UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2006
Commission File No. 0-28720
PAID, INC.
(Name of Small Business Issuer in its Charter)
Delaware 73-1479833
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
4 Brussels Street, Worcester, Massachusetts 01610
(Address of Principal Executive Offices)(Zip Code)
(508) 791-6710
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.001 Par Value
(Title of Class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|
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 |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.|_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
State Issuer's revenues for its most recent fiscal year: $8,048,854.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates on March 8, 2007 was approximately $58,730,659 based upon the
closing price of $.32 per share on such date.*
* The issuer continues to meet the definition of a small business issuer because
it has not had a public float of at least $25,000,000 for two consecutive fiscal
years. The aggregate market value of the voting and non-voting common equity
held by non-affiliates on December 1, 2006, a date which is 60 days prior to the
end of the issuer's most recent fiscal year end, was approximately $34,871,328,
based upon the closing price of $.19 per share on such date. The aggregate
market value of the voting and non-voting common equity held by non-affiliates
on December 1, 2005, a date which is 60 days prior to the end of the issuer's
immediately prior most recent fiscal year end, was $21,984,114, based upon the
closing price of $.12 per share on such date.
As of March 8, 2007, the issuer had outstanding 223,231,210 shares of its Common
Stock, par value of $0.001, its only class of voting securities.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report except those
Exhibits so incorporated as set forth in the Exhibit Index.
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Description of Business ................................................. 2
Item 2. Description of Property ................................................. 9
Item 3. Legal Proceedings ....................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders ..................... 9
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities ................................... 9
Item 6. Management's Discussion and Analysis or Plan of Operation ............... 10
Item 7. Financial Statements .................................................... 14
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure ..................................... 14
Item 8A. Controls and Procedures ................................................. 15
Item 8B. Other Information ....................................................... 15
PART III
Item 9. Directors, Executive Officers, Promoters, Control Persons
and Corporate Governance; Compliance with Section 16(a) of the
Exchange Act ............................................................ 15
Item 10. Executive Compensation .................................................. 17
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ......................................... 18
Item 12. Certain Relationships and Related Transactions, and Director Independence 19
Item 13. Exhibits ................................................................ 20
Item 14. Principal Accountant Fees and Services .................................. 21
Signatures ......................................................................... 23
1
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-KSB (including without limitation the Risk
Factors included as Exhibit 99) may contain forward looking statements. We
caution you to be aware of the speculative nature of "forward-looking
statements". Statements that are not historical in nature, including the words
"anticipate," "estimate," "should," "expect," "believe," "intend," and similar
expressions, are intended to identify forward-looking statements. Although these
statements reflect our good faith belief based on current expectations,
estimates and projections about (among other things) the industry and the
markets in which we operate, they are not guarantees of future performance.
Whether actual results will conform to our expectations and predictions is
subject to a number of known and unknown risks and uncertainties, including the
risks and uncertainties discussed in this Annual Report; general economic,
market, or business conditions; the opportunities that may be presented to and
pursued by us; competitive actions by other companies; changes in laws or
regulations; and other circumstances, many of which are beyond our control.
Consequently, all of the forward-looking statements made in this Annual Report
are qualified by these cautionary statements and there can be no assurance that
the actual results anticipated by us will be realized or, even if substantially
realized, that they will have the expected consequences to, or effects on, us or
our business or operations. Except as required by applicable laws, we do not
intend to publish updates or revisions of any forward-looking statements we make
to reflect new information, future events or otherwise. Readers are urged to
carefully review and consider the various disclosures made by Paid, Inc. in this
Annual Report, which attempts to advise interested parties of the risks and
factors that may affect our business, financial condition, results of operations
and prospects.
PART I.
Item 1. Description of Business.
Paid, Inc. (the "Company") was incorporated in Delaware as Rose
International Ltd. on August 9, 1995. The Company's main web address is located
at www.paid.com, which offers updated information on various aspects of our
operations, as well as access to www.ksportsent.com and www.paidcelebrity.com.
The Company has one subsidiary, Rotman Collectibles, Inc. Information contained
in the Company's websites shall not be deemed to be a part of this Annual
Report. The Company's principal executive offices are located at 4 Brussels
Street, Worcester, Massachusetts 01610, and the Company's telephone number is
(508) 791-6710.
BUSINESS
Our Business
The Company's primary focus is to provide businesses and clients with
marketing, management, merchandising, auction management, website hosting, and
authentication and consignment services for the entertainment, sports and
collectible industries. We provide business management tools for online
retailers, through AuctionInc, which is home to our patent pending shipping
calculator and automated auction checkout and order processing system. This
system provides the fundamental structure for our celebrity web hosting and
development services, and for individuals seeking a professional and interactive
presence on the Internet. We also provide the merchandise and fulfillment
services for these websites, using 20 years of experience from Rotman Auction,
to maintain the best customer service and integrity for these celebrities. We
continue to provide live and private autograph signings and support professional
athletes' careers through the Rotman Auction brand and K Sports initiative.
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In 2004 we added the services of the newly acquired K Sports brand which
specializes in athlete agent services and marketing and promoting these
celebrities. K Sports delivers personalized attention to each client for
services that include contract negotiations, endorsements, public relations, or
charitable activities. The merger of K Sports' experience and clientele with
Paid's expertise in merchandising, website hosting, and auction management based
services for fan clubs and tour and travel packages was intended to create a
business that is unrivaled in the sports and entertainment industry.
For the years ended December 31, 2006 and 2005, there was a large shift in
our revenues from being derived from Rotman Auction and the sale of collectibles
to merchandising, fan club memberships, V.I.P. fan experiences, and ticketing
for musical artists and sports and entertainment celebrities. All the sales for
our celebrity and entertainment services are made through the artist's personal
website and Paid's proprietary content managed system. A customer interested in
a membership, merchandise, fan experience or ticketing would use our system to
make purchases, and then depending on the sale, the Company either ships the
merchandise, or delivers the fan experience at an event. The services offered by
a client depend upon the client's desire and willingness to offer different
initiatives. Not all artists and fan bases are the same and the Company works
closely with its different clients to cater to their needs. Our services include
ticketing, merchandising, video production, marketing, fan experiences,
management, sponsorship, mobile marketing, and website development and
management. We provide these services for artists such as Aerosmith, Rockapella,
The New Cars, Keith Lockhart, Joey Kramer, DMC, and Patti LaBelle.
Other revenue in 2006 was derived primarily from sales of collectibles,
and fees from buyers and sellers, through the Rotman Auction operations, and
sports marketing revenues. The sale of collectibles and movie posters occurs in
various different sales channels; retail, online auction, charity auction,
direct sale, and wholesale distribution. Most of the online auctions take place
through a person-to-person auction service. Our auctions consist of sports and
non-sports cards, collectibles, Americana, autographed items, and movie
memorabilia, among other types of collectibles from the 1800s to the present
day. Rotman Auction also maintains a substantial inventory of memorabilia with
popular and historical significance which allows customers to directly purchase
the memorabilia without the competition from bidders in an auction format. Most
of these sales are consummated through our website located at www.paidsports.com
(formerly, www.rotmanauction.com). We acquire inventory in the ordinary course
of our business from a number of companies and individuals. We also may acquire
inventory through acquisition of companies that own collectibles, or through the
acquisition of substantially all the assets of a company that holds
collectibles.
We engage in autograph signing activities under the "Rotman Auction" name,
at public and private autograph signing events. We contract and pay the
celebrities for their services and for supplying products for the event. We
hosted celebrities such as Adam Viniateri, Bronson Arroyo, Troy Brown, Johnny
Damon, Jim Rice, Ty Law, Terry O'Reilly, Pete Rose, Ray Bourque, Paul Pierce,
Trot Nixon, Corey Dillon, Derek Lowe, Carlton Fisk, Tedy Bruschi, and Alfonso
Soriano. Our autograph signing events include the creation, development and
maintenance of celebrity websites. We provide comprehensive content managed
websites that include message boards, shopping, articles, statistics,
biographical information and event schedules. We currently host such
celebrities' websites as Jerry Rice, Doug Flutie, Chris Chambers, Willie
McGinest, Tim Wakefield, Bronson Arroyo, and Lee Evans. Revenues are generated
from sales of product produced by the celebrity. Full and part-time employees,
as well as interns update the news and information on these sites. We receive
payment in the form of autographs for maintaining and hosting the website. We
also provide management services for order fulfillment and product distribution
for the celebrities.
To assist with the inventory management and order processing Rotman
Auction uses the AuctionInc platform for reducing order processing time,
increasing sales and improving customer service. The AuctionInc system was
originally designed to just assist and improve Rotman Auction's business, but
management realized that there was a need for an order management system for
individuals and businesses that sell on the Internet, specifically at auction.
In 2000 the technology team focused its attention on the core fundamental piece
of the system called the Shipping Calculator. The Company realized the potential
importance of the calculator and filed for a patent before launching it to the
public
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in April of 2001. The product is modular based and continues to develop new
tools and products for its customers.
AuctionInc Software. AuctionInc is a suite of online management tools
assisting businesses with e-commerce storefronts, order processing, customer
service, shipping solutions, inventory management, and auction processing. The
application was designed originally to reduce overhead costs for Rotman Auction,
but based on its marketability the Company began to offer the application to
other sellers in 2003. A seller's use of the application reduces overhead and
labor costs, and through its customer-friendly setup improves customer relations
and increases sales.
AIship is a shipping calculator that automatically estimates the shipping,
sales tax, and insurance on auction listings. This module automatically
calculates shipping costs, carrier insurance fees, optional shipping services,
and offers an adjustable shipping fee markup, and co-branded shipping calculator
page. It pre-configures shipping rates with handling costs, and provides a
multiple auctions tab to calculate shipping on numerous auctions. The Company
receives a transaction fee for each auction listing that uses AIship.
AIseller is an auction management tool used to streamline a seller's order
processing for improved customer service and higher sales. This module is
designed for sellers who are selling more than 50 items per month at online
auctions. It offers summary and detail order and sales reporting, auction/sales
tracking, automated personalized e-mail notifications, auction re-listing
reports, a complete integrated order management system, a customer checkout
system, as well as automatic shipping rates and sales tax calculations for
consolidating multiple auctions. The Company does not actively market this
product, but would receive a transaction fee for each listing at auction that
uses AIseller.
During 2005 we enhanced our new products that we launched the end of 2004
to provide more features and options for the new online user. These enhanced
tools were focused on e-commerce and were therefore branded under the Paid name.
These products ranged from a simple shipping calculator to be used anywhere on
the internet to a complex integration into our software application.
PaidShipCalc is a shipping calculator that provides the most comprehensive
shipping calculations available today. A customer can use this tool anywhere on
the Internet, including its website, web store, or even classified listing.
Shoppers can then choose from the shipping methods that the customer offers
along with the ability to combine shipping, include your flexible handling
charges, and calculate insurance and taxes if necessary.
PaidShopCart provides website and e-commerce store owners a fully
functional shopping cart with shipping calculations from all the major carriers.
We have designed the Paid ShopCart with a customer's needs in mind; an
affordable, simple, easy to use cart that is feature heavy and an enhanced
replacement for the carts being utilized today. This Paypal integrated shopping
cart can be inserted into any web page by just pasting in just a few lines of
HTML. It provides accurate rates for 25 domestic shipping services from USPS,
UPS, FedEx, and DHL, and is configurable to match with a customer's web site
design.
Paid Inc's Global Module is a direct plug into the PaidShopCart and
PaidShipCalc. This module is used to add comparative international rate
calculations to your PaidShopCart or PaidShipCalc products.
Interested clients may purchase any and all of our tools or applications
for a flat quarterly fee and/or per-transaction fee depending on the module
chosen. The Company may add more features and modules to the suite to enable it
to grow with sellers and continue to provide them superior online selling tools.
Web Hosting and Development. The Company provides web hosting and
development for various clients that pay monthly hosting fees and maintenance
fees for updates. This service also uses the core AuctionInc platform for
maintaining web portals and storefronts systems. The Company also maintains
several corporate websites which it hopes to continue to expand and grow.
Through improved customer
4
awareness and a larger customer base we hope these websites will continue to
grow and offer a revenue source to the Company. These websites provide minimal
revenue to the Company, but offer awareness and advertising opportunities for
the Company's other products.
Industry Background
Growth of the Internet and the Web
The Internet enables millions of people worldwide to share information,
communicate and conduct business electronically. The growth in the number of Web
users is being driven by the increasing importance of the Internet as a
communications medium, an information resource, and a sales and distribution
channel. The Internet has also evolved into a unique marketing channel. Unlike
the traditional marketing channels, Internet retailers do not have many of the
overhead costs borne by traditional retailers. The Internet offers the
opportunity to create a large, geographically dispersed customer base more
quickly than traditional retailers. The Internet also offers customers a broader
selection of goods to purchase, provides sellers the opportunity to sell their
goods more efficiently to a broader base of buyers and allows business
transactions to occur at all hours.
State of Viral Communities on the Internet
The massive growth of online communities over the past decade has reached
viral proportions. Internet communities are built revolving around ideas, music,
individuals, artists, writers, or any tangible or intangible entity, and new
content can be distributed within minutes of exposure. Viral communities and
viral marketing are the next phenomenon that web users are embracing with vigor.
As traffic and communities continue to grow, more services will be required to
sustain the appetite of these users.
State of the Collectibles and Online Auction Industries
The online auction industry continues to be a strong and permanent player
in e-commerce. Online auctions resolve the weaknesses of traditional auctions
(i.e. limited geographical coverage, a dearth of product variety, high
transaction costs and information inefficiency). The Internet overcomes these
issues because it can handle large quantities of data and support an infinite
number of products and services. It also allows buyers and sellers to trade on a
global basis.
Business Strategy
During 2006 we experienced continued growth with our celebrity web-hosting
and fan club and membership programs. We believe there will be an increase in
online communities that will create an opportunity for more celebrity
web-hosting and fan club services. It is our view that our services and programs
will become more desirable as these communities grow. Our proprietary system was
built to handle news, events, ticketing, fan experiences, e-commerce,
authentication, charity auctions, chat, video editing, music streaming, mobile
services, downloads and forums.
Our goal for our celebrity services is to build the best communication and
quality services that provide unparalleled opportunities for viral communities,
celebrities and their fans. This goal can be accomplished by implementing the
following strategy:
o Increase the number of celebrity service clients and programs we offer to
capitalize on internet communities. Provide high quality services and
continued impeccable customer and fulfillment services building on our
solid reputation.
o Expand into new services being offered that will generate larger
partnerships and marketing opportunities for our clients.
o Shift to a quarterly billing system on AuctionInc, reducing the initial
fee but increasing the number of renewal receivables.
5
o Increase the general awareness of our Shipping Calculators and continuing
to offer cutting edge technology and services in the industry.
o Offer more authentication services increasing our distribution and
partnerships and limited costs and overhead associated with this service.
o Increase our web hosting services, charging a one time set up fee plus
monthly maintenance fees, and an hourly fee for any design or feature
enhancements we make;
o As the number of visitors to our site increases, impose monthly/annual
membership fees.
We expect the above plan will enable us to increase our celebrity services
and offer a wider variety of management services providing more resources for a
sales and a marketing campaign to promote the Company.
The business strategy described above is intended to enhance our
opportunities in the online e-commerce market. However, there are a number of
factors that may impact our plans and inhibit our success. See "Risk Factors"
included as Exhibit 99. Therefore, we have no guarantees and can provide no
assurances, that our plans will be successful.
Marketing and Sales
Successful branding of our corporate identity and services is the key to
our success. We changed our name to Paid, Inc. at the end of 2003 and have
consolidated our websites and brands under one internet presence.
In the past our marketing had been designed to position the Company as the
premier collectibles site on the Internet, targeting both traditional collectors
as well as the new online generation of collectors. We are continuing to market
to collectors, but we have been shifting our focus to dealers, distributors and
retail outlets to reduce the number of vendors and costs and increase sales.
Promoting and marketing Paid's celebrity services will be undertaken using
various mediums of marketing; "adword" campaigns, traditional print methods, and
industry trade shows. As our celebrity services continue to gain exposure, we
will have substantial opportunity to grow our business through referrals.
Networking and referral business is a large portion of sales and marketing for
these types of services. As we market and promote our celebrity services, we
also will be supporting our proprietary content management system and our
shipping calculator products.
The Company will continue to market AuctionInc throughout 2007. In the
past years, representatives of the Company attended trade shows, events and
conferences to analyze the potential for AuctionInc and to narrow the Company's
marketing base. Based on experience with existing partnerships that promote
AuctionInc, the Company believes that creating partnerships is an effective
marketing tool to promote and encourage new registrations. The Company will
continue to seek new partnerships. The Company also intends to promote the
AuctionInc product line in trade publications to reach small and midsize
companies.
Although we believe that this marketing strategy, if successful, will lead
to increased revenues, and attract more users to our site, we have no
commitments that our marketing will be successful or our sales will increase.
There are a number of factors that may impact our plans and inhibit our success.
See "Risk Factors" described in Exhibit 99. Therefore, we have no guarantees and
can provide no assurances that our plans will be successful.
Revenue Sources
In 2006, 90% of our revenues were derived from our celebrity services, fan
club management, and ticketing and fan experiences, almost all of which is from
one artist. We also generated retail
6
revenues from the sale of autographed merchandise, collectibles and movie
posters. Adding to these revenues were agent commissions, marketing
opportunities for athletes and celebrity clients of K Sports.
As additional services, we currently provide web hosting and online
appraisal services. To date, we have generated minimal revenues from these
services, but if the awareness of the AuctionInc product line increases, we will
be able to increase our advertising and marketing efforts, which we expect will
generate revenue and may attract more visitors that will utilize these services
on our site. In addition to web hosting, we expect to increase revenues through
the development and design of third party websites. We also have an agreement
with Krause Publications, pursuant to which Krause Publications prints Maloney's
Antiques & Collectibles Resource Directory and we receive a percentage of the
sales revenues from the book sales. We own "www.MaloneysOnline.com," a
clearinghouse for hard to find information that contains the searchable Internet
version of the resource directory.
Although we expect that this revenue model will generate increased
revenue, if we are not successful in implementing this model, if the
entertainment industry and fans are not accepting of the services we provide, if
costs are higher than anticipated, or if revenues do not increase as rapidly as
anticipated, we may not be able to continue positive cash flow. There are a
number of factors that may impact our plans and inhibit our success. See "Risk
Factors" included as Exhibit 99. Therefore, we have no guarantees and can
provide no assurances, that our plans will be successful.
Competition
Electronic content management, fan club membership and fan experiences and
ticketing services, are relatively new and growing industries. This industry has
several hurdles for new companies; building a strong reputation, proficient
operational skills in customer service and fulfillment, and gaining a client
base. While these are big hurdles and present a strong barrier to entry, they
are not insurmountable. There are several competitors in this industry like
Music Today, UltraStar, and FanAsylum, each of whom offer unique solutions and
services. There are other indirect competitors who deal in just merchandising or
electronic memberships, but these companies serve a different customer base.
The electronic commerce market is relatively new, rapidly evolving and
intensely competitive. Furthermore, we expect competition to intensify in the
future. Barriers to entry are relatively low, and current and new competitors
can launch new sites at relatively low cost using commercially available
software. Our Rotman Auction operation competes with a variety of other
companies depending on the type of merchandise and sales format offered to
customers. These competitors include: (i) various Internet collectible
companies, Collectors Universe, Shop at Home and Tri-Star Productions; (ii) a
number of indirect competitors that specialize in electronic commerce or derive
a substantial portion of their revenue from electronic commerce, including
Internet Shopping Network and AOL, Shopping.com; and (iii) a variety of other
companies that offer merchandise similar to that of our Company but through
physical auctions.
In addition, several large companies sell specialty consumer products,
including collectibles through interactive electronic media, including
broadcast, cable and satellite television and, increasingly, the Internet. These
companies include QVC, Home Shopping Network and Shop At Home. They generally
have substantial financial resources and, while their current collectible
offerings tend to be less focused than our collectible offerings, there can be
no guarantee that they will not become significant competitors in the future.
There can be no assurance that we can maintain our competitive position
against potential competitors, especially those with greater financial,
marketing, customer support, technical and other resources than us. Increased
competition is likely to result in reduced operating margins, loss of market
share and a diminished brand franchise, any one of which could materially
adversely affect the our business, results of operations and financial
condition.
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Intellectual Property
Our web hosting software program, AuctionInc software suite, is
proprietary. We have filed one application for a patent related to AIShip. We do
not have any patents for our designs or innovations and we may not be able to
obtain copyright, patent or other protection for our proprietary technologies or
for the processes developed by our employees. Legal standards relating to
intellectual property rights in computer software are still developing and this
area of the law is evolving with new technologies. Our intellectual property
rights do not guarantee any competitive advantage and may not sufficiently
protect us against competitors with similar technology. To protect our interest
in our intellectual property, we restrict access by others to our proprietary
software. In addition, we have federally registered the "Collecting Channel" and
the "Paid" marks.
We believe that our products and other proprietary rights do not infringe
on the proprietary rights of third parties. However, there can be no assurance
that third parties will not assert infringement claims against us in the future
with respect to current or future products or other works of ours. This
assertion may require us to enter into royalty arrangements or result in costly
litigation.
We also utilize free open-source technology in certain areas. Unlike
proprietary software, open-source software has publicly available source code
and can be copied, modified and distributed with minimal restrictions. Our
principal web servers' software is Apache, a free web server software. We are
using PHPShop for our e-commerce to provide highly customizable storefronts. In
addition to PHPShop we develop a substantial portion of our websites with the
language PHP.
Research and Development
Over the past 2 years the Company has not made additional investments in
research and development.
Employees
The Company currently employs 17 personnel, 16 of whom are employed full
time. We believe that our future success will depend in part on our continued
ability to attract, hire and retain qualified personnel.
Government Regulation
We are not currently subject to direct federal, state or local regulation,
and laws or regulations applicable to access or commerce on the Internet, other
than regulations applicable to businesses generally. However, due to the
increasing popularity and use of the Internet and other online services, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet or other online services covering issues such as user privacy,
freedom of expression, pricing, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
8
Item 2. Description of Property.
Our corporate headquarters are located at 4 Brussels Street, Worcester,
Massachusetts 01610. Currently, we are tenants-at-will, and pay $2,600 monthly
in rent. We also have an office at 236 Huntington Avenue, Boston, 5th Floor, and
pay $5,822 monthly under a 5-year lease. The condition of our offices is
excellent. We do not invest in real estate or interests in real estate, real
estate mortgages, or securities of or interests in persons primarily engaged in
real estate activities, and we have no policies related to such investments.
Item 3. Legal Proceedings.
In Parshall v. Paid, Inc., Paul L. Parshall filed a lawsuit against the
Company in the Court of Common Pleas of Franklin County, Ohio on October 3,
2006. Mr. Parshall claims to be the owner of 423,415 shares represented by Stock
Certificate Number 01123. According to the Company's transfer agent, the
Company's records show that Stock Certificate Number 01123 was cancelled on May
15, 1997. Mr. Parshall was affiliated with a previous transfer agent of the
Company. The Company filed a motion to dismiss based on lack of personal
jurisdiction through its Ohio counsel. Mr. Parshall requests damages equal to
the market value of the shares and for any loss for not recognizing the shares.
The Company disputes Mr. Parshall's claims.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II.
Item 5. Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities.
Our common stock, par value $.001 per share, is presently traded on the
Over-the-Counter Bulletin Board ("OTCBB") under the symbol, "PAYD".
The following table sets forth the high and low bid prices for our common
stock as reported by OTCBB for the eight quarters ended December 31, 2006. The
quotations from the OTCBB reflect inter-dealer prices without retail mark-up,
mark-down, or commission and may not represent actual transactions.
2005 High Low
----- ---
Quarter ended March 31, 2005 $.35 $.15
Quarter ended June 30, 2005 $.36 $.17
Quarter ended September 30, 2005 $.29 $.165
Quarter ended December 31, 2005 $.235 $.115
2006 High Low
----- ---
Quarter ended March 31, 2006 $.22 $.14
Quarter ended June 30, 2006 $.71 $.12
Quarter ended September 30, 2006 $.575 $.24
Quarter ended December 31, 2006 $.38 $.18
As of March 8, 2007, there were approximately 2,066 holders of record of
our common stock. Because many of the shares are held by brokers and other
institutions on behalf of stockholders, the Company is unable to estimate the
total number of individual stockholders represented by these holders of record.
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We have not previously paid cash dividends on our common stock, and intend
to utilize current resources to operate the business; thus, it is not
anticipated that cash dividends will be paid on our common stock in the
foreseeable future.
Equity Compensation Plan Information
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Number of Securities
Number of Remaining Available
Securities To be For Future Issuance
Issued Upon Under Equity
Exercise of Weighted-Average Compensation Plans
Outstanding Exercise Price of (Excluding Securities
Options, Warrants Outstanding Options, Reflected in Column
and Rights Warrants and Rights (a))
(a) (b) (c)
----------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans Approved by 25,000,000 $.041 5,000,000
Security Holders
----------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans Not Approved by 136,054 $.044 6,325,329
Security Holders
----------------------------------------------------------------------------------------------------------------------
Total 25,136,054 $.043 11,325,329
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Refer to Note 7, Notes to Consolidated Financial Statements for the Years ended
December 31, 2006 and 2005, incorporated by reference herein from Part II, Item
7, of this Annual Report, for a discussion of the material features of the stock
options, warrants and related stock plans.
We compensate a number of employees and consultants through stock options
grants under the Company's 2001 Non-Qualified Stock Option Plan. Eighty million
shares were registered under that plan since its inception in 2001. Typically,
shares are immediately exercised by the employee or consultant. In 2006,
employees received options for 1,195,799 shares equal to $263,016 in
compensation, and consultants and professionals received 6,744,876 shares equal
to $1,009,319 in compensation.
Item 6. 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 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 sports agent marketing services, have created
more services and opportunities for our sports clientele.
10
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 3 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
The following discussion compares the Company's results of operations for
the year ended December 31, 2006 with those for the year ended December 31,
2005. The Company's financial statements and notes thereto included elsewhere in
this annual report contain detailed information that should be referred to in
conjunction with the following discussion.
Revenues. For the year ended December 31, 2006, revenues were $8,049,000,
90% 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 6% of revenues, and sports marketing revenues represented
3% of revenues. Gross sales of the Company's own product were $473,000. Fan
experience, fan club membership and related merchandise sales revenues were
$7,278,000, and sports marketing revenues were $247,300. Other revenues were
$50,600, 1% of gross revenues, during the year ended December 31, 2006.
Management anticipates increases from fan club memberships, merchandise, and fan
experiences from tours, products and services related to several other
performing artists during 2007.
The Company's 2006 revenues represent an increase of approximately
$3,129,000 or 64%, over 2005, in which revenues were $4,920,000. For the year
ended December 31, 2005, sales of the Company's product were $1,301,000, or 26%
of gross sales, fan club membership and related merchandise sales revenues were
$3,228,000, 66% of gross revenues, sports marketing revenues were $357,200, or
7% of gross revenues, and other revenues were $33,900, or 1% of gross revenues.
11
The reason for the increase in revenues was a $4,049,000 increase related
to the tours of performing artists, offset by lower revenues related to sports
marketing services of $110,000 and lower sales of Company owned product of
approximately $828,000 from the same period in 2005. Gross profit from Company
owned product sales for the year ended December 31, 2006 was approximately
$26,300, $281,000 less than in 2005. Since gross margin percentages on Company
owned product were lower (5.6% versus 23.6%) in 2006 and sales of Company owned
product were $828,000 lower during the year ended December 31, 2006, the Company
produced $281,000 fewer 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, and an increase in the
reserve against inventories.
Operating Expenses. Total operating expenses for the year ended December
31, 2006 were $4,185,000 compared to $4,561,000 in 2005, a decrease of $376,000.
Sales, general and administrative ("SG&A") expenses for the year ended
December 31, 2006 were $3,665,000, compared to $4,016,000 for the year ended
December 31, 2005. The decrease of $350,000 in SG&A costs includes decreases in
payroll and related costs of $17,000, depreciation and amortization of $703,000
as certain assets became fully depreciated during 2006 and 2005, and credit card
commissions of $17,000, offset by increases in professional fees of $227,000,
travel of $11,000, postage and shipping costs of $80,000, and rents of $30,000.
The travel 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 year ended December 31, 2006 decreased by $26,000 from 2005. This
decrease is due primarily to a decrease in consulting costs of $255,000, offset
by increases in depreciation and amortization of $46,000, and computer costs of
$48,000. The Company also capitalized $134,000 fewer web site development costs
in 2006 than in 2005.
Interest Expense. For the year ended December 31, 2006, the Company
incurred approximately $18,000 of interest charges compared to interest charges
of $295,000 in 2005, a decrease of $277,000. $60,000 of the decrease is
attributable to a settlement with Augustine Fund with respect to amounts owed,
$104,000 to lower amortization of beneficial conversion features, and the
balance to lower balances of interest-bearing debt in 2006.
Net Loss. The Company realized a net loss for the year ended December 31,
2006 of $1,704,000 compared to a net loss of $3,498,000 for the year ended
December 31, 2005. The 2006 loss represented $.01 per share, while the 2005 loss
represented $.02 per share.
Inflation. The Company believes that inflation has not had a material
effect on its results of operations.
12
Assets
At December 31, 2006, total assets of the Company were $1,681,000 compared
to $3,929,000 at December 31, 2005. The decrease was primarily due to lower cash
and deferred expenses of $1,921,000 as performing artists completed tours in
December 2006, and depreciation and amortization of $148,000. Sales of fan
experiences for 2007 tours did not begin until after year end. The Company also
reports no related liability to customers, in the form of deferred revenues at
December 31, 2006. At December 31, 2005 this liability was $2,305,000.
Operating Cash Flows
A summarized reconciliation of the Company's net losses to cash provided
by (used in) operating activities for the years ended December 31, 2006 compared
to December 31, 2005, is as follows:
2006 2005
---- ----
Net loss $(1,704,100) $(3,498,200)
Depreciation and amortization 148,400 805,800
Amortization of beneficial conversion
Discount and debt discount -- 103,900
Common stock issued in payment of services 1,282,300 1,632,500
Common stock issued in payment of interest 137,800 137,200
Net current assets and liabilities associated with advance
ticketing (1,749,000) 1,749,000
Changes in current assets and liabilities 232,200 485,900
----------- -----------
Net cash provided by (used in) operating activities ($1,652,400) $ 1,416,100
=========== ===========
Working Capital and Liquidity
The Company had cash and cash equivalents of $138,000 at December 31,
2006, compared to $1,503,000 at December 31, 2005. The Company had $67,800 of
working capital at December 31, 2006 compared to a working capital deficiency of
$148,300 at December 31, 2005. At December 31, 2006 current liabilities were
$1,409,000 compared to $3,787,700 at December 31, 2005. Current liabilities
decreased at December 31, 2006 compared to December 31, 2005 primarily due to
deferred revenues of $2,305,000 associated with events scheduled during the
first quarter of 2006. As discussed in greater detail in Note 9 to the Financial
Statements, included in Part I of this annual report and incorporated by
reference herein, the Company had a convertible note outstanding held by
Augustine Fund, L.P. at December 31, 2005 with an outstanding principal amount
of $1,150,000.
The Company's registered public accounting firm has issued a going concern
opinion on the Company's consolidated financial statements for the year ended
December 31, 2006. The Company may need an infusion of additional capital to
fund anticipated operating costs over the next 12 months. Management anticipates
growth in revenues and gross profits in 2007 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,
"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
13
consignment, and web hosting are expected to increase revenues and result in
higher total gross profit. Subject to the discussion below, management believes
that the Company has sufficient cash commitments to fund operations during the
next 12 months. These commitments include call options, expiring on May 9, 2007,
for approximately 825,000 shares of common stock, which, once assigned by the
Company, can generate between $130,000 and $355,000 (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 Annual Report on Form 10-KSB 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 annual 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, 2006.
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 7. Financial Statements.
The consolidated financial statements and supplementary data required by
this item appear on Page F-1 immediately following the signature page, and are
incorporated by reference herein.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
14
Item 8A. 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 this evaluation, the principal executive officer and
principal financial officer concluded that, as of the end of the period covered
by this report, the Company's disclosure controls and procedures were effective
for the purpose of ensuring that the information required to be disclosed in the
reports that the Company files or submits under the Exchange Act with the
Securities and Exchange Commission is recorded, processed, summarized and
reported within the time period specified by the Securities and Exchange
Commission's rules and forms, and is accumulated and communicated to the
Company's management, including its principal executive and financial officers,
as appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Item 8B. Other Information.
None.
Part III.
Item 9. Directors, Executive Officers, Promoters, Control Persons and
Corporate Governance; Compliance with Section 16(a) of the
Exchange Act.
Directors and Executive Officers
The following table sets forth certain information regarding the directors
and executive officers of Paid, Inc.:
Name Age Position
---- --- --------
Gregory Rotman* 41 Director, Chief Executive Officer & President
Richard Rotman* 36 Director, Chief Financial Officer, Vice President, Treasurer &
Secretary
Andrew Pilaro 37 Director
------------
* Gregory Rotman and Richard Rotman are brothers.
Each of the directors was elected as of September 19, 2000, for a term
expiring at the 2001 Annual Meeting of Stockholders and until their successors
are elected and qualified. The Company has not held an annual meeting or elected
directors since September 19, 2000. Under the Delaware General Corporation Law,
each director holds office until such director's successor is elected and
qualified or until such director's earlier resignation or removal. The following
is a description of the current occupation and business experience for at least
five years for each director and executive officer.
Gregory Rotman has served as a Director and the Chief Executive Officer
and President of Paid, Inc. since February 1999. From 1995 to 1998, he served as
a Partner of Teamworks, LLC, which was responsible for the design, financing and
build-out of MCI National Sports Gallery.
15
Richard Rotman has served as a Director and the Chief Financial Officer,
Vice President, Treasurer and Secretary of Paid, Inc. since February 1999. Prior
to joining Paid, Inc., he was involved in the management and day-to-day
operations of Rotman Auction, which he formed in February 1997. From 1995 until
February 1997, Mr. Rotman worked for the family business, Rotman Collectibles,
where he focused on sale and distribution of collectibles, including through
auctions and on the Internet.
Andrew Pilaro has served as a Director of Paid, Inc. since September 2000.
Since August, 1996, he has served as the Assistant to the Chairman of CAP
Advisors Limited, an investment management company, with responsibility for
asset management.
Other Significant Persons
Keith Garde, age 54, is President of the celebrity services group.
Mr. Garde has more than 25 years of management and production experience in the
entertainment industry. In 1995, Mr. Garde founded PKA Management, a
Boston-based firm that manages national talent, manages video production and
provides consulting services. Mr. Garde was one of the early pioneers in
leveraging the Internet for entertainment entities, utilizing it for the digital
distribution of artists' content and intellectual property. Mr. Garde has
collaborated on special projects for MTV, VH1, A&E, ESPN, NFL, Disney, Paramount
Pictures, Daimler-Chrysler, multiple record labels and many other major
corporations and artists. He also serves as special projects manager for the
artist Aerosmith.
Audit Committee/Code of Ethics
The Securities and Exchange Commission has adopted rules to implement
certain requirements of the Sarbanes-Oxley Act of 2002 pertaining to public
company audit committees. One of the rules requires a company to disclose
whether it has an "audit committee financial expert" serving on its audit
committee. Based on its review of the criteria of an audit committee financial
expert under the rule adopted by the SEC, the Board of Directors does not
believe that any member of the Board of Directors' Audit Committee would be
described as an audit committee financial expert. At this time, the Board of
Directors believes it would be desirable for the Audit Committee to have an
audit committee financial expert serving on the committee. While from time to
time informal discussions as to potential candidates have occurred, no formal
search process has commenced.
The Company has adopted a Code of Ethics that applies to all of its
directors, officers, and employees, including its principal executive officer,
principal financial officer, principal accounting officer, or controller, or
persons performing similar functions. A written copy of the Company's Code of
Ethics will be provided to anyone, free of charge, upon request to: Richard
Rotman, CFO, Paid, Inc., 4 Brussels Street, Worcester, Massachusetts 01610.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's outstanding Common Stock to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
Common Stock. These persons are required by SEC regulation to furnish the
Company with copies of all such reports they file. To the Company's knowledge,
based solely on a review of the copies of such reports furnished to the Company
and representations that no other reports were required, all Section 16(a)
filing requirements applicable to its officers and directors and beneficial
owners of more than 10% of the Company's stock, have been complied with for the
period which this Form 10-KSB relates, except that Augustine Fund, L.P. filed a
late report on Form 4 with respect to three of the five reported transactions,
as reported on June 6, 2006. In addition, Augustine Fund, L.P. initially
reported 100,000 fewer shares being beneficially owned by it in its original
timely Form 3 filing and amended its filing on June 6, 2006, or two days later
than the time required for the original filing.
16
Item 10. Executive Compensation.
The following table sets forth the compensation of the Company's chief
executive officer, the chief financial officer, and each officer whose total
cash compensation exceeded $100,000, for the last two fiscal years ended
December 31, 2006 and 2005.
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------
Name and
Principal Position Year Salary (1) Total
------------------------------------------------------------------------
Gregory Rotman 2006 $100,000 $100,000
President and Chief Executive 2005 $ 84,871 $ 84,871
Officer
------------------------------------------------------------------------
Richard Rotman 2006 $ 88,461 $ 88,461
Chief Financial Officer, Vice 2005 $ 86,794 $ 86,794
President, Treasurer and Secretary
------------------------------------------------------------------------
(1) In 2006, with respect to Richard Rotman only, and in 2005, with respect to
both Richard Rotman and Gregory Rotman, the Company paid the amount shown
as compensation, but has accrued the difference between these amounts per
annum for both Gregory Rotman and Richard Rotman and $100,000.
No options were granted to the named executive officers during the last
fiscal year. On October 11, 2002, both Gregory Rotman and Richard Rotman were
granted options to purchase 10,000,000 shares of common stock at an exercise
price of $.041, under the Company's 2002 Stock Option Plan, pursuant to the
following vesting schedule: options to purchase 4,000,000 shares of common stock
vested on April 11, 2003; options to purchase 3,000,000 shares of common stock
vested on October 11, 2003, and options to purchase 3,000,000 shares vested on
October 11, 2004.
The following table sets forth certain information related to equity than
awards as of December 31, 2006 for Gregory Rotman and Richard Rotman. Other the
option awards described in the table below, there were no other equity or stock
awards.
17
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
----------------------------------------------------------------------------------------------------------------------
Option Awards
----------------------------------------------------------------------------------------------------------------------
Name Number Number Equity Option Option
of of Incentive Exercise Expiration
Securities Securities Plan Price Date
Underlying Underlying Awards: ($)
Unexercised Unexercised Number
Options Options of
(#) (#) Securities
Exercisable Unexercisable Underlying
Unexercised
Unearned
Options
(#)
----------------------------------------------------------------------------------------------------------------------
Gregory Rotman, President 10,000,000 0 0 $.041 10/11/12
and CEO
----------------------------------------------------------------------------------------------------------------------
Richard Rotman, CFO, Vice 10,000,000 0 0 $.041 10/11/12
President and Secretary
----------------------------------------------------------------------------------------------------------------------
None of the Company's directors received any separate compensation from
the Company for serving as directors in 2006. However, on October 11, 2002,
Andrew Pilaro received options to purchase 2,000,000 shares of common stock at
an exercise price of $.041, pursuant to the 2002 Stock Option Plan, subject to
the following vesting schedule: options to purchase 800,000 shares of common
stock vested immediately; options to purchase an additional 600,000 shares of
common stock vested on October 11, 2003, and options to purchase 600,000 shares
of common stock vested on October 11, 2004.
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
To the knowledge of the management of the Company the following table sets
forth the beneficial ownership of our common stock as of March 8, 2007 of each
of our directors and executive officers, and all of our directors and executive
officers as a group.
Name and Address of Number of Shares % of
Beneficial Owner (1) Beneficially Owned Class (4)
-------------------- ------------------ ---------
Gregory Rotman 17,684,005 (2) 7.21%
Richard Rotman 19,471,451 (2) 7.94%
Andrew Pilaro 2,068,700 (3) .84%
All directors and executive 39,224,156 15.99%
officers as a group (3 individuals)
--------------------------
(1) The address of each person named is the address of the Company.
(2) Includes options to purchase 10,000,000 shares of the Company's common
stock at an exercise price of $.041, 4,000,000 of which vested on April 1,
2003, 3,000,000 of which vested on October 11, 2003, and 3,000,000 of
which vested on October 11, 2004.
18
(3) Includes 17,200 shares held indirectly as custodian for Mr. Pilaro's minor
sons and options to purchase 2,000,000 shares of the Company's common
stock at an exercise price of $.041, 800,000 of which vested on October
11, 2002, 600,000 of which vested on October 11, 2003, and 600,000 of
which vested on October 11, 2004.
(4) Percentages are calculated on the basis of the amount of outstanding
securities plus for such person or group, any securities that person or
group has the right to acquire within 60 days.
To the knowledge of the management of the Company the following table
sets forth the beneficial ownership of our common stock as of March 8, 2007 of
each beneficial owner of more than five percent of any class of the Company's
Common Stock, other than as held by our directors and executive officers.
Name and Address of Number of Shares % of
Beneficial Owner (1) Beneficially Owned Class
-------------------- ------------------ -----
Augustine Fund, L.P.
141 W. Jackson Blvd., Suite 2182
Chicago, IL 60604 22,473,741 10.06%
------------------------------------
The information regarding the Company's "Equity Compensation Plan
Information" is incorporated herein by reference in Part II, Item 5 of this
Annual Report on Form 10-KSB.
Item 12. Certain Relationships and Related Transactions, and Director
Independence.
Steven Rotman is the father, and Leslie Rotman is the mother, of Gregory
Rotman, President of the Company, and Richard Rotman, CFO/Vice
President/Secretary of the Company. The Company entered into a number of
transactions over the past two years with both Steven Rotman and Leslie Rotman.
Management believes that these transactions are fair and reasonable to the
Company and no less favorable than could have been obtained by an unaffiliated
third party.
In December 2001, the Company engaged Steven Rotman to provide consulting
services to the Company. Steven Rotman did not provide any consulting services
in 2005. However, during 2005, for consulting fees owed and for consulting
services provided prior to 2005, including $160,000 in fees and services
provided in 2004, the Company paid Steven Rotman $251,659 in the form of options
to purchase 1,264,630 shares of common stock of the Company pursuant to the
Company's 2001 Non-Qualified Stock Option Plan. During 2006, the Company
incurred $86,154 of consulting fees paid to Steven Rotman. Under the 2001
Non-Qualified Stock Option 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.
In 2002, the Company obtained private financing from Mr. Steven Rotman in
the aggregate amount of $115,000 at an 8% interest rate, and borrowed an
additional $15,000 in 2003, all of which was outstanding in 2004. In 2005, the
Company repaid $50,000, but continues to owe Steven Rotman $80,000 in principal,
and $40,322 in interest, including $6,489 in interest which accrued in 2006.
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, pursuant to which Rotman Collectibles, Inc., a Massachusetts
corporation, was merged into the Company's Delaware subsidiary, now named Rotman
Collectibles, Inc. 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 (as set forth in the Settlement Agreement
19
and Mutual Release) and granted the Company an option to purchase the shares for
$.001 per share. The option is assignable by the Company and now expires two
years from the date of grant. During 2006 the Company assigned options to
purchase 800,000 shares of stock from Leslie Rotman to certain individuals in
exchange for $331,848.
On September 8, 2005, the Company purchased approximately $1,010,000 of
memorabilia for sale from Leslie Rotman, the mother of Richard and Greg Rotman,
in exchange for 6,433,121 shares of restricted common stock valued at $.157.
In August 2006 the Company began paying rent, as a tenant at will, to a
company in which Steven Rotman, the father of Greg and Richard Rotman, is a
shareholder. Monthly payments under this arrangement of $2,600 began on August
1, 2006. The Company had previously occupied the premises rent-free.
Item 13. Exhibits.
Exhibits are numbered in accordance with Item 601 of Regulation S-B.
Exhibit Description of Exhibits
------- -----------------------
No.
---
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to Form 8-K, filed on November 25,
2003)
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to Form 8-K, filed on December 8, 2004)
4.1 Specimen of certificate for Common Stock (incorporated by
reference to Exhibit 4.1 to Form SB-2/A filed on December 1,
2000)
4.2 Convertible Promissory Note dated March 23, 2000 issued to
Augustine Fund, LP pursuant to Securities Purchase Agreement
(incorporated by reference to Exhibit 10.3 to Form 10-KSB
filed on April 14, 2000)
4.3 Convertible Promissory Note, dated November 7, 2001, issued to
Augustine Fund, L.P., pursuant to Loan Agreement (incorporated
by reference from Exhibit 4.2 to Form 8-K filed on November
21, 2001)
4.4 Modification Agreement dated September 19, 2000 between the
Company and Augustine Fund, L.P. (incorporated by reference to
Exhibit 4.7 to Form S-3 filed on October 25, 2000).
4.5 Amended Modification Agreement dated July 15, 2001, between
the Company and Augustine Fund, L.P. (incorporated by
reference from Exhibit 4.10 to Form SB-2/A filed on August 8,
2001)
4.6 Second Amended Modification Agreement dated August 30, 2001
between the Company and Augustine Fund, L.P. (incorporated by
reference from Exhibit 4.11 to Form SB-2 filed on August 31,
2001)
4.7 Third Amended Modification Agreement dated May 21, 2002
between the Company and Augustine Fund, L.P. (incorporated by
reference from Exhibit 4.1 to Form 10-QSB/A filed on August
14, 2002)
4.8 Modification Agreement dated May 21, 2002 between the Company
and Augustine Fund, L.P. (incorporated by reference from
Exhibit 4.2 to Form 10-QSB/A filed on August 14, 2002)
4.9 Second Modification Agreement dated October 31, 2003 between
the Company and Augustine Fund, L.P. (incorporated by
reference from Exhibit 4.10 to Form 10-KSB filed on March 30,
2004)
20
4.10 Third Modification Agreement dated October 15, 2005 between
the Company and Augustine Fund, L.P. (incorporated by
reference from Exhibit 4.10 to Form 10-KSB filed on March 31,
2006)
4.11 Warrant issued by the Registrant to Delano Group Securities,
LLC (expired March 2005) (incorporated by reference to Exhibit
10.7 to Form 10-KSB filed on April 14, 2000).
4.12 Warrant dated March 23, 2000 issued to Augustine Fund, LP
pursuant to Securities Purchase Agreement (expired March 2005)
(incorporated by reference to Exhibit 10.4 to Form 10-KSB
filed on April 14, 2000)
10.1 1999 Stock Option Plan (incorporated by reference to Exhibit
10.2 to Form SB-2/A filed on December 1, 2000)
10.2 1999 Omnibus Share Plan (incorporated by reference to Exhibit
10.3 to Form SB-2/A filed on December 1, 2000)
10.3 2001 Non-Qualified Stock Option Plan, as amended (incorporated
by reference from Exhibit 99.1 to Form S-8 filed on September
5, 2003)
10.4 2002 Stock Option Plan (incorporated by reference from Exhibit
10.17 to Form 10-KSB filed on March 31, 2003)
10.5 Securities Purchase Agreement dated March 23, 2000 between the
Company and Augustine Fund, LP. (incorporated by reference to
Exhibit 10.2 to Form 10-KSB filed on April 14, 2000)
10.6 Loan Agreement, dated November 7, 2001, by and between
Augustine Fund, L.P. and the Company (incorporated by
reference from Exhibit 10.1 to Form 8-K filed on November 21,
2001)
10.7 Loan Agreement dated May 21, 2002 between the Company and
Augustine Fund, L.P. (incorporated by reference from Exhibit
10.1 to Form 10-QSB/A filed on August 14, 2002)
10.8 Agreement and Plan of Merger between the Company, Rotman
Collectibles, Inc. and Leslie Rotman dated October 23, 2001
(incorporated by reference from Exhibit 2.1 to Form 8-K filed
on November 21, 2001)
10.9 Asset Purchase Agreement dated September 8, 2005 between the
Company and Leslie Rotman (incorporated by reference from
Exhibit 10 to Form 10-QSB filed on November 14, 2005)
10.10 Settlement Agreement and Mutual Release dated May 9, 2005
between the Company and Leslie Rotman (incorporated by
reference to Exhibit 10.1 to Form 10-QSB filed on May 13,
2005)
10.11 Escrow Agreement dated May 9, 2005 between the Company, Leslie
Rotman, and Escrow Agent (incorporated by reference to Exhibit
10.2 to Form 10-QSB filed on May 13, 2005)
21 Subsidiaries of the Registrant (included in Item I)*
23 Consent of Carlin, Charron & Rosen, LLP*
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*
99 Risk Factors*
-----------------------------
* filed herewith
Item 14. Principal Accountant Fees and Services.
Audit Fees. The aggregate fees billed by Carlin, Charron & Rosen, LLP for
the audit of the Company's annual consolidated financial statements for the
fiscal year ended December 31, 2006 and 2005, and the reviews of the
consolidated financial statements included in the Corporation's Forms 10-QSB for
fiscal years 2006 and 2005, were $55,200 and $52,500, respectively.
Audit Related Fees. There were no fees billed to the Company by Carlin,
Charron & Rosen, LLP in either of the past two fiscal years for assurance and
related services that are reasonably related to the performance of the audit or
review of the Company's financial statements.
21
Tax Fees. There were no fees billed to the Company by Carlin, Charron &
Rosen, LLP in either of the past two fiscal years for professional services for
tax compliance, tax advice, and tax planning.
All Other Fees. There were no fees billed to the Company by Carlin,
Charron & Rosen, LLP for any other services for the past two fiscal years.
The Audit Committee approves all audit and audit-related fees. The Audit
Committee is required to pre-approve all non-audit services to be performed by
the auditor. The percentage of hours expended on the principal accountant's
engagement to audit the Company's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was 0%.
22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PAID, INC.
/s/ Gregory Rotman
By: _______________________________
Gregory Rotman, President
Date: April 3, 2007
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Gregory Rotman
-----------------------------------
Gregory Rotman, President and Director
Date: April 3, 2007
/s/ Richard Rotman
------------------------------------
Richard Rotman, Vice President, Treasurer,
Secretary and Director
Date: April 3, 2007
/s/ Andrew Pilaro
------------------------------------
Andrew Pilaro, Director
Date: April 3, 2007
23
PAID, INC. AND SUBSIDIARY
DECEMBER 31, 2006 AND 2005
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting
Firm (Carlin, Charron & Rosen LLP) .......................... F-2
Consolidated Balance Sheets at December 31, 2006 and 2005 ......... F-3
Consolidated Statements of Operations
Years ended December 31, 2006 and 2005 ...................... F-4
Consolidated Statement of Changes in Shareholders' Equity (Deficit)
Years ended December 31, 2006 and 2005 ...................... F-5
Consolidated Statements of Cash Flows
Years ended December 31, 2006 and 2005 ...................... F-6
Notes to Consolidated Financial Statements
Years ended December 31, 2006 and 2005 ...................... F-7 - F-17
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Paid, Inc.
We have audited the accompanying consolidated balance sheets of Paid, Inc. and
subsidiary (the Company) as of December 31, 2006 and 2005, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion of the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Paid, Inc. and
subsidiary as of December 31, 2006 and 2005, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred recurring losses.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans regarding those matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 14, the consolidated financial statements for the year
ended December 31, 2005 have been restated to reflect the correction of the
Company's accounting for a settlement and mutual release agreement entered into
on May 9, 2005. Note 14 also discusses the restatement effect on the quarterly
results previously reported for 2005 and 2006.
/s/ Carlin, Charron & Rosen LLP
Westborough, Massachusetts
April 3, 2007
F-2
PAID, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS 2006 2005
---- ----
(Restated)
Current assets:
Cash and cash equivalents $ 138,326 $ 1,502,987
Accounts receivable 34,731 72,317
Inventories, net 1,181,361 1,364,248
Deferred expenses -- 556,250
Prepaid expenses 80,975 67,981
Due from employees 32,803 66,558
Other current assets 9,073 9,073
------------ ------------
Total current assets 1,477,269 3,639,414
Property and equipment, net 191,518 256,244
Other intangible assets, net 11,768 33,290
------------ ------------
Total assets $ 1,680,555 $ 3,928,948
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes and loans payable $ 98,000 $ 130,000
Accounts payable 396,257 275,336
Accrued expenses 915,176 1,077,081
Deferred revenues -- 2,305,278
------------ ------------
Total current liabilities 1,409,433 3,787,695
------------ ------------
Long term liabilities:
Convertible debt -- 1,150,000
------------ ------------
Shareholders' equity (deficit):
Common stock, $.001 par value, 350,000,000 shares authorized; 218,329,910
and 200,405,555 shares issued and outstanding at December 31, 2006
and 2005, respectively 218,330 200,406
Additional paid-in capital 28,638,897 25,672,844
Accumulated deficit (28,586,105) (26,881,997)
------------ ------------
Total shareholders' equity (deficit) 271,122 (1,008,747)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 1,680,555 $ 3,928,948
============ ============
See accompanying notes to consolidated financial statements
F-3
PAID, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
2006 2005
---- ----
(Restated)
Revenues $ 8,048,854 $ 4,920,123
Cost of revenues 5,556,635 3,562,073
------------- -------------
Gross profit 2,492,219 1,358,050
------------- -------------
Operating expenses:
Selling, general, and administrative expenses 3,665,846 4,016,219
Website development costs 519,096 545,171
------------- -------------
Total operating expenses 4,184,942 4,561,390
------------- -------------
Loss from operations (1,692,723) (3,203,340)
------------- -------------
Other income (expense):
Interest expense (17,877) (294,822)
Other income 6,492 0
------------- -------------
Total other income (expense), net (11,385) (294,822)
------------- -------------
Loss before income taxes (1,704,108) (3,498,162)
Provision for income taxes -- --
------------- -------------
Net loss $ (1,704,108) $ (3,498,162)
============= =============
Loss per share (basic and diluted) $ (0.01) $ (0.02)
============= =============
Weighted average shares 210,364,212 184,008,727
============= =============
See accompanying notes to consolidated financial statements
F-4
PAID, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Common stock Additional
------------------------- Paid-in Accumulated Unearned
Shares Amount Capital Deficit Compensation Total
----------- ----------- ------------ -------------- -------------- ------------
Balance, December 31, 2004 173,320,731 $ 173,321 $ 21,166,334 $ (23,383,835) $ (35,000) $(2,079,180)
Common stock issued pursuant to exercise
of stock options granted to employees
for services 1,561,315 1,561 310,119 -- -- 311,680
Common stock issued in payment of
professional and consulting fees 7,064,926 7,065 1,278,765 -- -- 1,285,830
Common stock issued in payment of
interest 1,057,966 1,058 136,103 -- -- 137,161
Common stock issued in payment of
note payable 761,905 762 159,238 -- -- 160,000
Stock options exercised 536,364 536 -- -- -- 536
Common stock issued for payment of
convertible debt 9,469,227 9,470 1,342,422 -- -- 1,351,892
Issuance of common stock 200,000 200 29,800 -- -- 30,000
Amortization of unearned compensation -- -- -- -- 35,000 35,000
Common stock issued for inventory 6,433,121 6,433 1,003,567 -- -- 1,010,000
Proceeds from sale of warrants -- -- 50,000 -- -- 50,000
Proceeds from assignment of call options -- -- 196,496 -- -- 196,496
Net loss -- -- -- (3,498,162) -- (3,498,162)
----------- ----------- ------------ ------------- ------------- -----------
Balance, December 31, 2005 (Restated) 200,405,555 200,406 25,672,844 (26,881,997) -- (1,008,747)
Issuance of common stock pursuant to
exercise of stock options granted to
employees for services 1,195,799 1,196 261,820 -- -- 263,016
Issuance of common stock pursuant to
exercise of stock options granted to
professionals and consultants 6,769,876 6,770 1,012,549 -- -- 1,019,319
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
Common stock issued in connection with
acquisition of assets of K-sports &
Entertainment, LLC 100,000 100 31,900 -- -- 32,000
Proceeds from assignment of call options -- -- 331,848 -- -- 331,848
Proceeds from sale of warrants -- -- 50,000 -- -- 50,000
Net loss -- -- -- (1,704,108) -- (1,704,108)
----------- ----------- ------------ ------------- ------------- -----------
Balance, December 31, 2006 218,329,910 $ 218,330 $ 28,638,897 $ (28,586,105) $ -- $ 271,122
=========== =========== ============ ============= ============= ===========
See accompanying notes to consolidated financial statements
F-5
PAID, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2006 2005
---- ----
Restated
Operating activities:
Net loss $(1,704,108) $(3,498,162)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 148,366 805,752
Bad debt expense 6,762 --
Inventory Reserve 150,000 --
Amortization of unearned compensation -- 35,000
Beneficial conversion feature -- 103,871
Common stock issued in payment of professional
and consulting fees 1,019,319 1,285,830
Issuance of common stock pursuant to exercise of
stock options granted to employees for services 263,016 311,680
Common stock issued in payment of interest 137,794 137,161
Changes in assets and liabilities:
Accounts receivable 30,824 (26,578)
Inventories 32,887 269,834
Deferred expenses 556,250 (556,250)
Prepaid expense and other current assets 20,761 46,297
Accounts payable 120,921 110,507
Accrued expenses (129,905) 85,885
Deferred revenue (2,305,278) 2,305,278
----------- -----------
Net cash provided by (used in) operating activities (1,652,391) 1,416,105
----------- -----------
Investing activities:
Property and equipment additions (62,118) (233,708)
----------- -----------
Net cash used in investing activities (62,118) (233,708)
----------- -----------
Financing activities:
Net payments of notes and loans payable (32,000) --
Proceeds from sale of warrants 50,000 50,000
Proceeds from sale of common stock -- 30,000
Proceeds from assignment of call options 331,848 196,496
Proceeds from exercise of stock options -- 536
----------- -----------
Net cash provided by financing activities 349,848 277,032
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,364,661) 1,459,429
Cash and cash equivalents, beginning 1,502,987 43,558
----------- -----------
Cash and cash equivalents, ending $ 138,326 $ 1,502,987
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ -- $ --
=========== ===========
Interest $ 8,371 $ 2,184
=========== ===========
See accompanying notes to consolidated financial statements
F-6
PAID, INC. AND SUBSIDIARY
DECEMBER 31, 2006 AND 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Note 2. Management's Plans
The Company has continued to incur significant losses. For the years ended
December 31, 2006 and 2005 the Company reported losses of approximately
$1,704,000 and $3,500,000, respectively. These conditions raise substantial
doubt about the Company's ability to grow as a going concern.
To date the Company has met its cash needs from the proceeds of convertible debt
and the assignment of call options discussed in Note 7.
Management anticipates growth in revenues and gross profits in 2007 from its
celebrity services products and websites; including memberships, fan experiences
and ticketing, appearances, and merchandise sales. In addition, "AuctionInc"
which hosts a suite of management tools and enhanced shipping calculator
solutions for small 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 total gross profit.
A 2005 Settlement Agreement provided the Company with call options for
approximately 2 million shares of the Company's common stock. As of December 31,
2006 the Company still held call options for 825,000 shares of common stock,
which currently expire on May 9, 2007. Assignment of these call options may
generate between $130,000 and $355,000 based solely upon 52 week high and low
closing prices of the Company's common stock.
Although there can be no assurances, the Company believes that the above
anticipated additional revenues, and additional financing will be sufficient to
meet the Company's working capital requirements through the end of 2007.
Note 3. Summary Of Significant Accounting Policies
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.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
F-7
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 December 31, 2006
and 2005 the Company provided for reserves totaling $200,000 and $50,000,
respectively.
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 years ended December 31, 2006
and 2005 the Company capitalized approximately $49,500 and $200,000,
respectively, of website development costs.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight line and double declining balance method over the estimated useful
lives of 3 to 5 years.
Intangible Assets
Intangible assets are being amortized on a straight-line basis over estimated
useful lives of two to seventeen years.
The Company accounts for intangible assets in accordance with Financial
Accounting Standards Board Statement No. 142 "Goodwill and Other Intangible
Assets" (SFAS No. 142). SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to
acquisition. SFAS No. 142 provides that intangible assets with finite lives be
amortized and that goodwill and intangible assets with indefinite lives not be
amortized, but rather be tested at least annually for impairment.
Revenue Recognition
The Company generates revenue from sales of fan experiences, from fan club
membership fees, from 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,
F-8
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 sale, 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.
Shipping and Handling fees and costs
All amounts billed to customers in sales transactions related to shipping and
handling represent revenues earned and are reported as revenues. Costs incurred
by the Company for shipping and handling are reported as an expense.
Advertising Costs
Advertising costs totaling approximately $42,500 in 2006 and $85,700 in 2005,
are charged to expense when incurred.
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses - The carrying amount of these financial instruments approximates fair
value because of the short-term nature of these instruments.
Notes payable - The carrying amount of these financial instruments approximates
fair value as the interest rate approximates market rates.
Convertible debt - The carrying amount of these financial instruments
approximates fair value as the interest rates approximate market rates.
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable.
Cash and cash equivalents - The Company places its cash and cash equivalents
with high credit quality institutions.
F-9
Accounts receivable - The Company maintains receivable balances with certain of
its customers and typically does not require collateral. The Company reviews a
customer's credit history before extending credit and establishes an allowance
for doubtful accounts based upon periodic reviews of the credit risk of specific
customers and other information, if necessary. Based on experience to date,
potential credit losses are considered minimal.
Income Taxes
Income taxes are accounted for under the liability method. Under this method,
deferred income taxes are provided for temporary differences between the
financial reporting and the tax bases of assets and liabilities and are measured
using enacted laws and rates that will be in effect when the differences are
expected to reverse. A valuation allowance is provided when management believes
it is more likely than not that some or all of the deferred tax assets will not
be realized.
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.
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-KSB 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.
At the date of adoption, there were no unvested options outstanding and no
options were granted during the year ended December 31, 2006. Consequently,
there was no share-based compensation expense recorded during the year ended
December 31, 2006.
F-10
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 have been issued upon conversion of the convertible debt would have
been 8,518,519 as of December 31, 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 27,136,054 shares and 27,165,054 shares at December 31,
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 at December 31, 2005, because they were
antidilutive. Diluted earnings per share have not been presented as a result of
the Company's net loss for each year.
Asset Impairment
In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets", long lived assets to be held and used by the Company are
reviewed to determine whether any events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. For long-lived
assets to be held and used, the Company bases its evaluation on such indicators
as the economic benefits of the assets, any historical or future profitability
measurements, a review of estimated useful lives, as well as other external
market conditions or factors that may be present. If such impairment indicators
are present or other factors exist that indicate that the carrying amount of the
asset may not be recoverable, the Company determines whether an impairment has
occurred through the use of an undiscounted cash flow analysis of assets at the
lowest level for which identifiable cash flow exist. If impairment has occurred,
the Company recognizes a loss for the difference between the carrying amount and
the estimated value of the asset. The fair value of the asset is measured using
an estimate of discounted cash flow analysis.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48")
which is an interpretation of FASB Statement 109, "Accounting for Income Taxes."
FIN 48 requires management to perform a two-step evaluation of all tax
positions, ensuring that these tax return positions meet the "more-likely than
not" recognition threshold and can be measured with sufficient precision to
determine the benefit recognized in the financial statements. These evaluations
provide management with a comprehensive model for how a company should
recognize, measure, present, and disclose in its financial statements certain
tax positions that the Company has taken or expects to take on income tax
returns. The Company does not believe the adoption of FIN 48 will have a
material impact on its financial position or results of operations. FIN 48 is
effective for the Company's interim reporting period beginning January 1, 2007.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108").
SAB 108 addresses how the effects of prior year uncorrected misstatements should
be considered when quantifying misstatements in current year financial
statements. SAB 108 requires companies to quantify misstatements using a balance
sheet and income statement approach and to evaluate whether either approach
results in quantifying an error that is material in light of relevant
quantitative and qualitative factors. When the effect of initial adoption is
material, companies will record the effect as a cumulative effect adjustment to
beginning of year retained earnings. The provisions of SAB 108 are effective for
the Company's interim reporting period beginning January 1, 2007. The Company
does not believe the adoption of SAB 108 will have a material impact on its
financial position or results of operations.
F-11
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". SFAS
157 prescribes a single definition of fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The Company
does not believe the adoption of SFAS 157 will have a material impact on its
financial condition or results of operations. SFAS 157 is effective for the
Company's interim reporting period beginning January 1, 2008.
Note 4. Property and Equipment
At December 31, property and equipment consisted of the following:
2006 2005
---- ----
Computer equipment and software $ 164,790 $ 905,179
Office furniture 2,850 61,927
Video and article archives 418,983 418,983
Video equipment -- 158,513
Website development cost 636,390 908,996
Purchased software -- 70,000
----------- -----------
1,223,013 2,523,598
Accumulated depreciation (1,031,495) (2,267,354)
----------- -----------
$ 191,518 $ 256,244
=========== ===========
Depreciation expense of property and equipment for the years ended December 31,
2006 and 2005 amounted to $126,800 and $150,200, respectively.
Note 5. Intangible Assets
At December 31, intangible assets are comprised of the following:
2006 2005
---- ----
Software licenses $ 2,882,660 $ 2,882,660
Patent pending 16,000 16,000
Domain names 57,025 77,025
Acquired web sites 762,301 762,301
Customer and user lists 327,157 327,157
Assigned contracts 54,900 54,900
Other 30,763 30,763
----------- -----------
4,130,806 4,150,806
Accumulated amortization (4,119,038) (4,117,516)
----------- -----------
$ 11,768 $ 33,290
=========== ===========
Amortization expense for intangible assets for the years ended December 31, 2006
and 2005 amounted to $21,500 and $655,600, respectively.
F-12
Estimated future annual amortization expense is $1,000 for each year through
2019.
Note 6. Accrued Expenses
At December 31, accrued expense are comprised of the following:
2006 2005
---- ----
Interest $ 44,201 $ 172,490
Payroll and related costs 268,702 204,280
Professional and consulting fees 115,111 134,411
Consignments - related party 172,782 172,782
Due to K Sports 30,500 62,500
Commissions 266,246 300,000
Other 17,634 30,618
---------- ----------
$ 915,176 $1,077,081
========== ==========
Note 7. Common Stock
Call Option Agreements
In connection with a settlement agreement with CSEI, the Company was granted
call options for 2,283,565 unregistered common shares held by CSEI at an
exercise price of $.001 per share.
During 2004 the Company assigned options to purchase 1,889,000 shares of stock
from CSEI to certain individuals in exchange for $573,000. 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, on May 6, 2005 (as
set forth in the Settlement Agreement and Mutual Release) and granted the
Company an option to purchase the shares for $.001 per share. The option is
assignable by the Company and, as most recently amended, expires on May 9, 2007.
During 2006 and 2005 the Company assigned options to purchase 800,000 and
375,000 shares, respectively, of stock from Leslie Rotman to certain individuals
in exchange for $331,848 and $96,885. The proceeds from the assignments of these
options were added to the paid in capital of the Company. At December 31, 2006,
825,000 call options remain outstanding.
F-13
Warrants
During the year ended December 31, 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 expiration date of
the Warrant was extended pending receipt of an additional $50,000 payment. If
exercised, $100,000 will be applied as partial payment of the exercise price. If
the Warrants are not exercised by June 1, 2008 the deposits will be forfeited.
The deposits have been recorded as an addition to Paid in Capital.
Share-based Incentive Plan
At December 31, 2006, the Company had stock option plans that include both
incentive and non-qualified 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 December 31, 2006, there were 5,463,000 shares available for future grants
under the above stock option plans. The weighted average exercise price of
options outstanding was $0.043 at December 31, 2006.
In October 2004, the Company granted options to an employee and a consultant to
purchase 635,418 shares of unrestricted common stock at $.001 per share. 468,750
of these options, valued at $150,000, were immediately vested while 166,668
vested over a nine-month period. The Company recorded unearned compensation of
$45,000, based on the difference between the fair value of the common stock at
the grant date and the exercise price of the options that did not immediately
vest. The unearned compensation was amortized over the option's vesting period
with $35,000 being charged to expense during 2005.
Information with respect to stock options granted under the above plans is as
follows:
Weighted
average
exercise
Number of shares price per share
---------------- ---------------
Options outstanding at December 31, 2005 25,165,054 $ .045
Granted -- --
Exercised -- --
Canceled (29,000) (1.373)
----------
Options outstanding at December 31, 2006 25,136,054 $ .043
==========
All options outstanding at December 31, 2006 are fully vested and exercisable.
Information pertaining to options outstanding at December 31, 2006 is as
follows:
Options Outstanding
Weighted Average
Remaining
Exercise Number of Contractual Intrinsic
Prices shares Life Value
------ ---------- ------------- ----------
$1.62 37,000 2 --
.001 99,054 8 $ 34,570
.041 25,000,000 6 7,725,000
----------
25,136,054
===========
F-14
During July 1999, the Company's Board of Directors adopted, subject to
stockholders' approval, the 1999 Omnibus Share Plan (the "Omnibus Plan") that
provides for both incentive and non-qualified stock options, stock appreciation
rights and other awards to directors, officers, and employees of the Company to
purchase or receive up to 1,000,000 shares of the Company's stock. A committee
of the Board of Directors ("Committee") establishes the option price at the time
each option is granted, which price may, in the discretion of the Committee, be
less than 100% of the fair market value of the shares on the date of the grant.
Any options granted will have a maximum term of ten years and will be
exercisable during a period as specified by the Committee. No options have ever
been granted under the Omnibus Plan.
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 year ended December 31, 2006 the Company granted options for
7,940,675 shares at various dates aggregating $1,273,335 under this plan. During
the year ended December 31, 2005 the Company granted options for 8,302,602
shares at various dates aggregating $1,580,216 under this plan. All options
except 99,054 shares granted under this plan were exercised.
The Company did not recognize compensation expense for employee stock option
grants for the year ended December 31, 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 year ended
December 31, 2005 as if the Company had applied the fair value recognition
provisions of SFAS 123 to share-based employee awards.
F-15
Amount Basic loss per share
------ --------------------
Net loss
As reported $(3,498,162) $ (.02)
Stock based compensation cost, as
reported (net of tax) 35,000 --
Stock based compensation cost that would
have been included in the determination
of net income had the fair value method
been applied (net of tax) (35,000) --
----------- -----------
Pro forma $(3,498,162) $ (.02)
=========== ===========
Note 8. Income Taxes
There was no provision for income taxes for the years ended December 31, 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.
The tax effects of temporary differences and carry forwards that give rise to
deferred taxes are as follows:
2006 2005
---- ----
Federal net operating loss carry
forwards $ 7,189,000 $ 6,758,000
State net operating loss carry
forwards 1,615,000 1,492,000
----------- -----------
8,804,000 8,250,000
Valuation reserve (8,804,000) (8,250,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The valuation reserve applicable to net deferred tax asset for the years ended
December 31, 2006 and 2005 is due to the likelihood of the deferred tax not to
be utilized.
At December 31, 2006, the Company has federal and state net operating loss carry
forwards of approximately $21,100,000 and $17,000,000, 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 9. Convertible Debt Financing
As of December 31, 2006 the Company has no convertible debt outstanding.
F-16
As of December 31, 2005 the Company had $1,150,000 of 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 December 31, 2005 this note has
been paid in full through a series of conversions to common stock. During 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
prior years $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. In accordance
with EITF 00-27, the intrinsic value of the beneficial conversion feature was
charged to interest expense over the original two year term of the related note.
The beneficial conversion feature that was charged to interest expense during
the year ended December 31, 2005 totaled $103,871. During the years ended
December 31, 2006 and 2005 the Company received conversion requests for
$1,150,000 and $1,100,000 into 9,020,230 and 8,056,285 shares of the Company's
common stock at conversion prices ranging from $.115 to $.157 per share.
Note 10. Notes and Loans Payable
At December 31, 2006, the Company was obligated on short-term demand notes
payable totaling $80,000 to a related party. The notes bear interest at 8%.
Interest expense charged to operations in connection with related party notes
totaled $6,489 in 2006. In addition, included in notes and loans payable is an
$18,000 non interest bearing loan.
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 10%. The related
party debt is due on demand while the remainder was due on May 31, 2006.
Interest expense charged to operations in connection with the related party
notes totaled $10,266 in 2005.
Note 11. Related party transactions
Steven Rotman is the father, and Leslie Rotman is the mother, of Gregory
Rotman, President of the Company, and Richard Rotman, CFO/Vice
President/Secretary of the Company. The Company entered into a number of
transactions over the past two years with both Steven Rotman and Leslie Rotman.
Management believes that these transactions are fair and reasonable to the
Company and no less favorable than could have been obtained by an unaffiliated
third party.
In December 2001, the Company engaged Steven Rotman to provide consulting
services to the Company. Steven Rotman did not provide any consulting services
in 2005. However, during 2005, for consulting fees owed and for consulting
services provided prior to 2005, including $160,000 in fees and services
provided in 2004, the Company paid Steven Rotman $251,659 in the form of options
to purchase 1,264,630 shares of common stock of the Company pursuant to the
Company's 2001 Non-Qualified Stock Option Plan. During 2006, the Company
incurred $86,154 of consulting fees paid to Steven Rotman. Under the 2001
Non-Qualified Stock Option 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.
In 2002, the Company obtained private financing from Mr. Steven Rotman in
the aggregate amount of $115,000 at an 8% interest rate, and borrowed an
additional $15,000 in 2003, all of which was outstanding in 2004. In 2005, the
Company repaid $50,000, but continues to owe Steven Rotman $80,000 in principal,
and $40,322 in interest, including $6,489 in interest which accrued in 2006.
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, pursuant to which Rotman Collectibles, Inc., a Massachusetts
corporation, was merged into the Company's Delaware subsidiary, now named Rotman
Collectibles, Inc. 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 (as set forth in the Settlement Agreement and
Mutual Release) and granted the Company an option to purchase the shares for
$.001 per share. The option is assignable by the Company and now expires two
years from the date of grant.
On September 8, 2005, the Company purchased approximately $1,010,000 of
memorabilia for sale from Leslie Rotman, the mother of Richard and Greg Rotman,
in exchange for 6,433,121 shares of restricted common stock valued at $.157.
In August 2006 the Company began paying rent, as a tenant at will, to a
company in which Steven Rotman, the father of Greg and Richard Rotman, is a
shareholder. Monthly payments under this arrangement of $2,600 began on August
1, 2006. The Company had previously occupied the premises rent-free.
Note 12. Issuance of Common Stock
During 2005 the Company purchased $1,010,000 of memorabilia for sale from Leslie
Rotman, the mother of Gregory and Richard Rotman in exchange for 6,433,121
shares of restricted stock valued at $.157.
During 2006 and 2005 the Company issued 838,450 and 1,019,871 shares of common
stock in connection with the payment of $137,794 and $129,161 of interest due on
its convertible debt.
Note 13. 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.
In August 2006 the Company began paying rent, as a tenant at will, to a company
in which Stephen Rotman, the father of Gregory and Richard Rotman, is a
shareholder. Monthly payments under this arrangement of $2,600 began on August
1, 2006.
F-17
Note 14. RESTATEMENT
During a detailed review of its accounting treatment for the Settlement
Agreement and Mutual Release (see Note 7) entered into on May 9, 2005, the
Company determined it had incorrectly accounted for the call options that were
issued in connection with this agreement. The Company determined that the cash
received from the sale price of the call options of $96,885 should be recorded
as an increase to additional paid-in capital. As a result, the Company restated
its statement of operations for the year ended December 31, 2005 to increase its
net loss by $397,510, which is the net of increasing cost of revenues by
$129,450; decreasing loss on call options by $202,490; and decreasing other
income by $470,550. In addition, the Companys assets decreased by $300,625 and
additional paid-in capital increased by $96,885 in connection with the
restatement. These changes did not result in any change to the basic and diluted
loss per share for the year ended December 31, 2005.
The accompanying financial statements and notes reflect the restated amounts for
the year ended December 31, 2005. The following tables detail the effect of the
restatement on each of the quarters in 2005 and as previously reported for the
quarters in 2006. The amounts indicated "as previously reported" are prior to
any adjustments to correct the accounting treatment of the agreement described
above.
F-18
As
Previously As
Reported Adjustments Restated
Quarter ended March 31, 2006
Net sales $ 2,806,841 $ 2,806,841
Loss from operations (225,284) -- (225,284)
Other income (expense) (51,055) 24,375 (26,680)
Net loss (276,339) 24,375 (251,964)
Basic and diluted weighted average
shares outstanding 198,844,439 198,844,439
Basic and diluted net loss per share $ (0.00) $ (0.00)
Quarter ended June 30, 2006
Net sales $ 604,388 $ 604,388
Loss from operations (568,672) -- (568,672)
Other income (expense) 617,555 (599,625) 17,930
Net income (loss) 48,883 (599,625) (550,742)
Basic weighted average shares outstanding 206,913,261 206,913,261
Diluted weighted average shares outstanding 231,580,941 206,913,261
Basic net income (loss) per share $ 0.00 $ (0.00)
Diluted net income (loss) per share $ 0.00 $ (0.00)
Quarter ended September 30, 2006
Net sales $ 1,499,154 $ 1,499,154
Loss from operations (646,080) -- (646,080)
Other income (expense) (267,526) 266,250 (1,276)
Net loss (913,606) 266,250 (647,356)
Basic and diluted weighted average
shares outstanding 215,893,397 215,893,397
Basic and diluted net loss per share $ (0.00) $ (0.00)
As
Previously As
Reported Adjustments Restated
Quarter ended June 30, 2005
Net sales $ 633,356 $ 633,356
Loss from operations (708,580) (129,450) (838,030)
Other income (expense) 246,524 (325,050) (78,526)
Net loss (462,056) (454,500) (916,556)
Basic and diluted weighted average
shares outstanding 178,777,729 178,777,729
Basic and diluted net loss per share $ (0.00) $ (0.01)
Quarter ended September 30, 2005
Net sales $ 492,367 $ 492,367
Loss from operations (970,283) -- (970,283)
Other income (expense) (47,996) (32,385) (80,381)
Net loss (1,018,279) (32,385) (1,050,664)
Basic and diluted weighted average
shares outstanding 183,403,606 183,403,606
Basic and diluted net loss per share $ (0.01) $ (0.01)
Quarter ended December 31, 2005
Net sales $ 2,934,747 $ 2,934,747
Loss from operations (509,880) -- (509,880)
Other income (expense) (131,502) 89,375 (42,127)
Net loss (641,382) 89,375 (552,007)
Basic and diluted weighted average
shares outstanding 199,300,877 199,300,877
Basic and diluted net loss per share $ (0.00) $ (0.00)
EXHIBIT INDEX
Exhibit Description of Exhibits
------- -----------------------
No.
----
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to Form 8-K, filed on November 25,
2003)
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to Form 8-K, filed on December 8, 2004)
4.1 Specimen of certificate for Common Stock (incorporated by
reference to Exhibit 4.1 to Form SB-2/A filed on December 1,
2000)
4.2 Convertible Promissory Note dated March 23, 2000 issued to
Augustine Fund, LP pursuant to Securities Purchase Agreement
(incorporated by reference to Exhibit 10.3 to Form 10-KSB
filed on April 14, 2000)
4.3 Convertible Promissory Note, dated November 7, 2001, issued to
Augustine Fund, L.P., pursuant to Loan Agreement (incorporated
by reference from Exhibit 4.2 to Form 8-K filed on November
21, 2001)
4.4 Modification Agreement dated September 19, 2000 between the
Company and Augustine Fund, L.P. (incorporated by reference to
Exhibit 4.7 to Form S-3 filed on October 25, 2000).
4.5 Amended Modification Agreement dated July 15, 2001, between
the Company and Augustine Fund, L.P. (incorporated by
reference from Exhibit 4.10 to Form SB-2/A filed on August 8,
2001)
4.6 Second Amended Modification Agreement dated August 30, 2001
between the Company and Augustine Fund, L.P. (incorporated by
reference from Exhibit 4.11 to Form SB-2 filed on August 31,
2001)
4.7 Third Amended Modification Agreement dated May 21, 2002
between the Company and Augustine Fund, L.P. (incorporated by
reference from Exhibit 4.1 to Form 10-QSB/A filed on August
14, 2002)
4.8 Modification Agreement dated May 21, 2002 between the Company
and Augustine Fund, L.P. (incorporated by reference from
Exhibit 4.2 to Form 10-QSB/A filed on August 14, 2002)
4.9 Second Modification Agreement dated October 31, 2003 between
the Company and Augustine Fund, L.P. (incorporated by
reference from Exhibit 4.10 to Form 10-KSB filed on March 30,
2004)
4.10 Third Modification Agreement dated October 15, 2005 between
the Company and Augustine Fund, L.P. (incorporated by
reference from Exhibit 4.10 to Form 10-KSB filed on March 31,
2006)
4.11 Warrant issued by the Registrant to Delano Group Securities,
LLC (expired March 2005) (incorporated by reference to Exhibit
10.7 to Form 10-KSB filed on April 14, 2000).
4.12 Warrant dated March 23, 2000 issued to Augustine Fund, LP
pursuant to Securities Purchase Agreement (expired March 2005)
(incorporated by reference to Exhibit 10.4 to Form 10-KSB
filed on April 14, 2000)
10.1 1999 Stock Option Plan (incorporated by reference to Exhibit
10.2 to Form SB-2/A filed on December 1, 2000)
10.2 1999 Omnibus Share Plan (incorporated by reference to Exhibit
10.3 to Form SB-2/A filed on December 1, 2000)
10.3 2001 Non-Qualified Stock Option Plan, as amended (incorporated
by reference from Exhibit 99.1 to Form S-8 filed on September
5, 2003)
10.4 2002 Stock Option Plan (incorporated by reference from Exhibit
10.17 to Form 10-KSB filed on March 31, 2003)
10.5 Securities Purchase Agreement dated March 23, 2000 between the
Company and Augustine Fund, LP. (incorporated by reference to
Exhibit 10.2 to Form 10-KSB filed on April 14, 2000)
10.6 Loan Agreement, dated November 7, 2001, by and between
Augustine Fund, L.P. and the Company (incorporated by
reference from Exhibit 10.1 to Form 8-K filed on November 21,
2001)
10.7 Loan Agreement dated May 21, 2002 between the Company and
Augustine Fund, L.P. (incorporated by reference from Exhibit
10.1 to Form 10-QSB/A filed on August 14, 2002)
10.8 Agreement and Plan of Merger between the Company, Rotman
Collectibles, Inc. and Leslie
Rotman dated October 23, 2001 (incorporated by reference from
Exhibit 2.1 to Form 8-K filed on November 21, 2001)
10.9 Asset Purchase Agreement dated September 8, 2005 between the
Company and Leslie Rotman (incorporated by reference from
Exhibit 10 to Form 10-QSB filed on November 14, 2005)
10.10 Settlement Agreement and Mutual Release dated May 9, 2005
between the Company and Leslie Rotman (incorporated by
reference to Exhibit 10.1 to Form 10-QSB filed on May 13,
2005)
10.11 Escrow Agreement dated May 9, 2005 between the Company, Leslie
Rotman, and Escrow Agent (incorporated by reference to Exhibit
10.2 to Form 10-QSB filed on May 13, 2005)
21 Subsidiaries of the Registrant (included in Item I)*
23 Consent of Carlin, Charron & Rosen, LLP*
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*
99 Risk Factors*
-----------------------------
* filed herewith