UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
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 |_|
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 August 10, 2006, the issuer had outstanding 215,811,397 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 Six Months ended June 30, 2006
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2006 and December 31, 2005 (unaudited)..................3
Consolidated Statements of Operations
Three and Six months ended June 30, 2006 and
2005 (unaudited).................................................4
Consolidated Statements of Cash Flows
Six months ended June 30, 2006 and
2005 (unaudited).................................................5
Consolidated Statements of Changes in Shareholders' Deficit
Six months ended June 30, 2006
(unaudited)......................................................6
Notes to Consolidated Financial Statements
Six months ended June 30, 2006 and 2005..........................7-13
Item 2. Management's Discussion and Analysis or
Plan of Operation......................................................13
Item 3. Controls and Procedures................................................18
Part II - Other Information
Item 1. Legal Proceedings......................................................19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...........19
Item 3. Defaults Upon Senior Securities........................................19
Item 4. Submission of Matters to a Vote of Security Holders....................19
Item 5. Other Information .....................................................20
Item 6. Exhibits ..............................................................20
Signatures.......................................................................21
- 2 -
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAID, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 2006 2005
---- ----
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 873,913 $ 1,502,987
Accounts receivable 61,643 72,317
Inventories, net 1,312,976 1,364,248
Investment in call options 694,875 300,625
Deferred expenses -- 556,250
Prepaid expenses 172,427 67,981
Due from employees 74,516 66,558
Other current assets 9,073 9,073
------------ ------------
Total current assets 3,199,423 3,940,039
Property and equipment, net 250,656 256,244
Other intangible assets, net 19,092 33,290
------------ ------------
Total assets $ 3,469,171 $ 4,229,573
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 280,000 $ 130,000
Accounts payable 291,560 275,336
Accrued expenses 876,935 1,077,081
Customer refunds payable 32,508 --
Deferred revenues 964,695 2,305,278
------------ ------------
Total current liabilities 2,445,698 3,787,695
------------ ------------
Long term liabilities:
Convertible debt -- 1,150,000
------------ ------------
Shareholders' equity (deficit):
Common stock, $.001 par value, 350,000,000 shares
authorized; 215,252,983 and 200,405,555 shares issued
and outstanding at June 30, 2006 and December 31,
2005, respectively 215,253 200,406
Additional paid-in capital 27,520,163 25,575,959
Accumulated deficit (26,711,943) (26,484,487)
------------ ------------
Total shareholders' equity (deficit) 1,023,473 (708,122)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 3,469,171 $ 4,229,573
============ ============
See accompanying notes to consolidated financial statements
- 3 -
PAID INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Six months Three months Six months
ended June ended June ended June ended June
30, 2006 30, 2006 30, 2005 30, 2005
------------- ------------- ------------- -------------
Revenues $ 604,388 $ 3,411,229 $ 633,356 $ 1,493,009
Cost of revenues 219,974 2,171,469 258,612 786,121
------------- ------------- ------------- -------------
Gross profit 384,414 1,239,760 374,744 706,888
------------- ------------- ------------- -------------
Operating expenses:
Selling, general, and administrative expenses 834,244 1,780,474 907,448 2,012,838
Web site development costs 118,842 253,242 175,876 287,777
------------- ------------- ------------- -------------
Total operating expenses 953,086 2,033,716 1,083,324 2,300,615
------------- ------------- ------------- -------------
Loss from operations (568,672) (793,956) (708,580) (1,593,727)
------------- ------------- ------------- -------------
Other income (expense):
Interest expense 17,925 (8,758) (78,523) (172,312)
Gain (loss) on call options 599,625 575,250 (145,500) (145,500)
Other income 5 8 470,547 470,548
------------- ------------- ------------- -------------
Total other income (expense), net 617,555 566,500 246,524 152,736
------------- ------------- ------------- -------------
Income (loss) before income taxes 48,883 (227,456) (462,056) (1,440,991)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net income (loss) $ 48,883 $ (227,456) $ (462,056) $ (1,440,991)
============= ============= ============= =============
Income (loss) per share (basic and diluted) $ 0.00 $ (0.00) $ (0.00) $ (0.01)
============= ============= ============= =============
Weighted average shares (basic) 206,913,261 204,015,368 178,777,729 176,565,145
============= ============= ============= =============
Weighted average shares (diluted) 231,580,941 n/a n/a n/a
============= ============= ============= =============
See accompanying notes to consolidated financial statements
- 4 -
PAID, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
2006 2005
---- ----
Operating activities:
Net loss $ (227,456) $(1,440,991)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 76,244 458,333
Bad debt expense 340
Settlement Agreement and Mutual Release - call options -- (470,500)
Amortization of unearned compensation -- 30,000
Beneficial conversion feature -- 60,457
Loss (gain) on call options (575,250) 145,500
Common stock issued in payment of professional
and consulting fees 567,218 831,870
Issuance of common stock pursuant to exercise of
stock options granted to employees for services 104,039 135,748
Common stock issued in payment of interest 137,794 8,000
Changes in assets and liabilities:
Accounts receivable 10,674 10,392
Inventories 51,272 11,512
Deferred expenses 556,250 --
Prepaid expense and other current assets (112,404) 92,587
Accounts payable 16,224 70,124
Accrued expenses (200,146) (139,391)
Customer refunds payable 32,508 --
Deferred revenue (1,340,583) --
----------- -----------
Net cash used in operating activities (903,616) (196,019)
----------- -----------
Investing activities:
Proceeds from assignment of call options 181,000 27,000
Property and equipment additions (56,458) (122,129)
----------- -----------
Net cash used in operating activities 124,542 (95,129)
----------- -----------
Financing activities:
Proceeds from loan payable 150,000 100,000
Proceeds from sale of warrants -- 50,000
Proceeds from sale of common stock -- 30,000
Proceeds from assignment of call options -- 99,611
Proceeds from exercise of stock options -- 336
----------- -----------
Net cash provided by financing activities 150,000 279,947
----------- -----------
Net decrease in cash and cash equivalents (629,074) (11,201)
Cash and cash equivalents, beginning 1,502,987 43,558
----------- -----------
Cash and cash equivalents, ending $ 873,913 $ 32,357
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ -- $ --
=========== ===========
Interest $ 4,107 $ --
=========== ===========
See accompanying notes to consolidated financial statements
- 5 -
PAID, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED JUNE 30, 2006
(Unaudited)
Common stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital deficit Total
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 200,405,555 $ 200,406 $ 25,575,959 $(26,484,487) $ (708,122)
Issuance of common stock pursuant to exercise of stock
options granted to employees for services 614,992 615 103,424 104,039
Issuance of common stock pursuant to exercise of stock
options granted to professionals and consultants 4,373,756 4,374 562,844 567,218
Common stock issued in payment of
interest on note payable 838,450 838 136,956 137,794
Common stock issued for payment of
convertible debt 9,020,230 9,020 1,140,980 1,150,000
Net loss -- -- -- (227,456) (227,456)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2006 215,252,983 $ 215,253 $ 27,520,163 $(26,711,943) $ 1,023,473
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
- 6 -
PAID, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
Note 1. Organization
Paid, Inc. and subsidiary (the "Company") provides businesses and clients with
marketing, management, merchandising, auction management, website hosting, and
authentication and consignment services for the entertainment, sports and
collectibles industries. 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). Except for the
balance sheet as of December 31, 2005, 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, 2005, 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. All
inter-company balances and transactions have been eliminated.
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 both June 30,
2006 and December 31, 2005 the Company has provided for reserves totaling
$50,000.
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, determined by the closing
price of the Company's common stock, 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).
- 7 -
Revenue Recognition
The Company generates revenue from sales of fan experiences, from fan club
membership fees, on sales of its purchased inventories, from web hosting
services, from appraisal services and from advertising and promotional services.
Fan experiences sales include tickets and related experiences at concerts and
other events conducted by performing artists. Revenues associated with these fan
experiences are generally reported gross, rather than net, following the
criteria of EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent", and are deferred until the related event has been concluded, at which
time the revenues and related direct costs are recognized.
Fan club membership fees are recognized when the member joins and all direct
costs associated with the membership have been incurred.
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.
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 $46,000 in 2006 and $68,000 in 2005,
are charged to expense when incurred.
Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheets and reported amounts of revenue and expenses during
the reporting periods. Material estimates that are particularly susceptible to
significant change in the near term relate to inventories and deferred tax asset
valuation. Although these estimates are based on management's knowledge of
current events and actions, they may ultimately differ from actual results.
- 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
13,414,634 as of June 30, 2005. 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 27,165,054 shares and 27,465,054 shares at June 30, 2006
and 2005, 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 for periods
in which a loss is reported.
Website Development Costs
The Company accounts for website development costs in accordance with the
provisions of EITF 00-2, "Accounting for Web Site Development Costs", which
requires that costs incurred in planning, maintaining, and operating stages that
do not add functionality to the site be charged to operations as incurred.
External costs incurred in the site application and infrastructure development
stage and graphic development are capitalized. Such capitalized costs are
included in "Property and equipment." During the six months ended June 30, 2006
and 2005 the Company capitalized approximately $49,500 and $119,000 of website
development costs, respectively.
Share based Compensation
Effective January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) 123(R), Share-Based Payment, which
establishes accounting for equity instruments exchanged for employee services.
Under the provisions of SFAS 123(R), share-based compensation cost is measured
at the grant date, based on the fair value of the award, and is recognized as an
expense over the employee's requisite service period (generally the vesting
period of the equity grant). Prior to January 1, 2006, the Company accounted for
share-based compensation to employees in accordance with Accounting Principles
Board (APB) Opinion No. 25, Accounting for stock issued to Employees, and
related interpretations. The Company also followed the disclosure requirements
of SFAS 123, Accounting for Stock-Based Compensation. The Company elected to
adopt the modified prospective transition method as provided by SFAS 123(R) and,
accordingly, financial statement amounts for the prior periods presented in the
Form 10-QSB have not been restated to reflect the fair value method of expensing
share-based compensation.
The Company estimates the fair value of stock options using the Black-Scholes
valuation model. Key input assumptions used to estimate the fair value of stock
options include the exercise price of the award, the expected option term, the
expected volatility of the Company's stock over the option's expected term, the
risk-free interest rate over the option's expected term, and the Company's
expected annual dividend yield. The Company believes that the valuation
technique and the approach utilized to develop the underlying assumptions are
appropriate in calculating the fair values of the Company's stock options.
Estimates of fair value are not intended to predict actual future events or the
value ultimately realized by persons who receive equity awards.
- 9 -
At the date of adoption, there were no unvested options outstanding and no
options were granted during the six months ended June 30, 2006. Consequently,
there was no share-based compensation expense recorded during the six months
ended June 30, 2006.
The Company did not recognize compensation expense for employee stock option
grants for the six months ended June 30, 2005, since the Company had previously
adopted the provisions of SFAS 123, through disclosure only. The following
illustrates the effects on net income and earnings per share for the three and
six months ended June 30, 2005 as if the Company had applied the fair value
recognition provisions of SFAS 123 to share-based employee awards.
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------- -------------
Net (loss) as reported $ (462,056) $(1,440,991)
Share based compensation as recorded
(net of any related income tax effects) 15,000 30,000
Share based compensation expense determined
Under the fair value method (net of
any related income tax effects) (15,000) (30,000)
----------- -----------
Proforma net (loss) $ (462,056) $(1,440,991)
=========== ===========
Note 2. Notes Payable
At June 30, 2006 the Company was obligated on short-term notes payable totaling
$280,000, of which $80,000 was to a related party. At December 31, 2005 the
Company was obligated on short-term notes payable totaling $130,000, of which
$80,000 was to a related party. The related party notes bear interest at 8%,
while the remainder bear interest at 8% to 10%. All of this short-term debt was
due on demand. Interest expense charged to operations during the six months
ended June 30, 2006 and 2005 in connection with the related party notes totaled
$3,200 and $5,200, respectively.
Note 3. Accrued Expenses
Accrued expenses are comprised of the following:
June 30, December 31,
2006 2005
---- ----
Interest $ 39,345 $ 172,490
Payroll and related costs 235,504 204,280
Professional and Consulting fees 174,325 134,411
Consignments 172,782 172,782
Due to K Sports 62,500 62,500
Commissions 156,000 300,000
Other 36,479 30,618
----------- -----------
$ 876,935 $ 1,077,081
=========== ===========
- 10 -
Note 4. Common Stock
Call Option Agreements
In connection with a February 1, 2002 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.
During January 2005 the remaining 394,565 options were assigned in exchange for
approximately $100,000. The proceeds from the assignment of these options were
added to the paid in capital of the Company.
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 options are assignable by
the Company and were modified on March 31, 2006 to expire two years from the
date of grant. During the six months ended June 30, 2006 and 2005 the Company
assigned call options for 350,000 and 100,000 shares respectively, for $181,000
and $27,000. At June 30, 2006, 1,275,000 call options remain outstanding.
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
80,000,000 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 grant.
During the six months ended June 30, 2006 the Company granted options for
4,880,415 shares at various dates aggregating $651,257 under this plan. During
the six months ended June 30, 2005 the Company granted options for 4,754,455
shares at various dates aggregating $967,618 under this plan. All options
granted during these periods were exercised.
During the six months ended June 30, 2005 the Company entered into an Agreement
and sold a warrant to purchase common stock ("Warrant") to an investor. The
investor paid the Company $50,000 as a deposit ("Deposit") for the right to
acquire up to 2,000,000 shares of unregistered common stock at any time within
one year of the Agreement at $.15 per share. During 2006 the initial deposit was
forfeited and the expiration date of the Warrant was extended for one year
pending receipt of an additional $50,000 payment. If exercised, $50,000 will be
applied as partial payment of the exercise price. If the Warrants are not
exercised within one year the extension the second deposit will be forfeited.
The initial deposit has been recorded as an addition to Paid in Capital.
- 11 -
Share-based Incentive Plan
At June 30, 2006, the Company had stock option plans that include both incentive
stock options and non-qualified stock options to be granted to certain eligible
employees, non-employee directors, or consultants of the Company. The maximum
number of shares currently reserved for issuance is 31,000,000 shares. The
options granted have ten-year contractual terms and vest either immediately or
annually over a five-year term.
At June 30, 2006, there were 5,483,000 shares available for future grants under
the above stock option plans. The weighted average exercise price of options
outstanding was $0.045 at June 30, 2006.
The following table presents the average price and contractual life information
about options outstanding and exercisable at June 30, 2006:
Number of Weighted Average Remaining
Outstanding Contractual Life Options Currently
Exercise Price Shares (years) Exercisable
-------------- ------ ------- -----------
$ .81 9,000 3.25 9,000
1.62 57,000 3.00 57,000
.001 99,054 8.50 99,054
.041 25,000,000 6.50 25,000,000
The aggregated intrinsic value of options outstanding and vested at June 30,
2006 was $12,653,885.
Note 5. Income Taxes
There was no provision for income taxes for the six months ended June 30, 2006
and 2005 due to the Company's net operating loss and its valuation reserve
against deferred income taxes.
The difference between the provision for income taxes using amounts computed by
applying the statutory federal income tax rate of 34% and the Company's
effective tax rate is due primarily to the net operating loss incurred by the
Company and the valuation reserve against the Company's deferred tax asset.
At June 30, 2006, the Company has federal and state net operating loss carry
forwards of approximately $20,000,000 and $16,000,000, respectively, available
to offset future taxable income. The state carry-forwards will expire
intermittently through 2011, while the federal carry forwards will expire
intermittently through 2026.
Note 6. Convertible Debt Financing
As of June 30, 2006 the Company has no convertible debt outstanding.
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. ("Buyer"). As of June 30, 2005 this note has been
paid in full through a series of conversions to common stock. During the six
months ended June 30, 2005 the Company received conversion requests for the
remaining $251,892 balance into 1,412,942 common shares at prices ranging from
$.149 to $.213 per share. During 2004,
- 12 -
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 March 31, 2005
totaling $2,250,000, had the Buyer converted the Series B Note at issuance,
Buyer would have received $3,082,193 in aggregate value of the Company's common
stock upon conversion of the convertible note. As a result, in accordance with
EITF 00-27, the intrinsic value of the beneficial conversion feature of $832,193
was charged to interest expense over the original two year term of the related
note. The entire beneficial conversion feature was charged to operations as of
December 31, 2005. The beneficial conversion feature that was charged to
interest expense during the six months ended June 30, 2005 totaled $60,457. The
total beneficial conversion discount related to this note was recorded as an
increase in additional paid in capital and the unamortized portion as a
reduction in the related note. During the six months ended June 30, 2006 and
2005 the Company received conversion requests for $1,150,000 and $50,000 into
9,020,230 and 330,885 shares of the Company's common stock at conversion prices
ranging from $.092 to $.151 per share. The first $1,050,000 was converted into
7,725,400 common shares at prices ranging from $.135 to $.152 per share between
July 1, 2005 and December 31, 2005.
Note 7. Concentrations
For the six months ended June 30, 2006 approximately 86% of the Company's
revenue was derived from the sale of fan experiences and merchandise related to
a major performing artist that was touring. This tour ended in late March 2006
and a new tour is scheduled to begin during September 2006.
Note 8. Commitments
The Company leases office facilities in Boston Massachusetts under a five year
lease beginning May 2006 requiring monthly payments of approximately $5,800,
plus increases in real estate taxes and operating expenses, through April 2011.
During the six months ended June 30, 2006 rent expense charged to operations
under this lease totaled approximately $8,500.
ITEM 2. Management's Discussion and Analysis or Plan of Operation.
Overview
Our innovative products and services are utilized in celebrity services,
ticketing, fan experiences, merchandising, online auctions and management, and
web site development. Our celebrity services proprietary content management
system provides an opportunity for our clients to offer more information,
merchandise and experiences to their customers and communities. This proprietary
system uses the AuctionInc. shipping calculator tools to provide improved
customer service and fulfillment services. 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 athletes and
entertainers official web sites and fan-club services including e-commerce
storefronts, articles, polls, message boards, contests, biographies and custom
features to attract thousands of visitors daily. Our autograph signing
events, working in conjunction with our new sports agent marketing services,
have created more services and opportunities for our sports clientele.
- 13 -
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: Property and equipment 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 June 30, 2006 to Three Months ended June 30, 2005.
The following discussion compares the Company's results of operations for the
three months ended June 30, 2006 with those for the three months ended June 30,
2005. The Company's financial statements and notes thereto included elsewhere in
this quarterly report contain detailed information that should be referred to in
conjunction with the following discussion.
Revenues. For the three months ended June 30, 2006, revenues were $604,400, 72%
of which was attributable to sales of fan club memberships, merchandise, and fan
experiences related to tours of performing artists. Sales of the Company's own
product and fees from buyers and sellers through the Rotman Auction operations
represented 18% of revenues, and sports marketing revenues represented 7% of
revenues. Gross sales of the Company's own product were $110,500. Fan
experience, Fan club membership and related merchandise sales revenues were
$433,500, and sports marketing revenues were $42,700. Other revenues were
$17,700, 3% of gross revenues, during the three months ended June 30, 2006.
Management anticipates continued increases from fan club memberships,
merchandise, and fan experiences from tours, products and services related to
several other performing artists during the remainder of 2006.
The Company's second quarter 2006 revenues represent a decrease of approximately
$29,000, or 5%, from the second quarter of 2005, in which revenue was $633,400.
For the three months ended June 30, 2005, sales of the Company's product were
$367,400, or 58% of gross sales, fan club membership and related merchandise
sales revenues were $137,800, 22% of gross revenues, sports marketing revenues
were $108,900, or 17% of gross revenues, and other revenues were $19,400, or 3%
of gross revenues.
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The reason for the decrease in revenues was less revenues related to sports
marketing services of $66,000 and lower sales of Company owned product of
approximately $256,900 from the same period in 2005, offset by increases of
$295,800 in fan experience revenues. Gross profit from Company owned product
sales for the three months ended June 30, 2006 was $12,300, $197,100 less than
in 2005. The decrease in sales and gross profit margin is attributable to a
management decision late in 2005 to streamline sales channels for Company owned
product and, in turn, terminating sales on eBAY, in an effort to reduce related
overhead.
Operating Expenses. Total operating expenses for the three months ended June 30,
2006 were $953,100 compared to $1,083,300 for the corresponding period in 2005,
a decrease of $130,200.
Sales, general and administrative ("SG&A") expenses for the three months ended
June 30, 2006 were $834,200, compared to $907,400 for the three months ended
June 30, 2005. The decrease of $73,200 in SG&A costs includes decreases in
payroll and related costs of $31,800 and depreciation and amortization of
$211,400, as certain assets became fully depreciated during 2006 and 2005,
offset by increases in professional fees of $125,100 travel of $6,100, credit
card commissions of $19,400,postage and shipping costs of $5,700 and rents of
$12,200. The travel, credit card commissions and postage and shipping increases
are all principally attributable to tours of performing artists.
Costs associated with planning, maintaining and operating our web sites for the
three months ended June 30, 2006 decreased by $57,000 from 2005. This decrease
is due primarily to a decrease in consulting costs of $135,900 offset by
increases in depreciation and amortization of $22,000 and payroll of $11,900. In
addition, during the three months ended June 30, 2006 the Company did not
capitalize any website development costs, while during the comparable 2005
period the Company capitalized $32,000.
Interest Expense. For the three months ended June 30, 2006, the Company
recovered approximately $17,900 of interest charges principally associated with
convertible debt, compared to interest charges incurred of $78,500 for the
corresponding period in 2005, a decrease of $96,500. $60,000 of the decrease is
attributable to a settlement with Augustine Fund with respect to amounts owed,
$30,100 to lower amortization of beneficial conversion features and the balance
to lower balances of interest-bearing debt in 2006.
Other income. Other income for the three months ended June 30, 2006 includes
$599,600 of realized and unrealized appreciation in the fair value of call
options received in the 2005 settlement with Leslie Rotman. For the three months
ended June 30, 2005 other income includes $470,500 of gain associated with the
settlement with Leslie Rotman, offset by $145,500 of realized and unrealized
depreciation in the fair value of the call options.
Net Profit (loss). The Company realized a net profit for the three months ended
June 30, 2006 of $48,900 compared to a net loss of $462,100 for the three months
ended June 30, 2005. Net profit for the three months ended June 30, 2006 was
less than $.01 per share while the net loss for the period ended June 30, 2005
was also less than $.01 per share.
Inflation. The Company believes that inflation has not had a material effect on
its results of operations.
Six Months ended June 30, 2006 to Six Months ended June 30, 2005.
The following discussion compares the Company's results of operations for the
six months ended June 30, 2006 with those for the six months ended June 30,
2005. 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.
- 15 -
Revenues. For the six months ended June 30, 2006, revenues were $3,411,200, 90%
of which was attributable to sales of fan club memberships, merchandise, and fan
experiences related to tours of performing artists. A tour of a major performing
artist ended during March 2006 resulting in lower revenues during the second
quarter of 2006 compared to the first quarter of 2006. Sales of the Company's
own product and fees from buyers and sellers through the Rotman Auction
operations represented 5% of revenues, and sports marketing revenues represented
4% of revenues. Gross sales of the Company's own product were $175,400. Fan
experience, Fan club membership and related merchandise sales revenues were
$3,081,000, and sports marketing revenues were $131,800. Other revenues were
$23,000, 1% of gross revenues, during the six months ended June 30, 2006.
Management anticipates continued increases from fan club memberships,
merchandise, and fan experiences from tours, products and services related to
several other performing artists during the remainder of 2006.
The Company's 2006 revenues represent an increase of approximately $1,918,200,
or 128%, from the comparable period in 2005, in which revenue was $1,493,000.
For the six months ended June 30, 2005, sales of the Company's product were
$834,400, or 56% of gross sales, fan club membership and related merchandise
sales revenues were $405,700, 27% of gross revenues, sports marketing revenues
were $229,900, or 15% of gross revenues, and other revenues were $22,900, or 2%
of gross revenues.
The reason for the increase in revenues was a $2,675,300 increase related to the
tours of performing artists, offset by lower revenues related to sports
marketing services of $98,100 and lower sales of Company owned product of
approximately $659,000 from the same period in 2005. Gross profit from Company
owned product sales for the six months ended June 30, 2006 was approximately
$39,900, $278,800 less than in 2005. Since gross margin percentages on Company
owned product were substantially lower in 2006 and sales of Company owned
product were $659,000 lower in the six months ended June 30, 2006, the Company
produced $278,800 lower gross margin dollars in 2006. The decrease in sales and
gross profit margin is attributable to a management decision late in 2005 to
streamline sales channels for Company owned product and, in turn, terminating
sales on eBAY, in an effort to reduce related overhead.
Operating Expenses. Total operating expenses for the six months ended June 30,
2006 were $2,033,700 compared to $2,300,600 for the corresponding period in
2005, a decrease of $266,900.
Sales, general and administrative ("SG&A") expenses for the six months ended
June 30, 2006 were $1,780,500, compared to $2,012,800 for the six months ended
June 30, 2005. The decrease of $232,400 in SG&A costs includes decreases in
payroll and related costs of $83,500, depreciation and amortization of $421,900
as certain assets became fully depreciated during 2006 and 2005, offset by
increases in professional fees of $49,100 travel of $37,900, credit card
commissions of $46,900, postage and shipping costs of $46,300, and rents of
$8,000. The travel, credit card commissions and postage and shipping increases
are all principally attributable to tours of performing artists.
Costs associated with planning, maintaining and operating our web sites for the
six months ended June 30, 2006 decreased by $34,500 from 2005. This decrease is
due primarily to a decrease in consulting costs of $157,000 offset by increases
in depreciation and amortization of $39,800. In addition, during the six months
ended June 30, 2006 the Company capitalized $49,500 of website development
costs, while during the comparable 2005 period the Company capitalized $119,000.
Interest Expense. For the six months ended June 30, 2006, the Company incurred
approximately $8,800 of interest charges compared to interest charges of
$172,300 for the corresponding period in 2005, a decrease of $163,600. $60,000
of the decrease is attributable to a settlement with Augustine Fund with respect
to amounts owed, $60,500 to lower amortization of beneficial conversion features
and the balance to lower balances of interest-bearing debt in 2006.
- 16 -
Other income. Other income for the six months ended June 30, 2006 includes
$575,000 of realized and unrealized appreciation in the fair value of call
options received in the 2005 settlement with Leslie Rotman. For the six months
ended June 30, 2005 other income includes $470,500 of gain associated with the
settlement with Leslie Rotman, offset by $145,500 of realized and unrealized
depreciation in the fair value of the call options.
Net Loss. The Company realized a net loss for the six months ended June 30, 2006
of $227,500 compared to a net loss of $1,441,000 for the six months ended June
30, 2005. The 2006 loss represented less than $.01 per share, while the 2005
loss represented $.01 per share.
Assets
At June 30, 2006, total assets of the Company were $3,469,200 compared to
$4,229,600 at December 31, 2005. The decrease was primarily due lower cash and
deferred expenses of $1,185,000 associated with the conclusion of entertainment
events held during the first two quarters of 2006. The Company also reports
$1,308,100 lower related liabilities, in the form of deferred revenues and
customer refunds payable, at June 30, 2006 than at December 31, 2005.
Operating Cash Flows
A summarized reconciliation of the Company's net losses to cash used in
operating activities for the six months ended June 30, 2006 and 2006 is as
follows:
2006 2005
---- ----
Net loss $ (227,500) $(1,441,000)
Depreciation and amortization 76,200 458,300
Amortization of unearned compensation -- 30,000
Amortization of beneficial conversion discount
and debt discount -- 60,500
Common stock issued in payment of services 671,300 967,600
Common stock issued in payment of interest 137,800 8,000
Receipt of call options, net of related (gains) losses (575,300) (325,000)
Net current assets and liabilities associated with
advance ticketing (751,800) --
Changes in current assets and liabilities (234,300) 45,600
Net cash used in operating activities $ (903,600) $ (196,000)
=========== ===========
Working Capital and Liquidity
The Company had cash and cash equivalents of $873,900 at June 30, 2006, compared
to $1,503,000 at December 31, 2005. The Company had $753,800 of working capital
at June 30, 2006 compared to $152,300 at December 31, 2005. At June 30, 2006
current liabilities were $2,445,700 compared to $3,787,700 at December 31, 2005.
Current liabilities decreased at June 30, 2006 compared to December 31, 2005
primarily due to the decrease in deferred revenues of $1,340,600 and an increase
in customer refunds payable of $32,500 associated with the suspension of a major
performing artist's tour late in the first quarter of 2006 and fewer scheduled
future events for other artists.
The Company's independent auditors have issued a going concern opinion on the
Company's consolidated financial statements for the year ended December 31,
2005. The Company may need an
- 17 -
infusion of additional capital to fund anticipated operating costs over the next
12 months. Management anticipates growth in revenues and gross profits in 2006
from its celebrity services products and websites, and similar services to other
entities; including memberships, fan experiences and ticketing, appearances,
website development and hosting, and merchandise sales from both existing and
new clients. In addition, pending receipt of the formal written notice of
allowance of the Company's patent application, the Company will pursue a variety
of possible revenue streams from its "AuctionInc" platform and patent which
hosts a suite of management tools and enhanced shipping calculator solutions for
small ecommerce enterprises. 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 1,275,000 shares of common stock, which, once assigned by the
Company, can generate between $132,000 and $815,700 (based solely upon the 52
week high and low closing prices of the Company's common stock) of cash.
However, there can be no assurance that 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, 2005.
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, tour or event
cancellations, 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
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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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) In the second quarter of 2006, the Company paid off the remaining
$1,150,000 of debt outstanding on its 8% convertible note issued by the Company
in the original principal amount of $2,250,000 to the Augustine Fund, L.P. on
November 7, 2001. During the second quarter of 2006, the Company issued
9,020,230 shares of its common stock to Augustine Fund, L.P., for principal and
interest on this convertible note. 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.
Also in the second quarter of 2006, the Company paid to Crescent Fund,
LLC, 1,111,110 shares, at $.096 per share, of unregistered common stock as
payment for corporate services to be provided by Crescent Fund, LLC. Crescent
Fund, LLC is an accredited investor that acquired the shares for its own
account. The issuance of the common stock 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.
- 19 -
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 CEO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
31.2 CFO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
32 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
- 20 -
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 14, 2006 PAID, INC.
Registrant
/s/ Gregory Rotman
----------------------------------------
Gregory Rotman, President
/s/ Richard Rotman
----------------------------------------
Richard Rotman, Chief Financial Officer,
Vice President and Secretary
- 21 -
LIST OF EXHIBITS
Exhibit No. Description
----------- -----------
31.1 CEO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
31.2 CFO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
32 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
- 22 -