principal into common stock. The Series B Note has a
principal amount outstanding as of September 30, 2004 of $2,250,000.
The Company's independent auditors have issued a going concern opinion on
the Company's consolidated financial statements for the year ended December 31,
2003. The Company needs an infusion of $600,000 to $800,000 of additional
capital to fund anticipated operating costs over the next 12 months. Management
anticipates growth in revenues and gross profits from its celebrity services
products and websites, including memberships, fan experiences, appearances, and
merchandise sales. In addition, "AuctionInc", which hosts a suite of management
tools and enhanced shipping calculator solutions for small e-commerce
enterprises, 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
16
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 810,000 shares of common stock, which, once assigned
by the Company, can generate between $84,000 and $582,000 (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, 2003.
For example, the Company's ability to achieve positive cash flow and to
become profitable may be adversely affected as a result of a number of factors
that could thwart its efforts. These factors include the Company's inability to
successfully implement the Company's business and revenue model, the
collectibles community not accepting the services the Company offers, higher
costs than anticipated, the Company's inability to sell its products and
services to a sufficient number of customers, the introduction of competing
products by others, the Company's failure to attract sufficient interest in and
traffic to its sites, the Company's inability to complete development of its
sites, the failure of the Company's operating systems, and the Company's
inability to increase its revenues as rapidly as anticipated. If the Company is
not profitable in the future, it will not be able to continue its business
operations.
ITEM 3. CONTROLS AND PROCEDURES
The Company's management, including the President of the Company and the
Chief Financial Officer of the Company, has evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Based upon their evaluation, the principal executive officer
and principal financial officer concluded that, as of the end of the period
covered by this report, the Company's disclosure controls and procedures were
effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission is recorded, processed,
summarized and reported within the time period specified by the Securities and
Exchange Commission's rules and forms, and is
17
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
(c) During the third quarter of 2004, Augustine Fund, L.P. converted
$252,580 of the March 23, 2000 convertible note into 1,000,000 shares of common
stock of the Company. The features of this convertible note are described in
Note 5 of the Notes to Consolidated Financial Statements, which are included in
Part I of this quarterly report. Augustine Fund, L.P. is an accredited investor
that represented that it acquired the convertible notes and the warrants issued
in connection with the note for its own account. The issuance of the securities
is exempt from registration under Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder. The Company issued 1,229,669 shares of its
common stock, par value $.001 per share, to Augustine Fund, L.P., for $82,614
interest due pursuant to the eight percent convertible note issued by the
Company to the Augustine Fund, L.P. on November 7, 2001.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 CEO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
31.2 CFO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
32.1 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
18
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 12, 2004 PAID, INC.
Registrant
/s/ Gregory Rotman
------------------------------------
Gregory Rotman, President
/s/ Richard Rotman
-------------------------------------
Richard Rotman, Chief Financial Officer,
Vice President and Secretary
19
LIST OF EXHIBITS
Exhibit No. Description
31.1 CEO Certification required under Section 302 of Sarbanes-Oxley Act
of 2002
31.2 CFO Certification required under Section 302 of Sarbanes-Oxley Act
of 2002
32.1 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
20