-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JIxgLZbr1SST5yxX53gtrAW0Ob+5QZnxdw1TTpvs9IQdJetNBwTkj93RYhgfmkDS CuS3qwOVd7vXg89hAspuGg== 0001169232-06-001791.txt : 20060331 0001169232-06-001791.hdr.sgml : 20060331 20060331170357 ACCESSION NUMBER: 0001169232-06-001791 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060331 DATE AS OF CHANGE: 20060331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAID INC CENTRAL INDEX KEY: 0001017655 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 731479833 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28720 FILM NUMBER: 06729847 BUSINESS ADDRESS: STREET 1: 4 BRUSSELS STREET STREET 2: SUITE 220 CITY: WORCESTER STATE: MA ZIP: 01610 BUSINESS PHONE: 5166254040 MAIL ADDRESS: STREET 1: 7633 EAST 63RD PL STREET 2: SUITE 220 CITY: TULSA STATE: OK ZIP: 74133 FORMER COMPANY: FORMER CONFORMED NAME: SALES ONLINE DIRECT INC DATE OF NAME CHANGE: 19990525 FORMER COMPANY: FORMER CONFORMED NAME: SECURITIES RESOLUTION ADVISORS INC DATE OF NAME CHANGE: 19980814 FORMER COMPANY: FORMER CONFORMED NAME: ROSE INTERNATIONAL LTD DATE OF NAME CHANGE: 19960627 10KSB 1 d67582_10ksb.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2005 Commission File No. 0-28720 PAID, INC. (Name of Small Business Issuer in its Charter) Delaware 73-1479833 (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) 4 Brussels Street, Worcester, Massachusetts 01610 (Address of Principal Executive Offices)(Zip Code) (508) 791-6710 (Issuer's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 Par Value (Title of Class) Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. |_| Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| State Issuer's revenues for its most recent fiscal year: $4,920,123. The aggregate market value of the voting and non-voting common equity held by non-affiliates on March 17, 2006 was approximately $32,976,172 based upon the average bid and ask over the counter price of $.18 per share on such date. However, the aggregate market value of the voting and non-voting common equity held by non-affiliates on December 1, 2005, a date which is 60 days prior to the end of the issuer's most recent fiscal year end, was $22,442,117, based upon the average bid and ask over the counter price of $.1225 per share on such date. As of March 17, 2006, the issuer had outstanding 201,575,111 shares of its Common Stock, par value of $0.001, its only class of voting securities. DOCUMENTS INCORPORATED BY REFERENCE No documents are incorporated by reference into this Annual Report except those Exhibits so incorporated as set forth in the Exhibit Index. TABLE OF CONTENTS
PAGE ---- PART I Item 1. Description of Business......................................................... 2 Item 2. Description of Property......................................................... 9 Item 3. Legal Proceedings............................................................... 9 Item 4. Submission of Matters to a Vote of Security Holders............................. 9 PART II Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities........................................... 9 Item 6. Management's Discussion and Analysis or Plan of Operation....................... 11 Item 7. Financial Statements............................................................ 15 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure............................................. 15 Item 8A. Controls and Procedures......................................................... 16 Item 8B. Other Information............................................................... 16 PART III Item 9. Directors and Executive Officers of the Registrant ............................. 16 Item 10. Executive Compensation.......................................................... 17 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters................................................. 19 Item 12. Certain Relationships and Related Transactions.................................. 20 Item 13. Exhibits, List and Reports on Form 8-K.......................................... 21 Item 14. Principal Accountant Fees and Services.......................................... 22 Signatures ................................................................................ 23
1 FORWARD LOOKING STATEMENTS This Annual Report on Form 10-KSB (including without limitation the Risk Factors included as Exhibit 99) may contain forward looking statements. We caution you to be aware of the speculative nature of "forward-looking statements". Statements that are not historical in nature, including the words "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions, are intended to identify forward-looking statements. Although these statements reflect our good faith belief based on current expectations, estimates and projections about (among other things) the industry and the markets in which we operate, they are not guarantees of future performance. Whether actual results will conform to our expectations and predictions is subject to a number of known and unknown risks and uncertainties, including the risks and uncertainties discussed in this Annual Report; general economic, market, or business conditions; the opportunities that may be presented to and pursued by us; competitive actions by other companies; changes in laws or regulations; and other circumstances, many of which are beyond our control. Consequently, all of the forward-looking statements made in this Annual Report are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise. Readers are urged to carefully review and consider the various disclosures made by Paid, Inc. in this Annual Report, which attempts to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects. PART I. Item 1. Description of Business. Paid, Inc. (the "Company") was incorporated in Delaware as Rose International Ltd. on August 9, 1995. The Company's main web address is located at www.paid.com, which offers updated information on various aspects of our operations, as well as access to www.ksportsent.com and www.paidcelebrityservices.com. The Company has one subsidiary, Rotman Collectibles, Inc. Information contained in the Company's websites shall not be deemed to be a part of this Annual Report. The Company's principal executive offices are located at 4 Brussels Street, Worcester, Massachusetts 01610, and the Company's telephone number is (508) 791-6710. BUSINESS Our Business The Company's primary focus is to provide businesses and clients with marketing, management, merchandising, auction management, website hosting, and authentication and consignment services for the entertainment, sports and collectible industries. We provide business management tools for online retailers, through AuctionInc, which is home to our patent pending shipping calculator and automated auction checkout and order processing system. This system provides the fundamental structure for our celebrity web hosting and development services, and for individuals seeking a professional and interactive presence on the Internet. We also provide the merchandise and fulfillment services for these websites, using 20 years of experience from Rotman Auction, to maintain the best customer service and integrity for these celebrities. We continue to provide live and private autograph signings and support professional athletes' careers through the Rotman Auction brand and K Sports initiative. 2 In 2004 we added the services of the newly acquired K Sports brand which specializes in athlete agent services and marketing and promoting these celebrities. K Sports delivers personalized attention to each client for services that include contract negotiations, endorsements, public relations, or charitable organizations. The merger of K Sports' experience and clientele with Paid's expertise in merchandising, website hosting, and auction management developed services for fan clubs and tour and travel packages was intended to create a business that is unrivaled in the sports and entertainment industry. During 2005 this acquisition proved to be a success as the Company's revenues increased substantially due to the focus on developing celebrity services. For the year ended December 31, 2005 there was a large shift in our revenues being derived from Rotman Auction and the sale of collectibles to merchandising, memberships, V.I.P. fan experiences, and ticketing. For 2005, a substantial portion of our revenue was generated from celebrity services because of the development of one particular artist's fan club. Throughout the year memberships and merchandising grew, while the artist planned a tour, creating an opportunity to capitalize on fan experiences and ticketing programs. All the sales for our celebrity and entertainment services are made through the artist's personal website and Paid's proprietary content managed system. A customer interested in a membership, merchandise, fan experience or ticketing would use our system to make purchases, and then depending on the sale, the Company either ships the merchandise, or delivers the fan experience at an event. The services offered by a client depend upon the client's desire and willingness to offer different initiatives. Not all artists and fan bases are the same and the Company works closely with its different clients to cater to their needs. The remainder of our revenue in 2005 was primarily derived from public and private autograph signings, the sale of collectibles and movie posters, and commissions relating to agent fees and marketing opportunities for our clients. The sale of collectibles and movie posters occurs in various different sales channels; retail, online auction, charity auction, direct sale, and wholesale distribution. Most of the online auctions take place through a person-to-person auction service. Our auctions consist of sports and non-sports cards, collectibles, Americana, autographed items, and movie memorabilia, among other types of collectibles from the 1800s to the present day. Rotman Auction also maintains a substantial inventory of memorabilia with popular and historical significance which allows customers to directly purchase the memorabilia without the competition from bidders in an auction format. Most of these sales are consummated through our website located at www.rotmanauction.com. We acquire inventory in the ordinary course of our business from a number of companies and individuals. We also may acquire inventory through acquisition of companies that own collectibles, or through the acquisition of substantially all the assets of a company that holds collectibles. We engage in autograph signing activities under the "Rotman Auction" name, at public and private autograph signing events. We contract and pay the celebrities for their services and for supplying products for the event. We hosted celebrities such as Adam Viniateri, Bronson Arroyo, Troy Brown, Johnny Damon, Jim Rice, Ty Law, Terry O'Reilly, Pete Rose, Ray Bourque, Paul Pierce, Trot Nixon, Corey Dillon, Derek Lowe, Carlton Fisk, Tedy Bruschi, and Alfonso Soriano. Our autograph signing events include the creation, development and maintenance of celebrity websites. We provide comprehensive content managed websites that include message boards, shopping, articles, statistics, biographical information and event schedules. We currently host such celebrities' websites as Jerry Rice, Tim Wakefield, Deuce McAllister, Roy Williams, and Chris Chambers. Revenues are generated from sales of product produced by the celebrity. Full and part-time employees, as well as interns update the news and information on these sites. We receive payment in the form of autographs for maintaining and hosting the website. We also provide management services for order fulfillment and product distribution for the celebrities. To assist with the inventory management and order processing Rotman Auction uses the AuctionInc platform for reducing order processing, increasing sales and improving customer service. The AuctionInc system was originally designed to just assist and improve Rotman Auction's business, 3 but management realized that there was a need for an order management system for individuals and businesses that sell on the Internet, specifically at auction. In 2000 the technology team focused its attention on the core fundamental piece of the system called the Shipping Calculator. The Company realized the potential importance of the calculator and filed for a patent before launching it to the public in April of 2001. The product is modular based and continues to develop new tools and products for its customers. AuctionInc Software. AuctionInc is a suite of online management tools assisting businesses with e-commerce storefronts, order processing, customer service, shipping solutions, inventory management, and auction processing. The application was designed originally to reduce overhead costs for Rotman Auction, but based on its marketability the Company began to offer the application to other sellers in 2003. A seller's use of the application reduces overhead and labor costs, and through its customer-friendly setup improves customer relations and increases sales. AIship is a shipping calculator that automatically estimates the shipping, sales tax, and insurance on auction listings. This module automatically calculates shipping costs, carrier insurance fees, optional shipping services, and offers an adjustable shipping fee markup, and co-branded shipping calculator page. It pre-configures shipping rates with handling costs, and provides a multiple auctions tab to calculate shipping on numerous auctions. The Company receives a transaction fee for each auction listing that uses AIship. AIseller is an auction management tool used to streamline a seller's order processing for improved customer service and higher sales. This module is designed for sellers who are selling more than 50 items per month at online auctions. It offers summary and detail order and sales reporting, auction/sales tracking, automated personalized e-mail notifications, auction re-listing reports, a complete integrated order management system, a customer checkout system, as well as automatic shipping rates and sales tax calculations for consolidating multiple auctions. The Company does not actively market this product, but would receive a transaction fee for each listing at auction that uses AIseller. During 2005 we enhanced our new products that we launched the end of 2004 to provide more features and options for the new online user. These enhanced tools were focused on ecommerce and were therefore branded under the Paid name. These products ranged from a simple shipping calculator to be used anywhere on the internet to a complex integration into our software application. PaidShipCalc is a shipping calculator that provides the most comprehensive shipping calculations available today. A customer can use this tool anywhere on the Internet, including its website, web store, or even classified listing. Shoppers can then choose from the shipping methods that the customer offers along with the ability to combine shipping, include your flexible handling charges, and calculate insurance and taxes if necessary. PaidShopCart provides website and ecommerce store owners a fully functional shopping cart with shipping calculations from all the major carriers. We have designed the Paid ShopCart with your needs in mind; an affordable, simple, easy to use cart that is feature heavy and an enhanced replacement for the carts being utilized today. This Paypal integrated shopping cart can be inserted into any web page by just pasting in just a few lines of HTML. It provides accurate rates for 25 domestic shipping services from USPS, UPS, FedEx, and DHL, and is configurable to match with a customer's web site design. Paid Inc's Global Module is a direct plug into the PaidShopCart and PaidShipCalc. This module is used to add comparative international rate calculations to your PaidShopCart or PaidShipCalc products. Interested clients may purchase any and all of our tools or applications for a flat quarterly fee and/or per-transaction fee depending on the module chosen. The Company may add more features and 4 modules to the suite to enable it to grow with sellers and continue to provide them superior online selling tools. Web Hosting and Development. The Company provides web hosting and development for various clients that pay monthly hosting fees and maintenance fees for updates. This service also uses the core AuctionInc platform for maintaining web portals and storefronts systems. The Company also maintains several corporate websites which it hopes to continue to expand and grow. Through improved customer 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. The Collecting Channel features extensive coverage of all aspects of collecting from its twelve micro-channels devoted to Antiques, Automotive, Books/Movies/Music, Jewelry/Gems, Stamps/Coins, Collectibles, Glass/Pottery, Dolls/Figures, Photo/Electronics, Toys/Beanie Babies, Sports and Miscellaneous. By combining information from the Collecting Exchange with the Collecting Channel portal, we have created a comprehensive collectibles site, offering services such as web searching, broadcast services, appraisal and valuation information, auction site sign-ins, price guides, shopping and classified ads. The CollectingChannel has approximately 15,000 articles, 6,000 minutes of video, and 150,000 items in the realized pricing database archived in various collecting databases. Appraisal Services. As part of the services we make available on our site, we also offer a completely interactive and dynamic appraisal service called Ask the AppraiserTM. The appraisal area permits visitors to send us an image in order to obtain an online appraisal of their item for a fee of $19.95 per appraisal. This service enables visitors to make informed decisions regarding their purchases, and helps sellers define the prices for their goods. Other Amenities. The CollectingChannel.com website also includes other amenities such as chat rooms, message boards, a classified posting area, and an information area regarding auctions. The My Collecting(TM) area of the website enables users to create and customize their own collecting pages, with personalized news, video, chat capability, wish lists and access to an extensive database of reference materials. The website also includes MaloneysOnline, a clearinghouse for hard to find information that contains the searchable Internet version of the book Maloney's Antiques & Collectibles Resource Directory. In 2003 the Company for the first time offered advertising in Maloney's Antiques & Collectibles Resource Directory. Industry Background Growth of the Internet and the Web The Internet enables millions of people worldwide to share information, communicate and conduct business electronically. The growth in the number of Web users is being driven by the increasing importance of the Internet as a communications medium, an information resource, and a sales and distribution channel. The Internet has also evolved into a unique marketing channel. Unlike the traditional marketing channels, Internet retailers do not have many of the overhead costs borne by traditional retailers. The Internet offers the opportunity to create a large, geographically dispersed customer base more quickly than traditional retailers. The Internet also offers customers a broader selection of goods to purchase, provides sellers the opportunity to sell their goods more efficiently to a broader base of buyers and allows business transactions to occur at all hours. State of Viral Communities on the Internet The massive growth of online communities over the past decade has reached viral proportions. Internet communities are built revolving around ideas, music, individuals, artists, writers, or any tangible or intangible entity, and new content can be distributed within minutes of exposure. Viral communities and 5 viral marketing are the next phenomenon that web users are embracing with vigor. As traffic and communities continue to grow, more services will be required to sustain the appetite of these users. State of the Collectibles and Online Auction Industries The online auction industry continues to be a strong and permanent player in e-commerce. Online auctions resolve the weaknesses of traditional auctions (i.e. limited geographical coverage, a dearth of product variety, high transaction costs and information inefficiency). The Internet overcomes these issues because it can handle large quantities of data and support an infinite number of products and services. It also allows buyers and sellers to trade on a global basis. Business Strategy During 2005 we experienced growth with our celebrity web-hosting and fan club and membership programs. We believe there will be an increase in online communities that will create an opportunity for more celebrity web-hosting and fan club services. It is our view that our services and programs will become more desirable as these communities grow. Our proprietary system was built to handle news, events, ticketing, fan experiences, ecommerce, authentication, charity auctions, chat, video editing, music streaming, mobile services, downloads and forums. Our goal for our celebrity services is to build the best communication and quality services that provide unparalleled opportunities for viral communities, celebrities and their fans. This goal can be accomplished by implementing the following strategy: o Increase the number of celebrity service clients and programs we offer to capitalize on internet communities. Provide high quality services and continued impeccable customer and fulfillment services building on our solid reputation. o Expand into new services being offered that will generate larger partnerships and marketing opportunities for our clients. o Shift to a quarterly billing system on AuctionInc, reducing the initial fee but increasing the number of renewal receivables. o Increase the general awareness of our Shipping Calculators and continuing to offer cutting edge technology and services in the industry. o Provide and offer more athletes and other artists marketing and promotional opportunities through K Sports & Entertainment brand. o Offer more private autograph signing and authentication services increasing our distribution and partnerships and limited costs and overhead associated with larger events. o Increase our web hosting services, charging a one time set up fee plus monthly maintenance fees, and an hourly fee for any design or feature enhancements we make; o As the number of visitors to our site increases, impose monthly/annual membership fees. We expect the above plan will enable us to increase our celebrity services and offer a wider variety of management services providing more resources for a sales and a marketing campaign to promote the Company. The business strategy described above is intended to enhance our opportunities in the online ecommerce market. However, there are a number of factors that may impact our plans and inhibit our success. See "Risk Factors" included as Exhibit 99. Therefore, we have no guarantees and can provide no assurances, that our plans will be successful. 6 Marketing and Sales Successful branding of our corporate identity and services is the key to our success. We changed our name to Paid, Inc. at the end of 2003 and have consolidated our websites and brands under one internet presence. In the past our marketing had been designed to position the Company as the premier collectibles site on the Internet, targeting both traditional collectors as well as the new online generation of collectors. We are continuing to market to collectors, but we have been shifting our focus to dealers, distributors and retail outlets to reduce the number of vendors and costs and increase sales. Promoting and marketing Paid's celebrity services will be undertaken using various mediums of marketing; "adword" campaigns, traditional print methods, and industry trade shows. As our celebrity services continue to gain exposure, we will have substantial opportunity to grow our business through referrals. Networking and referral business is a large portion of sales and marketing for these types of services. As we market and promote our celebrity services, we also will be supporting our proprietary content management system and our shipping calculator products. The Company will continue to market AuctionInc throughout 2006. In the past years, representatives of the Company attended trade shows, events and conferences to analyze the potential for AuctionInc and to narrow the Company's marketing base. Based on experience with existing partnerships that promote AuctionInc, the Company believes that creating partnerships is an effective marketing tool to promote and encourage new registrations. The Company will continue to seek new partnerships. The Company also intends to promote the AuctionInc product line in trade publications to reach small and midsize companies. Although we believe that this marketing strategy, if successful, will lead to increased revenues, and attract more users to our site, we have no commitments that our marketing will be successful or our sales will increase. There are a number of factors that may impact our plans and inhibit our success. See "Risk Factors" described in Exhibit 99. Therefore, we have no guarantees and can provide no assurances that our plans will be successful. Revenue Sources In 2005, 66% 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, collectibles and movie posters. Adding to these revenues were agent commissions, marketing opportunities for athletes and celebrity clients of K Sports. As additional services, we currently provide web hosting and online appraisal services. To date, we have generated minimal revenues from these services, but we hope that as the awareness of the AuctionInc product line increases, we will be able to increase our advertising and marketing efforts, which we expect will generate revenue and may attract more visitors that will utilize these services on our site. In addition to web hosting, we expect to increase revenues through the development and design of third party websites. We also have an agreement with Krause Publications, pursuant to which Krause Publications prints Maloney's Antiques & Collectibles Resource Directory and we receive a percentage of the sales revenues from the book sales. We own "www.MaloneysOnline.com," a clearinghouse for hard to find information that contains the searchable Internet version of the resource directory. Although we expect that this revenue model will generate increased revenue, if we are not successful in implementing this model, if the collectibles community is not accepting of the services we provide, if costs are higher than anticipated, or if revenues do not increase as rapidly as anticipated, we may not be able to continue positive cash flow. There are a number of factors that may impact our plans 7 and inhibit our success. See "Risk Factors" included as Exhibit 99. Therefore, we have no guarantees and can provide no assurances, that our plans will be successful. Competition Electronic content management, fan club membership and fan experiences and ticketing services, are relatively new and growing industries. This industry has several hurdles for new companies; building a strong reputation, proficient operational skills in customer service and fulfillment, and gaining a client base. While these are big hurdles and present a strong barrier to entry, they are not insurmountable. There are several competitors in this industry like Music Today, UltraStar, and FanAsylum, each of whom offer unique solutions and services. There are other indirect competitors who deal in just merchandising or electronic memberships, but these companies serve a different customer base. The electronic commerce market is relatively new, rapidly evolving and intensely competitive. Furthermore, we expect competition to intensify in the future. Barriers to entry are relatively low, and current and new competitors can launch new sites at relatively low cost using commercially available software. Our Rotman Auction operation competes with a variety of other companies depending on the type of merchandise and sales format offered to customers. These competitors include: (i) various Internet collectible companies, Collectors Universe, Shop at Home and Tri-Star Productions; (ii) a number of indirect competitors that specialize in electronic commerce or derive a substantial portion of their revenue from electronic commerce, including Internet Shopping Network and AOL, Shopping.com; and (iii) a variety of other companies that offer merchandise similar to that of our Company but through physical auctions. In addition, several large companies sell specialty consumer products, including collectibles through interactive electronic media, including broadcast, cable and satellite television and, increasingly, the Internet. These companies include QVC, Home Shopping Network and Shop At Home. They generally have substantial financial resources and, while their current collectible offerings tend to be less focused than our collectible offerings, there can be no guarantee that they will not become significant competitors in the future. There can be no assurance that we can maintain our competitive position against potential competitors, especially those with greater financial, marketing, customer support, technical and other resources than us. Increased competition is likely to result in reduced operating margins, loss of market share and a diminished brand franchise, any one of which could materially adversely affect the our business, results of operations and financial condition. Intellectual Property Our web hosting software program, AuctionInc software suite, is proprietary. We have filed one application for a patent related to AIShip. We do not have any patents for our designs or innovations and we may not be able to obtain copyright, patent or other protection for our proprietary technologies or for the processes developed by our employees. Legal standards relating to intellectual property rights in computer software are still developing and this area of the law is evolving with new technologies. Our intellectual property rights do not guarantee any competitive advantage and may not sufficiently protect us against competitors with similar technology. To protect our interest in our intellectual property, we restrict access by others to our proprietary software. In addition, we own the "Collecting Channel" mark and for the mark "Paid". 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. 8 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 We currently employ 21 personnel, 19 of whom are employed full time. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. Government Regulation We are not currently subject to direct federal, state or local regulation, and laws or regulations applicable to access or commerce on the Internet, other than regulations applicable to businesses generally. However, due to the increasing popularity and use of the Internet and other online services, it is possible that a number of laws and regulations may be adopted with respect to the Internet or other online services covering issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. Item 2. Description of Property. Our corporate headquarters are located at 4 Brussels Street, Worcester, Massachusetts 01610. Currently, we are tenants-at-will, but we are not required to pay rent on the Brussels Street, Worcester location. The condition of our corporate headquarters is excellent. We do not invest in real estate or interests in real estate, real estate mortgages, or securities of or interests in persons primarily engaged in real estate activities, and we have no policies related to such investments. Item 3. Legal Proceedings. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities. Our common stock, par value $.001 per share, is presently traded on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol, "PAYD". The following table sets forth the high and low bid prices for our common stock as reported by OTCBB for the eight quarters ended December 31, 2005. The quotations from the OTCBB reflect inter-dealer prices without retail mark-up, mark-down, or commission and may not represent actual transactions. 9 2004 High Low ----- --- Quarter ended March 31, 2004 $ .80 $ .175 Quarter ended June 30, 2004 $ .47 $ .275 Quarter ended September 30, 2004 $ .39 $ .221 Quarter ended December 31, 2004 $ .34 $ .05 2005 High Low ----- --- Quarter ended March 31, 2005 $ .35 $ .15 Quarter ended June 30, 2005 $ .36 $ .17 Quarter ended September 30, 2005 $ .29 $ .165 Quarter ended December 31, 2005 $ .235 $ .115 As of March 17, 2006, there were approximately 2,345 holders of record of our common stock. 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 Remaining Available For Number of Securities Future Issuance Under To be Issued Upon Weighted-Average Equity Compensation Exercise of Exercise Price of Plans (Excluding Outstanding Options, Outstanding Options, Securities Reflected in Warrants and Rights Warrants and Rights Column (a)) (a) (b) (c) - ---------------------------------------------------------------------------------------------------------------------- Equity Compensation Plans Approved by Security Holders 25,000,000 $.041 5,000,000 - ---------------------------------------------------------------------------------------------------------------------- Equity Compensation Plans Not Approved by Security Holders 165,054 $.6126 2,913,365 - ---------------------------------------------------------------------------------------------------------------------- Total 25,165,054 $.045 7,913,365 - ----------------------------------------------------------------------------------------------------------------------
Refer to Note 7, Notes to Consolidated Financial Statements for the Years ended December 31, 2005 and 2004, incorporated by reference in Part II, Item 7, of this Annual Report, for a detailed discussion of the stock options and warrants that are outstanding. 10 During the fourth quarter of 2005, the Company did not receive any conversion requests from Augustine Fund, L.P. with respect to the Company's November 7, 2001 convertible note. The remaining balance on the November 7, 2001 convertible note as of December 31, 2005 is $1,150,000. Augustine Fund, L.P. is an accredited investor that represented that it acquired the convertible note for its own account. The issuance of the convertible note and securities pursuant to the convertible note is exempt from registration under Section 4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder. The terms of the Note are described further in Note 9, Notes to Consolidated Financial Statements for the Years ended December 31, 2005 and 2004, incorporated by reference in Part II, Item 7, of this Annual Report. The Company borrowed $160,000 from an unaffiliated individual in October 2004, which amount, including all principal and 12% interest, was paid off in full through two issuances of common stock of the Company: 125,000 shares on October 29, 2004, and 800,000 shares on March 7, 2005. The shares were not registered under the Securities Act of 1933. The issuance of the securities is exempt from registration under Section 4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder. The Company paid an unaffiliated consultant 250,000 shares of common stock of the Company in lieu of fees. The shares were issued on December 31, 2004 and delivered in certificate form in January 2005. The shares were not registered under the Securities Act of 1933. The issuance of the securities is exempt from registration under Section 4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder. Item 6. Management's Discussion and Analysis or Plan of Operation. Overview Our innovative products and services are utilized in celebrity services, ticketing, fan experiences, merchandising, online auctions and management, and web site development. Our celebrity services proprietary content management system provides an opportunity for our clients to offer more information, merchandise and experiences to their customers and communities. This proprietary system uses the AuctionInc. shipping calculator tools to provide improved customer service and fulfillment services. The technology is based on our patent-pending process that streamlines back-office and shipping processes for online auctions and e-commerce. Our new celebrity services offer famous people official web sites and fan-club services including e-commerce storefronts, articles, polls, message boards, contests, biographies and custom features to attract tens of thousands of visitors daily. Our autograph signing events, working in conjunction with our new sports agent marketing services, have created more services and opportunities for our sports clientele. 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 11 that we believe to be reasonable and appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies include: Inventories: Inventories are stated at the lower of average cost or market on a first-in, first-out method. On a periodic basis we review inventories on hand to ascertain if any is slow moving or obsolete. In connection with this review, we establish reserves based upon management's experience and assessment of current product demand. Property and Equipment and Intangible Assets: Property and equipment and intangible assets are stated at cost. Depreciation and amortization are computed over estimated useful lives that are reviewed periodically. In connection with this review we consider changes in the economic environment, technological advances, and management's assessment of future revenue potential and a review of the estimated useful lives of the various assets. Results of Operations The following discussion compares the Company's results of operations for the year ended December 31, 2005 with those for the year ended December 31, 2004. 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. Revenue. For the year ended December 31, 2005, revenues were $4,920,100, 66% of which was attributable to sales of fan club memberships, merchandise, and fan experiences related to the tour of a major performing artist which ended in March 2006. Sales of the Company's own product and fees from buyers and sellers through the Rotman Auction operations represented 26% of revenues, and Sports marketing revenues represented 7% of revenues. Gross sales of the Company's own product were $1,299,800. Fan experience, Fan club membership and related merchandise sales revenues were $3,228,400, and sports marketing revenues were $357,200. Advertising and web hosting fees were $33,900, less than 1% of gross revenues, during the year ended December 31, 2005. Substantially all of the fan club membership and fan experience revenues were generated during the fourth quarter of 2005. Management anticipates continued increases in revenues from these sources and from tours, products and services related to several other performing artists for the year ending December 31, 2006. The Company's 2005 revenues represent an increase of approximately $3,067,600, or 165%, from the year ended December 31, 2004, in which revenue was $1,853,000. For the year ended December 31, 2004, sales of the Company's product were $1,613,500, or 87% of gross sales, fan club membership and related merchandise sales revenues were $126,500, 7% of gross revenues, sports marketing revenues were $90,200, or 5% of gross revenues, and advertising and web hosting fees were $17,500, or 1% of gross revenues. The reason for the increase in revenues was a $3,101,900 increase related to the beginning of a tour by a major performing artist in late October 2005 which continued through most of the first quarter of 2006, higher revenues related to sports marketing services of $267,000 which was acquired in the K Sports transaction during the fourth quarter of 2004, offset by lower sales of Company owned product of approximately $313,700 from the same period in 2004. Gross profit from Company owned product sales for the year ended December 31, 2005 was approximately $433,600, $177,300 less than in 2004. Since gross margin percentages on Company owned product were 5% less in 2005 and sales of Company owned product were $313,700 lower in the year ended December 31, 2005, the Company produced 12 $177,300 lower gross margin dollars in 2005. The decrease in sales and gross profit margin is attributable to a management decision to streamline sales channels for company owned product and, in turn, terminating sales on eBAY, in an effort to reduce related overhead. Operating Expenses. Total operating expenses for the year ended December 31, 2005 were $4,561,400, compared to $4,272,100 for the corresponding period in 2004, an increase of $289,300. Sales, general and administrative ("SG&A") expenses for the year ended December 31, 2005 were $4,016,200, compared to $3,492,300 for the year ended December 31, 2004. The increase of $524,000 in SG&A costs includes increases in payroll and related costs of $139,900, travel of $148,000, credit card commissions of $150,800, postage and shipping costs of $79,600, and professional fees of $105,200, offset by decreases in depreciation and amortization of $187,800 as certain assets became fully depreciated during 2005 and 2004. The payroll, travel, credit card commissions and postage and shipping increases are all principally attributable to the tour of a major performing artist. Costs associated with planning, maintaining and operating our web sites for the year ended December 31, 2005 decreased $234,600 from 2004. This decrease is due primarily to decreases in personnel costs of $11,500, and depreciation and amortization of $84,300, as certain website development costs became fully depreciated. In addition, during 2005 the Company capitalized approximately $200,000 of website development costs, while in 2004 the Company capitalized $64,700. Interest Expense. For the year ended December 31, 2005, the Company incurred interest charges of approximately $294,800 principally associated with one convertible note, compared to interest charges of $497,300 for the corresponding period in 2004, a decrease of $202,500. $14,900 of the decrease is attributable to lower balances of interest-bearing debt in 2005 and $187,600 of the decrease is attributable to lower amortization of beneficial conversion features. Net Loss. The Company realized a net loss for the year ended December 31, 2005 of $3,100,700 compared to a loss of $4,079,700 for the year ended December 31, 2004. Losses in both years represented $.02 per share. Inflation. The Company believes that inflation has not had a material effect on its results of operations. Assets At December 31, 2005, total assets of the Company were $4,229,600 compared to $1,764,900 at December 31, 2004. The increase was primarily due the $999,800 remaining balance of the acquisition of a large collection of movie poster inventory and cash and deferred expenses totaling $1,880,000 associated with sales of tickets to entertainment events to be held during the first quarter of 2006, offset by depreciation and amortization totaling $805,800. The Company also reports a related liability to customers, in the form of deferred revenues, at December 31, 2005 of $2,305,300. 13 Operating Cash Flows A summarized reconciliation of the Company's net losses to cash provided by (used in) operating activities for the years ended December 31, 2005 compared to December 31, 2004, is as follows: 2005 2004 ---- ---- Net loss $ 3,100,700) $(4,079,700) Depreciation and amortization 805,800 1,077,900 Amortization of beneficial conversion Discount and debt discount 103,900 291,500 Common stock issued in payment of services 1,632,500 1,401,500 Common stock issued in payment of interest 137,200 315,200 Net current assets and liabilities associated with advance ticketing 1,749,000 -- Call Options (268,000) -- Changes in current assets and liabilities 356,400 264,900 ----------- ----------- Net cash provided by (used in) operating activities $ 1,416,100 $ (728,700) =========== =========== Working Capital and Liquidity The Company had cash and cash equivalents of $1,503,000 at December 31, 2005, compared to $43,500 at December 31, 2004. The Company had $152,300 of working capital at December 31, 2005 compared to a deficit in working capital of $542,800 at December 31, 2004. At December 31, 2005 current liabilities were $3,787,700 compared to $1,446,000 at December 31, 2004. Current liabilities increased at December 31, 2005 compared to December 31, 2004 primarily due to deferred revenues of $2,305,300 associated with events scheduled during the first quarter of 2006. As discussed in greater detail in Note 9 to the Financial Statements, included in Part I of this annual report and incorporated by reference herein, the Company has outstanding a convertible notes held by Augustine Fund, L.P. The Series B Note has a principal amount outstanding as of December 31, 2005 of $1,150,000. The Company's independent auditors have issued a going concern opinion on the Company's consolidated financial statements for the year ended December 31, 2005. The Company may need an infusion of additional capital to fund anticipated operating costs over the next 12 months. Management anticipates growth in revenues and gross profits in 2006 from its celebrity services products and websites, and similar services to other entities; including memberships, fan experiences and ticketing, appearances, website development and hosting, and merchandise sales from both existing and new clients. In addition, "AuctionInc" which hosts a suite of management tools and enhanced shipping calculator solutions for small ecommerce enterprises, sales of movie posters, both from inventory and on consignment, and web hosting are expected to increase revenues and result in higher total gross profit. Subject to the discussion below, management believes that the Company has sufficient cash commitments to fund operations during the next 12 months. These commitments include call options for approximately 1,625,000 shares of common stock, which, once assigned by the Company, can generate between $195,000 and $585,000 (based solely upon the 52 week high and low closing prices of the Company's common stock) of cash. However, there can be no assurance that assignment of the call options can be concluded on reasonably acceptable terms. If assignments are not made, management may need to seek alternative sources of capital to support operations. Forward Looking Statements This Annual Report on Form 10-KSB contains certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 14 1934) regarding the Company and its business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements in this report. Additionally, statements concerning future matters such as the development of new services, technology enhancements, purchase of equipment, credit arrangements, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements. Although forward-looking statements in this annual report reflect the good faith judgment of the Company's management, such statements can only be based on facts and factors currently known by the Company. Consequently, forward-looking statements are inherently subject to risks, contingencies and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in this report. Although the Company believes that its plans, intentions and expectations reflected in these forward-looking statements are reasonable, the Company can give no assurance that its plans, intentions or expectations will be achieved. For a more complete discussion of these risk factors, see Exhibit 99, "Risk Factors", in the Company's Form 10-KSB for the fiscal year ended December 31, 2005. For example, the Company's ability to achieve positive cash flow and to become profitable may be adversely affected as a result of a number of factors that could thwart its efforts. These factors include the Company's inability to successfully implement the Company's business and revenue model, tour or event cancellations, higher costs than anticipated, the Company's inability to sell its products and services to a sufficient number of customers, the introduction of competing products by others, the Company's failure to attract sufficient interest in and traffic to its sites, the Company's inability to complete development of its sites, the failure of the Company's operating systems, and the Company's inability to increase its revenues as rapidly as anticipated. If the Company is not profitable in the future, it will not be able to continue its business operations. Item 7. Financial Statements. The consolidated financial statements and supplementary data required by this item appear on Page F-1 immediately following the signature page, and are incorporated by reference herein. Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. None. 15 Item 8A. Controls and Procedures. The Company's management, including the President of the Company and the Chief Financial Officer of the Company, has evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon this evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time period specified by the Securities and Exchange Commission's rules and forms, and is accumulated and communicated to the Company's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 8B. Other Information. None. Part III. Item 9. Directors and Executive Officers of the Registrant. Directors and Executive Officers The following table sets forth certain information regarding the directors and executive officers of Paid, Inc.: Name Age Position ---- --- -------- Gregory Rotman* 40 Director, Chief Executive Officer & President Richard Rotman* 35 Director, Chief Financial Officer, Vice President, Treasurer & Secretary Andrew Pilaro 36 Director ---------- *Gregory Rotman and Richard Rotman are brothers. Each of the directors was elected as of September 19, 2000, for a term expiring at the 2001 Annual Meeting of Stockholders and until their successors are elected and qualified. The Company has not held an annual meeting or elected directors since September 19, 2000. Under the Delaware General Corporation Law, each director holds office until such director's successor is elected and qualified or until such director's earlier resignation or removal. The following is a description of the current occupation and business experience for at least five years for each director and executive officer. Gregory Rotman has served as a Director and the Chief Executive Officer and President of Paid, Inc. since February 1999. From 1995 to 1998, he served as a Partner of Teamworks, LLC, which was responsible for the design, financing and build-out of MCI National Sports Gallery. 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 16 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. The Securities and Exchange Commission has adopted rules to implement certain requirements of the Sarbanes-Oxley Act of 2002 pertaining to public company audit committees. One of the rules requires a company to disclose whether it has an "audit committee financial expert" serving on its audit committee. Based on its review of the criteria of an audit committee financial expert under the rule adopted by the SEC, the Board of Directors does not believe that any member of the Board of Directors' Audit Committee would be described as an audit committee financial expert. At this time, the Board of Directors believes it would be desirable for the Audit Committee to have an audit committee financial expert serving on the committee. While from time to time informal discussions as to potential candidates have occurred, no formal search process has commenced. The Company has adopted a Code of Ethics that applies to all of its directors, officers, and employees, including its principal executive officer, principal financial officer, principal accounting officer, or controller, or persons performing similar functions. A written copy of the Company's Code of Ethics will be provided to anyone, free of charge, upon request to: Richard Rotman, CFO, Paid, Inc., 4 Brussels Street, Worcester, Massachusetts 01610 or (508) 791-6710. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of the Company's outstanding Common Stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock. These persons are required by SEC regulation to furnish the Company with copies of all such reports they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and representations that no other reports were required, all Section 16(a) filing requirements applicable to its officers and directors and beneficial owners of more than 10% of the Company's stock, have been complied with for the period which this Form 10-KSB relates. Item 10. Executive Compensation. The following table sets forth the compensation of the Company's chief executive officer, the chief financial officer, and each officer whose total cash compensation exceeded $100,000, for the last three fiscal years ended December 31, 2005, 2004, and 2003. 17 SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------- Long-Term Annual Compensation Compensation ------------------------ Awards(2) ---------------------------------------------------------------------------------------------- Name and Fiscal Securities Underlying Principal Position Year Salary (1) Options (#) ---------------------------------------------------------------------------------------------- Gregory Rotman 2005 $84,871 0 President and Chief Executive Officer 2004 $ 92,154 0 2003 $ 72,000 0 ---------------------------------------------------------------------------------------------- Richard Rotman 2005 $86,794 0 Chief Financial Officer and Vice President and Secretary 2004 $ 93,491 0 2003 $ 90,532 0 ----------------------------------------------------------------------------------------------
(1) For each of 2005, 2004, and 2003, the Company paid the amount shown as compensation , but has accrued the difference between these amounts per annum for both Gregory Rotman and Richard Rotman and $100,000. (2) On October 11, 2002, both Gregory Rotman and Richard Rotman were granted options to purchase 10,000,000 shares of common stock at an exercise price of $.041, under the Company's 2002 Stock Option Plan, pursuant to the following vesting schedule: options to purchase 4,000,000 shares of common stock vested on April 11, 2003; options to purchase 3,000,000 shares of common stock vested on October 11, 2003, and options to purchase 3,000,000 shares vested on October 11, 2004. No options were granted to the named executive officers during the last fiscal year. The following table sets forth certain information related to the number of options exercised and the number and value of exercisable and unexercisable options of the named executive officers as of December 31, 2005: 18 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
---------------------------------------------------------------------------------------------------------------- Number of Securities Value of Underlying Unexercised Unexercised In-The-Money Options/SARs at Options/SARs at Shares Value FY-End (#) FY-End ($) Acquired on Realized Exercisable/ Exercisable/ Name Exercise (#) ($) Unexercisable Unexercisable ---------------------------------------------------------------------------------------------------------------- Gregory Rotman, President and CEO 0 $0 10,000,000/0 $1,440,000/$0 ---------------------------------------------------------------------------------------------------------------- Richard Rotman, CFO, Vice President and Secretary 0 $0 10,000,000/0 $1,440,000/$0 ----------------------------------------------------------------------------------------------------------------
(1) Based on closing price of $.185 on December 31, 2005 as reported by the OTC Bulletin Board. None of the Company's directors receives any compensation from the Company for serving as directors. 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. Based on a closing price of the Company's common stock as report on the OTC Bulletin Board of $.185 as of December 31, 2005, Mr. Pilaro's exercisable options have a value of $288,000. Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. To the knowledge of the management of the Company the following table sets forth the beneficial ownership of our common stock as of March 17, 2005 of each of our directors and executives officers, and all of our directors and executive officers as a group. Name and Address of Number of Shares % of Beneficial Owner (1) Beneficially Owned Class - -------------------- ------------------ ----- Gregory Rotman 18,309,005 (2) 8.19% Richard Rotman 19,996,451 (2) 8.94% Andrew Pilaro 2,068,700 (3) .93% All directors and 40,374,156 18.06% officers as a group (3 individuals) (1) The address of each person named is the address of the Company. (2) Includes options to purchase 10,000,000 shares of the Company's common stock at an exercise price of $.041, 4,000,000 of which vested on April 1, 2003, 3,000,000 of which vested on October 11, 2003, and 3,000,000 of which vested on October 11, 2004. (3) Includes 17,200 shares held indirectly as custodian for Mr. Pilaro's minor sons and options to purchase 2,000,000 shares of the Company's common stock at an exercise price of $.041, 800,000 of which vested on October 11, 2002, 600,000 of which vested on October 11, 2003, and 600,000 of which vested on October 11, 2004. To the knowledge of the Company's management, as of March 17, 2006, there are no persons and/or companies who or which beneficially own, directly or indirectly, shares carrying more than 5% of the 19 voting rights attached to all outstanding shares of the Company, other than Gregory Rotman and Richard Rotman, as set forth above. The information regarding the Company's Equity Compensation Plan Information is incorporated herein by reference in Part II, Item 5 of this Annual Report on Form 10-KSB. Item 12. Certain Relationships and Related Transactions. Steven Rotman is the father, and Leslie Rotman is the mother, of Gregory Rotman, President of the Company, and Richard Rotman, CFO/Vice President/Secretary of the Company. The Company entered into a number of transactions over the past two years with both Steven Rotman and Leslie Rotman. Management believes that these transactions are fair and reasonable to the Company and no less favorable than could have been obtained by an unaffiliated third party. In December 2001, the Company engaged Steven Rotman to provide consulting services to the Company. Steven Rotman did not provide any consulting services in 2005. However, during 2005, for consulting fees owed and for consulting services provided prior to 2005, including $160,000 in fees and services provided in 2004, the Company paid Steven Rotman $251,659 in the form of options to purchase 1,264,630 shares of common stock of the Company pursuant to the Company's 2001 Non-Qualified Stock Option Plan. Under the 2001 Non-Qualified Stock Option Plan employees and consultants may elect to receive their gross compensation in the form of options to acquire the number of shares of the Company's common stock equal to their gross compensation divided by the fair value of the stock on the date of grant. In 2002, the Company obtained private financing from Mr. Steven Rotman in the aggregate amount of $115,000 at an 8% interest rate, and borrowed an additional $15,000 in 2003, all of which was outstanding in 2004. In 2005, the Company repaid $50,000, but continues to owe Steven Rotman $80,000 in principal, and $33,833 in interest, including $10,267 in interest which accrued in 2005. In 2004, the Company acquired approximately $110,000 of memorabilia for sale from Mr. Steven Rotman. On May 9, 2005, the Company entered into a Settlement Agreement and Mutual Release with Leslie Rotman ("Seller") to settle all outstanding disputes regarding the value paid and the value received in the 2001 transaction in which Seller, Rotman Collectibles, Inc., and the Company entered into an Agreement and Plan of Merger, pursuant to which Rotman Collectibles, Inc., a Massachusetts corporation, was merged into the Company's Delaware subsidiary, now named Rotman Collectibles, Inc. To settle any possible differences or disputes between the value paid and the value received, Seller delivered 2,000,000 shares of the Company's common stock into escrow, with a fair market value of $600,000 based on the closing bid price of $.30 on May 6, 2005 (as set forth in the Settlement Agreement and Mutual Release) and granted the Company an option to purchase the shares for $.001 per share. The option is assignable by the Company and expires one year from the date of grant. The related $600,000 settlement gain has been apportioned between other income in the amount $340,500, representing the amount attributable to goods sold in prior years and $259,500 as reductions of inventory cost at January 1, 2005. Also included in other income is the effect of reducing the $130,000 reserve related to the movie poster inventory at January 1, 2005. During 2005 the Company assigned options to purchase 375,000 shares of stock from Leslie Rotman to certain individuals in exchange for $96,885. On September 8, 2005, the Company entered into an Asset Purchase Agreement for the purchase of approximately $1,010,000 of memorabilia for sale from Leslie Rotman, the mother of Richard and Greg Rotman, in exchange for 6,433,121 shares of restricted common stock valued at $.157. 20 Item 13. Exhibits, List and Reports on Form 8-K. (a) Exhibits. Exhibits are numbered in accordance with Item 601 of Regulation S-B. Exhibit 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 Convertible Promissory Note dated March 23, 2000 issued to Augustine Fund, LP pursuant to Securities Purchase Agreement (incorporated by reference to Exhibit 10.3 to Form 10-KSB filed on April 14, 2000) 4.3 Convertible Promissory Note, dated November 7, 2001, issued to Augustine Fund, L.P., pursuant to Loan Agreement (incorporated by reference from Exhibit 4.2 to Form 8-K filed on November 21, 2001) 4.4 Modification Agreement dated September 19, 2000 between the Company and Augustine Fund, L.P. (incorporated by reference to Exhibit 4.7 to Form S-3 filed on October 25, 2000). 4.5 Amended Modification Agreement dated July 15, 2001, between the Company and Augustine Fund, L.P. (incorporated by reference from Exhibit 4.10 to Form SB-2/A filed on August 8, 2001) 4.6 Second Amended Modification Agreement dated August 30, 2001 between the Company and Augustine Fund, L.P. (incorporated by reference from Exhibit 4.11 to Form SB-2 filed on August 31, 2001) 4.7 Third Amended Modification Agreement dated May 21, 2002 between the Company and Augustine Fund, L.P. (incorporated by reference from Exhibit 4.1 to Form 10-QSB/A filed on August 14, 2002) 4.8 Modification Agreement dated May 21, 2002 between the Company and Augustine Fund, L.P. (incorporated by reference from Exhibit 4.2 to Form 10-QSB/A filed on August 14, 2002) 4.9 Second Modification Agreement dated October 31, 2003 between the Company and Augustine Fund, L.P. (incorporated by reference from Exhibit 4.10 to Form 10-KSB filed on March 30, 2004) 4.10 Third Modification Agreement dated October 15, 2005 between the Company and Augustine Fund, L.P.* 4.11 Warrant issued by the Registrant to Delano Group Securities, LLC (expired March 2005) (incorporated by reference to Exhibit 10.7 to Form 10-KSB filed on April 14, 2000). 4.12 Warrant dated March 23, 2000 issued to Augustine Fund, LP pursuant to Securities Purchase Agreement (expired March 2005) (incorporated by reference to Exhibit 10.4 to Form 10-KSB filed on April 14, 2000) 10.1 1999 Stock Option Plan (incorporated by reference to Exhibit 10.2 to Form SB-2/A filed on December 1, 2000) 10.2 1999 Omnibus Share Plan (incorporated by reference to Exhibit 10.3 to Form SB-2/A filed on December 1, 2000) 10.3 2001 Non-Qualified Stock Option Plan, as amended (incorporated by reference from Exhibit 99.1 to Form S-8 filed on September 5, 2003) 10.4 2002 Stock Option Plan (incorporated by reference from Exhibit 10.17 to Form 10-KSB filed on March 31, 2003) 10.5 Securities Purchase Agreement dated March 23, 2000 between the Company and Augustine Fund, LP. (incorporated by reference to Exhibit 10.2 to Form 10-KSB filed on April 14, 2000) 10.6 Loan Agreement, dated November 7, 2001, by and between Augustine Fund, L.P. and the Company (incorporated by reference from Exhibit 10.1 to Form 8-K filed on November 21, 2001) 21 10.7 Loan Agreement dated May 21, 2002 between the Company and Augustine Fund, L.P. (incorporated by reference from Exhibit 10.1 to Form 10-QSB/A filed on August 14, 2002) 10.8 Agreement and Plan of Merger between the Company, Rotman Collectibles, Inc. and Leslie Rotman dated October 23, 2001 (incorporated by reference from Exhibit 2.1 to Form 8-K filed on November 21, 2001) 10.9 Asset Purchase Agreement dated September 8, 2005 between the Company and Leslie Rotman (incorporated by reference from Exhibit 10 to Form 10-QSB filed on November 14, 2005) 10.10 Settlement Agreement and Mutual Release dated May 9, 2005 between the Company and Leslie Rotman (incorporated by reference to Exhibit 10.1 to Form 10-QSB filed on May 13, 2005) 10.11 Escrow Agreement dated May 9, 2005 between the Company, Leslie Rotman, and Escrow Agent (incorporated by reference to Exhibit 10.2 to Form 10-QSB filed on May 13, 2005) 21 Subsidiaries of the Registrant (included in Item I)* 23 Consent of Carlin, Charron & Rosen, LLP* 31.1 CEO Certification required under Section 302 of Sarbanes-Oxley Act of 2002* 31.2 CFO Certification required under Section 302 of Sarbanes-Oxley Act of 2002* 32 CEO and CFO Certification required under Section 906 of Sarbanes-Oxley Act of 2002* 99 Risk Factors* - ---------- * filed herewith (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the last quarter of 2005. Item 14. Principal Accountant Fees and Services. Audit Fees. The aggregate fees billed by Carlin, Charron & Rosen, LLP for the audit of the Company's annual consolidated financial statements for the fiscal year ended December 31, 2005 and 2004, and the reviews of the consolidated financial statements included in the Corporation's Forms 10-QSB for fiscal years 2005 and 2004, were $52,500 and $50,000, respectively. Audit Related Fees. There were no fees billed to the Company by Carlin, Charron & Rosen, LLP in either of the past two fiscal years for assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements. Tax Fees. There were no fees billed to the Company by Carlin, Charron & Rosen, LLP in either of the past two fiscal years for professional services for tax compliance, tax advice, and tax planning. All Other Fees. There were no fees billed to the Company by Carlin, Charron & Rosen, LLP for any other services for the past two fiscal years. The Audit Committee approves all audit and audit-related fees. The Audit Committee is required to pre-approve all non-audit services to be performed by the auditor. The percentage of hours expended on the principal accountant's engagement to audit the Company's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was 0%. 22 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PAID, INC. By: /s/ Gregory Rotman ---------------------------- Gregory Rotman, President Date: March 31, 2006 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Gregory Rotman ------------------------------------------ Gregory Rotman, President and Director Date: March 31, 2005 /s/ Richard Rotman ------------------------------------------ Richard Rotman, Vice President, Treasurer, Secretary and Director Date: March 31, 2006 /s/ Andrew Pilaro ------------------------------------------ Andrew Pilaro, Director Date: March 31, 2006 23 PAID, INC. AND SUBSIDIARY DECEMBER 31, 2005 AND 2004 AUDITED CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (Carlin, Charron & Rosen LLP)..............................F-2 Consolidated Balance Sheets at December 31, 2005 and 2004 ...........F-3 Consolidated Statements of Operations Years ended December 31, 2005 and 2004.........................F-4 Consolidated Statement of Changes in Shareholders' Deficit Years ended December 31, 2005 and 2004.........................F-5 Consolidated Statements of Cash Flows Years ended December 31, 2005 and 2004.........................F-6 Notes to Consolidated Financial Statements Years ended December 31, 2005 and 2004.........................F-7 - F-16 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of Paid, Inc. We have audited the accompanying consolidated balance sheets of Paid, Inc. and subsidiary (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders' deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Paid, Inc. and subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred recurring losses and has a shareholders' deficit at December 31, 2005. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Westborough, Massachusetts March 17, 2006 F-2 PAID, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31,
ASSETS 2005 2004 ---- ---- Current assets: Cash and cash equivalents $ 1,502,987 $ 43,558 Accounts receivable 72,317 45,739 Inventories, net 1,364,248 624,082 Investment in call options 300,625 -- Deferred expenses 556,250 -- Prepaid expenses 67,981 125,180 Due from employees 66,558 55,656 Other current assets 9,073 9,073 ------------ ------------ Total current assets 3,940,039 903,288 Property and equipment, net 256,244 172,706 Other intangible assets, net 33,290 688,872 ------------ ------------ Total assets $ 4,229,573 $ 1,764,866 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Notes payable $ 130,000 $ 290,000 Accounts payable 275,336 164,829 Accrued expenses 1,077,081 991,196 Deferred revenues 2,305,278 -- ------------ ------------ Total current liabilities 3,787,695 1,446,025 ------------ ------------ Long term liabilities: Convertible debt 1,150,000 2,398,021 ------------ ------------ Shareholders' deficit: Common stock, $.001 par value, 350,000,000 shares authorized; 200,405,555 and 173,320,731 shares issued and outstanding at December 31, 2005 and 2004, respectively 200,406 173,321 Additional paid-in capital 25,575,959 21,166,334 Accumulated deficit (26,484,487) (23,383,835) Unearned compensation -- (35,000) ------------ ------------ Total shareholders' deficit (708,122) (2,079,180) ------------ ------------ Total liabilities and shareholders' deficit $ 4,229,573 $ 1,764,866 ============ ============
See accompanying notes to consolidated financial statements F-3 PAID, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31,
2005 2004 ---- ---- Revenues $ 4,920,123 $ 1,852,545 Cost of revenues 3,432,623 1,162,953 ------------- ------------- Gross profit 1,487,500 689,592 ------------- ------------- Operating expenses: Selling, general, and administrative expenses 4,016,219 3,492,264 Website development costs 545,171 779,811 ------------- ------------- Total operating expenses 4,561,390 4,272,075 ------------- ------------- Loss from operations (3,073,890) (3,582,483) ------------- ------------- Other income (expense): Interest expense (294,822) (497,320) Loss on call options (202,490) -- Other income 470,550 69 ------------- ------------- Total other expense, net (26,762) (497,251) ------------- ------------- Loss before income taxes (3,100,652) (4,079,734) Provision for income taxes -- -- ------------- ------------- Net loss $ (3,100,652) $ (4,079,734) ============= ============= Loss per share (basic and diluted) $ (0.02) $ (0.02) ============= ============= Weighted average shares 184,008,727 163,762,845 ============= =============
See accompanying notes to consolidated financial statements F-4 PAID, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Common stock Additional ----------------------- Paid-in Accumulated Unearned Shares Amount Capital deficit Compensation Total ----------- -------- ----------- ------------ ------------ ----------- Balance, December 31, 2003 159,100,228 $159,100 $17,832,123 $(19,304,101) $ -- $(1,312,878) Compensatory stock options granted -- -- 195,000 -- (45,000) 150,000 Amortization of stock-based compensation -- -- -- -- 10,000 10,000 Issuance of common stock pursuant to exercise of stock options granted to employees for services 800,679 801 192,714 -- -- 193,515 Common stock issued in payment of professional and consulting fees 4,240,573 4,241 1,043,743 -- -- 1,047,984 Common stock issued in payment of interest on convertible debt 3,924,905 3,925 311,300 -- -- 315,225 Common stock issued in connection with acquisition of assets of K-sports & Entertainment, LLC 195,313 195 62,305 62,500 Conversions of notes payable 4,882,783 4,883 931,705 -- -- 936,588 Proceeds from assignment of call options -- -- 573,060 573,060 Exercise of stock options 176,250 176 -- -- -- 176 Beneficial conversion discount -- -- 24,384 -- -- 24,384 Net loss -- -- -- (4,079,734) -- (4,079,734) ----------- -------- ----------- ------------ -------- ----------- Balance, December 31, 2004 173,320,731 173,321 21,166,334 (23,383,835) (35,000) (2,079,180) Common stock issued pursuant to exercise of stock options granted to employees for services 1,561,315 1,561 310,119 -- -- 311,680 Common stock issued in payment of professional and consulting fees 7,064,926 7,065 1,278,765 -- -- 1,285,830 Common stock issued in payment of interest 1,057,966 1,058 136,103 -- -- 137,161 Common stock issued in payment of note payable 761,905 762 159,238 -- -- 160,000 Stock options exercised 536,364 536 -- -- -- 536 Common stock issued for payment of convertible debt 9,469,227 9,470 1,342,422 -- -- 1,351,892 Issuance of common stock 200,000 200 29,800 -- -- 30,000 Amortization of unearned compensation -- -- -- -- 35,000 35,000 Common stock issued for inventory 6,433,121 6,433 1,003,567 -- -- 1,010,000 Proceeds from sale of warrants -- -- 50,000 -- -- 50,000 Proceeds from assignment of call options -- -- 99,611 -- -- 99,611 Net loss -- -- -- (3,100,652) -- (3,100,652) ----------- -------- ----------- ------------ -------- ----------- Balance, December 31, 2005 200,405,555 $200,406 $25,575,959 $(26,484,487) $ -- $ (708,122) =========== ======== =========== ============ ======== ===========
See accompanying notes to consolidated financial statements F-5 PAID, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2005 2004 ---- ---- Operating activities: Net loss $(3,100,652) $(4,079,734) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 805,752 1,077,889 Settlement Agreement and Mutual Release - call options (470,500) -- Amortization of unearned compensation 35,000 10,000 Beneficial conversion feature 103,871 291,494 Loss on call options 202,490 -- Common stock issued in payment of professional and consulting fees 1,285,830 1,047,984 Issuance of common stock pursuant to exercise of stock options granted to employees for services 311,680 193,515 Common stock issued in payment of interest 137,161 315,225 Compensatory stock options granted -- 150,000 Changes in assets and liabilities: Accounts receivable (26,578) 72,340 Inventories 140,334 77,996 Deferred expenses (556,250) -- Prepaid expense and other current assets 46,297 (110,214) Accounts payable 110,507 (39,869) Accrued expenses 85,885 264,703 Deferred revenue 2,305,278 -- ----------- ----------- Net cash provided by (used in) operating activities 1,416,105 (728,671) ----------- ----------- Investing activities: Proceeds from assignment of call options 96,885 -- Property and equipment additions (233,708) (66,330) Cash paid for assets of K Sports & Entertainment, LLC -- (50,000) ----------- ----------- Net cash used in investing activities (136,823) (116,330) ----------- ----------- Financing activities: Net proceeds from notes payable 250,000 145,000 Payments of notes payable (250,000) Proceeds from sale of warrants 50,000 -- Proceeds from sale of common stock 30,000 -- Proceeds from convertible debt -- 65,926 Proceeds from assignment of call options 99,611 573,060 Proceeds from exercise of stock options 536 176 ----------- ----------- Net cash provided by financing activities 180,147 784,162 ----------- ----------- Net increase (decrease) in cash and cash equivalents 1,459,429 (60,839) Cash and cash equivalents, beginning 43,558 104,397 ----------- ----------- Cash and cash equivalents, ending $ 1,502,987 $ 43,558 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes $ -- $ -- =========== =========== Interest $ 2,184 $ 6,750 =========== ===========
See accompanying notes to consolidated financial statements F-6 PAID, INC. AND SUBSIDIARY DECEMBER 31, 2005 AND 2004 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Organization Paid, Inc. and subsidiary (the "Company") provides businesses and clients with marketing, management, merchandising, auction management, website hosting, and authentication and consignment services for the entertainment, sports and collectibles industries. On October 7, 2004 the Company acquired operating assets of K Sports & Entertainment LLC ("K Sports") comprised of accounts receivable totaling $114,550, property and equipment valued at $5,550 and intangible assets comprised of contract rights, valued at $54,900. The purchase price, totaling $175,000, was paid with 195,313 unregistered shares of Company stock, valued at $62,500, $50,000 in cash, and a commitment to issue an additional 195,312 unregistered shares of company stock, valued at $62,500 on October 7, 2005. Such shares remain unissued at December 31, 2005. K Sports operated as a sports agency business and is expected to supplement and enhance the Company's celebrity services offerings. Note 2. Management's Plans The Company has continued to incur significant losses. For the years ended December 31, 2005 and 2004 the Company reported losses of approximately $3,100,000 and $4,100,000, respectively. To date the Company has met its cash needs from the proceeds of convertible debt and the assignment of call options discussed in Note 7. Management anticipates growth in revenues and gross profits in 2006 from its celebrity services products and websites; including memberships, fan experiences and ticketing, appearances, and merchandise sales. In addition, "AuctionInc" which hosts a suite of management tools and enhanced shipping calculator solutions for small ecommerce enterprises, sales of movie posters, both from inventory and on consignment, and web hosting are expected to increase revenues and result in higher total gross profit. A 2005 Settlement Agreement provided the Company with call options for approximately 2 million shares of the Company's common stock. As of December 31, 2005 the Company still held call options for 1,625,000 shares of common stock, which expire on May 9, 2006. Assignment of these call options is expected to produce between $195,000 and $585,000 based solely upon 52 week high and low closing prices of the Company's common stock. Although there can be no assurances, the Company believes that the above anticipated additional revenues, and additional financing will be sufficient to meet the Company's working capital requirements through the end of 2006. Note 3. Summary Of Significant Accounting Policies Principles of consolidation The accompanying consolidated financial statements include the accounts of Paid, Inc. and its wholly-owned subsidiary, Rotman Collectibles, Inc. All inter-company balances and transactions have been eliminated. F-7 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 collectible merchandise for sale and are stated at the lower of average cost or market on a first-in, first-out (FIFO) method. When a purchase contains multiple copies of the same item, they are stated at average cost. On a periodic basis management reviews inventories on hand to ascertain if any is slow moving or obsolete. In connection with this review, at December 31, 2005 and 2004 the Company has provided for reserves totaling $50,000 and $300,000, respectively. Investment in call options The Company accounts for investment in call options in accordance with EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". Accordingly, call options are recorded at fair value, determined by the closing price of the Company's common stock, on the date they are received and adjusted to fair value at the balance sheet date. Any realized or unrealized gains or losses are recorded in other income (expense). Website Development Costs The Company accounts for website development costs in accordance with the provisions of EITF 00-2, "Accounting for Web Site Development Costs" ("EITF 00-2"), which requires that costs incurred in planning, maintaining, and operating stages that do not add functionality to the site be charged to operations as incurred. External costs incurred in the site application and infrastructure development stage and graphic development are capitalized. Such capitalized costs are included in "Property and equipment." During the year ended December 31, 2005 the Company capitalized approximately $200,000 of website development costs. During the year ended December 31, 2004 the Company capitalized approximately $65,000 of website development costs. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight line and double declining balance method over the estimated useful lives of 3 to 5 years. Intangible Assets Intangible assets are being amortized on a straight-line basis over estimated useful lives of two to seventeen years. The Company accounts for intangible assets in accordance with Financial Accounting Standards Board Statement No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to acquisition. SFAS No. 142 provides that intangible assets with finite lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. F-8 Revenue Recognition The Company generates revenue on sales of its purchased inventories, from fees and commissions on sales of merchandise under consignment type arrangements, from web hosting services, from fan club membership fees, from sales of fan experiences, from appraisal services and from advertising and promotional services. Fan experiences sales include tickets and related experiences at concerts and other events conducted by performing artists. Revenues associated with these fan experiences are reported gross, rather than net, following the criteria of EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent", and are deferred until the related event has been concluded, at which time the revenues and related direct costs are recognized. Fan club membership fees are recognized when the member joins and all direct costs associated with the membership have been incurred. For sales of merchandise owned and warehoused by the Company, the Company is responsible for conducting the auction, billing the customer, shipping the merchandise to the customer, processing customer returns and collecting accounts receivable. The Company recognizes revenue upon verification of the credit card transaction and shipment of the merchandise, discharging all obligations of the Company with respect to the transaction. For sales of merchandise under consignment-type arrangements, the Company takes physical possession of the merchandise, but is not obligated to, and does not take title or ownership of merchandise. When an auction is completed, consigned merchandise that has been sold is shipped upon receipt of payment. The Company recognizes the net commission and service revenues relating to the consigned merchandise upon receipt of the gross sales proceeds and shipment of the merchandise. The Company then releases the net sales proceeds to the Consignor, discharging all obligations of the Company with respect to the transaction. The Company provides web hosting services under two types of arrangements. Revenue is recognized on a monthly basis as the services are provided for those where payment is to be received in cash. Professional athletes' web sites are hosted under arrangements that are settled by the athlete providing a certain number of autographs on merchandise to be sold by the Company. Revenue related to player websites is recognized upon sale of the autographed merchandise. Appraisal revenues are recognized when the appraisal is delivered to the customer. Advertising revenues are recognized at the time the advertisement is initially displayed on the Company's web site. Sponsorship revenues are recognized at the time that the related event is conducted. Shipping and Handling Fees and Costs All amounts billed to customers in sales transactions related to shipping and handling represent revenues earned and are reported as revenues. Costs incurred by the Company for shipping and handling are reported as an expense. Advertising Costs Advertising costs totaling approximately $85,700 in 2005 and $99,500 in 2004, are charged to expense when incurred. F-9 Fair Value of Financial Instruments Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses - The carrying amount of these financial instruments approximates fair value because of the short-term nature of these instruments. Notes payable - The carrying amount of these financial instruments approximates fair value as the interest rate approximates market rates. Convertible debt - The carrying amount of these financial instruments approximates fair value as the interest rates approximate market rates. Concentrations of Credit Risk The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents - The Company places its cash and cash equivalents with high credit quality institutions. Accounts receivable - The Company maintains receivable balances with certain of its customers and typically does not require collateral. The Company reviews a customer's credit history before extending credit and establishes an allowance for doubtful accounts based upon periodic reviews of the credit risk of specific customers and other information, if necessary. Based on experience to date, potential credit losses are considered minimal. Income Taxes Income taxes are accounted for under the liability method. Under this method, deferred income taxes are provided for temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using enacted laws and rates that will be in effect when the differences are expected to reverse. A valuation allowance is provided when management believes it is more likely that not that some or all of the deferred tax assets will not be realized. Use of Estimates In preparing consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and reported amounts of revenue and expenses during the reporting periods. Material estimates that are particularly susceptible to significant change in the near term relate to inventories, intangible assets and deferred tax asset valuation. Although these estimates are based on management's knowledge of current events and actions, they may ultimately differ from actual results. Stock Compensation Plans The Company accounts for stock based employee compensation in accordance with Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. F-10 Although SFAS Nos. 123 and 148 encourage all entities to adopt a fair value based method of accounting for employee stock compensation plans, they also allow an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company's stock option plans typically have no intrinsic value at the date of grant, and under Opinion No. 25 no compensation cost is recognized for them. The Company has elected to continue with the accounting methodology in Opinion No. 25 and has provided proforma disclosures, in accordance with SFAS No 148, of net income and earnings per share as if the fair value based method of accounting had been applied (refer to note 7). Earnings Per Common Share Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to convertible debt and outstanding stock options and warrants. The number of common shares that would be issued upon conversion of the convertible debt would have been 8,518,519 as of December 31, 2005 and 12,447,224 as of December 31, 2004. The number of common shares that would be included in the calculation of outstanding options and warrants is determined using the treasury stock method. The assumed conversion of outstanding dilutive stock options and warrants would increase the shares outstanding but would not require an adjustment of income as a result of the conversion. Stock options and warrants applicable to 27,165,054 shares and 26,101,418 shares at December 31, 2005 and 2004, respectively, have been excluded from the computation of diluted earnings per share, as have the common shares that would be issued upon conversion of the convertible debt, because they were antidilutive. Diluted earnings per share have not been presented as a result of the Company's net loss for each year. Asset Impairment In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", long lived assets to be held and used by the Company are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, the Company bases its evaluation on such indicators as the economic benefits of the assets, any historical or future profitability measurements, a review of estimated useful lives, as well as other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, the Company determines whether an impairment has occurred through the use of an undiscounted cash flow analysis of assets at the lowest level for which identifiable cash flow exist. If impairment has occurred, the Company recognizes a loss for the difference between the carrying amount and the estimated value of the asset. The fair value of the asset is measured using an estimate of discounted cash flow analysis. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" and superseding APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R requires the Company to expense grants made under stock option and employee stock purchase plans. The cost will be recognized over the vesting period of the plans. SFAS No. 123R is effective for the first interim or annual period beginning after June 15, 2005. SFAS 123R is effective for the Company beginning January 1, 2006 at which time the Company will adopt the modified prospective transition method. SFAS 123R is not expected to have a material impact on the financial statements at the time of adoption. F-11 In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," an amendment of ARB No. 43, Chapter 4, "Inventory Pricing". This statement clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not produce products and therefore, does not expect adoption of this standard to have a material impact on its financial position, results of operations and cash flow. In May 2005, the Financial Accounting Standards Board issued SFAS No. 154, "Accounting Changes and Error Corrections" (SFAS No. 154), which replaces APB Opinion No. 20, "Accounting Changes and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion No. 28". SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, to prior years' financial statements, as the required method for reporting a change in accounting principle and the reporting of an error unless it is not practical to do so. SFAS No. 154 is effective for accounting changes and a correction of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by the Company in the first quarter of 2006. Note 4. Property and Equipment At December 31, property and equipment consisted of the following: 2005 2004 ---- ---- Computer equipment and software $ 905,179 $ 871,467 Office furniture 61,927 61,927 Video and article archives 418,983 418,983 Video equipment 158,513 158,513 Website development cost 908,996 709,000 Purchased software 70,000 70,000 ----------- ----------- 2,523,598 2,289,890 Accumulated depreciation (2,267,354) (2,117,184) ----------- ----------- $ 256,244 $ 172,706 =========== =========== Depreciation expense of property and equipment for the years ended December 31, 2005 and 2004 amounted to $150,200 and $297,100, respectively. The Company uses office and warehouse facilities as a tenant at will in a building leased by a related party. No rent has been charged during the years ended December 31, 2005 and 2004. Note 5. Intangible Assets At December 31, intangible assets are comprised of the following: 2005 2004 ---- ---- Software licenses $ 2,882,660 $ 2,882,660 Patent pending 16,000 16,000 Domain names 77,025 77,025 Acquired Websites 762,301 762,301 Customer and user lists 327,157 327,157 Assigned contracts 54,900 54,900 Other 30,763 30,763 ----------- ----------- 4,150,806 4,150,806 Accumulated amortization (4,117,516) (3,461,934) ----------- ----------- $ 33,290 $ 688,872 =========== =========== F-12 Amortization expense for intangible assets for the years ended December 31, 2005 and 2004 amounted to $655,600 and $780,800, respectively. Estimated amortization expense for each of the next five years is $21,000 in 2006 and $1,000 in each year 2007 to 2010. Note 6. Accrued Expenses At December 31, accrued expense are comprised of the following: 2005 2004 ---- ---- Interest $ 172,490 $ 129,635 Payroll and related costs 204,280 167,322 Professional and Consulting fees 134,411 378,210 Consignments 172,782 173,626 Due to K Sports 62,500 62,500 Commissions 300,000 40,000 30,618 39,903 ---------- ---------- Other $1,077,081 $ 991,196 ========== ========== Note 7. Common Stock Call Option Agreements In connection with a settlement agreement with CSEI, the Company was granted call options for 2,283,565 unregistered common shares held by CSEI at an exercise price of $.001 per share. During 2004 the Company assigned options to purchase 1,889,000 shares of stock from CSEI to certain individuals in exchange for $573,000. During January 2005 the remaining 394,565 options were assigned in exchange for approximately $100,000. The proceeds from the assignment of these options were added to the paid in capital of the Company. On May 9, 2005, the Company entered into a Settlement Agreement and Mutual Release with Leslie Rotman ("Seller") to settle all outstanding disputes regarding the value paid and the value received in the 2001 transaction in which Seller, Rotman Collectibles, Inc., and the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Rotman Collectibles, Inc., a Massachusetts corporation, was merged into the Company's Delaware subsidiary, now named Rotman Collectibles, Inc. Seller is the mother of Gregory Rotman, President of the Company, and Richard Rotman, CFO/Vice President/Secretary of the Company. To settle any possible differences or disputes between the value paid and the value received, Seller delivered 2,000,000 shares of the Company's common stock into escrow, with a fair market value of $600,000 based on the closing bid price of $.30 on May 6, 2005 (as set forth in the Settlement Agreement and Mutual Release) and granted the Company an option to purchase the shares for $.001 per share. The option is F-13 assignable by the Company and expires one year from the date of grant. The related $600,000 settlement gain has been apportioned between other income in the amount $340,500, representing the amount attributable to goods sold in prior years and $259,500 as reductions of inventory cost at January 1, 2005. Also included in other income is the effect of reducing the $130,000 reserve related to the movie poster inventory at January 1, 2005. During 2005 the Company assigned options to purchase 375,000 shares of stock from Leslie Rotman to certain individuals in exchange for $96,885. At December 31, 2005, 1,625,000 call options remain outstanding. Stock Options In June 1999, the Company's Board of Directors adopted the 1999 Stock Option Plan (the "1999 Plan") that provides for the issuance of options to directors, officers, employees and consultants of the Company to purchase up to 1,000,000 shares of the Company's common stock. Options granted under the plan may be either incentive stock options or nonqualified stock options. The 1999 Plan provides that each option be granted at a price determined by the Board of Directors on the date such option is granted and have a maximum option term of ten years. The options granted become exercisable during a period of time as specified by the Board of Directors at the date such option is granted. In 1999, the Company also granted options to purchase 126,000 shares of unrestricted common stock at the stock's fair value on the dates of grant (between $.8125 and $1.625 per share). In October 2002, the Company's Board of Directors adopted the 2002 Stock Option Plan (the "2002 Plan") that provides for the issuance of options to directors, officers, employees and consultants of the Company to purchase up to 30,000,000 shares of the Company's common stock. Options granted under the plan may be either incentive stock options or nonqualified stock options. The 2002 Plan provides that each option be granted at a price determined by the Board of Directors on the date such option is granted and have a maximum option term of ten years. The options granted become exercisable during a period of time as specified by the Board of Directors at the date such option is granted. In 2002 the Company granted options to purchase a total of 25,000,000 restricted shares of common stock to its President, Chief Financial Officer, Chief Technology Officer and a Director at the stock's fair value on the date of grant, $0.041. In October 2004, the Company granted options to an employee and a consultant to purchase 635,418 shares of unrestricted common stock at $.001 per share. 468,750 of these options, valued at $150,000, were immediately vested while 166,668 vested over a nine-month period. The Company recorded unearned compensation of $45,000, based on the difference between the fair value of the common stock at the grant date and the exercise price of the options that did not immediately vest. The unearned compensation was amortized over the option's vesting period with $35,000 and $10,000 being charged to expense during 2005 and 2004, respectively. There were no other options granted or cancelled/expired under any plans during 2004 or 2005. Information pertaining to options outstanding at December 31, 2005 is as follows:
Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price .81 9,000 3 $.81 9,000 $ .81 1.62 57,000 3 1.62 57,000 1.62 .001 99,054 9 .001 99,054 .001 .041 25,000,000 7 .041 25,000,000 .041 ---------- ---------- Outstanding at end of year 25,165,054 $.045 25,165,054 $ .045 ========== ==========
F-14 During July 1999, the Company's Board of Directors adopted, subject to stockholders' approval, the 1999 Omnibus Share Plan (the "Omnibus Plan") that provides for both incentive and non-qualified stock options, stock appreciation rights and other awards to directors, officers, and employees of the Company to purchase or receive up to 1,000,000 shares of the Company's stock. A committee of the Board of Directors ("Committee") establishes the option price at the time each option is granted, which price may, in the discretion of the Committee, be less than 100% of the fair market value of the shares on the date of the grant. Any options granted will have a maximum term of ten years and will be exercisable during a period as specified by the Committee. No options have ever been granted under the Omnibus Plan. On February 1, 2001 the Company adopted the 2001 Non-Qualified Stock Option Plan (the "2001 Plan") and has filed Registration Statements on Form S-8 to register 70,000,000 shares of its common stock. Under the 2001 Plan, employees and consultants may elect to receive their gross compensation in the form of options, exercisable at $.001 per share, to acquire the number of shares of the Company's common stock equal to their gross compensation divided by the fair value of the stock on the date of grant. During the year ended December 31, 2005 the Company granted options for 8,302,602 shares at various dates aggregating $1,580,216 under this plan. During the year ended December 31, 2004 the Company granted options for 5,676,670 shares at various dates aggregating $1,436,499 under this plan. All options except 99,054 shares granted during the 2005 and 2004 were exercised. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, compensation cost has been recognized only to the extent described above. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by FASB Statement No. 123, the Company's net income and earnings per share would have been adjusted to the pro forma amounts indicated below: Years Ended December 31, ------------ 2005 2004 ---- ---- Net loss As reported $(3,100,652) $(4,079,734) Stock based compensation cost, as reported (net of tax) 35,000 160,000 Stock based compensation cost that would have been included in the determination of net income had the fair value method been applied (net of tax) (35,000) (424,450) ----------- ----------- Pro forma $(3,100,652) $(4,344,184) =========== =========== Basic loss per share as reported $ (.02) $ (.02) Stock based compensation cost, as reported (net of tax) -- -- Stock based compensation cost that would have been included in the determination of net income had the fair value method been applied (net of tax) (.00) (.01) ----------- ----------- Pro forma $ (.02) $ (.03) =========== =========== F-15 Note 8. Income Taxes There was no provision for income taxes for the years ended December 31, 2005 and 2004 due to the Company's net operating loss and its valuation reserve against deferred income taxes. The difference between the provision for income taxes using amounts computed by applying the statutory federal income tax rate of 34% and the Company's effective tax rate is due primarily to the net operating loss incurred by the Company and the valuation reserve against the Company's deferred tax asset. The tax effects of temporary differences and carry forwards that give rise to deferred taxes are as follows: 2005 2004 ---- ---- Federal net operating loss carry forwards $ 6,758,000 $ 6,357,000 State net operating loss carry forwards 1,492,000 1,776,000 ----------- ----------- 8,250,000 8,133,000 Valuation reserve (8,250,000) (8,133,000) ----------- ----------- Net deferred tax asset $ -- $ -- =========== =========== The valuation reserve applicable to net deferred tax asset for the years ended December 31, 2005 and 2004 is due to the likelihood of the deferred tax not to be utilized. At December 31, 2005, the Company has federal and state net operating loss carry forwards of approximately $20,000,000 and $16,000,000, respectively, available to offset future taxable income. The state carry-forwards will expire intermittently through 2010, while the federal carry forwards will expire intermittently through 2025. Note 9. Convertible Debt Financing As of December 31, 2005 the Company has outstanding $1,150,000 of convertible debt. On March 23, 2000, the Company entered into a Securities Purchase Agreement (the "Agreement"), whereby the Company sold an 8% convertible note in the amount of $3,000,000 (the "Series A Note"), due in shares of F-16 common stock on March 31, 2002 to Augustine Fund, L.P. (the "Buyer"). The Series A Note, as most recently modified on May 21, 2002, provided for the extensions of the maturity date until March 31, 2005. As of December 31, 2005 this note has been paid in full through a series of conversions to common stock. During 2005 the Company received conversion requests for the remaining $251,892 balance into 1,412,942 common shares at prices ranging from $.149 to $.213 per share. During 2004, 2003, and 2002 $2,748,108, had been converted into 25,314,096 shares of the Company's common stock at conversion prices ranging from $.028 to $.375 per share. The Company entered into a second Loan Agreement, most recently modified in October 2005, whereby it issued an 8% convertible note in the amount of $2,250,000, due November 7, 2006 (the "Series B Note") to Buyer. The Series B Note is convertible into common stock at a conversion price equal to the lesser of: (1) $.25 per share, or (2) seventy-three percent (73%) of the average of the closing bid price for the common stock for the five (5) trading days immediately preceding the conversion date. Based upon advances through December 31, 2005 totaling $2,250,000, had the Buyer converted the series B Note at issuance, Buyer would have received $3,082,193 in aggregate value of the company's common stock upon conversion of the convertible note. As a result, in accordance with EITF 00-27, the intrinsic value of the beneficial conversion feature of $832,193 was charged to interest expense over the original two year term of the related note. The beneficial conversion feature that was charged to interest expense totaled $103,871 and $291,494 in 2005 and 2004, respectively. The total beneficial conversion discount related to this note was recorded as an increase in additional paid in capital and the unamortized portion as a reduction in the related note. Note 10. Notes Payable At December 31, 2005 the Company was obligated on short-term notes payable totaling $130,000, of which $80,000 was to a related party. The related party notes bear interest at 8%, while the remainder bear interest at 10%. The related party debt is due on demand while the remainder is due on May 31, 2006. Interest expense charged to operations in connection with the related party notes totaled $10,266 in 2005. At December 31, 2004, the Company was obligated on short-term notes payable totaling $290,000, of which $130,000 was to a related party. The related party notes bear interest at 8%, while the remainder bore interest at 12% to 18%. In addition, with respect to the third party debt, the Company issued 125,000 unregistered shares of stock valued at $17,500 as an origination fee. All of this short-term debt was due on demand. Interest expense charged to operations in connection with the related party notes totaled $10,967 in 2004. Note 11. Related party transactions During the year ended December 31, 2004 the Company acquired approximately $110,000 of memorabilia for sale from Steven Rotman, the father of Richard and Greg Rotman. Note 12. Issuance of Common Stock During 2005 the Company purchased $1,010,000 of memorabilia for sale from Leslie Rotman, the mother of Richard and Greg Rotman in exchange for 6,433,121 shares of restricted stock valued at $.157. During 2005 and 2004 the Company issued 1,019,871 and 3,924,905 shares of common stock, respectively, in connection with the payment of $129,161 and $315,225, respectively, of interest due on its convertible debt. F-17 EXHIBIT INDEX Exhibit 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 Convertible Promissory Note dated March 23, 2000 issued to Augustine Fund, LP pursuant to Securities Purchase Agreement (incorporated by reference to Exhibit 10.3 to Form 10-KSB filed on April 14, 2000) 4.3 Convertible Promissory Note, dated November 7, 2001, issued to Augustine Fund, L.P., pursuant to Loan Agreement (incorporated by reference from Exhibit 4.2 to Form 8-K filed on November 21, 2001) 4.4 Modification Agreement dated September 19, 2000 between the Company and Augustine Fund, L.P. (incorporated by reference to Exhibit 4.7 to Form S-3 filed on October 25, 2000). 4.5 Amended Modification Agreement dated July 15, 2001, between the Company and Augustine Fund, L.P. (incorporated by reference from Exhibit 4.10 to Form SB-2/A filed on August 8, 2001) 4.6 Second Amended Modification Agreement dated August 30, 2001 between the Company and Augustine Fund, L.P. (incorporated by reference from Exhibit 4.11 to Form SB-2 filed on August 31, 2001) 4.7 Third Amended Modification Agreement dated May 21, 2002 between the Company and Augustine Fund, L.P. (incorporated by reference from Exhibit 4.1 to Form 10-QSB/A filed on August 14, 2002) 4.8 Modification Agreement dated May 21, 2002 between the Company and Augustine Fund, L.P. (incorporated by reference from Exhibit 4.2 to Form 10-QSB/A filed on August 14, 2002) 4.9 Second Modification Agreement dated October 31, 2003 between the Company and Augustine Fund, L.P. (incorporated by reference from Exhibit 4.10 to Form 10-KSB filed on March 30, 2004) 4.10 Third Modification Agreement dated October 15, 2005 between the Company and Augustine Fund, L.P.* 4.11 Warrant issued by the Registrant to Delano Group Securities, LLC (expired March 2005) (incorporated by reference to Exhibit 10.7 to Form 10-KSB filed on April 14, 2000). 4.12 Warrant dated March 23, 2000 issued to Augustine Fund, LP pursuant to Securities Purchase Agreement (expired March 2005) (incorporated by reference to Exhibit 10.4 to Form 10-KSB filed on April 14, 2000) 10.1 1999 Stock Option Plan (incorporated by reference to Exhibit 10.2 to Form SB-2/A filed on December 1, 2000) 10.2 1999 Omnibus Share Plan (incorporated by reference to Exhibit 10.3 to Form SB-2/A filed on December 1, 2000) 10.3 2001 Non-Qualified Stock Option Plan, as amended (incorporated by reference from Exhibit 99.1 to Form S-8 filed on September 5, 2003) 10.4 2002 Stock Option Plan (incorporated by reference from Exhibit 10.17 to Form 10-KSB filed on March 31, 2003) 10.5 Securities Purchase Agreement dated March 23, 2000 between the Company and Augustine Fund, LP. (incorporated by reference to Exhibit 10.2 to Form 10-KSB filed on April 14, 2000) 10.6 Loan Agreement, dated November 7, 2001, by and between Augustine Fund, L.P. and the Company (incorporated by reference from Exhibit 10.1 to Form 8-K filed on November 21, 2001) 10.7 Loan Agreement dated May 21, 2002 between the Company and Augustine Fund, L.P. (incorporated by reference from Exhibit 10.1 to Form 10-QSB/A filed on August 14, 2002) 10.8 Agreement and Plan of Merger between the Company, Rotman Collectibles, Inc. and Leslie Rotman dated October 23, 2001 (incorporated by reference from Exhibit 2.1 to Form 8-K filed on November 21, 2001) 10.9 Asset Purchase Agreement dated September 8, 2005 between the Company and Leslie Rotman (incorporated by reference from Exhibit 10 to Form 10-QSB filed on November 14, 2005) 10.10 Settlement Agreement and Mutual Release dated May 9, 2005 between the Company and Leslie Rotman (incorporated by reference to Exhibit 10.1 to Form 10-QSB filed on May 13, 2005) 10.11 Escrow Agreement dated May 9, 2005 between the Company, Leslie Rotman, and Escrow Agent (incorporated by reference to Exhibit 10.2 to Form 10-QSB filed on May 13, 2005) 21 Subsidiaries of the Registrant (included in Item I)* 23 Consent of Carlin, Charron & Rosen, LLP* 31.1 CEO Certification required under Section 302 of Sarbanes-Oxley Act of 2002* 31.2 CFO Certification required under Section 302 of Sarbanes-Oxley Act of 2002* 32 CEO and CFO Certification required under Section 906 of Sarbanes-Oxley Act of 2002* 99 Risk Factors* - ---------- * filed herewith EX-4.10 2 d67582_ex4-10.txt THIRD MODIFICATION AGREEMENT EXHIBIT 4.10 THIRD MODIFICATION AGREEMENT This THIRD MODIFICATION AGREEMENT (the "Agreement") is made as of Oct. 15, 2005, by and between PAID, INC., a Delaware corporation (the "Corporation") and AUGUSTINE FUND, L.P. (the "Lender"). W1TNESSETH R.1. On November 1, 2001 (the "Transaction Date), the Corporation and the Lender entered into a Loan Agreement (the "Loan Agreement") pursuant to which the Lender agreed to extend loans up to $1,000,000 in the form of a Convertible Promissory Note (the "Note"). The Note is convertible into shares of the Corporation's common stock, par value $.001 per share (the "Common Stock"). R.2. On May 21, 2002, the Corporation and Lender entered into a Modification Agreement (the "Modification Agreement") to amend the Loan Agreement, the Note, and the Registration Rights Agreement, including to increase the principal loan amount from $1 million to $2 million. R.3. On October 31, 2003, the Corporation and Lender entered into a Second Modification Agreement to amend the Loan Agreement, the Note, and the Registration Rights Agreement, including to increase the principal loan amount from $2,000,000 to $2,250,000. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged the Corporation and Lender hereby agree as follows: 1. Recitals; Definitions. The recitals set forth above are true and correct in every respect and are incorporated herein by reference. Any capitalized terms contained herein not defined herein shall have the meaning assigned to such term in the Loan Agreement, or if not defined in the Loan Agreement, in the Note. 2. Amendment to Loan Agreement. The first three sentences of Section 2.4 of the Loan Agreement, as modified by the Modification Agreement, shall be deleted in their entirety, and in lieu thereof, the Loan Agreement shall state as follows: "The outstanding principal amount of the Loans, and any interest accrued but unpaid with respect to such advance, shall be payable in full on November 7, 2006." 3. Amendment to Note. a. The second and third sentences of the first paragraph of the Note, as modified by the Modification Agreement, shall be deleted in their entirety, and in lieu thereof, the Note shall state as follows: "Subject to certain mandatory prepayment requirements and other terms and conditions with respect to prepayment, the Principal Sun and all accrued and unpaid interest shall be payable in full on November 7, 2006 (the "Maturity Date")." b. The sixth paragraph of the Note shall be amended by deleting any reference to "November 7, 2005", and replacing it with "November 7, 2006." 4. Not a Novation. The Corporation and the Lender agree that this Agreement shall not be construed as an agreement to extinguish the Corporation's or Lender's original obligations under the Note and other documents and shall not constitute a novation as to the obligations of the Corporation or Lender under the Note. 5. Counterparts. This Agreement may be executed in any number of counterparts, all of which when taken together shall constitute one Agreement. 6. Successors and Assigns. Whenever used herein, the words "Corporation" and "Lender" shall be deemed to include their respective successors and assigns. All words used herein shall be deemed to refer to the singular, plural, masculine, feminine or neuter as the identity of the person or entity or the context may require. 7. Termination. This Agreement shall not terminate unless and until Lender represents in writing that it has no further rights to obtain Common Stock of the Corporation under any agreement, or to convert any outstanding indebtedness into shares of Common Stock of the Corporation, and until Lender does not beneficially own any shares of Common Stock of the Corporation. IN WITNESS WHEREOF, the Corporation and the Lender have caused this Agreement to be executed as of the date first above written. PAID, INC. By: /s/ Gregory P. Rotman ------------------------------------ Gregory P. Rotman Chief Executive Officer AUGUSTINE FUND, L.P. By: Augustine Capital Management, LLC, General Partner By: /s/ Thomas F. Duszynski ------------------------------------ EX-23 3 d67582_ex-23.txt CONSENT OF CARLIN, CHARRON & ROSEN, LLP EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration Nos. 333-55180, 333-63268, 333-68718, 333-81290, 333-104402, 333-108529 and 333-125194) of Paid, Inc. of our report dated March 17, 2006, on our audit of the consolidated financial statements of Paid, Inc., which report appears in the December 31, 2005 annual report on Form 10-KSB of Paid, Inc. /s/ Carlin, Charron & Rosen, LLP Westborough, Massachusetts March 31, 2006 EX-31.1 4 d67582_ex31-1.txt SECTION 302 CERTIFICATION OF CEO EXHIBIT 31.1 CERTIFICATION I, Gregory Rotman, certify that: 1. I have reviewed this annual report on Form 10-KSB of Paid, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 31, 2006 /s/ Gregory Rotman ------------------------- Gregory Rotman, President EX-31.2 5 d67582_ex31-2.txt SECTION 302 CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATION I, Richard Rotman, certify that: 1. I have reviewed this annual report on Form 10-KSB of Paid, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 31, 2006 /s/ Richard Rotman --------------------------------------- Richard Rotman, Chief Financial Officer EX-32 6 d67582_ex-32.txt SECTION 906 CERTIFICATION OF CEO AND CFO EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Paid, Inc. (the "Company") on Form 10-KSB for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in their respective capacities as capacity as President and CEO of the Company and as CFO of the Company, certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gregory Rotman - ---------------------------- Gregory Rotman President and CEO March 31, 2006 /s/ Richard Rotman - ----------------------------- Richard Rotman Chief Financial Officer March 31, 2006 EX-99 7 d67582_ex-99.txt RISK FACTORS EXHIBIT 99 RISK FACTORS 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: o our ability to anticipate and adapt to a developing market; o dependence upon the level of hits to our sites and on sites that we use to sell our products and services; and o 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 tour experiences; o our ability to engage organizations for website development and sponsorship; o development of equal or superior Internet portals, auctions and related services by competitors. To address these risks, we must, among other things, successfully market celebrities, musical artists, and service their fan base, increase traffic to our websites, 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 auditors have 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, then our business will fail and our stock will be worthless. Our capital is limited and we need additional financing to implement our business plan and continue operations. We require substantial working capital to fund our business. Additional funds are necessary for our Company to implement its business plan and continue our operations. If we are unable to obtain financing in the amounts desired and on acceptable terms, or at all, we will be required to reduce significantly the scope of our expenditures, 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, 2005, we need additional capital to fund our anticipated operating expenses over the next 12 months. If we require additional funding, and 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. 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: o our ability to sign up well known celebrities, musical artists, and athletes for website and fan management, as well as other entities for website development and sponsorship; o our ability to significantly increase our customer base and traffic to our websites, manage our inventory mix and the mix of products offered, liquidate our inventory in a timely manner, maintain gross margins, and maintain customer satisfaction; o our ability to market and sell our software products; o the availability and pricing of merchandise from vendors; o consumer confidence in encrypted transactions in the Internet environment; o the timing, cost and availability of advertising on our websites and other entities' websites; o temporary popularity of some collectibles, celebrities, and sports figures; o the amount and timing of costs relating to expansion of our operations and the hiring of experienced personnel; o the announcement or introduction of new types of services or products by our competitors; o technical difficulties with respect to consumer and fan use of our websites; o our ability to make acquisitions of complementary business and technologies; o governmental regulation by federal or local governments; and o general economic conditions and economic conditions specific to the Internet and electronic commerce. 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. Our advertising has been limited, and we have increased our reliance on our relationships with online companies for advertising. We have been unable to afford substantial advertising with other online companies and magazines and have, as a result, generated minimal revenues from advertisements. To help expand our revenues, we should expand our advertising arrangements with auction sites and with other companies in the sports and collectibles arena. These website advertising arrangements could include mutual linking arrangements, such as other companies linking to our site and our site linking to the sites of those companies. An increased dependence on online advertising relationships includes the following risks: o a competitor could purchase exclusive rights to attractive space on one or more key sites; o it is uncertain that significant spending on these relationships will increase our revenues substantially or at all; o the expected revenue increases resulting from this spending may not occur within the time periods that we are expecting; o space on other websites or the same sites may increase in price or cease to be available on reasonable terms or at all; o online companies will be unable to deliver a sufficient number of customer visits or impressions; and o online companies may compete with our Company for limited online auction revenues. 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 websites to the Internet. From time to time, we have experienced temporary interruptions in our websites' 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 auction 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. For the sale of our collectibles, we rely heavily on other internet auction companies, such as eBay, to sell our products and services. 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 attract advertising revenue in quantities and at rates that are satisfactory to us could harm our business. Currently, we generate minimal revenues from website advertising and our ability to achieve any substantial advertising revenue is unlikely and depends upon: o the development of a large base of users possessing demographic characteristics attractive to advertisers; o the level of traffic on our websites; o our ability to derive better demographic and other information from our users; o acceptance by advertisers of the Web as an advertising medium; and o our ability to transition and expand into other forms of advertising. If we are unsuccessful in sustaining or increasing advertising sales levels, it could have a material adverse effect on our business, operating results and financial condition. 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. Increases in the volume of merchandise sales have 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: o the need to manage relationships with our clients; o the need to manage relationships with various technology licensors, advertisers, other web sites and services, Internet service providers and other third parties; o difficulties in hiring and retaining skilled personnel necessary to support our businesses; o the need to train and manage a growing employee base; and o pressures for the continued development of our financial and information management systems. 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. 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. These individuals have acquired specialized knowledge and skills with respect to our Company and our operations. As a result, if either 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 Gregory Rotman and Richard Rotman have not executed employment agreements with the Company. 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 our ability to purchase inventory at attractive prices and to liquidate inventory rapidly and the marketability of our services and our software products. Rotman Auction continues to be a strong source of revenue. We purchase these collectibles from dealers and collectors and assume the inventory and price risks of these items until they are sold. We also have a large inventory of collectible movie posters. It is difficult to determine with certainty whether an item will sell for more than the price we paid. Further, when we sell items at auction, minimum opening bid prices for the merchandise listed on our websites generally are lower than our acquisition costs for the merchandise, and we cannot offer any assurance that we will achieve positive gross margins on any given sale. If we are unable to resell our purchased collectibles when we want or need to, or at prices sufficient to generate a profit on their resale, or if the market value of our inventory of purchased collectibles were to decline, our operating results would be negatively affected. 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 is dependent 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 or sports figures do not recognize or trust our name, a celebrity or sports figure 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 website users, advertisers and e-commerce entities that we have advertising relationships with through: o Web advertising and marketing; o traditional media advertising campaigns; and o providing a high quality user experience. 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. Our competitors often provide Internet access or computer hardware to our customers and they could make it difficult for our customers to access our services. Our users must access our services through an Internet service provider, or ISP, with which the user establishes a direct billing relationship using a personal computer or other access device. To the extent that an access provider, such as America Online, ComCast, Verizon or a computer or computing device manufacturer offers online services or properties that are competitive with those of our Company, the user may find it more convenient to use the services or properties of that access provider or manufacturer. In addition, the access provider or manufacturer may make it difficult to access our services by not listing them in the access provider's or manufacturer's own directory. Also, because an access provider gathers information from the user in connection with the establishment of the billing relationship, an access provider may be more effective than our Company in tailoring services and advertisements to the specific tastes of the user. To the extent that a user opts to use the services offered by his or her access provider or those offered by computer or computing device manufacturers rather than the services provided by our Company, our business, operating results and financial condition will be materially adversely affected. 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 websites, and the websites that we manage. A portion of our revenues depends on the number of customers who use these websites to purchase merchandise or services. Accordingly, the satisfactory performance, reliability and availability of these websites, 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, that result in the unavailability of these websites 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 flood 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: o we will be able to accurately project the rate or timing of increases if any, in the use of our websites; o we will be able to timely expand and upgrade our systems and infrastructure to accommodate increases in the use of these websites; o we will have uninterrupted access to the Internet; o our users will be able to reach these web sites; o communications via these web sites will be secure; o 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 websites increases. 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 websites, 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. We obtain some of our revenues from fees from sellers for listing products for sale on our service and fees from successfully completed auctions. Demand for collectibles is influenced by the popularity of certain themes, cultural and demographic trends, marketing and advertising expenditures and general economic conditions. The popularity of certain categories of items, such as toys, dolls and memorabilia, among consumers may vary over time due to perceived scarcity, subjective value, and societal and consumer trends in general. Because these factors can change rapidly, customer demand also can shift quickly. Some collectibles appeal to customers for only a limited time. The success of new product introductions depends on various factors, including product selection and quality, sales and marketing efforts, timely production and delivery and consumer acceptance. We may not always be able to respond quickly and effectively to changes in customer taste and demand due to the amount of time and financial resources that may be required to bring new products to market. A decline in the popularity of, or demand for, certain collectibles or other items sold through our service could reduce the overall volume of transactions on our service, resulting in reduced revenues. In addition, certain consumer "fads" may temporarily inflate the volume of certain types of items listed on our service, placing a significant strain upon our infrastructure and transaction capacity. These trends may also cause significant 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 one pending patent application with respect to AIship, 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. When we acquired the assets of CollectingChannel.com we were granted two perpetual licenses for the proprietary software eCMS and acquired the source codes for the software. This is the content management system primarily used by the CollectingChannel.com. 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 adversely affect our business, results of operations and financial condition. We may be exposed to liability for content retrieved from our websites. We may be exposed to liability for content retrieved from our websites. 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 websites, we may be subject to claims relating to: o the content and publication of various materials based on defamation, libel, negligence, personal injury and other legal theories; o copyright, trademark or patent infringement and wrongful action due to the actions of third parties; and o other theories based on the nature and content of online materials made available through our websites. 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. 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 rapidly evolving and intensely competitive, and we expect competition to intensify in the future. 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: o other companies that manage celebrity websites or that sell concert tour tickets online; o various Internet auction houses such as eBay, uBID, Yahoo! Auctions, Froogle and others; o 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; o a variety of other companies that offer merchandise similar to ours but through physical auctions and with which we compete for sources of supply; and o other companies that have combined a variety of services under one brand in a manner similar to ours including Alta Vista, Excite and Lycos. We believe that the principal competitive factors affecting our market are the ability to attract customers at favorable customer acquisition costs, operate the websites 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 vendors to obtain exclusive or semi-exclusive sources of merchandise. Accordingly, it is possible that new competitors or alliances among competitors and vendors 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. With respect to our collectibles portal, several other companies have combined a variety of services under one brand in a manner similar to our portal, including Yahoo! and Google. Although our portal is focused specifically on the collectibles industry, we run the risk of other sites entering into this sector and 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 our Company. 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. Our success in providing services and merchandise depends upon the popularity of the musical artist, celebrity, athlete and other entities. We provide a full line of services for musical artists, celebrities and athletes, as well as other entities, including sales of merchandise, online ticketing and fan experiences, and a fan website. 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 is likely to refund the costs of the services sold for that show. 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. The effects of 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, laws applicable to auction companies and auctioneers, 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. 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. Furthermore, the growth and development of the market for Internet commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business over the Internet. The adoption of any additional laws or regulations may decrease the growth of the Internet, which, in turn, could decrease the demand for our Internet auctions and increase our cost of doing business or otherwise have an adverse effect on our business, results of operations and financial condition. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, auction regulation, 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, 2005, our stock price as traded on the OTC Bulletin Board has ranged from a high of $.36 per share to a low of $.11 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: o actual or anticipated variations in our results of operations, o announcements of new products or technological innovations by our competitors; o developments with respect to patents, copyrights or proprietary rights; o naked short selling our common stock and stock price manipulation; o developments in Internet and auction regulation; and o general conditions and trends in the Internet, collectibles and electronic commerce industries. 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. As of December 31, 2005, in lieu of cash compensation to employees and consultants, we had outstanding stock options to acquire 25,165,054 shares of our common stock, exerciseable at prices ranging from $.001 to $1.62, with a weighted average exercise price of $.04. In addition to these options, since March 2000, we have issued three convertible notes with a total principal amount of $6,250,000, of which one convertible note for $2,250,000, is still partially outstanding. The $2,250,000 note with Augustine Fund, L.P. is convertible into common stock at a conversion price equal generally to the lesser of $.275 or 73% of the average of the closing bid price for the common stock for the 5 trading days immediately preceding the conversion date. This note is due and payable on November 7, 2006. As of December 31, 2005, the Company owes $1.15 million in principal plus interest on this note. Based on the average closing price of $.185 on December 31, 2005 (and a conversion price of approximately $.135), the $1.15 million that the Company would be required to pay over 8.5 million shares of its common stock to pay off the remaining principal of the $2,250,000 note. However, Augustine Fund, L.P. is not entitled to hold more than 4.99% of the Company's shares at any time. Unless we agree otherwise, or in certain other circumstances, the convertible notes issued to Augustine Fund, L.P. may only be converted to the extent Augustine Fund, L.P.'s ownership interest in the Company does not exceed 4.99%. This 4.99% limit, however, may not prevent Augustine Fund, L.P. from converting all of its convertible note or exercising its warrants, because Augustine Fund, L.P. can convert the convertible note or exercise warrants into 4.99% of our outstanding common stock, then to the extent it liquidates some or all of these shares, Augustine Fund, L.P. can convert additional amounts of the convertible note. As a result, the 4.99% limit does not prevent Augustine Fund, L.P. from selling more than 4.99% of our common stock. Because the conversion price is a percentage of the market price, the lower the common stock price at the time the holder converts, the more common shares the holder will receive upon conversion. Due to the conversion ratio, there is no limit on the aggregate number of shares of common stock into which the note can be converted. However, only a limited number of shares may be converted on any given day. To the extent the holder converts a portion of the convertible note and sells its shares of common stock, the price of our stock may decrease due to the additional shares in the market. This could allow the holder to subsequently convert an additional portion of the convertible note into greater amounts of common stock, the sale of which would further decrease the stock price. Purchasers of our common stock could therefore experience substantial dilution upon conversion of the convertible note. During the terms of these securities, Augustine Fund, L.P. will have the opportunity to profit from either an increase or, in the case of the convertible note, decrease in the market price of our common stock followed by a subsequent increase, with resulting dilution to the holders of shares who purchased shares for a price higher than the respective exercise or conversion price. In addition, the increase in the outstanding shares of our common stock as a result of the exercise or conversion of these securities will result in a significant decrease in the percentage ownership of our common stock by the purchasers of our common stock. 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 200 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 and former directors 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 18% of our outstanding common stock (if we include options that they hold and exercise). As a result, by joining forces with each other and the holders of 32% of our outstanding common stock, they may be able to exercise control over all matters submitted to our stockholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets). 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, 2005, the actual trading volume ranged from a low of 21,000 shares of common stock to a high of over 2.3 million shares of common stock with 8 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. -----END PRIVACY-ENHANCED MESSAGE-----