PAID INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the fiscal year ended December 31, 2009 or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from ________________ to ________________
Commission file number:
0-28720
Paid, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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73-1479833
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification Number)
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4 Brussels Street
Worcester, Massachusetts 01610
(Address of Principal Executive Offices)(Zip Code)
(617) 861
-6050
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, $0.001 Par Value
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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No
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Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Yes
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No
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated Filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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The aggregate market value of the common stock held by non-affiliates of the registrant based on the last sale price of such stock as reported by the Over-the-Counter Bulletin Board on June 30, 2009 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $83,960,247.
As of March 10, 2010, the registrant had 268,908,415 shares of Common Stock outstanding.
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.
Paid
, Inc.
Form 10-K
For the Year Ended December 31, 2009
Table of Contents
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PART I
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Item 1.
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1
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Item 1A.
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6
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Item 1B.
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18
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Item 2.
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18
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Item 3.
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18
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Item 4.
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18
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PART II
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Item 5.
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Item 6.
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21
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Item 7.
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22
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Item 7A.
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26
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Item 8.
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27
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Item 9.
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27
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Item 9A.
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27
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Item 9A(T)
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34
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Item 9B.
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34
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PART III
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Item 10.
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35
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Item 11.
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37
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Item 12.
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41
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Item 13.
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42
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Item 14.
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43
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PART IV
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Item 15.
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44
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45
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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", "could", "may", "should", "will", "would", 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, purchases 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 be based only on facts and factors currently known by the Company. Further, 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. Thus, 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 Item 1A, "Risk Factors".
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.
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 review carefully and to 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.
Paid, Inc. (the “Company”) was incorporated in Delaware 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. Information contained in the Company's website 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 (617) 861-6050.
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the Securities and Exchange Commission (the “SEC”). These reports, any amendments to these reports, proxy and information statements and certain other documents we file with the SEC are available through the SEC’s website at www.sec.gov or free of charge on our website as soon as reasonably practicable after we file the documents with the SEC. The public may also read and copy these reports and any other materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
BUSINESS
Our Business
The Company’s primary focus is to provide brand-related services to businesses and celebrity clients with brand management, brand marketing, product merchandising, website design, development and hosting, and authentication services for the entertainment, sports and collectible industries. We offer entertainers and celebrity athletes comprehensive web-presence related services supporting and managing clients’ official websites and fan-community services including e-commerce, VIP ticketing, live event fan experiences, user-generated content, client content publishing and distribution, fan forums, social network management and social media marketing. Paid’s brand support services also include design and production of print, audio and video promotion marketing materials for client branded products and events. In addition to sourcing, designing and marketing, Paid sells merchandise for celebrities, through official fan website stores and other web-based outlets as well as on-tour and retail brick and mortar. Our celebrity services proprietary content management system and our use of both off-the-shelf best of class and proprietary software applications provides an opportunity for our clients to offer more information, merchandise and experiences to their customers and communities while optimizing our ability to capture customer data and build robust customer data-bases for them. We provide business management tools for online retailers, through AuctionInc, which is home to our patented 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.
All the sales for our celebrity and entertainment services, other than retail and tour merchandising, 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 a concert or other 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 also include video production, marketing, management, sponsorship, mobile marketing, and website development and management. We provide these services for artists such as Aerosmith, Rockapella, Moody Blues, The Professional Bull Riders, Stand up to Cancer, Deep Purple and others.
To assist with the inventory management and order processing the Company uses the AuctionInc platform for reducing order processing time, increasing sales and improving customer service. The AuctionInc system was originally designed to assist and improve just the Company’s sales, 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 Company’s 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 in April of 2001. The Company obtained a patent on the shipping calculator in January 2008. The product is modular based and we continue 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 auction sales, 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.
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 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. Artists can announce tours or other news, sell premium tickets to fan club members, sell merchandise, and other fan experiences. Viral communities and viral marketing are a 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.
Business Strategy
During 2009 we experienced continued expansion of our celebrity web-hosting and fan community programs. We believe there will be an increase in online communities that will create an opportunity for more celebrity web-hosting and fan community 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, 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:
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Increase the number of celebrity services 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.
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Providing our services in an a la carte format will enable more clients to utilize our platform and services.
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Expand into new services being offered that will generate larger partnerships and marketing opportunities for our clients.
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Increase the general awareness of our Shipping Calculators and continuing to offer cutting edge technology and services in the industry.
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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.
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Create a program where Paid works closely with all their service partners and supports their platforms by utilizing our core services.
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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.
In providing our services, our business plan includes the payment of advances to some clients on merchandise and VIP programs and appearances, and recoup those advances from the artists’ and celebrities’ share of profits, as agreed upon in any agreement with the artist or celebrity.
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 in Item 1A. 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.
Promoting and marketing Paid’s celebrity services will continue by using various mediums of marketing; “adword” campaigns, social media marketing, traditional print methods, and industry trade shows. However, as our celebrity services continue to gain exposure, we have had 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 2010. In the past, 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 may 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” included in Item 1A. Therefore, we have no guarantees and can provide no assurances that our plans will be successful.
Revenue Sources
In 2009, 97% of our revenues were derived from our celebrity services, fan club management, and ticketing and fan experiences. We also generated retail revenues from the sale of autographed merchandise and collectibles. Adding to these revenues were marketing opportunities for athletes and celebrity clients.
As additional services, we currently provide web hosting 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.
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 do not accept the services we provide, if costs are higher than anticipated, or if revenues do not increase as rapidly as hoped, we may not be able to maintain positive cash flow. There are a number of factors that may impact our plans and inhibit our success. See “Risk Factors” included in Item 1A. 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 Live Nation, Ticketmaster, Music Today, UltraStar, and FanAsylum, each of whom offers 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.
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 and adversely affect our business, results of operations and financial condition.
Intellectual Property
Our web hosting software program, AuctionInc software suite, is proprietary. We received a patent related to our online action shipping calculator in January 2008. We do not have any other 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 “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 20 full time equivalents. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel.
Subsidiaries
The Company merged its only subsidiary, Rotman Collectibles, Inc., into it in December 2007. The Company currently has no subsidiaries.
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.
You should carefully consider the risks
and uncertainties described below before deciding to invest in shares of our common stock. If
any of the following risks or uncertainties actually occurs, our business, prospects,
financial condition and operating results would likely suffer, possibly materially.
In that event, the market price of our common stock could decline and you could lose
all or part of your investment.
Risks Relating to the Company
We have experienced significant operating losses.
Our business and prospects must be considered in light of the risks, expenses and difficulties that are inherent in our business. The risks include:
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our ability to anticipate and adapt to a developing market;
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our ability to attract new businesses in the entertainment market for our brand-related services;
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our ability to engage musical artists, celebrities and athletes, to service a sustainable fan base for each musical artist, celebrity, and athlete, and to sell merchandise, VIP tickets, fan experiences and other services;
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dependence upon the level of hits to our artists’ sites and on sites that we use to sell our products and services;
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the popularity and success of the artists who receive our services;
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artist tour activities and fan attendance;
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our ability to recoup any advance paid to an artist or celebrity for merchandise, artist appearances, and VIP programs;
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our ability to engage organizations for web site development and sponsorship;
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our ability to market, license and enforce our patented shipping calculator; and
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development of equal or superior Internet portals, auctions and related services by competitors.
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To address these risks, we must, among other things, successfully market celebrities, musical artists, and service their fan base, increase traffic to their web sites, maintain our customer base, attract significant numbers of new customers and clients, respond to competitive developments, implement and execute successfully our business strategy and continue to develop and upgrade our technologies and customer services. We cannot offer any assurances that that we will be successful in addressing these risks.
We incurred substantial losses each year since 1999. There can be no assurance that we will be profitable in the future.
There is substantial doubt as to our ability to continue as a going concern, and our business has a high risk of failure.
Due to our recurring losses from operations and a working capital deficiency, our independent registered public accounting firm has raised substantial doubt as to our ability to continue as a going concern. The success of our business operations will depend upon our ability to increase revenues and gross profits, and obtain adequate financing, among other things. If we are unable to obtain an infusion of additional capital or generate substantial profit, then our business will fail and our stock will be worthless.
Our capital is limited and we may need additional financing to continue operations.
We require substantial working capital to fund our business. Additional funds may be necessary for our Company to continue its operations and to pay recoupable advances for merchandise, artist appearances, and VIP programs. If we are unable to obtain financing in the amounts desired and on acceptable terms, or at all, we could be required to reduce significantly the scope of our expenditures or limit our ability to engage an artist, which would have a material adverse effect on our business potential and the market price of our common stock. If we raise additional funds by issuing equity securities, our shareholders will be further diluted. Based on our cash position as of December 31, 2009, we may need significant additional capital to fund our anticipated operating expenses over the next 12 months. If we require additional funding, there can be no assurances that the financing will be obtained, or if obtained, that funding will be obtained on reasonably acceptable terms.
We are unable to guarantee that the marketplace will accept our software products.
The software markets are characterized by rapid technological change, frequent new product enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. Our software products could be rendered obsolete if products based on new technologies are introduced or new industry standards emerge, or if we do not obtain adequate intellectual property protection. We are unable to provide any assurances that the marketplace will accept our software products and services, or that we will be able to provide these products and services at a profit.
Our operating results are unpredictable and are expected to fluctuate in the future.
You should not rely on the results for any period as an indication of future performance. Our operating results are unpredictable and are expected to fluctuate in the future due to a number of factors, many of which are outside our control. These factors beyond our control include:
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our ability to engage well known celebrities, musical artists, and businesses in the entertainment industry with name brands for merchandise sales, web site and fan management, as well as other entities for web site development and sponsorship;
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our ability to engage celebrities for ticket sales services;
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our ability to significantly increase our customer base and traffic to our web sites, manage our inventory mix and the mix of products offered, liquidate our inventory in a timely manner, maintain gross margins, and maintain customer satisfaction;
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our ability to market and sell our software products;
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the availability and pricing of merchandise from vendors;
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consumer confidence in encrypted transactions in the Internet environment;
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the timing, cost and availability of advertising on our web sites and other entities' web sites;
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popularity of celebrities and sports figures;
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the amount and timing of costs related to expansion of our operations and the hiring of experienced personnel;
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the announcement or introduction of new types of services or products by our competitors;
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technical difficulties with respect to consumer and fan use of our web sites;
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our ability to make acquisitions of complementary business and technologies;
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governmental regulation by federal or local governments; and
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general economic conditions and economic conditions specific to the Internet and electronic commerce.
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As a strategic response to changes in the competitive environment, we may from time to time make certain service, marketing or supply decisions or acquisitions that could have a material adverse effect on our results of operations and financial condition. In 2009, 97% of our revenues were derived from our celebrity services, fan club management, and ticketing and fan experiences. We also generated retail revenues from the sale of autographed merchandise and collectibles. Adding to these revenues were marketing opportunities for athletes and celebrity clients. Our success depends upon our ability to sign up additional artists and celebrities that use our services.
The successful operation of our business depends upon the supply of critical technology elements from other third parties, including our Internet service provider and technology licensors.
Our operations depend on a number of third parties for Internet/telecom access, delivery services, and software services. We have limited control over these third parties and no long-term relationships with any of them. We do not own a gateway onto the Internet, but instead rely on an Internet service provider to connect our web sites to the Internet. From time to time, we have experienced temporary interruptions in our web sites’ connection and also our telecommunications access. We license technology and related databases from third parties for certain elements of our properties. Furthermore, we are dependent on hardware suppliers for prompt delivery, installation, and service of servers and other equipment to deliver our products and services. Our internally developed software depends on an operating system, database and server software that was developed and produced by and licensed from third parties. We have from time to time discovered errors and defects in the software from these third parties and, in part, rely on these third parties to correct these errors and defects in a timely manner. Any errors, failures, interruptions, or delays experienced in connection with these third-party technologies and information services could negatively impact our relationship with users and adversely affect our brand and our business, and could expose us to liabilities to third parties.
We rely on third parties for our order fulfillment, and failures on the part of these third parties could harm our business.
We use overnight courier and delivery services for substantially all of our merchandise and products. We use third party manufacturers to produce our merchandise. Should these services be unable to deliver our products for a sustained time period as a result of a strike, war, act of terrorism, business failure, or other reason, our business, results of operations and financial condition would be adversely affected. If, due to computer systems failures or other problems related to these third-party service providers, we experience any delays in shipment, our business, results of operations and financial condition would be adversely affected.
Our failure to manage growth could place a significant strain on our management, operational and financial resources.
Growth places a significant strain on our management, operational and financial resources, and has placed significant demands on our management, which currently includes only two executive officers. In order to manage growth, we will be required to expand existing operations, particularly with respect to customer service and merchandising, to improve existing and implement new operational, financial and inventory systems, procedures and controls.
We have experienced a significant strain on our resources because of:
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the need to manage relationships with our clients, including musical artists, businesses in the entertainment industry with name brands, sports figures and other celebrities;
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the need to manage relationships with various technology licensors, advertisers, other web sites and services, Internet service providers and other third parties;
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difficulties in hiring and retaining skilled personnel necessary to support our businesses;
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the need to train and manage a growing employee base; and
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pressures for the continued development of our financial and information management systems.
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Difficulties we may encounter in dealing successfully with the above risks could seriously harm our operations. We cannot offer any assurance that our current personnel, systems, procedures and controls will be adequate to support our future operations or that management will be able to identify, hire, train, retain, motivate and manage required personnel.
If our acquisitions are not successful, or if we are not able to structure future acquisitions in a financially efficient manner, there could be an adverse effect on our business and operations.
If appropriate opportunities present themselves, we may acquire businesses, technologies, services or products that we believe will help us develop and expand our business. The process of integrating an acquired business, technology, service or product may result in operating difficulties and expenditures which we cannot anticipate and may absorb significant management attention that would otherwise be available for further development of our existing business. Moreover, the anticipated benefits of any acquisition may not be realized. Any future acquisitions of other businesses, technologies, services or products might require us to obtain additional equity or debt financing, which might not be available to us on favorable terms or at all, and might be dilutive. Additionally, we may not be able to successfully identify, negotiate or finance future acquisitions or to integrate acquisitions with our current business.
Our Company’s success still depends upon the continued services of its current management and other relationships.
We are substantially dependent on the continued services of our management, Gregory Rotman, our President and Chief Executive Officer; and Richard Rotman, our Chief Financial Officer, Vice President, and Secretary, and with the President of our celebrity services group, Keith Garde. These individuals have acquired specialized knowledge and skills with respect to our Company and our operations. As a result, if any of these individuals were to leave our Company, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary training and experience. We do not maintain any key person life insurance and these individuals have not executed employment agreements with the Company.
Loss of our key relationships, management and other personnel could result in the loss of key tours.
The live music business is uniquely dependent upon personal relationships, as promoters and executives leverage their existing network of relationships with artists, agents and managers in order to secure the rights to the live music tours and events which are critical to our success. Due to the importance of those industry contacts to our business, the loss of any of our officers, relationships or other key personnel could adversely affect our operations.
Our Company’s success will depend on our ability to attract and retain qualified personnel.
We believe that our future success will depend upon our ability to identify, attract, hire, train, motivate and retain other highly skilled managerial, merchandising, engineering, technical consulting, marketing and customer service personnel. We cannot offer assurances that we will be successful in attracting, assimilating or retaining the necessary personnel, and the failure to do so could have a material adverse effect on our business.
Our success is dependent upon the marketability of our services and our software products.
We have devoted a substantial amount of resources to the development of AuctionInc software. Our future financial performance could depend on the success of AuctionInc. We cannot yet assess AuctionInc’s market acceptance or predict with accuracy the amount of revenue it will generate, or whether the revenue will be significant. AuctionInc consists of a suite of software management tools. Some of these management tools have not yet been fully developed. New products can require long development and testing periods. Significant delays in new product releases or significant problems in installing or implementing new software products could seriously damage our business. We have in the past experienced delays in the scheduled introduction of new and enhanced products and may experience similar delays in the future.
Our success depends upon market awareness of our brand.
Development and awareness of our Company will depend largely on our success in increasing our customer and client base. If vendors do not perceive us as an effective marketing and sales channel for their merchandise, or consumers do not perceive our Company as offering an entertaining and desirable way to purchase merchandise, we may be unsuccessful in promoting and maintaining our brand. If celebrities, musical artists or sports figures do not recognize or trust our name, they will be less likely to engage us for our services. To attract and retain customers and to promote and maintain our Company in response to competitive pressures, we may find it necessary to increase our marketing, networking, and advertising budgets and otherwise to increase substantially our financial commitment to creating and maintaining brand loyalty among vendors, clients and consumers. We will need to continue to devote substantial financial and other resources to increase and maintain the awareness of our online brands among web site users, advertisers and e-commerce entities that we have advertising relationships with through:
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web advertising and marketing;
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traditional media advertising campaigns; and
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providing a high quality user experience.
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Our results of operations could be seriously harmed if our investment of financial and other resources, in an attempt to achieve or maintain a leading position in Internet commerce or to promote and maintain our brand, does not generate a corresponding increase in net revenue, or if the expense of developing and promoting our online brands becomes excessive.
System failures could result in interruptions in our service, which could harm our business.
A key element of our strategy is to generate a high volume of traffic to, and use of, our web sites, and the web sites that we manage. Accordingly, the satisfactory performance, reliability and availability of these web sites, transaction processing systems, network infrastructure and delivery and shipping systems are critical to our operating results, as well as our reputation and our ability to attract and retain customers and maintain adequate customer service levels.
We periodically have experienced minor systems interruptions, including Internet disruptions. Some of the interruptions are due to upgrading our equipment to increase speed and reliability. During these upgrades the outages have generally lasted for a few hours, and even longer, on occasion. Any systems interruptions, including Internet disruptions, which result in the unavailability of these web sites or reduced order fulfillment performance would reduce the volume of goods sold, which could harm our business. In addition to placing increased burdens on our engineering staff, these outages create a large number of user questions and complaints that need to be responded to by our personnel. Although we have taken steps to increase the reliability and redundancy of our system, these steps are expensive, reduce our margins, and may not be successful in reducing the frequency or duration of unscheduled downtime. We cannot offer assurances that:
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we will be able to accurately project the rate or timing of increases if any, in the use of our web sites;
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we will be able to expand and upgrade on a timely basis our systems and infrastructure to accommodate increases in the use of these web sites;
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we will have uninterrupted access to the Internet;
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our users will be able to reach these web sites;
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communications via these web sites will be secure;
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we or our suppliers' network will be able to timely achieve or maintain a sufficiently high capacity of data transmission, especially if the customer usage of these web sites increases.
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Any disruption in the Internet access to our web sites or any systems failures could significantly reduce consumer demand for our services, diminish the level of traffic to our web sites, impair our reputation and reduce our commerce and advertising revenues.
We do not have redundant systems, a disaster recovery plan or alternate providers with respect to our communications hardware and computer hardware.
Our main servers are located within 45 minutes from our corporate headquarters. Our Massachusetts facilities are not protected from fire, flood, power loss, telecommunication failure, break-in and similar events. We do not presently have fully redundant systems, a formal disaster recovery plan or alternative providers of hosting services. A substantial interruption in these systems would have a material adverse effect on our business, results of operations and financial condition.
Our servers are also vulnerable to computer viruses, physical or electronic break-ins, attempts by third parties to deliberately exceed the capacity of our systems and similar disruptive problems. Computer viruses, break-ins or other problems caused by third parties could lead to interruptions, delays, loss of data or cessation in service to users of our services and products and could seriously harm our business and results of operations.
Some of our future revenues depend upon the continued consumer interest in the collectibles industry, and demand for the types of collectibles that are listed for sales.
A decline in the popularity of, or demand for, certain collectibles or other items sold by us could reduce the overall volume of transactions, resulting in reduced revenues. In addition, certain consumer “fads” may temporarily inflate the volume of certain types of items listed by us, placing a significant strain upon our infrastructure and transaction capacity. These trends may also cause fluctuations in our operating results from one quarter to the next. Any decline in demand for the goods or services offered through our collectibles portal as a result of changes in consumer trends could adversely affect on our business.
There are certain provisions of Delaware law that could have anti-takeover effects.
Certain provisions of Delaware law and our Certificate of Incorporation, and Bylaws could make an acquisition of our Company by means of a tender offer, a proxy contest or otherwise, and the removal of our incumbent officers and directors more difficult. Our Certificate of Incorporation and Bylaws do not provide for cumulative voting in the election of directors. Our Bylaws include advance notice requirements for the submission by stockholders of nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at a meeting.
We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”), which will prohibit us from engaging in a “business combination” with an “interested stockholder” for three years after the date of the transaction in which the person became an interested stockholder unless the business combination is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior to the determination of interested stockholder status, did own) 15% or more of a corporation's voting stock. The existence of this provision would be expected to have an anti-takeover effect with respect to transactions not approved in advance by the Board of Directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders. Section 203 could adversely affect the ability of stockholders to benefit from certain transactions which are opposed by the Board or by stockholders owning 15% of our common stock, even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.
Our success is dependent in part on our ability to obtain and maintain proprietary protection for our technologies and processes.
Our most important intellectual property relates to the software for our AuctionInc products, our web-hosting services and our research center. We do not have any patents or patent applications for our designs or innovations, except for our patent with respect to our online auction shipping calculator, one of our software products. 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.
As part of our confidentiality procedures, we generally enter into agreements with our employees and consultants and limit access to and distribution of our software, documentation and other proprietary information. We cannot offer assurances that the steps we have taken will prevent misappropriation of our technology or that agreements entered into for that purpose will be enforceable. Notwithstanding the precautions we have taken, it might be possible for a third party to copy or otherwise obtain and use our software or other proprietary information without authorization or to develop similar software independently. Policing unauthorized use of our technology is difficult, particularly because the global nature of the Internet makes it difficult to control the ultimate destination or security of software or other data transmitted. The laws of other countries may afford our Company little or no effective protection of its intellectual property. Because our success in part relies upon our technologies, if proper protection is not available or can be circumvented, our business may suffer.
Intellectual property infringement claims would harm our business.
We may in the future receive notices from third parties claiming infringement by our software or other aspects of our business. Any future claim, with or without merit, could result in significant litigation costs and diversion of resources, including the attention of management, and require us to enter into royalty and licensing agreements, which could have a material adverse effect on our business, results of operations and financial condition. Royalty and licensing agreements, if required, may not be available on terms acceptable to the Company or at all. In the future, we may also need to file lawsuits to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. This litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, results of operations and financial condition.
Our success is dependent on licensed technologies.
We rely on a variety of technologies that we license from third parties. We license some of our software from third party vendors. We have two perpetual licenses for the proprietary software eCMS and acquired the source codes for the software. We also rely on encryption and authentication technology licensed from a third party through an online user agreement to provide the security and authentication necessary to effect secure transmission of confidential information.
We cannot make any assurances that these third-party technology licenses will continue to be available to us on commercially reasonable terms. Although no single software vendor licensor provides us with irreplaceable software, the termination of a license and the need to obtain and install new software on our systems would interrupt our operations. Our inability to maintain or obtain upgrades to any of these technology licenses could result in delays in completing our proprietary software enhancements and new developments until equivalent technology could be identified, licensed or developed and integrated. These delays would materially and adversely affect our business, results of operations and financial condition.
We may be exposed to liability for content retrieved from our web sites.
We may be exposed to liability for content retrieved from our web sites. Our exposure to liability from providing content on the Internet is currently uncertain. Due to third party use of information and content downloaded from our web sites, we may be subject to claims relating to:
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the content and publication of various materials based on defamation, libel, negligence, personal injury and other legal theories;
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copyright, trademark or patent infringement and wrongful action due to the actions of third parties; and
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other theories based on the nature and content of online materials made available through our web sites.
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Our exposure to any related liability could result in us incurring significant costs and could drain our financial and other resources. We do not maintain insurance specifically covering these claims. Liability or alleged liability could further harm our business by diverting the attention and resources of our management and by damaging our reputation in our industry and with our customers.
The Company may be exposed to potential risks relating to our significant deficiencies and material weaknesses in our internal controls over financial reporting.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting in their annual reports, including Form 10-K. In addition, the independent registered public accounting firm auditing a company’s financial statements also must attest to and report on the effectiveness of the Company’s internal control over financial reporting as well as the operating effectiveness of the Company’s internal controls. We have identified significant deficiencies and material weaknesses in our internal controls that we have taken steps to remediate these weaknesses as cost-effectively as possible. Based on these significant deficiencies and material weaknesses, investors and others may lose confidence in the reliability of our financial statements and our ability to obtain equity or debt financing could suffer.
Risks Associated With Our Industry
The market for online services is intensely competitive with low barriers to entry.
The market for Internet products and services is very competitive. Barriers to entry are relatively low, and current and new competitors can launch new sites at a relatively low cost using commercially available software. We currently or potentially compete with a variety of other companies depending on the type of merchandise and sales format offered to customers. These competitors include:
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other companies that manage celebrity web sites or that sell concert tour tickets online, such as Live Nation/Ticketmaster, Music Today, UltraStar, and FanAsylum;
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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, AOL, and Shopping.com; and
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a variety of other companies that offer merchandise similar to ours but through physical auctions and with which we compete for sources of supply.
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We believe that the principal competitive factors affecting our market are the ability to engage celebrities, musical artists, businesses in the entertainment industry with name brands, and sports figures, the tour activities of our musical artists, and ability to attract customers at favorable customer acquisition costs, operate the web sites in an uninterrupted manner and with acceptable speed, provide effective customer service and obtain merchandise at satisfactory prices. We cannot offer any assurances that we can maintain our competitive position against current and potential competitors, especially those with greater financial, marketing, customer support, technical and other resources.
Current competitors have established or may establish cooperative relationships among themselves or directly with celebrities, musical artists and sports figures, and with vendors to obtain exclusive or semi-exclusive sources of merchandise. Accordingly, it is possible that new competitors or alliances may emerge and rapidly acquire market share. 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 our business, results of operations and financial condition. Many of our current and potential competitors have significantly greater financial, marketing, customer support, technical and other resources than the Company. As a result, these competitors may be able to secure merchandise from vendors on more favorable terms than we can, and they may be able to respond more quickly to changes in customer preferences or to devote greater resources to the development, promotion and sale of their merchandise than we can.
Our success in providing services and merchandise depends upon the popularity of the musical artist, celebrity, athlete and other entities that we serve.
We provide a full line of services for musical artists, celebrities and athletes, as well as other entities with name brands, including sales of merchandise, online ticketing and fan experiences, and a fan web site. Our success depends in part on the level of popularity of a particular artist, the depth of the fan base, and the continued popularity of the artist. The Company can be adversely affected, and incur substantial loss of revenue, if an entire tour, or one or more shows within a tour, is terminated due to lack of interest, illness, death, or for any other reason. In the event that a show or tour is cancelled or postponed, the Company may incur losses for that show, or fail to recoup any advance monies paid to the artist. In addition, we may not be able to obtain sufficient insurance coverage at reasonable costs to adequately protect us against the death, disability or other failure of such artists to continue engaging in revenue-generating activities under those arrangements.
Any inability to fund the significant up-front cash requirements associated with our touring business could result in the loss of key tours.
To secure a tour, including global tours by major artists, or to establish a relationship, we are often required to advance funds to the artist or celebrity prior to the sale of any tickets for that tour. If we do not have sufficient cash on hand or capacity under any credit or cash to advance the necessary funds for any given tour, we would not be able to secure the artist and our revenue would be negatively impacted.
The live entertainment business is highly sensitive to public tastes and dependent on our ability to secure popular artists and other live entertainment events, and we may be unable to anticipate or respond to changes in consumer preferences, which may result in decreased demand for our services.
Our ability to generate revenue from our entertainment operations is highly sensitive to rapidly changing public tastes and dependent on the availability of popular artists, brands and events. Our success depends in part on our ability to anticipate the tastes of consumers and to offer events that appeal to them. Since we rely on unrelated parties to create and perform live entertainment content, such as concerts, musical performances, or appearances, any unwillingness to tour or lack of availability of popular artists, could limit our ability to generate revenue. In particular, there are a limited number of artists that can headline a major North American or global tour or who can sell out larger venues. If those key artists do not continue to tour, or if we are unable to secure the rights to their future tours, then our business would be adversely affected.
In addition, we often agree to pay an artist an upfront recoupable advance for artist or celebrity appearances, VIP programs, and merchandise, prior to our receiving any operating income. We may agree to advance funds for the artist to record an album, or to pre-fund other artist or brand ventures, agree to recoup the advance based on future sales. Therefore, if the public is not receptive to the tour, merchandise, album, or other venture, we may incur a loss depending on the amount of any advance or incurred costs relative to any revenue earned. We may not have cancellation insurance policies in place to cover our losses if a performer cancels a tour. Furthermore, consumer preferences change from time to time, and our failure to anticipate, identify or react to these changes could result in reduced demand for our services, which would adversely affect our operating results and profitability.
We may be adversely affected by the deterioration in economic conditions, which could affect consumer and corporate spending and our ability to raise capital, and, therefore, significantly adversely impact our operating results.
A decline in attendance at or reduction in the number of live entertainment events may have an adverse effect on our revenue and operating income. The impact of slowdowns on our business is difficult to predict, but they may result in reductions in ticket sales, sponsorship opportunities and our ability to generate revenue. The risks associated with our businesses may become more acute in periods of slowing economy or recession, which may be accompanied by a decrease in attendance at live entertainment events. Instability in the financial markets as a result of recession or otherwise, as well as insufficient financial sector liquidity, also could affect the cost of capital and energy suppliers and our ability to raise capital.
Our business depends on discretionary consumer and corporate spending. Many factors related to corporate spending and discretionary consumer spending, including economic conditions affecting disposable consumer income such as employment, fuel prices, interest and tax rates and inflation can significantly impact our operating results. Business conditions, as well as various industry conditions, including corporate marketing and promotional spending and interest levels, can also significantly impact our operating results. These factors can affect attendance at our events, premium seats, sponsorship, advertising and hospitality spending, concession and souvenir sales, as well as the financial results of sponsors of our venues, events and the industry. Negative factors such as challenging economic conditions, public concerns over additional terrorism and security incidents, particularly when combined, can impact corporate and consumer spending, and one negative factor can impact our results more than another. There can be no assurance that consumer and corporate spending will not be adversely impacted by economic conditions, thereby possibly impacting our operating results and growth.
Market consolidation has created and continues to create companies that are larger and have greater resources than us.
As the online commerce market continues to grow, other companies may enter into business combinations or alliances that strengthen their competitive positions. For example, in early 2010, Live Nation merged with Ticketmaster. The effects that any completed and pending acquisitions and strategic plans may have on us cannot be predicted with accuracy, but some of these companies that maintain divisions that compete with us are aligned with companies that are larger or better established than us. Even though some of the competitive services offered by these companies may comprise a small amount of their business, their potential access to greater financial, marketing and technical resources would put them in a stronger competitive position as compared to our Company. In addition, these companies include television broadcasters with access to unique content and substantial marketing resources that may not be available to our Company.
Security breaches and credit card fraud could harm our business.
We rely on encryption and authentication technology licensed from a third party through an online user agreement to provide the security and authentication necessary to effect secure transmission of confidential information. We believe that a significant barrier to electronic commerce and communications is the secure transmission of confidential information over public networks. We cannot give assurances that advances in computer capabilities, new discoveries in the field of cryptography or other events or developments will not result in a compromise or breach of the algorithms we use to protect customer transaction data. If this compromise of our security were to occur, it could have a material adverse effect on our business, results of operations and financial condition. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. To the extent that activities of our Company or third-party contractors involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could expose us to a risk of loss or litigation and possible liability. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by these breaches. We cannot offer assurances that our security measures will prevent security breaches or that failure to prevent these security breaches will not have a material adverse effect on our business.
Our industry may be exposed to increased government regulation.
Our Company is not currently subject to direct regulation by any government agency, other than regulations applicable to businesses generally, and laws or regulations directly applicable to access to, or commerce on, the Internet. Today there are relatively few laws specifically directed towards online services, other than to protect user privacy or children. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, freedom of expression, pricing, content and quality of products and services, fraud, taxation, advertising, intellectual property rights and information security. Compliance with additional regulation could hinder our growth or prove to be prohibitively expensive.
The applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales tax, libel and personal privacy is uncertain and may take years to resolve. In addition, because our service is available over the Internet in multiple states, and we sell to numerous consumers resident in these states, these jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each state. Our failure to qualify as a foreign corporation in a jurisdiction where it is required to do so could subject our Company to taxes and penalties for the failure to qualify. Any new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business, could have a material adverse effect our business, results of operations and financial condition.
Risks Associated with our Common Stock
Our stock price has been and may continue to be very volatile.
The market price of the shares of our common stock has been, and is likely to be, highly volatile. During the 12 months prior to December 31, 2009, our stock price as traded on the OTC Bulletin Board has ranged from a high of $.60 per share to a low of $.08 per share. The variance in our share price makes it extremely difficult to forecast with any certainty the stock price at which you may be able to buy or sell your shares of our common stock. The market price for our stock could be subject to wide fluctuations in response to factors that are out of our control such as:
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actual or anticipated variations in our results of operations,
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announcements of new products, services or technological innovations by our competitors;
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developments with respect to patents, copyrights or proprietary rights;
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short selling our common stock and stock price manipulation;
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developments in Internet regulation; and
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general conditions and trends in the Internet, entertainment and electronic commerce industries.
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The trading prices of many technology companies' stock have experienced extreme price and volume fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market factors may adversely affect the market price of our common stock. These market fluctuations, as well as general economic, political and market conditions such as recessions or interest rate fluctuations, may adversely affect the market price of our common stock. Any negative change in the public’s perception of the prospects of Internet or e-commerce companies could depress our stock price regardless of our results.
We have issued options, warrants and convertible notes that have had and will have a dilutive effect on our shareholders.
We have issued numerous options, and convertible securities to acquire our common stock that have had a dilutive effect on our shareholders. We depend on our ability to issue stock and options to conserve cash. We compensate a number of employees and consultants through stock options grants under the Company’s 2001 Non-Qualified Stock Option Plan. One hundred ten million shares were registered under that plan since its inception in 2001. Typically, shares are immediately exercised by the employee or consultant. In 2009, employees received options for 1,098,272 shares equal to $282,001 in compensation, and consultants and professionals received 14,203,311 shares equal to $2,179,821 in compensation. Dilution is more substantial when our stock price is low.
We may have difficulty obtaining additional financing as a result of the significant number of shares that have been issued upon conversion of the convertible notes.
The significant number of shares issued upon conversion of our convertible notes may make it difficult to obtain additional financing. Due to the significant number of shares of our common stock which resulted from conversion of our convertible notes, among other things, new investors may either decline to make an investment in our Company due to the large number of shares outstanding, which number is over 260 million. If we are required to provide similar terms to obtain required financing in the future, the potential adverse effect of these existing financings could be perpetuated and significantly increased. In addition, sales of substantial amounts of our common stock in the public market pursuant to Rule 144, upon exercise or conversion of derivative securities or otherwise, or even the potential for these sales, could also affect our ability to raise capital through the sale of equity securities.
Present management may control the election of our directors and all other matters submitted to the stockholders for approval.
Our executive officers and directors, in the aggregate, beneficially own approximately 10% of our outstanding common stock (if we include options that they hold and can exercise), and two other stockholder groups own approximately 16% of our outstanding common stock. As a result, by joining forces with each other and the holders of approximately 24% of our outstanding common stock, they may be able to exercise control over all matters submitted to our stockholders for approval. Accordingly, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company, impede a merger, consolidation, takeover or other business combination involving the Company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could have an adverse effect on the market price of our common stock.
“Penny stock” regulations may impose certain restrictions on marketability of securities.
The SEC adopted regulations which generally define "penny stock" to be an equity security that has a market price of less than $5.00 per share. Our common stock may be subject to rules that impose additional sales practice requirements on broker-dealers who sell these securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of these securities and have received the purchaser's prior written consent to the transaction.
Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the "penny stock" rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability to sell our common stock in the secondary market.
The market for our Company’s securities is limited and may not provide adequate liquidity.
Our common stock is currently traded on the OTC Bulletin Board (“OTCBB”), a regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter equity securities. As a result, an investor may find it more difficult to dispose of, or obtain accurate quotations as to the price of, our securities than if the securities were traded on the Nasdaq Stock market, or another national exchange. There is a limited number of active market makers of our common stock. In order to trade shares of our common stock you must use one of these market makers unless you trade your shares in a private transaction. In the twelve months prior to December 31, 2009, the actual daily trading volume ranged from a low of 30,000 shares of common stock to a high of over 3.2 million shares of common stock with 46 days exceeding a trading volume over 1,000,000. On many days, the trading volume is limited. Selling our shares can be more difficult because smaller quantities of shares are bought and sold and news media coverage about us is limited. These factors result in a limited trading market for our common stock and therefore holders of our Company’s stock may be unable to sell shares purchased should they desire to do so.
None.
We do not own any real property. Currently, we are tenants-at-will at our principal office at 4 Brussels Street, Worcester, Massachusetts, and pay $2,600 monthly in rent. We also have an office at 236 Huntington Avenue, Boston, 5
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Floor, and pay $5,822 monthly under a 5-year lease, due to expire in 2011. 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.
From time to time we may be a party to various legal proceedings arising in the ordinary course of our business. Our management is not aware of any litigation outstanding, threatened or pending as of the date hereof by or against us or our properties which we believe would be material to our financial condition or results of operations.
Our common stock, par value $.001 per share, is presently traded on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol, "PAYD".
The following table sets forth the high and low bid information for our common stock as reported by OTCBB for the eight quarters ended December 31, 2009. The quotations from the OTCBB reflect inter-dealer prices without retail mark-up, mark-down, or commission and may not represent actual transactions.
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Quarter ended March 31, 2009
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$ | .23 | $ | .08 | ||||
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Quarter ended June 30, 2009
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$ | .42 | $ | .10 | ||||
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Quarter ended September 30, 2009
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$ | .549 | $ | .305 | ||||
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Quarter ended December 31, 2009
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$ | .6025 | $ | .28 | ||||
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2008
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Quarter ended March 31, 2008
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$ | .59 | $ | .21 | ||||
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Quarter ended June 30, 2008
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$ | .31 | $ | .184 | ||||
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Quarter ended September 30, 2008
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$ | .28 | $ | .191 | ||||
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Quarter ended December 31, 2008
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$ | .23 | $ | .10 | ||||
As of March 1, 2010, there were approximately 1,689 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.
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
|
Number of Securities To be Issued Upon Exercise of Outstanding Options, Warrants and Rights
(a)
|
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
(b)
|
Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
(c)
|
||||||||||
|
Equity Compensation Plans Approved by Security Holders
|
25,250,000 | $ | .115 | 3,000,000 | ||||||||
|
Equity Compensation Plans Not Approved by Security Holders
|
2,023,612 | $ | .001 | 2,090,390 | ||||||||
|
Total
|
27,273,612 | $ | .107 | 5,090,390 | ||||||||
Refer to Note 7, Notes to Financial Statements for the Years ended December 31, 2009, 2008 and 2007 incorporated by reference herein from Part II, Item 8, 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 option grants under the Company’s 2001 Non-Qualified Stock Option Plan. One hundred ten million shares were registered under that plan since its inception in 2001. Typically, shares are immediately exercised by the employee or consultant. In 2009, employees received options for 1,098,272 shares equal to $282,001 in compensation, and consultants and professionals received 14,203,311 shares equal to $2,179,821 in compensation.
Recent Sales of Unregistered Securities
None.
Repurchase of Equity Securities
None.
Performance Graph
The following graph compares the annual percentage change in our cumulative total stockholder return on our common stock during the period commencing on December 31, 2004 and ending on December 31, 2009 (as measured by dividing (i) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between our share price at the end and the beginning of the measurement period; by (B) our share price at the beginning of the measurement period) with the cumulative total return of the
Nasdaq Stock Exchange Composite Index and two peer issuers, Live Nation, Inc. (NYSE: LYV) and Collectors Universe (NASDAQ: CLCT) during such period. We have not paid any dividends on our common stock, and we do not include dividends in the representation of our performance. The stock price performance on the graph below does not necessarily indicate future price performance.
Source: www.dailyfinance.com
|
Company/Index
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||||
|
Paid, Inc.
|
$ | 100 | $ | 67 | $ | 127 | $ | 142 | $ | 69 | $ | 171 | ||||||||||||
|
Nasdaq Stock Exchange Composite Index
|
$ | 100 | $ | 101 | $ | 111 | $ | 122 | $ | 85 | $ | 123 | ||||||||||||
|
Collectors Universe, Inc. (NASDAQ: CLCT)
|
$ | 100 | $ | 79 | $ | 66 | $ | 60 | $ | 14 | $ | 46 | ||||||||||||
|
Live Nation, Inc. (NYSE: LYV)
|
-- | $ | 100 | $ | 171 | $ | 111 | $ | 44 | $ | 65 | |||||||||||||
The following table summarizes our financial data for the periods presented. You should read the following financial information together with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes to those financial statements appearing elsewhere in this annual report. The selected statements of operations data for the fiscal years ended December 31, 2009, 2008 and 2007, and the selected balance sheet data as of December 31, 2009 and 2008 are derived from the audited financial statements, which are included elsewhere in this document. The selected statements of operations data for the years ended December 31, 2006 and 2005, and the balance sheet data at December 31, 2007, 2006 and 2005 are derived from our audited financial statements not included in this document. Historical results are not necessarily indicative of the results to be expected in future periods.
|
For the Years Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Statement of Operations Data:
|
||||||||||||||||||||
|
Revenue
|
$ | 4,725,962 | $ | 2,181,236 | $ | 3,383,294 | $ | 8,048,854 | $ | 4,920,123 | ||||||||||
|
Cost of revenues
|
3,069,701 | 1,410,402 | 1,965,619 | 5,556,635 | 3,562,073 | |||||||||||||||
|
Gross profit
|
1,656,261 | 770,834 | 1,417,675 | 2,492,219 | 1,358,050 | |||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||
|
Salary, general and administrative expenses
|
4,770,132 | 4,555,504 | 3,650,646 | 3,665,846 | 4,016,219 | |||||||||||||||
|
Web site development costs
|
448,465 | 466,499 | 423,308 | 519,096 | 545,171 | |||||||||||||||
|
Total operating expenses
|
5,218,597 | 5,022,003 | 4,073,954 | 4,184,942 | 4,561,390 | |||||||||||||||
|
Loss from operations
|
(3,562,336 | ) | (4,251,169 | ) | (2,656,279 | ) | (1,692,723 | ) | (3,203,340 | ) | ||||||||||
|
Other income (expense), net
|
78,018 | (483,199 | ) | (67,804 | ) | (11,385 | ) | (294,822 | ) | |||||||||||
|
Loss before income taxes
|
(3,484,318 | ) | (4,734,368 | ) | (2,724,083 | ) | (1,704,108 | ) | (3,498,162 | ) | ||||||||||
|
Provision for income taxes
|
— | — | — | — | — | |||||||||||||||
|
Net loss
|
(3,484,318 | ) | (4,734,368 | ) | (2,724,083 | ) | (1,704,108 | ) | (3,498,162 | ) | ||||||||||
|
Loss per share
|
$ | (.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | |||||
|
Weighted Average Shares
|
260,711,253 | 240,469,844 | 226,679,082 | 210,364,212 | 184,008,727 | |||||||||||||||
|
For the Years Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Total current assets
|
$ | 2,933,640 | $ | 1,572,684 | $ | 1,685,415 | $ | 1,477,269 | $ | 3,639,414 | ||||||||||
|
Property and equipment, net
|
40,517 | 30,967 | 74,338 | 191,518 | 256,244 | |||||||||||||||
|
Other intangible assets, net
|
8,948 | 9,888 | 10,828 | 11,768 | 33,290 | |||||||||||||||
|
Total assets
|
2,983,105 | 1,613,539 | 1,770,581 | 1,680,555 | 3,928,948 | |||||||||||||||
|
Total current liabilities
|
942,819 | 1,014,222 | 762,252 | 1,409,433 | 3,787,695 | |||||||||||||||
|
Long term liabilities
|
— | — | — | — | 1,150,000 | |||||||||||||||
|
Total shareholders’ equity (deficit)
|
2,040,286 | 599,317 | 1,008,329 | 271,122 | (1,008,747 | ) | ||||||||||||||
|
Total liabilities and shareholders’ equity
|
2,983,105 | 1,613,539 | 1,770,581 | 1,680,555 | 3,928,948 | |||||||||||||||
Forward Looking Statements
This Annual Report on Form 10-K 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", "could", "may", "should", "will", "would", 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 Item 1A, "Risk Factors.”
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.
Overview
Our primary focus is to provide businesses and clients with brand management, brand marketing, product merchandising, website design, development, and hosting and authentication services for the entertainment, sports and collectible industries. We offer businesses, entertainers, and celebrity athletes comprehensive web-presence related services supporting and managing clients' official websites and fan-community services including VIP ticketing, live event fan experiences, e-commerce, user generated content, client content publishing and distribution, fan forums, social network management and social media marketing. We also provide business management tools for online retailers, through AuctionInc, which utilizes our patented shipping calculator and automated auction checkout and order processing system. Operations are directly affected by the number and type of clients that we provide services to. Performing artists that tour have the potential to generate larger amounts of revenue than clients that do not and the revenue potential of celebrity athletes is dependent upon their performance.
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. The Company's inventories are comprised of merchandise and collectibles that relate to performing artists and athletes and valuation of it is more subjective than with more standard inventories. General economic conditions, tour schedules of performing artists, and the reputation of the performing artists/athletes, might make sale or disposition of these inventories more or less difficult. Any increases in the reserves would cause a decline in profitability, since such increases are recorded as charges against operations. In addition, to the extent that inventories that are sold had been overly reserved in a prior period, the Company would recognize an increase in earnings, since the carrying cost of the related merchandise had been reduced.
Results of Operations
Year ended December 31, 2009 to year ended December 31, 2008
The following discussion compares the Company's results of operations for the year ended December 31, 2009 with those for the year ended December 31, 2008. 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, 2009, revenues were $4,726,000, 97% of which was attributable to sales of fan club memberships, merchandise, and fan experiences related to tours of performing artists, while 3% was related the sales of Company own product and other revenues. Management anticipates increases from fan club memberships, merchandise, and fan experiences from tours, products and services related to several other performing artists during 2010. Performing artists typically do not announce tour plans until two to four months in advance of the first show. Several performing artists represented by the Company have announced tours that are scheduled to begin during 2010.
In 2009 revenues increased approximately $2,545,000 or 117% from 2008, when revenues were $2,181,000. For the year ended December 31, 2008, fan club membership and related merchandise sales revenues were $1,979,000, 91% of gross revenues, sales of the Company's product were $164,000 or 7% of gross revenues, and other revenues were $38,000, or less than 2% of gross revenues.
The main reasons for the increase in revenues was a $2,622,000 increase related to the fan club memberships and tours of performing artists, offset by lower sales of Company owned product of $43,000. Revenues related to tours of performing artists are dependent upon tour schedules, the popularity of the artist(s) on tour, and whether the tour(s) are domestic or international. Fan experience packages marketed for certain artists include a ticket of admission, while for others they do not. While there was an increase in the number of artists represented by the Company in 2009, there were no artists on tour until the middle of June. Gross profit from celebrity services in 2009 and 2008 was $2,187,000 and $1,222,000, respectively.
Operating Expenses.
Total operating expenses for the year ended December 31, 2009 were $5,219,000 compared to $5,022,000 in 2008, an increase of $197,000 or 4%.
Sales, general and administrative ("SG&A") expenses for the year ended December 31, 2009 were $4,770,000, compared to $4,556,000 for the year ended December 31, 2008. The increase of $215,000 in SG&A costs includes increases in payroll and related costs of $81,000, tour expenses of $42,000, shipping related costs of $121,000, and credit card processing fees of $163,000. These increases were offset by decreases in professional fees of $112,000, and other SG&A related costs of $78,000. The increase in shipping related costs and credit card processing fees is directly attributed to higher levels of touring activity and an increase in online merchandise sales of performing artists.
Costs associated with planning, maintaining and operating our web sites for the year ended December 31, 2009 decreased by $18,000 from 2008. This decrease is due primarily to a decrease in depreciation of $46,000 offset by an increase in the costs associated with the maintenance of our datacenter.
Interest Expense.
For the year ended December 31, 2009, the Company incurred approximately $2,000 of interest charges compared to interest charges of $484,000 in 2008, a decrease of $482,000. This decrease is attributable to the discount related to restricted stock granted in settlement of notes payable and amortization of the fair value of warrants issued in connection with short term debt in 2008 that did not recur in 2009.
Net Loss.
The Company realized a net loss for the year ended December 31, 2009 of $3,484,000 compared to a net loss of $4,734,000 for the year ended December 31, 2008. The 2009 loss represents $.01 per share while the loss for 2008 represents $.02 per share.
Inflation.
The Company believes that inflation has not had a material effect on its results of operations.
Year ended December 31, 2008 to year ended December 31, 2007
The following discussion compares the Company's results of operations for the year ended December 31, 2008 with those for the year ended December 31, 2007. 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, 2008, revenues were $2,181,000, 91% 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 represented 8% of revenues. Gross sales of the Company's own product were $164,000. Fan experience, fan club membership and related merchandise sales revenues were $1,979,000. Other revenues were $38,000, less than 2% of gross revenues, during the year ended December 31, 2008.
The Company's 2008 revenues represent a decrease of approximately $1,202,000 or 36%, from 2007, when revenues were $3,383,000. For the year ended December 31, 2007, sales of the Company's product were $175,000 or 5% of gross sales, fan club membership and related merchandise sales revenues were $3,145,000, 93% of gross revenues, sports marketing revenues were $36,000, or 1% of gross revenues, and other revenues were $27,000, or less than 1% of gross revenues.
The main reasons for the decrease in revenues was a $1,167,000 decrease related to the tours of performing artists, lower revenues related to sports marketing services of $36,000 and lower sales of Company owned product of $10,000 from the same period in 2007. Revenues related tours of performing artists are dependent upon tour schedules, the popularity of the artist(s) on tour, and whether the tour(s) are domestic or international. During 2008, while there was an increase in the number of artists represented by the Company, the concerts held were at smaller venues, resulting in lower attendance. Gross Profit from celebrity services for the years ended December 31, 2008 and 2007 was approximately $1,122,000 and $1,484,000 respectively. Gross profit (loss) from Company owned product sales for the year ended December 31, 2008 was approximately ($98,000), $192,000 less than in 2007. This decrease in gross profit is attributable to an addition to the inventory reserve of $150,000 during 2008.
Operating Expenses.
Total operating expenses for the year ended December 31, 2008 were $5,022,000 compared to $4,074,000 in 2007, an increase of $948,000.
SG&A expenses for the year ended December 31, 2008 were $4,556,000, compared to $3,651,000 for the year ended December 31, 2007. The increase of $905,000 in SG&A costs includes increases in payroll and related costs of $89,000, option compensation of $453,000, professional fees of $394,000, and other expenses of $131,000, offset by decreases in travel of $57,000, shipping and postage of $14,000, and credit card processing fees of $58,000. The credit card processing fees and postage and shipping decreases are principally attributable to lower levels of tours of performing artists. The increase in professional fees is attributable to new business development costs and those associated with Sarbanes-Oxley compliance testing.
Costs associated with planning, maintaining and operating our web sites for the year ended December 31, 2008 increased by $43,000 from 2007. This increase is due primarily to an increase in payroll and related costs of $91,000 offset by a decrease in depreciation of $58,000.
Interest Expense.
For the year ended December 31, 2008, the Company incurred approximately $484,000 of interest charges compared to interest charges of $83,000 in 2007, an increase of $401,000. This increase is attributable to the discount related to restricted stock granted in settlement of notes payable and amortization of the fair value of warrants issued in connection with short term debt.
Net Loss.
The Company realized a net loss for the year ended December 31, 2008 of $4,734,000 compared to a net loss of $2,724,000 for the year ended December 31, 2007. The 2008 loss represents $.02 per share while the loss for 2007 represents $.01 per share.
Inflation.
The Company believes that inflation has not had a material effect on its results of operations.
Assets
At December 31, 2009, total assets of the Company were $2,983,000 compared to $1,614,000 at December 31, 2008.
Operating Cash Flows
A summarized reconciliation of the Company's net loss to cash used in operating activities for the years ended December 31 is as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Net loss
|
$ | (3,484,300 | ) | $ | (4,734,400 | ) | $ | (2,724,100 | ) | |||
|
Depreciation and amortization
|
18,300 | 71,000 | 129,100 | |||||||||
|
Inventory reserve
|
112,500 | 150,000 | -- | |||||||||
|
Share based compensation
|
453,000 | 453,000 | -- | |||||||||
|
Amortization of debt discount
|
-- | 61,100 | -- | |||||||||
|
Fair value of stock options awarded in payment of outside services and compensation
|
2,837,800 | 2,159,800 | 1,735,000 | |||||||||
|
Interest charge on discounted stock issuance
|
-- | 371,800 | 75,000 | |||||||||
|
Services provided in consideration of payment of stock subscription receivable
|
50,000 | -- | -- | |||||||||
|
Net current assets and liabilities associated with advance ticketing
|
71,100 | -- | -- | |||||||||
|
Changes in current assets and liabilities
|
(571,200 | ) | 72,300 | (379,500 | ) | |||||||
|
Net cash used in operating activities
|
$ | (512,800 | ) | $ | (1,395,400 | ) | $ | (1,164,500 | ) | |||
Working Capital and Liquidity
The Company had cash and cash equivalents of $730,400 at December 31, 2009, compared to $107,000 at December 31, 2008. The Company had $1,991,000 of working capital at December 31, 2009 compared to $558,000 at December 31, 2008. At December 31, 2009 current assets were $2,934,000 compared to $1,573,000 at December 31, 2008. The increase in current assets is related to increases in cash and cash equivalents of $623,000 and accounts receivable of $621,000. Both of these increases are attributable to concerts canceled during the third quarter of 2009. Related accounts receivable totaling $115,000 were collected early in 2010. At December 31, 2009 current liabilities were $943,000 compared to $1,014,000 at December 31, 2008. Current liabilities decreased at December 31, 2009 compared to December 31, 2008 primarily due to a decrease in accounts payable and accrued expenses of $142,000, offset by an increase in deferred revenues of $71,000.
The Company's independent registered public accounting firm has issued a going concern opinion on the Company's financial statements for the year ended December 31, 2009. 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 2010 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. Subject to the discussion below, management believes that the Company has sufficient cash resources to fund operations during the next 12 months. These resources include cash on hand, accounts receivable, and management's continued exploration of opportunities to monetize its patent. However, there can be no assurance that anticipated touring activity will occur, and that the Company will be successful in monetizing its patent. Management continues to seek alternative sources of capital to support operations.
In addition, our success in providing services and merchandise depends upon the popularity of the musical artists, celebrity, athlete and other entities that we currently, or may in the future, serve. The Company can also be adversely affected, and suffer substantial loss of revenue, if an entire tour, or one or more shows within a tour, is terminated due to lack of interest, illness, death or any other reason.
Contractual Obligations and Other Commercial Commitments
The table below summarizes our gross contractual obligations and other commercial commitments as of December 31, 2009. We did not have any contractual obligations (long term debt obligations, capital lease obligations, purchase obligations, or other long-term liabilities) other than our operating lease.
|
Payments Due by Period
|
||||||||||||||||||||
|
Contractual Obligations
|
2010
|
2011
|
2012
|
2013 and
Thereafter
|
Total
|
|||||||||||||||
|
Operating lease
|
69,600 | 69,600 | 0 | 0 | 139,200 | |||||||||||||||
|
Total contractual obligations
|
$ | $ 69,600 | $ | 69,600 | $ | 0 | $ | $ 0 | $ | $ 139,200 | ||||||||||
Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency rates, interest rates, and other relevant market rates or price changes. In the ordinary course of business, the Company is exposed to market risk resulting from changes in foreign currency exchange rates, and the Company regularly evaluates its exposure to such changes. The Company’s overall risk management strategy seeks to balance the magnitude of the exposure and the costs and availability of appropriate financial instruments.
Impact of Inflation and Changing Prices
Historically, our business has not been materially impacted by inflation. We price and provide our service within a short time frame.
Foreign Currency Fluctuation
Our revenue is primarily denominated in U.S. dollars. Therefore, we are not directly affected by foreign exchange fluctuations. However, fluctuations in foreign exchange rates may have an effect on merchandise sales for concerts occurring outside the U.S. We do not believe that foreign exchange fluctuations will materially affect our results of operations.
Seasonality
Our revenue is subject to seasonality and fluctuations during the year primarily related to artist touring activities. More outdoor venues are available during May through September. In addition, the timing of tours for top-grossing acts could impact comparability of quarterly results year over year.
The financial statements listed in Item 15(a) are incorporated herein by reference and are filed as a part of this report and follow the signature pages to this Annual Report on Form 10-K on page F-1.
None.
Evaluation of Disclosure Controls and Procedures
The Company’s management, including the President of the Company, as its principal executive officer, and the Chief Financial Officer of the Company, as its principal financial officer, 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 President and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective, due to material weaknesses in internal control over financial reporting described below, 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.
As described in our accompanying
Management’s Report on Internal Control over Financial Reporting
, we have identified five remaining material weaknesses in internal control over financial reporting. Because of these remaining material weaknesses, we concluded that, as of December 31, 2009, our internal control over financial reporting was not effective based on the criteria outlined in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Accordingly, we have also concluded that our disclosure controls and procedures were not effective as of December 31, 2009.
We intend to implement procedures and controls in 2010 to take further steps to remediate the material weaknesses at the entity and activity levels, and to review further our procedures and controls. In addition, we will continue to make additional changes to our infrastructure and related processes that we believe are also reasonably likely to strengthen and materially affect our internal control over financial reporting.
Prior to the complete remediation of these material weaknesses, there remains risk that the processes and procedures on which we currently rely will fail to be sufficiently effective, which could result in material misstatement of our financial position or results of operations and require a restatement. Moreover, because of the inherent limitations in all control systems, no evaluation of controls—even where we conclude the controls are operating effectively—can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our control systems, as we develop them, may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected and could be material to our financial statements.
The certifications of our principal executive officer and principal financial officer required in accordance with Rule 13a-14(a) under the Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning (i) the evaluation of our disclosure controls and procedures, and changes in internal control over financial reporting, referred to in paragraph 4 of the certifications, and (ii) material weaknesses in the design or operation of our internal control over financial reporting, referred to in paragraph 5 of the certifications. Those certifications should be read in conjunction with this Item 9A for a more complete understanding of the matters covered by the certifications.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting of the Company. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management, with the participation of our principal executive officer and principal financial officer, is required to evaluate the effectiveness of our internal controls over financial reporting as of December 31, 2009 based on criteria established under the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework, an integrated framework for evaluation of internal controls issued to identify the risks and control objectives related to the evaluation of the control environment. Management has concluded that our internal controls over financial reporting were not effective as of December 31, 2009 due to the following:
1. Entity Level Controls
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Lack of corporate governance
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Ineffective control environment
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Lack of segregation of duties
2. Activity Level Controls
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Lack of procedures and control documentation
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Lack of information technology controls and documentation
1. Inadequate Entity Level Controls
Lack of Corporate Governance
The Company’s Corporate Governance is made up of a set of practices, policies, laws, and principles, designed to provide guidance and structure to directors, managers, and employees with a clear view of corporate goals and business objectives. These processes and procedures need to be clearly defined, presented and administered to each participant in the organization, and should document the distribution of rights and responsibilities among employees, management, clients and customers.
Steps taken towards Remediation for a Lack of Corporate Governance:
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The Company has made improvements by designing and drafting a corporate governance policy which has been approved by the Board of Directors, which documents the role of the Board and management, functions of the Board, role of the Audit Committee, agenda items for board meetings, recoupment of unearned compensation, indemnification, reporting of concerns & complaints, and director access to management.
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Management has increased its communication of corporate goals and initiatives through meetings and documented emails to provide an increased level of awareness and accountability.
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Certain employees and managers, in different departments, are now required to report to executives and managers with documented financial reports, statistical summaries of projects and tasks, and weekly reviews.
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Ineffective Control Environment
The control environment philosophy of an organization influences the consciousness of its people and how they conduct their activities and responsibilities. Control environment factors include, the integrity, ethical values, and competence of the entity’s people; management’s philosophy and operating style; the way management assigns authority and responsibility; the way management organizes and develops its people; and the attention and direction provided by the audit committee and board of directors.
Steps taken towards Remediation for an Ineffective Control Environment:
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Through a more comprehensive project and task review cycle, management is instilling a more definitive code of conduct throughout all levels of employment. All employees have always been encouraged to communicate openly with management regarding all business matters. The Company now proactively engages each employee in regular weekly and monthly reviews and requires each participant to provide a written document of their assignments, completed tasks and pending projects.
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Independent contractors and consultants are responsible for presenting a monthly report as to their projects and tasks. The reviews are met with a discussion with management followed by an evaluation to make sure the participant is fulfilling their duties and following the core philosophies of the Company. These reviews are following by an email documenting the discussion and any decisions that management approved.
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Management is now formally meeting to discuss our filings and the discussions are being documented for future reference. During these discussions, the auditors, legal or accounting may be presenting to the Company various information which may be of material importance to our financial reporting and internal controls.
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Departments are now required to periodically review their procedures and policies to make sure they are still appropriate. These analyses are documented and then presented to management for review and discussion. While a primary focus is on the financial reporting procedures, all departments are required to follow this corporate guideline.
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The Company has made progress and will continue to make improvements with regard to our financial reporting systems. Meetings are formalized and each financial decision is now documented from weekly reviews of accounts payable and receivable to budget requests for corporate expenditures. Reports are now authorized and filed with participants’ signatures and research and pending decisions are reviewed the following meeting to assess progress.
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Lack of Segregation of Duties
A clear and concise segregation of duties is important to maximize checks and balances so that no single individual has control over two or more phases of a transaction or operation. A strong segregation of duty also is critical to reduce effectively the risk of mistakes and inappropriate actions preventing fraud and discourages collusion. It can be difficult for small businesses to always have a clear separation of duties because there simply are not enough personnel to cover each and every process and procedure. Ultimately, checks and balances need to be in place as a supportive measure to the business operations, but also as a fraud prevention measure as well.
Steps taken towards Remediation for Segregation of Duties:
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The Company redesigned the processes and procedures around inventory management to better align duties and responsibilities so that there is a greater segregation of duties.
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Certain departments have implemented procedural steps and approval mechanisms on certain financial reporting processes to ensure a greater level of oversight and separation of duties.
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Management is requiring greater control and documentation outlining specific duties and tasks on all projects.
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The Company implemented new project management software which was designed to increase efficiencies and reduce overhead. The software also identifies deliverables which may be dependent on other deliverables enabling the project managers to redirect duties to other individuals. This software assists the Company with reducing its dependency on any one particular employee with multiple responsibilities, thus preventing a bottleneck and risk of too much control on any one individual.
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Although significant steps have been taken in this area, many of the changes made to our entity level controls were implemented late in 2008, with no significant steps made in 2009. In addition, further work is required to develop appropriate controls in some aspects of entity level control to provide reasonable assurance that controls are designed in the most effective and efficient manner possible. While we believe these changes will be effective at mitigating risk of material error, there continues to be additional work required for us to conclude that all three of these control areas are operating effectively. As noted in the Management’s Report on Internal Control over Financial Reporting, we consider each of these control areas within the entity level control to constitute a material weakness.
2. Inadequate Activity Level Controls
Lack of procedures and control documentation
The Company’s activity level controls are ineffective relating to certain accounts, revenue recognition, purchasing, accounts payable, inventory, and financial closing. Ineffective internal controls relating to these accounts may affect the financial statements and will directly affect the nature and timing of other auditing procedures for certain activities.
Steps taken towards Remediation of Revenue Recognition:
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Most revenue transactions are online credit card payments from products placed for sale on various clients’ web sites. The pricing for the products listed is reviewed and approved by management and documented on purchase orders that are reviewed by each department manager.
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Each week client managers receive a document outlining the revenues from all clients with strategic information enabling them to prepare a plan and goal for future weeks. Management reviews the document and works with client managers to hit incremental milestones or forecast.
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All web sales are reconciled across the Company’s multiple revenue and accounting systems comparing for any discrepancies.
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Improved systems and procedures reconciling offsite revenue nightly. This process reconciles individual revenues directly back to individual general ledger accounts. There is a clear segregation of duties throughout the process minimizing risk of fraud and requiring more individuals to be accountable at different times.
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Steps taken towards Remediation of Expenditures and Accounts Payable:
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Established improved procedures documenting and providing an approval process for authorizing a merchandising agent to complete and submit a purchase order. Each purchase order has been authorized by management and a clear segregation of duties exists between the merchandise being ordered, received and payment made.
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An internal control procedure has been implemented for receiving goods accurately and validating the cost, quantities, quality of goods against the purchase order
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Implemented a signature authorization policy outlining specific authority prior to any commitment of our funds for various transactions and purchases.
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Client accounts are reviewed on a weekly basis to assess their revenues and expenses and each week is documented and filed for review against quarterly reports and client payments. All quarterly payments are analyzed and reconciled between the different accounting systems to verify accurate reporting.
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The Vendor Master File is reviewed on a weekly basis for updates and changes and any changes are analyzed and monitored for their activity and frequency.
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Steps taken towards Remediation of Inventory Controls:
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Access to changing data within the inventory management software has been restricted to only essential personnel. Other individuals have access to view data and access reports, but they are restricted from making any changes within the system.
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Policies have been implemented that require all purchases and inventory maintenance to be reviewed by management to authorize pricing, sales and promotional events through client web sites.
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Improved procedures regarding receiving logs, quality assurance checks, and purchase order processes have been implemented to provide for a clear separation of duties. These procedures deter fraud and protect against collusion.
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Improved physical inventory controls, overseen by management, with weekly reviews randomly checking floor to sheet and sheet to floor. This procedure is designed to tighten inventory controls and create faster turns on inventory by management discussing with merchandising on the status of the inventory on a more regular basis.
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Steps taken towards Remediation of Financial Closing:
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The Company enhanced its quarterly procedures for financial closings requiring the executives and management to review the financial data prior to the package being submitted to the accountants.
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Lack of information technology controls and documentation
Information technology controls are specific activities performed by persons or systems designed to ensure that the business objectives can be met, protect the business from fraud and collusion, and keep the corporate assets protected and safe.
Steps taken towards Remediation of Information Technology Controls:
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Enhanced the documentation and procedures of our information technology to control assurance that changes to financial applications are properly authorized and tested and that access to our information systems and financial applications are appropriately restricted.
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Updated our information systems user profiles to improve access controls.
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Implemented improvements to our information systems to further address control deficiencies.
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Updated secure backup procedures with best practice methodologies for protecting our financial data and incase of a problem continuously test the restoring from backup tapes.
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Enhanced the documentation of certain core proprietary technologies so that there is more redundancy and protection of corporate assets.
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Although significant steps have been taken in this area, many of the changes made to our activity level controls were implemented late in 2008, with no significant steps made in 2009. In addition, further work is required to develop appropriate controls in some aspects of activity level control to provide reasonable assurance that controls are designed in the most effective and efficient manner possible. Therefore, while we believe these changes are effective at mitigating risk of material error, there continues to be additional work required for us to conclude that both of these control areas are operating effectively. Therefore, as noted in the Management’s Report on Internal Control over Financial Reporting, we consider each of these control areas within the activity level control to constitute a material weakness.
A factor for our internal control deficiencies is the small size of the Company and the lack of a financial expert on the Audit Committee of the Board of Directors and other corporate governance controls. As defined by the Public Company Accounting Oversight Board Auditing Standard No. 5, a material weakness is a significant control deficiency or a combination of significant control deficiencies that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management continues to monitor and assess the controls to ensure compliance.
Our independent registered public accounting firm has issued its report on the Company’s internal control over financial reporting as of December 31, 2009. This report appears below.
Attestation Report of the Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Paid, Inc.
Worcester, Massachusetts
We have audited Paid, Inc.’s (the Company) internal control over financial reporting as of December 31, 2009, based on the criteria established in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, including Management’s Report on Internal Control over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures the (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness of the internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
As described in Managements’ Annual Report on Internal Control over Financial Reporting, management has concluded that the Company did not maintain effective control over financial reporting as of December 31, 2009 due to pervasive control deficiencies and material weaknesses. The existence of pervasive control deficiencies and material weaknesses impair the effectiveness of other controls by rendering their design ineffective or by keeping them from operating effectively. As stated in management’s report, the pervasive deficiencies identified include both entity and activity level controls and consisted of (1) ineffective corporate governance, (2) an ineffective control environment, (3) the lack of any procedural and control documentation, (4) a pervasive lack of segregation of duties without appropriate alternative controls and, (5)
the lack of information technology controls and documentation. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the financial statements. This report does not affect our report on such financial statements.
In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2009, based on the criteria established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Bard (United States), the balance sheets and the related statements of operations, cash flows and stockholders equity of the Company as of and for the year ended December 31, 2009. Our report dated March 12, 2010 expressed an unqualified opinion on those financial statements and included an explanatory paragraph expressing substantial doubt about the Company’s ability to continue as a going concern.
/s/ CCR LLP
Westborough, MA
March 12, 2010
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b)
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Changes in Internal Control Over Financial Reporting
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As discussed in the Managements' Annual Report on Internal Control over Financial Reporting, the Company made a number of changes to improve its internal controls over financial reporting late in 2008. Although significant steps were taken late in 2008, no additional changes were made in 2009. Therefore, while we believe they are effective at mitigating risk of material error, there has been insufficient time for us to conclude that they are operating effectively.
Not applicable.
Not applicable.
Directors and Executive Officers
The following table sets forth certain information regarding the directors and executive officers of Paid, Inc.:
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Name
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Age
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Position
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Gregory Rotman*
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44
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Director, Chief Executive Officer & President
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Richard Rotman*
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39
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Director, Chief Financial Officer, Vice President, Treasurer & Secretary
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Andrew Pilaro
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40
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Director
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______________
*Gregory Rotman and Richard Rotman are brothers.
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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.
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, and he currently serves as Chairman.
The Company has not made any material changes to the procedures by which security holders may recommend nominees to the Board of Directors.
Other Significant Persons
Keith Garde
, age 56, 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
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. Andrew Pilaro, the Company’s only independent director, is the sole member of the audit committee. The audit committee does not have a charter.
Audit Committee Report
The Audit Committee reviewed and discussed our audited financial statements for the year ended December 31, 2009 with our management. The Audit Committee also reviewed and discussed our audited financial statements and the matters required to be discussed by Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1 AU section 380) with CCR LLP, our independent registered public accounting firm. The Audit Committee received from CCR LLP the written disclosures and letter required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with the independent accountant the independent accountant’s independence.
Based on the reviews and discussions referred to above, the Audit Committee recommended to our Board of Directors that our audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2009.
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The Audit Committee
Andrew Pilaro
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Code of Ethics
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.
Any waiver of the code of business conduct and ethics for directors or executive officers, or any amendment to the code that applies to directors or executive officers, may only be made by the board of directors. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our web site, at the address and location specified above. To date, no such waivers have been requested or granted.
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-K relates, except that Lewis Asset Management, Corp, Lewis Opportunity Fund, L.P., and LAM Opportunity Fund, Ltd., have not filed any Form 3, or any reports on Form 4 or Form 5. The Company believes that such parties may have been required to file a Form 3 as one affiliated group, but has no knowledge as to whether such parties or their affiliates should have filed a Form 3, Form 4, or Form 5 or whether such entities were engaged in any reporting transactions.
Compensation
Discussion
and
Analysis
Overview
Our three member board of directors serves in lieu of a compensation committee. The Board does not have a separate compensation committee. The Board is responsible for establishing policies and otherwise discharging the responsibilities of a compensation committee with respect to the compensation of our executive officers. Both executive officers are members of the Board and help set compensation.
The Board has traditionally set a low salary for its executive officers, and has relied heavily on grants of stock options as further compensation incentive. The primary objective of our compensation program is to compensate executives in a way that reinforces decisions which would lead to long-term growth, which in turn leads to increased stockholder value. The Board also periodically is responsible for administering our incentive and equity-based plans. All decisions with respect to executive compensation are approved by the Board, including the one independent member of the board.
Elements of compensation for our executives named in the Summary Compensation Table generally include:
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Base Salary (not typically subject to adjustment); and
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Stock Option Awards.
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In addition, our executives receive the same health, disability and insurance benefits as all other full time employees.
Our allocation between long-term and currently paid compensation is intended to ensure adequate base compensation to attract and retain personnel, while providing incentives to maximize long-term value for our Company and our shareholders. We provide cash compensation in the form of base salary to meet competitive salary norms to the extent possible. We provide non-cash compensation to reward tenure with the Company. Our option awards typically require a one to four year vesting from the date of grant to encourage management continuity. There is no established policy or formula for deciding when to award long-term compensation or the amount of such compensation. This approach provides us with flexibility to respond to marketplace and individual factors in attracting and retaining our executives and encouraging performance.
Elements of Compensation
Base Salary
Our Board establishes base salary compensation for our executive officers at a rate that the Board considers low in order to conserve limited cash resources. In establishing base salaries for the fiscal year ended December 31, 2009, our Board considered historical salaries paid to executive officers. Increases are not pre-set and, if made, would take into account the executive’s performance, responsibilities of the position, and experience. The salaries for the Company’s two named executive officers have not changed for the three year period ended on December 31, 2009. The Company believes it is difficult to distinguish the efforts of the two named executive officers, and that a difference in salary between them would not be beneficial to morale, as both executives devote all of their energies to the Company. The Board does not believe that a sufficient peer group exists to appropriately compare the base salaries against other companies, but believes that the salaries paid are competitive with or substantially lower than other comparable entities.
Bonus and Other Non-Equity Incentive Plan Compensation
Given our desire to conserve cash, we generally do not award cash bonuses or provide for other non-equity incentive plan compensation.
Stock Option and Equity Incentive Programs
We believe that equity grants provide our executive officers with a strong link to our long-term performance, create an ownership culture and closely align the interests of our executive officers with the interests of our shareholders. Because of the direct relationship between the value of an option and the market price of our common stock, we believe that granting stock options is the best method of motivating the executive officers to manage our Company in a manner that is consistent with the interests of our Company and our shareholders. We believe that equity grants in the form of stock options motivate executives to make stronger business decisions, improve financial performance, focus on both short-term and long-term objectives and encourage behavior that protects and enhances the long-term interests of our stockholders. In addition, the one to four year vesting feature of our typical equity grants is designed to encourage executive officer retention because this feature provides an incentive to our executive officers to remain in our employ during the vesting period.
In determining the size of equity grants to our executive officers, our Board considers the applicable executive officer’s performance, the period during which an executive officer has been in a key position with us, the amount of equity previously awarded to the applicable executive officer, the vesting of such awards, the number of shares available under our plans, the limitations under our plans and the recommendations of management.
We currently do not have any formal requirement to grant, or not to grant, equity compensation on specified dates. The grant value of all equity awards granted to executive officers is equal to the fair market value on the date of grant.
Under the Company’s 2002 Stock Option Plan, the Board is authorized to determine and designate from time to time those individuals to whom options are granted. Unless an earlier expiration is specified by the Board in the option agreement, each option granted under the Stock Option Plan will expire generally on the tenth anniversary of the date the option was granted.
The Company’s 2002 Stock Option Plan provides for the reserved 30,000,000 shares of Common Stock of the Company for issuance upon the exercise of options granted under the plan. No options are currently available for grant under the plan. Upon any attempt to transfer an option, or to assign, pledge, hypothecate or otherwise dispose of an option in violation of the Stock Option Plan, or upon the levy of any attachment or similar process upon such option or such rights, the option immediately becomes null and void.
Perquisites
Our executive officers do not receive any perquisites and are not entitled to benefits that are not otherwise available to all of our employees. In this regard it should be noted that we do not provide pension arrangements, post-retirement health coverage, or similar benefits for our executive officers or employees.
Defined Contribution Plan
We do not maintain a qualified retirement plan pursuant to Internal Revenue Code Section 401(k) covering employees or any other similar retirement plan.
Employment Agreements
In general, we have not entered into formal employment agreements with our employees.
Accounting and Tax Considerations
We select and implement our various elements of compensation for their ability to help us achieve our performance and retention goals and not based on any unique or preferential financial accounting treatment. In this regard, Section 162(m) of the Internal Revenue Code generally sets a limit of one million dollars on the amount of annual compensation (other than certain enumerated categories of performance-based compensation) that we may deduct for federal income tax purposes. Compensation realized upon the exercise of stock options is considered performance based if, among other requirements, the plan pursuant to which the options are granted has been approved by the a company’s stockholders and has a limit on the total number of shares that may be covered by options issued to any plan participant in any specified period. Options granted under our 2002 Stock Option Plan are considered performance based. Therefore any compensation realized upon the exercise of stock options granted under the 2002 Stock Option Plan will be excluded from the deductibility limits of Section 162(m). While we have not adopted a policy requiring that all compensation be deductible, we consider the consequences of Section 162(m) in designing our compensation practices.
Stock Ownership Guidelines
Although we have not adopted any stock ownership guidelines, we believe that our compensation of executive officers, which includes the use of stock options, results in an alignment of interest between these individuals and our stockholders.
Benchmarking and Consultants
Our Board reviews the history of all the elements of each executive officer’s total compensation over the past several years. The Board may choose to compare the compensation of the executive officers with that of the executive officers in an appropriate market comparison group comprised of smaller public entities. The Board does not believe that a sufficient peer group exists to appropriately compare the base salaries against other companies, but believes that the salaries paid are competitive with or substantially lower than other comparable entities
Other Employees
We compensate a number of non-executive employees and consultants through stock option grants under the Company’s 2001 Non-Qualified Stock Option Plan. One hundred ten million shares were registered under that plan since its inception in 2001. Typically, shares are immediately exercised by the employee or consultant. In 2009, employees received options for 1,098,272 shares equal to $282,001 in compensation, and consultants and professionals received 14,203,311 shares equal to $2,179,821 in compensation.
Compensation to the Named Executive Officers
During fiscal year 2009, both of our named executive officers were accrued a salary of $100,000. While we did not research comparable salaries with a peer group, we believe that these salaries are either competitive with or substantially lower than salaries of similarly situated executive officers. To the extent that either executive received cash compensation higher than $100,000 in a given year, the increase was due to payment of accrued salary from a prior year. If less than $100,000, the executive and the Company made the decision to conserve cash and thus accrue the required cash payment.
Both named executives have served in their roles since February 1999. Over the past 10 years, the two executives received two stock option grants which vested over time. The first grant was made under the Company’s 2002 Stock Option Plan on October 11, 2002. Both executives were granted options to purchase 10,000,000 shares of common stock at an exercise price of $.041, 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. During 2009, neither Gregory Rotman nor Richard Rotman exercised options any options to purchase shares. Under the Company’s 2002 Stock Option Plan, on January 10, 2008, each named executive received an additional grant of 2,500,000 shares of common stock at $.415 per share, which vest on January 10, 2012.
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 $100,000, for the last three fiscal years ended December 31, 2009, 2008 and 2007.
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SUMMARY COMPENSATION TABLE
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Name and
Principal Position
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Year
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Salary (1)
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Option Awards ($)
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Total
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Gregory Rotman
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2009
|
$ | 100,000 | $ | 0 | $ | 100,000 | ||||||
|
President and Chief Executive
|
2008
|
$ | 100,000 | $ | 226,862 | (2) | $ | 326,862 | |||||
|
Officer (PEO)
|
2007
|
$ | 100,000 | $ | 0 | $ | 100,000 | ||||||
|
Richard Rotman
|
2009
|
$ | 100,000 | $ | 0 | $ | 100,000 | ||||||
|
Chief Financial Officer, Vice
|
2008
|
$ | 100,000 | $ | 226,862 | (2) | $ | 326,862 | |||||
|
President, Treasurer and
|
2007
|
$ | 100,000 | $ | 0 | $ | 100,000 | ||||||
|
Secretary (PFO)
|
|||||||||||||
(1) In 2009, 2008, and 2007, for each of Gregory Rotman and Richard Rotman, the executive earned $100,000, although payment may have been accrued and paid in a later pay period.
(2) On January 10, 2008, each of Gregory Rotman and Richard Rotman received stock received options to purchase 2,500,000 shares of common stock at an exercise price of $.415 per share. The options vest four years after the date of grant.
The Company did not make any equity awards or grants to either of the named executive officers in 2009.
The following tables set forth certain information related to outstanding equity awards as of December 31, 2009 for Gregory Rotman and Richard Rotman. Other than the option awards described in the table below, no other equity or stock awards were made. During 2009, Gregory Rotman and Richard Rotman did not exercise options or receive vested options or other equity awards.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|
Option Awards
|
|||||||||||||||||
|
Name
|
Number of Securities Underlying Unexercised Options (#) Exercisable
|
Number of Securities Underlying Unexercised Options (#) Unexercisable
|
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)
|
Option Exercise Price ($)
|
Option Expiration Date
|
||||||||||||
|
Gregory Rotman,
|
9,250,000 | 0 | 0 | $ | .041 |
10/11/12
|
|||||||||||
|
President and CEO
|
|||||||||||||||||
|
(PEO)
|
0 | 2,500,000 | 0 | $ | .415 |
1/10/18
|
|||||||||||
|
Richard Rotman, CFO,
|
9,000,000 | 0 | 0 | $ | .041 |
10/11/12
|
|||||||||||
|
Vice President and
|
|||||||||||||||||
|
Secretary (PFO)
|
0 | 2,500,000 | 0 | $ | .415 |
1/10/18
|
|||||||||||
None of the Company's directors, including both named executive officers, received any separate compensation from the Company for serving as directors in 2009. 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. These options have not been exercised and expire on October 11, 2012.
Compensation Committee Interlocks and Insider Participation
The Company has no separate compensation committee. Each of Gregory Rotman, Richard Rotman and Andrew Pilaro, and no other current or former officer or director, participated in deliberations of the Board of Directors concerning executive officer compensation.
For the fiscal year ended December 31, 2009, (i) no executive officer of the Company served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of the Company; (ii) no
executive officer of the Company served as a director of another entity, one of whose executive officers served on the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of the Company; and (iii) n
o executive officer of the Company served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served as a director of the Company.
Compensation Committee Report
The board of directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of SEC Regulation S-K with management and, based on such review and discussions, the board of directors recommended that this Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
|
Board of Directors
|
|
|
Andrew Pilaro
|
|
|
Gregory Rotman
|
|
|
Richard Rotman
|
To the knowledge of the management of the Company the following table sets forth the beneficial ownership of our common stock as of March 1, 2010 of each of our directors and executive officers, and all of our directors and executive officers as a group.
|
Name of
|
Amount and Nature of
|
Percent of
|
||
|
Beneficial Owner
|
Beneficial Ownership
|
Class
(4)
|
||
|
Gregory Rotman
|
12,130,299 (1)
|
4.26%
|
||
|
Richard Rotman
|
15,903,294 (2)
|
5.58%
|
||
|
Andrew Pilaro
|
2,068,700 (3)
|
.73%
|
||
|
All directors and executive
officers as a group (3 individuals)
|
30,102,293
|
10.56%
|
||
(1) Includes options to purchase 8,250,000 shares of the Company’s common stock at an exercise price of $.041, granted on October 11, 2002. Excluded are options to purchase 2,500,000 shares of the Company’s common stock at an exercise price of $.415, granted on January 10, 2008, which vest on January 10, 2012, as such options are not exercisable within 60 days, and thus, are not beneficially owned.
(2) Includes options to purchase 8,000,000 shares of the Company’s common stock at an exercise price of $.041, granted on October 11, 2002. Excluded are options to purchase 2,500,000 shares of the Company’s common stock at an exercise price of $.415, granted on January 10, 2008, which vest on January 10, 2012, as such options are not exercisable within 60days, and thus, are not beneficially owned.
(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, all of which are vested.
(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, based solely on our review of SEC filings, the following table sets forth the beneficial ownership of our common stock as of March 1, 2009 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
|
Amount and Nature of
|
Percent of
|
||
|
Beneficial Owner (1)
|
Beneficial Ownership
|
Class
|
||
|
Lewis Asset Management, Corp.
Lewis Opportunity Fund, L.P.
LAM Opportunity Fund, Ltd.
500 5
th
Avenue, Suite 2240
New York, NY 10010
|
31,309,208
|
10.98%
|
||
|
Augustine Fund, L.P.
141 W. Jackson Blvd., Suite 2182
Chicago, IL 60604
|
15,795,148
|
5.54%
|
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-K.
The Company did not engage in any transaction in 2008 or 2009, and does not currently propose any transaction, in which the Company was is a participant and the amount involved exceeds $120,000, and in which any related person had or will have a direct or indirect material interest.
Review, Approval or Ratification of Transactions with Related Parties
It is our unwritten policy, which policy is not otherwise evidenced, for any related party transaction that involves more than a de minimis obligation, expense or payment or stock option or equity grants, to obtain approval by our entire board of directors prior to our entering into any such transaction. In conformity with our various policies on related party transactions, each of the transactions discussed in this Item 13 has been reviewed and approved by our board of directors.
Director Independence
We are currently traded on the OTCBB. Accordingly, we are not required to and do not have a majority of independent directors or an audit, compensation or nominating committee.
Our board of directors currently consists of three members. Our board of directors determined that one of the three directors, Andrew Pilaro, is independent under the standards of the “Nasdaq Global Market" pursuant to Nasdaq Listing Rule 5605.
Audit Fees
. The aggregate fees billed by CCR LLP for the audit of the Company’s annual financial statements for the fiscal year ended December 31, 2009 and 2008, and the reviews of the quarterly financial statements included in the Company’s Forms 10-Q for fiscal years 2009 and 2008, were $98,925 and $54,800, respectively.
Audit Related Fees
.
There were no audit related fees for the past two fiscal years. There were no fees billed to the Company by CCR LLP for 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.
Tax Fees
. There were no fees billed to the Company by CCR 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 CCR 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%.
(a)(1) Financial Statements
For a list of the financial information included herein, see “Index to Audited Financial Statements” on page F-1 of this Annual Report on Form 10-K.
(a)(2) Financial Statements Schedules
All schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
(a)(3) Exhibits
The list of exhibits filed as a part of this Annual Report on Form 10-K is set forth on the Exhibit Index immediately preceding the exhibits hereto and is incorporated herein by reference.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
PAID, INC.
|
|||
|
|
|||
|
By:
|
/s/ Gregory Rotman
|
||
|
Gregory Rotman, President
|
|||
|
Date:
|
March 12, 2010
|
||
Pursuant to the requirements of the Securities Exchange Act of 1934, 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 (PEO)
|
||
|
Date: March 12, 2010
|
||
|
/s/ Richard Rotman
|
||
|
Richard Rotman, Vice President, Treasurer,
|
||
|
Secretary and Director (PFO)
|
||
|
Date: March 12, 2010
|
||
|
/s/ Andrew Pilaro
|
||
|
Andrew Pilaro, Director
|
||
|
Date: March 12, 2010
|
||
PAID, INC.
INDEX TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 AND 2007
|
Page
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
|
Balance Sheets at December 31, 2009 and 2008
|
F-3
|
|
Statements of Operations
|
|
|
Years ended December 31, 2009, 2008 and 2007
|
F-4
|
|
Statement of Changes in Shareholders’ Equity
|
|
|
Years ended December 31, 2009, 2008 and 2007
|
F-5
|
|
Statements of Cash Flows
|
|
|
Years ended December 31, 2009, 2008 and 2007
|
F-6
|
|
Notes to Financial Statements
|
F-7
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Paid, Inc.
Worcester, Massachusetts
We have audited the accompanying balance sheets of Paid, Inc. (the Company) as of December 31, 2009 and 2008, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 financial statements referred to above present fairly, in all material respects, the financial position of Paid, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in Note 2 to the financial statements, the Company has suffered substantial net losses in recent years and has an accumulated deficit at December 31, 2009. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also disclosed in Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2010 expressed an adverse opinion on the Company’s internal control over financial reporting.
/s/ CCR LLP
Westborough, Massachusetts
March 12, 2010
PAID, INC.
|
BALANCE SHEETS
|
||||||||
|
DECEMBER 31,
|
||||||||
|
ASSETS
|
2009
|
2008
|
||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 730,433 | $ | 106,948 | ||||
|
Accounts receivable, net
|
622,145 | 1,425 | ||||||
|
Inventories, net
|
1,042,700 | 1,016,938 | ||||||
|
Prepaid expenses and other current assets
|
518,722 | 404,876 | ||||||
|
Due from employees
|
19,640 | 42,497 | ||||||
|
Total current assets
|
2,933,640 | 1,572,684 | ||||||
|
Property and equipment, net
|
40,517 | 30,967 | ||||||
|
Intangible asset, net
|
8,948 | 9,888 | ||||||
|
Total assets
|
$ | 2,983,105 | $ | 1,613,539 | ||||
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 159,716 | $ | 399,383 | ||||
|
Accrued expenses
|
592,350 | 495,139 | ||||||
|
Deferred revenues
|
190,753 | 119,700 | ||||||
|
Total current liabilities
|
942,819 | 1,014,222 | ||||||
|
Commitments and contingencies (Note 10)
|
- | - | ||||||
|
Shareholders' equity:
|
||||||||
|
Common stock, $.001 par value, 350,000,000 shares authorized; 268,174,642 and 251,369,046 shares issued and outstanding at December 31, 2009 and 2008, respectively
|
268,175 | 251,369 | ||||||
|
Additional paid-in capital
|
41,370,985 | 36,392,504 | ||||||
|
Accumulated deficit
|
(39,528,874 | ) | (36,044,556 | ) | ||||
|
Stock subscription receivable
|
(70,000 | ) | - | |||||
|
Total shareholders' equity
|
2,040,286 | 599,317 | ||||||
|
Total liabilities and shareholders' equity
|
$ | 2,983,105 | $ | 1,613,539 | ||||
See accompanying notes to financial statements
PAID, INC.
|
STATEMENTS OF OPERATIONS
|
||||||||||||
|
YEARS ENDED DECEMBER 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
4,725,962 | 2,181,236 | 3,383,294 | |||||||||
|
Cost of revenues
|
3,069,701 | 1,410,402 | 1,965,619 | |||||||||
|
Gross profit
|
1,656,261 | 770,834 | 1,417,675 | |||||||||
|
Operating expenses:
|
||||||||||||
|
Selling, general, and administrative expenses
|
4,770,132 | 4,555,504 | 3,650,646 | |||||||||
|
Web site development costs
|
448,465 | 466,499 | 423,308 | |||||||||
|
Total operating expenses
|
5,218,597 | 5,022,003 | 4,073,954 | |||||||||
|
Loss from operations
|
(3,562,336 | ) | (4,251,169 | ) | (2,656,279 | ) | ||||||
|
Other income (expense):
|
||||||||||||
|
Interest expense
|
(2,500 | ) | (484,441 | ) | (82,659 | ) | ||||||
|
Other income
|
80,518 | 1,242 | 14,855 | |||||||||
|
Total other income (expense), net
|
78,018 | (483,199 | ) | (67,804 | ) | |||||||
|
Loss before income taxes
|
(3,484,318 | ) | (4,734,368 | ) | (2,724,083 | ) | ||||||
|
Provision for income taxes
|
- | - | - | |||||||||
|
Net (loss)
|
$ | (3,484,318 | ) | $ | (4,734,368 | ) | $ | (2,724,083 | ) | |||
|
Loss per share - basic and diluted
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) | |||
|
Weighted average shares - basic and diluted
|
260,711,253 | 240,469,844 | 226,679,082 | |||||||||
See accompanying notes to financial statements
PAID, INC.
|
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||
|
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
|
||||||||||||||||||||||||
|
Additional
|
Stock
|
|||||||||||||||||||||||
|
Common stock
|
Paid-in
|
Accumulated
|
subscription
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
receivable
|
Total
|
|||||||||||||||||||
|
Balance, December 31, 2006
|
218,329,910 | 218,330 | 28,638,897 | (28,586,105 | ) | - | 271,122 | |||||||||||||||||
|
Issuance of common stock pursuant to exercise of stock options granted to employees for services
|
778,044 | 778 | 224,186 | - | - | 224,964 | ||||||||||||||||||
|
Issuance of common stock pursuant to exercise of stock options granted to professionals and consultants
|
6,663,479 | 6,663 | 1,503,347 | - | - | 1,510,010 | ||||||||||||||||||
|
Issuance of common stock
|
6,517,896 | 6,519 | 1,256,881 | - | - | 1,263,400 | ||||||||||||||||||
|
Options exercised
|
1,000,000 | 1,000 | 40,000 | - | - | 41,000 | ||||||||||||||||||
|
Common stock issued in connection with acquisition of assets of K-sports & Entertainment, LLC
|
100,000 | 100 | 31,900 | - | - | 32,000 | ||||||||||||||||||
|
Common stock issued in payment of notes payable
|
333,333 | 333 | 99,667 | - | - | 100,000 | ||||||||||||||||||
|
Common stock issued in payment of interest
|
194,155 | 194 | 58,052 | - | - | 58,246 | ||||||||||||||||||
|
Common stock issued in payment of accrued expenses
|
719,925 | 720 | 215,413 | - | - | 216,133 | ||||||||||||||||||
|
Proceeds from assignment of call options
|
- | - | 15,537 | - | - | 15,537 | ||||||||||||||||||
|
Net loss
|
- | - | - | (2,724,083 | ) | - | (2,724,083 | ) | ||||||||||||||||
|
Balance, December 31, 2007
|
234,636,742 | 234,637 | 32,083,880 | (31,310,188 | ) | - | 1,008,329 | |||||||||||||||||
|
Issuance of common stock pursuant to exercise of stock options granted to employees for services
|
440,183 | 440 | 99,868 | - | 100,308 | |||||||||||||||||||
|
Intrinsic value of options granted to consultant for services
|
- | - | 250,000 | - | 250,000 | |||||||||||||||||||
|
Issuance of common stock pursuant to exercise of stock options granted to professionals and consultants
|
8,106,079 | 8,106 | 1,801,409 | - | 1,809,515 | |||||||||||||||||||
|
Proceeds from assignment of call options
|
- | - | 123,464 | - | 123,464 | |||||||||||||||||||
|
Options exercised
|
750,000 | 750 | 30,000 | - | 30,750 | |||||||||||||||||||
|
Issuance of warrants in conjunction with loans payable
|
- | - | 61,112 | - | 61,112 | |||||||||||||||||||
|
Proceeds from extension of expiration date of warrants
|
- | - | 10,000 | - | 10,000 | |||||||||||||||||||
|
Common stock issued in payment of notes payable
|
7,436,042 | 7,436 | 1,479,771 | - | 1,487,207 | |||||||||||||||||||
|
Share based compensation related to issuance of incentive stock options
|
- | - | 453,000 | - | 453,000 | |||||||||||||||||||
|
Net loss
|
- | - | - | (4,734,368 | ) | - | (4,734,368 | ) | ||||||||||||||||
|
Balance, December 31, 2008
|
251,369,046 | 251,369 | 36,392,504 | (36,044,556 | ) | - | 599,317 | |||||||||||||||||
|
Issuance of common stock pursuant to exercise of stock options granted to employees for services
|
1,098,272 | 1,099 | 280,902 | - | - | 282,001 | ||||||||||||||||||
|
Issuance of common stock pursuant to exercise of stock options granted to professionals and consultants
|
8,880,400 | 8,880 | 2,472,543 | - | - | 2,481,423 | ||||||||||||||||||
|
Gross compensation related to stock options granted to consultant for services
|
- | - | 74,398 | - | - | 74,398 | ||||||||||||||||||
|
Proceeds from assignment of call options
|
- | - | 158,245 | - | - | 158,245 | ||||||||||||||||||
|
Issuance of common stock
|
4,826,924 | 4,827 | 1,341,393 | - | - | 1,346,220 | ||||||||||||||||||
|
Share based compensation related to issuance of incentive stock options
|
- | - | 453,000 | - | - | 453,000 | ||||||||||||||||||
|
Exercise of warrants
|
2,000,000 | 2,000 | 198,000 | - | (120,000 | ) | 80,000 | |||||||||||||||||
|
Services received in consideration of payment of stock subscription receivable
|
- | - | - | - | 50,000 | 50,000 | ||||||||||||||||||
|
Net loss
|
- | - | - | (3,484,318 | ) | - | (3,484,318 | ) | ||||||||||||||||
|
Balance, December 31, 2009
|
268,174,642 | $ | 268,175 | $ | 41,370,985 | $ | (39,528,874 | ) | $ | (70,000 | ) | $ | 2,040,286 | |||||||||||
See accompanying notes to financial statements
PAID, INC.
|
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
FOR THE YEARS ENDED DECEMBER 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Operating activities:
|
||||||||||||
|
Net loss
|
$ | (3,484,318 | ) | $ | (4,734,368 | ) | $ | (2,724,083 | ) | |||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||||||
|
Depreciation and amortization
|
18,348 | 71,031 | 129,074 | |||||||||
|
Bad Debt
|
- | - | 26,622 | |||||||||
|
Inventory reserve
|
112,527 | 150,000 | - | |||||||||
|
Share based compensation
|
453,000 | 453,000 | - | |||||||||
|
Amortization of debt discount
|
- | 61,112 | - | |||||||||
|
Fair value of stock options awarded to professionals and consultants in payment of fees for services provided
|
2,555,821 | 2,059,515 | 1,510,010 | |||||||||
|
Fair value of stock options awarded to employees in payment of compensation
|
282,001 | 100,308 | 224,964 | |||||||||
|
Services received in consideration of payment of stock subscription receivable
|
50,000 | - | - | |||||||||
|
Issuance of common stock in payment of interest on
|
||||||||||||
|
notes payable
|
- | 15,405 | - | |||||||||
|
Interest charge on discounted stock issuance
|
- | 371,802 | 75,000 | |||||||||
|
Changes in assets and liabilities:
|
||||||||||||
|
Accounts receivable
|
(199,500 | ) | (1,425 | ) | 8,109 | |||||||
|
Inventories
|
(138,289 | ) | 28,753 | (14,328 | ) | |||||||
|
Prepaid expense and other current assets
|
(90,989 | ) | (222,460 | ) | (100,564 | ) | ||||||
|
Accounts payable
|
(239,667 | ) | 126,907 | (123,781 | ) | |||||||
|
Accrued expenses
|
97,211 | 114,863 | (285,021 | ) | ||||||||
|
Deferred revenue
|
71,053 | 10,200 | 109,500 | |||||||||
|
Net cash used in operating activities
|
(512,802 | ) | (1,395,357 | ) | (1,164,498 | ) | ||||||
|
Investing activities:
|
||||||||||||
|
Property and equipment additions
|
(26,958 | ) | (26,720 | ) | (10,954 | ) | ||||||
|
Financing activities:
|
||||||||||||
|
Net proceeds (repayments) of notes and loans payable
|
- | 1,100,000 | (18,000 | ) | ||||||||
|
Proceeds from sale of warrants
|
80,000 | 10,000 | - | |||||||||
|
Proceeds from assignment of call options
|
158,245 | 123,464 | 15,537 | |||||||||
|
Proceeds from exercise of stock options
|
- | 30,750 | 41,000 | |||||||||
|
Proceeds from sale of common stock
|
925,000 | - | 1,263,400 | |||||||||
|
Net cash provided by financing activities
|
1,163,245 | 1,264,214 | 1,301,937 | |||||||||
|
Net increase (decrease)in cash and cash equivalents
|
623,485 | (157,863 | ) | 126,485 | ||||||||
|
Cash and cash equivalents, beginning
|
106,948 | 264,811 | 138,326 | |||||||||
|
Cash and cash equivalents, ending
|
$ | 730,433 | $ | 106,948 | $ | 264,811 | ||||||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Income taxes
|
$ | - | $ | - | $ | - | ||||||
|
Interest
|
$ | - | $ | 40,000 | $ | 1,357 | ||||||
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
||||||||||||
|
Amounts due in connection with issuance of common stock
|
$ | 421,220 | $ | - | $ | - | ||||||
|
Common stock issued in final payment of amounts due in connection with the 2004 acquistion of K-Sports and Entertainment, LLC
|
$ | - | $ | - | $ | 32,000 | ||||||
|
Common stock issued in payment of notes payable
|
$ | - | $ | 1,100,000 | $ | 80,000 | ||||||
|
Common stock issued in payment of accrued consignments and interest
|
$ | - | $ | - | $ | 219,379 | ||||||
See accompanying notes to financial statements
PAID, INC.
DECEMBER 31, 2009, 2008 AND 2007
NOTES TO FINANCIAL STATEMENTS
Paid, Inc. (the “Company”) provides businesses and clients with brand management, brand marketing, product merchandising, website design, development, and hosting and authentication services for the entertainment, sports and collectible industries. We offer businesses, entertainers, and celebrity athletes comprehensive web-presence related services supporting and managing clients' official websites and fan-community services including VIP ticketing, live event fan experiences, e-commerce, user generated content, client content publishing and distribution, fan forums, social network management and social media marketing.
The Company has continued to incur significant losses. For the years ended December 31, 2009, 2008, and 2007 the Company reported losses of approximately $3,484,000, $4,734,000 and $2,724,000, respectively. The Company has an accumulated deficit of $39,253,000 at December 31, 2009. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
To date the Company has met its cash needs from the proceeds of the sale of warrants, equity financing, and the assignment of the call options discussed in Note 7.
Management anticipates growth in revenues and gross profits in 2010 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, management continues to explore opportunities to monetize its patent.
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 2010.
Recent Accounting Pronouncements
Adoption of New Accounting Standards
In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a Replacement of FASB Statement No. 162" ("The Codification" or “ASC”). The Codification reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than Securities and Exchange Commission guidance for publicly-traded companies) is considered non-authoritative. The Codification was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. The adoption of the Codification changed the Company's references to U.S. GAAP accounting standards but did not impact the Company's financial statements.
In December 2007, the FASB issued revised guidance for the accounting for business combinations. The revised guidance, which is now part of ASC 805, "Business Combinations," requires the fair value measurement of assets acquired, liabilities assumed, and any non-controlling interest in the acquire, at acquisition date with limited exceptions. ASC 805 is applicable to business combinations for acquisitions occurring after January 1, 2009. Adoption of ASC 805 on January 1, 2009 did not have a material impact on our financial statements.
In March 2008, the FASB issued new guidance related to disclosures about derivative instruments and hedging activities. The new guidance, which is now part of ASC 815, "Derivatives and Hedging", requires enhanced disclosures about (a) how an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. The new guidance was effective for interim and annual periods beginning after November 15, 2008. Adoption of ASC 815 on January 1, 2009 did not have a material impact on our financial statements.
In April 2008, the FASB issued revised guidance about the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The revised guidance, which is now part of ASC 350, "Intangibles - Goodwill and Other", was adopted on January 1, 2009 with no material impact on our financial statements.
In June 2008, the FASB issued guidance for determining whether an equity-linked financial instrument is indexed to an entity's own stock. The revised guidance, which is now part of ASC 815, "Derivatives and Hedging", was adopted on January 1, 2009 with no material impact on our financial statements.
In April 2009, the FASB issued interpretive guidance for determining other-than-temporary impairments for debt securities. The interpretive guidance, which is now part of ASC 320, "Investments - Debt and Equity Securities", was adopted by the Company in 2009 with no material impact on our financial statements.
In April 2009, the FASB issued new guidance related to the disclosure of the fair value of financial instruments. The new guidance, which is now part of ASC 825, "Financial Instruments," requires disclosure of the fair value of financial instruments whenever a publicly traded company issues financial information in interim reporting periods in addition to the annual disclosure required at year-end. ASC 825 was adopted by the Company in 2009 with no material impact on our financial statements.
In April 2009, the FASB issued new guidance for determining when a transaction is not orderly and of estimating fair value when there has been a significant decrease in the volume and level of activity of an asset or liability. The new guidance, which is now part of ASC 820, "Fair Value Measurements and Disclosures," requires disclosure of the inputs and valuation techniques used, as well as any changes in valuation techniques and inputs used during the period, to measure fair value in interim and annual periods. In addition, presentation of the fair value hierarchy is required to be presented by major security type as described in ASC 820. ASC 820 was adopted by the Company in 2009 with no material impact on our financial statements.
In May 2009, the FASB issued new guidance for accounting for subsequent events. The new guidance, which is now part of ASC 855, "Subsequent Events," sets forth the period after the balance sheet during which management shall evaluate events or transactions that may occur for potential recognition or disclosure, the circumstances under which an entity shall recognize such events or transactions in the financial statements, and the disclosures required about such events or transactions. ASC 855 was adopted by the Company in 2009 with no material impact on our financial statements.
In August 2009, the FASB issued new guidance for the accounting for the fair value measurement of liabilities. The new guidance, which is part of ASC 820, provides clarification that in certain circumstances in which a quoted price in an active market for the identical liability is not available, a company is required to measure the fair value using one or more of the following valuation techniques: the quoted price of the identical liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as an asset, and/or another valuation technique that is consistent with the principles of fair value measurements. The new guidance clarifies that a company is not required to include an adjustment for restrictions that prevent the transfer of the liability and if an adjustment is applied to the quoted price used in a valuation technique, the result is a Level 2 or 3 fair value measurements. These provisions of ASC 855 were adopted by the Company in 2009 with no material impact on our financial statements.
Accounting Standards not yet Adopted
In October 2009 the FASB issued revised guidance for the determination of whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration shall be measured and allocated to the separate units of accounting in the arrangement. The revised guidance is part of ASC 605, "Revenue Recognition," and is effective for revenue arrangements entered into, or materially modified, after June 15, 2010. The Company has not yet determined whether adoption of ASC 605 will have a material impact on its financial statements.
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.
Inventories
Inventories consist of 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, 2009 and 2008 the Company provided for reserves totaling $587,000 and $475,000, respectively.
Website Development Costs
The Company accounts for website development costs in accordance with ASC 350, "Intangibles - Goodwill and Other," 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."
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight line method over the estimated useful lives of 3 to 5 years.
Intangible Assets
Intangible assets, comprised principally of a patent, are being amortized on a straight-line basis over an estimated useful life of 17 years.
Revenue Recognition
The Company generates revenue from sales of fan experiences, from fan club membership fees, from sales of its purchased inventories, and from web development and hosting services.
Fan experiences sales generally 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 ASC 605, "Revenue," 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 ratably over the term of the related membership, generally one year.
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.
Web hosting revenues are billed to customers and recognized on a monthly basis as the services are provided.
Cost of revenues
Cost of revenues includes event tickets, catering, merchandise, and commissions paid to celebrities.
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 totaling $200,000, $91,100, and $115,200 in 2009, 2008, and 2007, respectively, are reported as a component of selling, general and administrative expenses.
Selling and Administrative expenses
Selling, general, and administrative expenses include travel, payroll, credit card processing fees, shipping and handling, professional fees, and other general and administrative costs.
Advertising costs
Advertising costs, totaling approximately $33,700, $30,900, and $16,500 in 2009, 2008 and 2007, respectively, are charged to expense when incurred.
Segment reporting
The Company has determined that it has only one discreet operating segment consisting of activities surrounding the sale of fan experiences, fan club memberships, and merchandise associated with its relationships with performing artists and publicly recognized people.
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.
Concentrations
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and cash equivalents with high credit quality institutions.
Approximately 67% and 87% of the Company's revenues for the years ended December 31, 2009 and 2007 were generated from fan experiences and sales of merchandise related to one performing artist, Aerosmith, while approximately 82% of the Company's revenues for the year ended December 31, 2008 were generated from fan experiences and sales of merchandise related to three performing artists.
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 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 and disclosure of contingent 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, deferred tax asset valuation, revenue recognition with respect to web hosting services, assumptions used in the determination of fair value of stock options and warrants using the Black-Scholes option-pricing model, and forfeiture rates related to unvested stock options. Although these estimates are based on management's knowledge of current events and actions, they may ultimately differ from actual results.
Share Based Compensation
The Company accounts for share-based compensation in accordance with the provisions of ASC 505, "Equity", and ASC 718, "Compensation - Stock Compensation". Under the provisions of ASC 505 and ASC 718, 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 or non-employee's requisite service period (generally the vesting period of the equity grant).
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.
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 outstanding stock options and warrants. 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 31,373,612, 32,914,625, and 26,136,054 shares at December 31, 2009, 2008 and 2007, respectively, have been excluded from the computation of diluted earnings per share because they were anti-dilutive. 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 ASC 360 - "Property, Plant, and Equipment”, 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.
At December 31, property and equipment consisted of the following:
|
2009
|
2008
|
|||||||
|
Computer equipment and software
|
$ | 126,137 | $ | 99,179 | ||||
|
Office furniture
|
3,824 | 3,824 | ||||||
|
Website development cost
|
314,191 | 314,191 | ||||||
| 444,152 | 417,194 | |||||||
|
Accumulated depreciation
|
(403,635 | ) | (386,227 | ) | ||||
| $ | 40,517 | $ | 30,967 | |||||
Depreciation expense of property and equipment for the years ended December 31, 2009, 2008, and 2007 amounted to 17,400, $70,100, and $128,100, respectively.
In January 2008, the United States Patent and Trademark Office issued the Company's patent #7324968 providing the Company with the rights granted to patent holders, including the ability to seek licenses for patent use and to protect the patent from infringement. The Company's patent is for the real-time calculation of shipping costs for items purchased through online auctions using a zip code as a destination location indicator. It includes shipping charge calculations across multiple carriers and accounts for additional characteristics of the item being shipped, such as weight, special packaging or handling, and insurance costs.
The patent is presented net of accumulated amortization of $7,000 and $6,100 at December 31, 2009 and 31, 2008, respectively.
Amortization expense of intangible assets for each of the years ended December 31, 2009, 2008 and 2007 was $940.
Estimated future annual amortization expense is $940 for each year through 2019.
At December 31 accrued expenses are comprised of the following:
|
2009
|
2008
|
|||||||
|
Payroll and related costs
|
$ | 179,605 | $ | 130,380 | ||||
|
Professional and consulting fees
|
186,064 | 232,259 | ||||||
|
Commissions
|
184,519 | 107,963 | ||||||
|
Other
|
42,162 | 24,537 | ||||||
| $ | 592,350 | $ | 495,139 | |||||
Call Option Agreements
In connection with a May 9, 2005 settlement with Leslie Rotman regarding the value paid and the value received in a 2001 transaction the Company received a call option for 2,000,000 shares of the Company's common stock at $.001 per share. Leslie Rotman is the mother, of Gregory Rotman, President of the Company, and Richard Rotman, CFO/Vice President/Secretary of the Company. The option was assignable by the Company. During 2009, 2008, 2007, 2006, and 2005 the Company assigned options to purchase 376,665, 340,000, 50,000, 800,000, and 433,335 shares, respectively, in exchange for $158,245, $123,464, $15,537, $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, 2009 there were no remaining call options outstanding.
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 $110,000 in deposits ("Deposits") for the right to acquire up to 2,000,000 shares of unregistered common stock at any time prior to June 2, 2009 at $.15 per share. On June 1, 2009 the expiration date of the Warrant was extended to June 30, 2009 in exchange for a reduction in the Deposits of $10,000. On June 28, 2009 the Warrant was exercised with the remaining $200,000 of consideration paid in the form of $80,000 of cash and an agreement for $120,000 for future consulting services valued at $120,000. During the remainder of 2009 the investor provided consulting services valued at $50,000. The unused portion of the consulting services ($70,000) is included in stock subscription receivable at December 31, 2009.
During the second and third quarters of 2008, in connection with $1,100,000 of short term notes payable, the Company granted warrants for 1,100,000 shares of common stock exercisable at $.25 per share. If not exercised these warrants expire at various dates between April and August 2011.
The fair value of the warrants granted during 2008 was $217,170, estimated at the date of issue using Black-Scholes option-pricing model with the following weighted average assumptions:
|
Expected term
|
3 years
|
|
Expected volatility
|
115%
|
|
Expected dividends
|
None
|
|
Risk free interest rate
|
3.88%
|
During 2008, $61,112, representing amortization for the period the related debt was outstanding, of the fair value of the warrants was charged to interest expense and added to additional paid in capital.
In October 2008 the Company issued 7,436,042 shares of restricted common stock in connection with the payment of $1,100,000 of short term notes payable plus the related outstanding interest totaling $15,006. The conversion price was $.15. The Company's stock on the date of conversion was trading at $.20 resulting in an additional interest charge to earnings of $372,000.
Issuance of Common Stock
Under agreements with certain individual artists of a single band, the Company issued 4,826,924 shares of common stock and guaranteed the individual artists that those shares would sell for a minimum of $1,600,000. If the shares sold for less than the minimum agreed upon amount the artists would receive cash or additional shares to make up the difference. The shares and guaranteed amounts were based upon a minimum number of tour dates. A portion of the related tour was canceled after only approximately 35% of the dates were performed. Consequently, the Company has included in cost of revenues approximately $565,000 related to the portion of the tour that was completed. The artists sold the related shares, and as a result of an unanticipated increase in the market value of the Company's stock, and the tour cancellation, received in excess of the guaranteed amounts. Consequently, the Company agreed to receive back $1,346,220 which represents the amount of the original advance payment associated with the canceled portion of the tour totaling $346,876 plus $999,344 representing the amount in excess of the guaranteed payment for the tour dates performed. These transactions are reported in the statement of changes in stockholders' equity as issuance of common stock.
At December 31, 2009, there remained outstanding receivables related to this arrangement totaling approximately $421,200, of which $115,000 was collected early in 2010.
During 2007 the Company issued 6,517,896 shares of common stock in exchange for $1,263,400 of cash.
Share-based Incentive Plans
Active Plans:
At December 31, 2009, the Company had two active 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 2002 Plan (“2002 Plan”) provides for the award of qualified and non-qualified options for up to 30,000,000 shares. As of December 31, 2009 there were 3,000,000 shares reserved for issuance. The options granted have a ten-year contractual term and vested either immediately or four years from the date of grant. Information with respect to stock options granted under the above plans is as follows:
|
Number of shares
|
Weighted average exercise
price per share
|
|||||||
|
Options outstanding at December 31, 2007
|
23,250,000 | $ | .041 | |||||
|
Granted
|
5,000,000 | .415 | ||||||
|
Options outstanding at December 31, 2008
|
28,250,000 | $ | 1.08 | |||||
|
Forfeited
|
(3,000,000 | ) | .041 | |||||
|
Options outstanding at December 31, 2009
|
25,250,000 | $ | .115 | |||||
The fair value of options granted under the 2002 Plan during 2008 was $1,815,000 which, assuming no forfeiture rate, resulted in $453,000 being charged to operations during each of the years ended December 31, 2009 and 2008.
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 110,000,000 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. Information with respect to stock options granted under the above plans is as follows:
|
Number of shares
|
Weighted average exercise
price per share
|
|||||||
|
Options outstanding at December 31, 2007
|
99,054 | $ | .001 | |||||
|
Granted
|
9,974,833 | .001 | ||||||
|
Exercised
|
(8,546,262 | ) | .001 | |||||
|
Options outstanding at December 31, 2008
|
1,527,625 | $ | .001 | |||||
|
Granted
|
15,301,583 | .001 | ||||||
|
Exercised
|
(14,805,596 | ) | .001 | |||||
|
Options outstanding at December 31, 2009
|
2,023,612 | $ | .001 | |||||
A summary of the awards under this plan during the years ended December 31 is as follows:
|
Number of
Shares
|
Gross
Compensation
|
|||||||
|
2009
|
||||||||
|
Employee payroll
|
1,098,272 | $ | 282,001 | |||||
|
Consulting and professional fees
|
14,203,311 | 2,555,821 | ||||||
|
Total
|
15,301,583 | $ | 2,837,822 | |||||
|
2008
|
||||||||
|
Employee payroll
|
440,183 | $ | 100,308 | |||||
|
Consulting and professional fees
|
9,534,650 | 2,059,515 | ||||||
|
Total
|
9,974,833 | $ | 2,159,823 | |||||
|
2007
|
||||||||
|
Employee payroll
|
778,044 | $ | 224,964 | |||||
|
Consulting and professional fees
|
6,663,479 | 1,510,010 | ||||||
|
Total
|
7,441,523 | $ | 1,734,974 | |||||
The maximum number of shares currently reserved for issuance is 2,090,390 shares. The options granted have a ten-year contractual term and vest immediately.
The fair value of the Company’s option grants was estimated at the date of grant using the Black-Scholes option–pricing model with the following weighted average assumptions:
|
2009
|
2008
|
2007
|
|||
|
Expected term (based upon historical experience)
|
<1 week
|
<1 week
|
<1 week
|
||
|
Expected volatility
|
108.31%
|
114.75%
|
114.24%
|
||
|
Expected dividends
|
None
|
None
|
None
|
||
|
Risk free interest rate
|
3.4%
|
3.4%
|
4%
|
The stock volatility for each grant is determined based on a review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected option term. The expected term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.
The incremental fair value calculated using the above assumptions over the gross compensation was determined to be immaterial and no related additional share based compensation has been recorded.
All but 5,000,000 options outstanding at December 31, 2009 are fully vested and exercisable. Information pertaining to options outstanding at December 31, 2009 is as follows:
Options Outstanding
|
Exercise Prices
|
Number of
Shares
|
Weighted Average Remaining
Contractual Life
|
Aggregate
Intrinsic
Value
|
|||||||||||
| $ | .001 | 2,023,612 | 8.75 | $ | 949,075 | |||||||||
| .041 | 20,250,000 | 2.75 | 8,687,250 | |||||||||||
| .415 | 5,000,000 | 8.00 | 275,000 | |||||||||||
| 27,273,612 | ||||||||||||||
The total intrinsic value of options exercised during the year ended December 31, 2009 under all plans was $2,387,424, in exchange for no cash, since they were all exercised under the 2001 Plan. The total intrinsic value of options exercised during the year ended December 31, 2008 under all plans was $2,329,823 in exchange for $30,750 of cash.
Expired Plans:
During July 1999, the Company's Board of Directors adopted The 1999 Plan (“1999 Plan”) which provided for the award of non-qualified options for up to 1,000,000 shares. The 1999 Plan expired in July 2009 as did all 37,000 options that were outstanding with an exercise price of $1.62 per share.
Also during July 1999, the Company's Board of Directors adopted, subject to stockholders' approval, the 1999 Omnibus Share Plan (the "Omnibus Plan") that provided 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. The Omnibus Plan also expired in July 2009. No options were ever granted under the Omnibus Plan.
There was no provision for income taxes for the years ended December 31, 2009, 2008, and 2007 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 losses incurred by the Company and the valuation reserve against the Company's deferred tax asset.
The tax effects of significant temporary differences and carry forwards that give rise to deferred taxes are as follows:
|
2008
|
2007
|
|||||||
|
Federal net operating loss carry forwards
|
$ | 10,568,000 | $ | 9,502,000 | ||||
|
State net operating loss carry forwards
|
1,311,000 | 1,682,000 | ||||||
| 11,879,000 | 11,184,000 | |||||||
|
Valuation allowance
|
(11,879,000 | ) | (11,184,000 | ) | ||||
|
Net deferred tax asset
|
$ | -- | $ | -- | ||||
The valuation reserve applicable to net deferred tax asset at December 31, 2009 and 2008 is due to the likelihood of the deferred tax not to be utilized.
The Company has not been audited by the Internal Revenue Service ("IRS") or any states in connection with income taxes. The Company files income tax returns in the U.S. federal jurisdiction and Massachusetts. The periods from 2006-2009 remain open to examination by the IRS and state jurisdictions. The Company believes it is not subject to any tax risk beyond the preceding discussion. The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of ASC 740, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any significant interest expense recognized during the years ended December 31, 2009 and 2008.
At December 31, 2009, the Company has federal and state net operating loss carry forwards of approximately $32,000,000 and $14,000,000, respectively, available to offset future taxable income. The state carry-forwards will expire intermittently through 2014, while the federal carry forwards will expire intermittently through 2029.
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. During 2009, 2008 and 2007, the Company incurred $60,000, $50,000 and $144,000, respectively, of consulting fees paid to Steven Rotman, who elected to receive this compensation in the form of options under the 2001 Plan.
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. In 2005, the Company repaid $50,000, but as of December 31, 2006 continued to owe Steven Rotman $80,000 in principal, and $40,322 in interest, including $6,275 in interest which accrued in 2007. On December 19, 2007 the Company repaid the $80,000 of principal plus $46,598 of then outstanding interest through the issuance of 527,488 restricted shares of the Company’s common stock. This conversion resulted in $31,600 of additional interest representing the discount granted due to the restriction.
During 2003 and 2004 the Company sold a number of items owned by Mr. Steven Rotman under consignment arrangements resulting in accrued liabilities to Steven Rotman of $62,776 and $110,006, respectively. During 2007 the Company issued 719,925 restricted shares of its common stock in settlement of this $172,782 accrued liability. This conversion resulted in $43,400 of additional interest representing the discount granted due to the restriction.
The Company pays rent, as a tenant at will, to a company in which Steven Rotman is a shareholder. Monthly payments under this arrangement are $2,600.
Lease commitment
The Company leases office facilities in Boston, Massachusetts under a five year lease expiring in April 2011. The lease requires monthly payments of approximately $5,800, plus increases in real estate taxes and operating expenses.
Legal matters
In the normal course of business, the Company periodically becomes involved in litigation. As of December 31, 2009, in the opinion of management, the Company had no pending litigation that would have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
In preparing the financial statements, and in accordance with ASC 855, the Company evaluated subsequent events after the balance sheet date of December 31, 2009 through March 12, 2009.
The following table presents selected unaudited financial information for the eight quarters in the period ended December 31, 2009. The results for any quarter are not necessarily indicative of future quarterly results and, accordingly, period-to-period comparisons should not be relied upon as an indication of future performance.
Paid, Inc. and Subsidiary
Selected Quarterly Data
December 31, 2009
|
For the Quarters Ended
|
||||||||||||||||||||||||||||||||
|
March 31, 2008
|
June 30, 2008
|
September 30, 2008
|
December 31, 2008
|
March 31, 2009
|
June 30, 2009
|
September 30, 2009
|
December 31, 2009
|
|||||||||||||||||||||||||
|
Revenues
|
$ | 253,972 | $ | 725,456 | $ | 945,257 | $ | 256,551 | $ | 326,866 | $ | 1,620,915 | $ | 2,116,536 | $ | 661,645 | ||||||||||||||||
|
Gross Profit
|
167,183 | 365,104 | 291,495 | (52,948 | ) | 189,717 | 603,147 | 1,350,335 | (486,938 | ) | ||||||||||||||||||||||
|
Income (Loss) from operations
|
(861,728 | ) | (936,590 | ) | (1,181,845 | ) | (1,271,006 | ) | (836,311 | ) | (1,111,521 | ) | 209,129 | (1,823,633 | ) | |||||||||||||||||
|
Net income (loss)
|
$ | (861,148 | ) | $ | (963,540 | ) | $ | (1,222,087 | ) | $ | (1,687,593 | ) | $ | (838,807 | ) | $ | (1,106,826 | ) | $ | 209,806 | $ | (1,748,491 | ) | |||||||||
|
Income (Loss) per share - basic
|
$ | - | $ | - | $ | (0.01 | ) | $ | (0.01 | ) | $ | - | $ | - | $ | - | $ | (0.01 | ) | |||||||||||||
|
Income (Loss) per share - diluted
|
N/A | N/A | N/A | N/A | N/A | N/A | $ | - | N/A | |||||||||||||||||||||||
|
Weighted average shares - basic
|
235,012,192 | 237,507,225 | 240,000,388 | 249,272,127 | 252,826,173 | 257,294,430 | 257,294,430 | 267,380,185 | ||||||||||||||||||||||||
|
Weighted average shares - diluted
|
N/A | N/A | N/A | N/A | N/A | N/A | 286,541,637 | N/A | ||||||||||||||||||||||||
EXHIBIT
INDEX
|
No.
|
Description of Exhibits
|
|
|
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
|
Agreement dated November 21, 2007, by and between the Company and Lewis Asset Management Equity Fund, LLP with respect to the purchase of 2,500,000 shares at $.20 per share (incorporated by reference to Exhibit 4.2 to Form 10-KSB filed on March 31, 2008)
|
|
|
4.3
|
Form of Warrant to Lewis Asset Management with respect to Promissory Note dated April 29, 2008 (incorporated by reference to Exhibit 4.2 to Form 10-Q filed on May 12, 2008)
|
|
|
10.1+
|
2001 Non-Qualified Stock Option Plan, as amended (incorporated by reference from Exhibit 99.1 to Form S-8 filed on September 5, 2003)
|
|
|
10.2+
|
2002 Stock Option Plan (incorporated by reference from Exhibit 10.17 to Form 10-KSB filed on March 31, 2003)
|
|
|
10.3
|
Promissory Note dated April 29, 2008 for up to $2,500,000 to Lewis Asset Management (incorporated by reference to Exhibit 10.2 to Form 10-Q filed on May 12, 2008)
|
|
|
Consent of CCR LLP
|
||
|
CEO Certification required under Section 302 of Sarbanes-Oxley Act of 2002
|
||
|
CFO Certification required under Section 302 of Sarbanes-Oxley Act of 2002
|
||
|
CEO and CFO Certification required under Section 906 of Sarbanes-Oxley Act
of 2002
|
||
|
|
* filed herewith
|
+ Indicates a management contract or any compensatory plan, contract or arrangement
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Removed and ReservedPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9a(t). Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions. and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesNote 1. OrganizationNote 2. Management's PlansNote 3. Summary Of Significant Accounting PoliciesNote 4. Property and EquipmentNote 5. Intangible AssetsNote 6. Accrued ExpensesNote 7. Common StockNote 8. Income TaxesNote 9. Related Party TransactionsNote 10. Commitments and ContingenciesNote 11. Subsequent EventsNote 12. Results By Quarter (unaudited)