UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
COMMISSION FILE NUMBER 0-28720
PAID, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 73-1479833
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
4 Brussels Street, Worcester, Massachusetts 01610
(Address of principal executive offices
(508) 791-6710
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of November 7, 2006, the issuer had outstanding 217,233,217 shares of
its Common Stock, par value $.001 per share.
Transitional Small Business Disclosure Format
Yes |_| No |X|
Paid, Inc.
and Subsidiary
Form 10-QSB
For the Nine Months ended September 30, 2006
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2006 and December 31, 2005 (unaudited)..............3
Consolidated Statements of Operations
Three and Nine months ended September 30, 2006 and
2005 (unaudited)..................................................4
Consolidated Statements of Cash Flows
Nine months ended September 30, 2006 and
2005 (unaudited)..................................................5
Consolidated Statements of Changes in Shareholders' Deficit
Nine months ended September 30, 2006
(unaudited).......................................................6
Notes to Consolidated Financial Statements
Nine months ended September 30, 2006 and 2005....................7-14
Item 2. Management's Discussion and Analysis or
Plan of Operation..........................................................14
Item 3. Controls and Procedures....................................................19
Part II - Other Information
Item 1. Legal Proceedings..........................................................20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...............20
Item 3. Defaults Upon Senior Securities............................................20
Item 4. Submission of Matters to a Vote of Security Holders........................20
Item 5. Other Information .........................................................20
Item 6. Exhibits ..................................................................20
Signatures.........................................................................21
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAID, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2006 2005
---- ----
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 712,965 $ 1,502,987
Accounts receivable 32,480 72,317
Inventories, net 1,404,112 1,364,248
Investment in call options 326,625 300,625
Deferred expenses 480,016 556,250
Prepaid expenses 125,036 67,981
Due from employees 82,808 66,558
Other current assets 9,073 9,073
------------ ------------
Total current assets 3,173,115 3,940,039
Property and equipment, net 222,683 256,244
Other intangible assets, net 12,003 33,290
------------ ------------
Total assets $ 3,407,801 $ 4,229,573
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 80,000 $ 130,000
Accounts payable 290,545 275,336
Accrued expenses 911,051 1,077,081
Deferred revenues 1,726,733 2,305,278
------------ ------------
Total current liabilities 3,008,329 3,787,695
------------ ------------
Long term liabilities:
Convertible debt -- 1,150,000
------------ ------------
Shareholders' equity (deficit):
Common stock, $.001 par value, 350,000,000 shares
authorized; 216,716,755 and 200,405,555 shares issued
and outstanding at September 30, 2006 and December 31, 2005,
respectively 216,717 200,406
Additional paid-in capital 27,808,304 25,575,959
Accumulated deficit (27,625,549) (26,484,487)
------------ ------------
Total shareholders' equity (deficit) 399,472 (708,122)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 3,407,801 $ 4,229,573
============ ============
See accompanying notes to consolidated financial statements
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PAID, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
------------- ------------- ------------- -------------
Revenues $ 1,499,154 $ 492,367 $ 4,910,383 $ 1,985,376
Cost of revenues 1,048,913 354,594 3,220,384 1,140,715
------------- ------------- ------------- -------------
Gross profit 450,241 137,773 1,689,999 844,661
------------- ------------- ------------- -------------
Operating expenses:
Selling, general, and administrative expenses 942,920 969,282 2,723,393 2,982,120
Web site development costs 153,400 138,774 406,642 426,551
------------- ------------- ------------- -------------
Total operating expenses 1,096,320 1,108,056 3,130,035 3,408,671
------------- ------------- ------------- -------------
Loss from operations (646,079) (970,283) (1,440,036) (2,564,010)
------------- ------------- ------------- -------------
Other income (expense):
Interest expense (6,628) (80,383) (15,386) (252,695)
Gain (loss) on call options (266,250) 32,385 309,000 (113,115)
Other income 5,351 2 5,360 470,550
------------- ------------- ------------- -------------
Total other income (expense), net (267,527) (47,996) 298,974 104,740
------------- ------------- ------------- -------------
Loss before income taxes (913,606) (1,018,279) (1,141,062) (2,459,270)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net loss $ (913,606) $ (1,018,279) $ (1,141,062) $ (2,459,270)
============= ============= ============= =============
Loss per share (basic and diluted) $ (0.00) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
Weighted average shares 215,893,397 183,403,606 208,018,220 178,878,154
============= ============= ============= =============
See accompanying notes to consolidated financial statements
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PAID, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2006 2005
---- ----
Operating activities:
Net loss $(1,141,062) $(2,459,270)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 115,621 704,964
Bad debt expense 340
Settlement Agreement and Mutual Release - call options -- (470,500)
Amortization of unearned compensation -- 35,000
Beneficial conversion feature -- 91,190
Loss (gain) on call options (309,000) 113,115
Common stock issued in payment of professional
and consulting fees 748,425 1,043,891
Issuance of common stock pursuant to exercise of
stock options granted to employees for services 212,437 228,110
Common stock issued in payment of interest 137,794 137,161
Changes in assets and liabilities:
Accounts receivable 39,837 (495,973)
Inventories (39,864) 176,922
Deferred expenses 76,234 --
Prepaid expense and other current assets (73,305) 51,002
Accounts payable 15,209 88,030
Accrued expenses (166,030) (135,828)
Deferred revenue (578,545) 1,152,794
----------- -----------
Net cash provided by (used in) operating activities (962,249) 260,948
----------- -----------
Investing activities:
Proceeds from assignment of call options 283,000 96,885
Property and equipment additions (60,773) (169,993)
----------- -----------
Net cash provided by (used in) investing activities 222,227 (73,108)
----------- -----------
Financing activities:
Net proceeds from (payments of) notes payable (50,000) 250,000
Proceeds from sale of warrants -- 50,000
Proceeds from sale of common stock -- 30,000
Proceeds from assignment of call options -- 99,611
Proceeds from exercise of stock options -- 336
----------- -----------
Net cash provided by (used in) financing activities (50,000) 429,947
----------- -----------
Net increase (decrease) in cash and cash equivalents (790,022) 617,787
Cash and cash equivalents, beginning 1,502,987 43,558
----------- -----------
Cash and cash equivalents, ending $ 712,965 $ 661,345
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ -- $ --
=========== ===========
Interest $ 6,458 $ 1,041
=========== ===========
See accompanying notes to consolidated financial statements
-5-
PAID, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(Unaudited)
Common stock Additional
----------------------- Paid-in Accumulated
Shares Amount Capital deficit Total
----------- -------- ----------- ------------ -----------
Balance, December 31, 2005 200,405,555 $200,406 $25,575,959 $(26,484,487) $ (708,122)
Issuance of common stock pursuant to exercise of stock
options granted to employees for services 991,607 992 211,445 -- 212,437
Issuance of common stock pursuant to exercise of stock
options granted to professionals and consultants 5,460,913 5,461 742,964 -- 748,425
Common stock issued in payment of
interest on note payable 838,450 838 136,956 137,794
Common stock issued for payment of
convertible debt 9,020,230 9,020 1,140,980 1,150,000
Net loss -- -- -- (1,141,062) (1,141,062)
----------- -------- ----------- ------------ -----------
Balance, September 30, 2006 216,716,755 $216,717 $27,808,304 $(27,625,549) $ 399,472
=========== ======== =========== ============ ===========
See accompanying notes to consolidated financial statements
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PAID, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006 and 2005
Note 1. Organization
Paid, Inc. and subsidiary (the "Company") provides businesses and clients with
marketing, management, merchandising, auction management, website hosting, and
authentication and consignment services for the entertainment, sports and
collectibles industries. The Company also provides other services for
celebrities and sports personalities including autograph signings, appearances,
marketing opportunities and event ticketing. The Company continues to sell
sports collectibles and merchandise through a variety of outlets, including
online auctions and wholesale and distribution outlets.
General
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the United States Securities
and Exchange Commission for interim financial reporting and include all
adjustments (consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation). Except for the
balance sheet at December 31, 2005, these financial statements have not been
audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to rules
and regulations for interim reporting. The Company believes that the disclosures
contained herein are adequate to make the information presented not misleading.
However, these financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
for the year ended December 31, 2005, which are included in the Company's Form
10-KSB.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of Paid,
Inc. and its wholly-owned subsidiary, Rotman Collectibles, Inc. All
inter-company balances and transactions have been eliminated.
Inventories
Inventories consist of collectible merchandise for sale and are stated at the
lower of average cost or market on a first-in, first-out (FIFO) method. When a
purchase contains multiple copies of the same item, they are stated at average
cost.
On a periodic basis management reviews inventories on hand to ascertain if any
is slow moving or obsolete. In connection with this review, at September 30,
2006 and December 31, 2005 the Company has provided for reserves totaling
$17,000 and $50,000, respectively.
Investment in call options
The Company accounts for investment in call options in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services".
Accordingly, call options are recorded at fair value, determined by the
-7-
closing price of the Company's common stock, on the date they are received and
adjusted to fair value at the balance sheet date. Any realized or unrealized
gains or losses are recorded in other income (expense).
Revenue Recognition
The Company generates revenue from sales of fan experiences, from fan club
membership fees, on sales of its purchased inventories, from web hosting
services, from appraisal services and from advertising and promotional services.
Fan experiences sales include tickets and related experiences at concerts and
other events conducted by performing artists. Revenues associated with these fan
experiences are generally reported gross, rather than net, following the
criteria of EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent", and are deferred until the related event has been concluded, at which
time the revenues and related direct costs are recognized.
Fan club membership fees are recognized when the member joins and all direct
costs associated with the membership have been incurred.
For sales of merchandise owned and warehoused by the Company, the Company is
responsible for conducting the auction, billing the customer, shipping the
merchandise to the customer, processing customer returns and collecting accounts
receivable. The Company recognizes revenue upon verification of the credit card
transaction and shipment of the merchandise, discharging all obligations of the
Company with respect to the transaction.
The Company provides web hosting services under two types of arrangements.
Revenue is recognized on a monthly basis as the services are provided for those
where payment is to be received in cash. Professional athletes' web sites are
hosted under arrangements that are settled by the athlete providing a certain
number of autographs on merchandise to be sold by the Company. Revenue related
to player websites is recognized upon sale of the autographed merchandise.
Appraisal revenues are recognized when the appraisal is delivered to the
customer.
Advertising revenues are recognized at the time the advertisement is initially
displayed on the Company's web site. Sponsorship revenues are recognized at the
time that the related event is conducted.
Advertising Costs
Advertising costs totaling approximately $59,000 in 2006 and $84,000 in 2005,
are charged to expense when incurred.
Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheets and reported amounts of revenue and expenses during
the reporting periods. Material estimates that are particularly susceptible to
significant change in the near term relate to inventories and deferred tax asset
valuation. Although these estimates are based on management's knowledge of
current events and actions, they may ultimately differ from actual results.
-8-
Earnings Per Common Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate to convertible
debt and outstanding stock options and warrants. The number of common shares
that would be issued upon conversion of the convertible debt would have been
6,571,429 as of September 30, 2005. The number of common shares that would be
included in the calculation of outstanding options and warrants is determined
using the treasury stock method. The assumed conversion of outstanding dilutive
stock options and warrants would increase the shares outstanding but would not
require an adjustment of income as a result of the conversion. Stock options and
warrants applicable to 27,165,054 shares and 27,365,054 shares at September 30,
2006 and 2005, respectively, have been excluded from the computation of diluted
earnings per share, as have the common shares that would be issued upon
conversion of the convertible debt, because they were antidilutive for periods
in which a loss is reported.
Website Development Costs
The Company accounts for website development costs in accordance with the
provisions of EITF 00-2, "Accounting for Web Site Development Costs", which
requires that costs incurred in planning, maintaining, and operating stages that
do not add functionality to the site be charged to operations as incurred.
External costs incurred in the site application and infrastructure development
stage and graphic development are capitalized. Such capitalized costs are
included in "Property and equipment." During the nine months ended September 30,
2006 and 2005 the Company capitalized approximately $50,000 and $165,000 of
website development costs, respectively.
Share based Compensation
Effective January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) 123(R), Share-Based Payment, which
establishes accounting for equity instruments exchanged for employee services.
Under the provisions of SFAS 123(R), share-based compensation cost is measured
at the grant date, based on the fair value of the award, and is recognized as an
expense over the employee's requisite service period (generally the vesting
period of the equity grant). Prior to January 1, 2006, the Company accounted for
share-based compensation to employees in accordance with Accounting Principles
Board (APB) Opinion No. 25, Accounting for stock issued to Employees, and
related interpretations. The Company also followed the disclosure requirements
of SFAS 123, Accounting for Stock-Based Compensation. The Company elected to
adopt the modified prospective transition method as provided by SFAS 123(R) and,
accordingly, financial statement amounts for the prior periods presented in the
Form 10-QSB have not been restated to reflect the fair value method of expensing
share-based compensation.
The Company estimates the fair value of stock options using the Black-Scholes
valuation model. Key input assumptions used to estimate the fair value of stock
options include the exercise price of the award, the expected option term, the
expected volatility of the Company's stock over the option's expected term, the
risk-free interest rate over the option's expected term, and the Company's
expected annual dividend yield. The Company believes that the valuation
technique and the approach utilized to develop the underlying assumptions are
appropriate in calculating the fair values of the Company's stock options.
Estimates of fair value are not intended to predict actual future events or the
value ultimately realized by persons who receive equity awards.
-9-
At the date of adoption, there were no unvested options outstanding and no
options were granted during the nine months ended September 30, 2006.
Consequently, there was no share-based compensation expense recorded during the
nine months ended September 30, 2006.
The Company did not recognize compensation expense for employee stock option
grants for the nine months ended September 30, 2005, since the Company had
previously adopted the provisions of SFAS 123 through disclosure only. The
following illustrates the effects on net income and earnings per share for the
three and nine months ended September 30, 2005 as if the Company had applied the
fair value recognition provisions of SFAS 123 to share-based employee awards.
Three months Nine months
ended ended
September 30, 2005
Net (loss) as reported $(1,018,279) $(2,459,270)
Share based compensation as recorded
(net of any related income tax effects) 5,000 35,000
Share based compensation expense determined
Under the fair value method (net of any
related income tax effects) (5,000) (35,000)
----------- -----------
Proforma net (loss) $(1,018,279) $(2,459,270)
=========== ===========
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 managements 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 fiscal year ending December 31, 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.
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
-10-
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 2. Notes Payable
At September 30, 2006 the Company was obligated on short-term notes payable
totaling $80,000, all of which was to a related party. At December 31, 2005 the
Company was obligated on short-term notes payable totaling $130,000, of which
$80,000 was to a related party. The related party notes bear interest at 8%,
while the remainder bear interest at 8% to 10%. All of this short-term debt is
due on demand. Interest expense charged to operations during the nine months
ended September 30, 2006 and 2005 in connection with the related party notes
totaled $4,850 and $7,900, respectively.
Note 3. Accrued Expenses
Accrued expenses are comprised of the following:
September 30, December 31,
2006 2005
------------- ------------
Interest $ 43,298 $ 172,490
Payroll and related costs 241,479 204,280
Professional and Consulting fees 154,229 134,411
Consignments 172,782 172,782
Due to K Sports 62,500 62,500
Commissions 175,000 300,000
Other 61,763 30,618
--------- -----------
$ 911,051 $ 1,077,081
========= ===========
Note 4. Common Stock
Call Option Agreements
In connection with a February 1, 2002 settlement agreement with CSEI, the
Company was granted call options for 2,283,565 unregistered common shares held
by CSEI at an exercise price of $.001 per share.
During January 2005 the remaining 394,565 options were assigned in exchange for
approximately $100,000. The proceeds from the assignment of these options were
added to the paid in capital of the Company.
On May 9, 2005, the Company entered into a Settlement Agreement and Mutual
Release with Leslie Rotman ("Seller") to settle all outstanding disputes
regarding the value paid and the value received in the 2001 transaction in which
Seller, Rotman Collectibles, Inc., and the Company entered into an Agreement and
Plan of Merger (the "Merger Agreement"), pursuant to which Rotman Collectibles,
Inc., a Massachusetts corporation, was merged into the Company's Delaware
subsidiary, now named Rotman Collectibles, Inc. Seller is the mother of Gregory
Rotman, President of the Company, and Richard Rotman, CFO/Vice
President/Secretary of the Company. To settle any possible differences or
disputes between the value paid and the value received, Seller delivered
2,000,000 shares of the Company's common stock into escrow, with a fair market
value of $600,000 based on the closing bid price of $.30 on May 6, 2005 (as set
forth in the Settlement Agreement and Mutual Release) and granted the Company an
option to purchase the shares for $.001 per share. The options are assignable by
the Company and
-11-
were modified on March 31, 2006 to expire on March 31, 2007, two years from the
date of grant. During the nine months ended September 30, 2006 and 2005 the
Company assigned call options for 650,000 and 375,000 shares respectively, for
$283,000 and $96,885. At September 30, 2006, 975,000 call options remain
outstanding.
Stock Options and Warrants
On February 1, 2001 the Company adopted the 2001 Non-Qualified Stock Option Plan
(the "2001 Plan") and has filed Registration Statements on Form S-8 to register
80,000,000 shares of its common stock. Under the 2001 Plan, employees and
consultants may elect to receive their gross compensation in the form of
options, exercisable at $.001 per share, to acquire the number of shares of the
Company's common stock equal to their gross compensation divided by the fair
value of the stock on the date of grant.
During the nine months ended September 30, 2006 the Company granted options for
6,452,520 shares at various dates aggregating $960,862 under this plan. During
the nine months ended September 30, 2005 the Company granted options for
5,366,911 shares at various dates aggregating $1,043,891 under this plan. All
options granted during these periods were exercised.
During the nine months ended September 30, 2005 the Company entered into an
Agreement and sold a warrant to purchase common stock ("Warrant") to an
investor. The investor paid the Company $50,000 as a deposit ("Deposit") for the
right to acquire up to 2,000,000 shares of unregistered common stock at any time
within one year of the Agreement at $.15 per share. During 2006 the initial
deposit was forfeited and the expiration date of the Warrant was extended for
one year pending receipt of an additional $50,000 payment. If exercised, $50,000
will be applied as partial payment of the exercise price. If the Warrants are
not exercised within one year of the extension the second deposit will be
forfeited. The initial deposit has been recorded as an addition to Paid in
Capital.
Share-based Incentive Plan
At September 30, 2006, the Company had stock option plans that include both
incentive stock options and non-qualified stock options to be granted to certain
eligible employees, non-employee directors, or consultants of the Company. The
maximum number of shares currently reserved for issuance is 31,000,000 shares.
The options granted have ten-year contractual terms and vest either immediately
or annually over a five-year term.
At September 30, 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 $0.045 at September 30, 2006.
The following table presents the average price and contractual life information
about options outstanding and exercisable at September 30, 2006:
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Number of Weighted Average Options
Exercise Outstanding Remaining Contractual Currently
Price Shares Life (years) Exercisable
----- ------ ------------ -----------
$.81 9,000 3.00 9,000
1.62 57,000 2.75 57,000
.001 99,054 8.25 99,054
.041 25,000,000 6.25 25,000,000
The aggregated intrinsic value of options outstanding and vested at September
30, 2006 was $7,383,065.
Note 5. Income Taxes
There was no provision for income taxes for the nine months ended September 30,
2006 and 2005 due to the Company's net operating loss and its valuation reserve
against deferred income taxes.
The difference between the provision for income taxes using amounts computed by
applying the statutory federal income tax rate of 34% and the Company's
effective tax rate is due primarily to the net operating loss incurred by the
Company and the valuation reserve against the Company's deferred tax asset.
At September 30, 2006, the Company has federal and state net operating loss
carry forwards of approximately $21,000,000 and $16,800,000, respectively,
available to offset future taxable income. The state carry-forwards will expire
intermittently through 2011, while the federal carry forwards will expire
intermittently through 2026.
Note 6. Convertible Debt Financing
As of September 30, 2006 the Company has no convertible debt outstanding.
On March 23, 2000, the Company entered into a Securities Purchase Agreement (the
"Agreement"), whereby the Company sold an 8% convertible note in the amount of
$3,000,000 (the "Series A Note"), due in shares of common stock on March 31,
2002 to Augustine Fund, L.P. ("Buyer"). As of September 30, 2005 this note has
been paid in full through a series of conversions to common stock. During the
nine months ended September 30, 2005 the Company received conversion requests
for the remaining $251,892 balance into 1,412,942 common shares at prices
ranging from $.149 to $.213 per share. During 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. The Series B
Note is convertible into common stock at a conversion price equal to the lesser
of: (1) $.25 per share, or (2) seventy-three percent (73%) of the average of the
closing bid price for the common stock for the five (5) trading days immediately
preceding the conversion date. Based upon advances through March 31, 2005
totaling $2,250,000, had the Buyer converted the Series B Note at issuance,
Buyer would have received $3,082,193 in aggregate value of the Company's common
stock upon conversion of the convertible note. As a result, in accordance with
EITF 00-27, the intrinsic value of the beneficial conversion feature of $832,193
was charged to interest expense over the original two
-13-
year term of the related note. The entire beneficial conversion feature was
charged to operations as of December 31, 2005. The beneficial conversion feature
that was charged to interest expense during the nine months ended September 30,
2005 totaled $91,190. The total beneficial conversion discount related to this
note was recorded as an increase in additional paid in capital and the
unamortized portion as a reduction in the related note. During the nine months
ended September 30, 2006 and 2005 the Company received conversion requests for
$1,150,000 and $50,000 into 9,020,230 and 330,885 shares of the Company's common
stock at conversion prices ranging from $.092 to $.151 per share. The first
$1,050,000 was converted into 7,725,400 common shares at prices ranging from
$.135 to $.152 per share between July 1, 2005 and December 31, 2005.
Note 7. Concentrations
For the nine months ended September 30, 2006 approximately 87% of the Company's
revenue was derived from the sale of fan experiences and merchandise related to
a major performing artist that was touring. The first tour ended in late March
2006 and a second tour began during September 2006.
Note 8. Commitments
The Company leases office facilities in Boston Massachusetts under a five year
lease beginning May 2006 requiring monthly payments of approximately $5,800,
plus increases in real estate taxes and operating expenses, through April 2011.
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.
During the nine months ended September 30, 2006 rent expense charged to
operations under the above leases totaled approximately $30,800, including
$4,900 to the related party.
Note 9. Related Party Transactions
During the nine months ended September 30, 2006 the Company incurred $86,000 of
consulting fees paid to Stephen Rotman.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Overview
Our innovative products and services are utilized in celebrity services,
ticketing, fan experiences, merchandising, online auctions and management, and
web site development. Our celebrity services proprietary content management
system provides an opportunity for our clients to offer more information,
merchandise and experiences to their customers and communities. This proprietary
system uses the AuctionInc. shipping calculator tools to provide improved
customer service and fulfillment services. The technology is based on our
patent-pending process that streamlines back-office and shipping processes for
online auctions and e-commerce. Our new celebrity services offer athletes and
entertainers official web sites and fan-club services including e-commerce
storefronts, articles, polls, message boards, contests, biographies and custom
features to attract thousands of visitors daily. Our autograph signing events,
working in conjunction with our new sports agent marketing services, have
created more services and opportunities for our sports clientele.
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Critical Accounting Policies
Our significant accounting policies are more fully described in Note 1 to our
financial statements. However, certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management; as a result, they are subject to an inherent degree of uncertainty.
In applying these policies, our management makes estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures. Those estimates and judgments are based upon our historical
experience, the terms of existing contracts, our observance of trends in the
industry, information that we obtain from our customers and outside sources, and
on various other assumptions that we believe to be reasonable and appropriate
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our critical accounting
policies include:
Inventories: Inventories are stated at the lower of average cost or market on a
first-in, first-out method. On a periodic basis we review inventories on hand to
ascertain if any is slow moving or obsolete. In connection with this review, we
establish reserves based upon management's experience and assessment of current
product demand.
Property and Equipment: Property and equipment are stated at cost. Depreciation
and amortization are computed over estimated useful lives that are reviewed
periodically. In connection with this review we consider changes in the economic
environment, technological advances, and management's assessment of future
revenue potential and a review of the estimated useful lives of the various
assets.
Results of Operations
Three months ended September 30, 2006 to three months ended September 30, 2005.
The following discussion compares the Company's results of operations for the
three months ended September 30, 2006 with those for the three months ended
September 30, 2005. The Company's financial statements and notes thereto
included elsewhere in this quarterly report contain detailed information that
should be referred to in conjunction with the following discussion.
Revenues. For the three months ended September 30, 2006, revenues were
$1,499,200, 89% 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 8% of revenues, and sports marketing revenues
represented 3% of revenues. Gross sales of the Company's own product were
$118,700. Fan experience, Fan club membership and related merchandise sales
revenues were $1,338,300, and sports marketing revenues were $37,900. Other
revenues were $4,100, less than 1% of gross revenues, during the three months
ended September 30, 2006. Management anticipates increases from fan club
memberships, merchandise, and fan experiences from tours, products and services
related to several performing artists during the fourth quarter of 2006.
The Company's third quarter 2006 revenues represent an increase of $1,006,800,
or 204%, from the third quarter of 2005, in which revenue was $492,400. For the
three months ended September 30, 2005, sales of the Company's product were
$288,200, or 59% of gross sales, fan club membership and related merchandise
sales revenues were $153,200, 31% of gross revenues, sports marketing revenues
were $42,500, or 9% of gross revenues, and other revenues were $8,400, or 2% of
gross revenues.
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The reason for the increase in revenues was greater revenues related to fan club
memberships, merchandise, and fan experiences of $1,185,200, offset by decreases
in sports marketing services of $4,600 and sales of Company owned product of
approximately $169,500 from the same period in 2005. Gross profit from Company
owned product sales for the three months ended September 30, 2006 was $71,900,
$61,300 more than in 2005. The increased gross profit margin is a result of a
management decision during the third quarter of 2005 to liquidate slower moving
inventories while in 2006 goods were being sold at more normal margins.
Operating Expenses. Total operating expenses for the three months ended
September 30, 2006 were $1,096,300 compared to $1,108,100 for the corresponding
period in 2005, a decrease of $11,800.
Sales, general and administrative ("SG&A") expenses for the three months ended
September 30, 2006 were $942,900, compared to $969,300 for the three months
ended September 30, 2005. The decrease of $26,400 in SG&A costs includes
decreases in depreciation and amortization of $206,500, as certain assets became
fully depreciated during 2006 and 2005 and other costs of $43,300, offset by
increases in payroll and related costs of $49,800, professional fees $97,100,
rents of $16,500, travel of $28,700, postage and shipping of $16,800, and credit
card fees of $14,500. The travel, credit card commissions and postage and
shipping increases are all principally attributable to tours of performing
artists.
Costs associated with planning, maintaining and operating our web sites for the
three months ended September 30, 2006 increased by $14,600 from 2005. This
increase is due primarily to increases in payroll of $4,000 and computer
expenses of $21,000 offset by decreases in consulting costs of $10,000.
Interest Expense. For the three months ended September 30, 2006, the Company
incurred $6,600 of interest charges, compared to interest charges incurred of
$80,400 for the corresponding period in 2005, a decrease of $73,800. All of this
decrease is attributable to settlement of convertible debt during the second
quarter of 2006.
Other income (expense). Other expense for the three months ended September 30,
2006 includes $266,300 of realized and unrealized depreciation in the fair value
of call options received in the 2005 settlement with Leslie Rotman. For the
three months ended September 30, 2005 other income includes $32,400 of gain
associated with realized and unrealized appreciation in the fair value of the
call options.
Net Profit (loss). The Company realized a net loss for the three months ended
September 30, 2006 of $913,600 compared to a net loss of $1,018,300 for the
three months ended September 30, 2005. Net profit for the three months ended
September 30, 2006 was less than $.01 per share while the net loss for the
period ended September 30, 2005 was $.01 per share.
Inflation. The Company believes that inflation has not had a material effect on
its results of operations.
Nine months ended September 30, 2006 to nine months ended September 30, 2005.
The following discussion compares the Company's results of operations for the
nine months ended September 30, 2006 with those for the nine months ended
September 30, 2005. The Company's financial statements and notes thereto
included elsewhere in this quarterly report contain detailed information that
should be referred to in conjunction with the following discussion.
Revenues. For the nine months ended September 30, 2006, revenues were
$4,910,400, 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
$294,100. Fan experience, Fan club
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membership and related merchandise sales revenues were $4,419,400, and sports
marketing revenues were $169,800. Other revenues were $27,100, 1% of gross
revenues, during the nine months ended September 30, 2006. Management
anticipates increases from fan club memberships, merchandise, and fan
experiences from tours, products and services related to several other
performing artists during the fourth quarter of 2006.
The Company's 2006 revenues represent an increase of approximately $2,925,000,
or 147%, from the comparable period in 2005, in which revenue was $1,985,400.
For the nine months ended September 30, 2005, sales of the Company's product
were $1,122,600, or 56% of gross sales, fan club membership and related
merchandise sales revenues were $558,900, 28% of gross revenues, sports
marketing revenues were $272,600, or 14% of gross revenues, and other revenues
were $31,400, or 2% of gross revenues.
The reason for the increase in revenues was a $3,860,500 increase related to the
tours of performing artists, offset by lower revenues related to sports
marketing services of $102,800 and lower sales of Company owned product of
approximately $828,500 from the same period in 2005. Gross profit from Company
owned product sales for the nine months ended September 30, 2006 was
approximately $111,800, $214,600 less than in 2005. Since gross margin
percentages on Company owned product were slightly higher in 2006 and sales of
Company owned product were $828,500 lower in the nine months ended September 30,
2006, the Company produced $214,600 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.
Operating Expenses. Total operating expenses for the nine months ended September
30, 2006 were $3,130,000 compared to $3,408,700 for the corresponding period in
2005, a decrease of $278,700.
Sales, general and administrative ("SG&A") expenses for the nine months ended
September 30, 2006 were $2,723,400, compared to $2,982,100 for the nine months
ended September 30, 2005. The decrease of $258,700 in SG&A costs includes
decreases in payroll and related costs of $33,700, depreciation and amortization
of $628,300 as certain assets became fully depreciated during 2006 and 2005,
offset by increases in professional fees of $146,300, travel of $66,600, credit
card commissions of $61,400, postage and shipping costs of $63,100, and rents of
$24,500. The travel, credit card commissions and postage and shipping increases
are all principally attributable to tours of performing artists.
Costs associated with planning, maintaining and operating our web sites for the
nine months ended September 30, 2006 decreased by $19,900 from 2005. This
decrease is due primarily to a decrease in consulting costs of $97,000, offset
by increases in depreciation and amortization of $38,900, and computer costs of
$37,800.
Interest Expense. For the nine months ended September 30, 2006, the Company
incurred approximately $15,400 of interest charges compared to interest charges
of $252,700 for the corresponding period in 2005, a decrease of $237,300.
$60,000 of the decrease is attributable to a settlement with Augustine Fund with
respect to amounts owed, $91,200 to lower amortization of beneficial conversion
features, and the balance to lower balances of interest-bearing debt in 2006.
Other income. Other income for the nine months ended September 30, 2006 includes
$309,000 of realized and unrealized appreciation in the fair value of call
options received in the 2005 settlement with Leslie Rotman. For the nine months
ended September 30, 2005 other income includes $470,500 of gain associated with
the settlement with Leslie Rotman, offset by $113,100 of realized and unrealized
depreciation in the fair value of the call options.
-17-
Net Loss. The Company realized a net loss for the nine months ended September
30, 2006 of $1,141,100 compared to a net loss of $2,459,300 for the nine months
ended September 30, 2005. The 2006 loss represented $.01 per share, while the
2005 loss represented $.02 per share.
Assets
At September 30, 2006, total assets of the Company were $3,407,800 compared to
$4,229,600 at December 31, 2005. The decrease was primarily due to lower cash
and deferred expenses of $866,300 associated with entertainment events to be
held during the subsequent periods. The Company also reports $578,500 lower
related liabilities, in the form of deferred revenues, at September 30, 2006
than at December 31, 2005.
Operating Cash Flows
A summarized reconciliation of the Company's net losses to cash provided by
(used in) operating activities for the nine months ended September 30, 2006 and
2005 is as follows:
2006 2005
---- ----
Net loss $(1,141,100) $(2,459,300)
Depreciation and amortization 115,600 704,900
Amortization of beneficial conversion discount
and debt discount -- 91,200
Common stock issued in payment of services 960,900 1,272,000
Common stock issued in payment of interest 137,800 137,200
Receipt of call options, net of related (gains)
losses (309,000) (357,400)
Net current assets and liabilities associated with
advance ticketing (502,300) 686,700
Changes in current assets and liabilities (224,100) 185,600
----------- -----------
Net cash used in operating activities $ (962,200) $ 260,900
=========== ===========
Working Capital and Liquidity
The Company had cash and cash equivalents of $713,000 at September 30, 2006,
compared to $1,503,000 at December 31, 2005. The Company had $164,800 of working
capital at September 30, 2006 compared to $152,300 at December 31, 2005. At
September 30, 2006 current liabilities were $3,008,300 compared to $3,787,700 at
December 31, 2005. Current liabilities decreased at September 30, 2006 compared
to December 31, 2005 primarily due to decreases in deferred revenues of $578,500
and accrued expenses of $166,000.
The Company's independent auditors have issued a going concern opinion on the
Company's consolidated financial statements for the year ended December 31,
2005. 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 later in 2006 from its celebrity services products
and websites, and similar services to other entities; including memberships, fan
experiences and ticketing, appearances, website development and hosting, and
merchandise sales from both existing and new clients. In addition, pending
receipt of the formal written notice of allowance of the Company's patent
application, the Company will pursue a variety of possible revenue streams from
its "AuctionInc" platform and patent which hosts a suite of management tools and
enhanced shipping calculator solutions for small ecommerce enterprises. Subject
to the discussion below, management believes that the
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Company has sufficient cash commitments to fund operations during the next 12
months. These commitments include call options for approximately 975,000 shares
of common stock, which, once assigned by the Company, can generate between
$100,000 and $625,000 (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 Quarterly Report on Form 10-QSB contains certain forward-looking statements
(within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934) regarding the Company and its business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements in this report. Additionally, statements concerning
future matters such as the development of new services, technology enhancements,
purchase of equipment, credit arrangements, possible changes in legislation and
other statements regarding matters that are not historical are forward-looking
statements.
Although forward-looking statements in this quarterly report reflect the good
faith judgment of the Company's management, such statements can only be based on
facts and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks, contingencies and uncertainties, and
actual results and outcomes may differ materially from results and outcomes
discussed in this report. Although the Company believes that its plans,
intentions and expectations reflected in these forward-looking statements are
reasonable, the Company can give no assurance that its plans, intentions or
expectations will be achieved. For a more complete discussion of these risk
factors, see Exhibit 99, "Risk Factors", in the Company's Form 10-KSB for the
fiscal year ended December 31, 2005.
For example, the Company's ability to achieve positive cash flow and to become
profitable may be adversely affected as a result of a number of factors that
could thwart its efforts. These factors include the Company's inability to
successfully implement the Company's business and revenue model, tour or event
cancellations, higher costs than anticipated, the Company's inability to sell
its products and services to a sufficient number of customers, the introduction
of competing products by others, the Company's failure to attract sufficient
interest in and traffic to its sites, the Company's inability to complete
development of its sites, the failure of the Company's operating systems, and
the Company's inability to increase its revenues as rapidly as anticipated. If
the Company is not profitable in the future, it will not be able to continue its
business operations.
ITEM 3. CONTROLS AND PROCEDURES
The Company's management, including the President of the Company and the Chief
Financial Officer of the Company, has evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Based upon their evaluation, the principal executive officer
and principal 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.
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There were no changes in the Company's internal control over financial reporting
during the last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No disclosure.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
No disclosure.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No disclosure.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No disclosure
ITEM 5. OTHER INFORMATION
No disclosure
ITEM 6. EXHIBITS
31.1 CEO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
31.2 CFO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
32 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
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In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 14, 2006 PAID, INC.
Registrant
/s/ Gregory Rotman
----------------------------------------
Gregory Rotman, President
/s/ Richard Rotman
----------------------------------------
Richard Rotman, Chief Financial Officer,
Vice President and Secretary
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LIST OF EXHIBITS
Exhibit No. Description
-------------------------
31.1 CEO Certification required under Section 302 of Sarbanes-Oxley Act
of 2002
31.2 CFO Certification required under Section 302 of Sarbanes-Oxley Act
of 2002
32 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
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