-----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, CxF4xiIf+57HkW+egJhjd15aaCJSNusA62R3Ybh/6957mwWGQbmQDY26zuKbxUHn 87n9W5jljDtY+lG59MYlEw== 0001169232-08-004066.txt : 20081110 0001169232-08-004066.hdr.sgml : 20081110 20081110163102 ACCESSION NUMBER: 0001169232-08-004066 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081110 DATE AS OF CHANGE: 20081110 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28720 FILM NUMBER: 081176085 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 10-Q 1 d75275_10-q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2008 COMMISSION FILE NUMBER 0-28720 PAID, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 73-1479833 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 4 Brussels Street, Worcester, Massachusetts 01610 (Address of Principal Executive Offices) (Zip Code) (508) 791-6710 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer |_| Accelerated Filer |X| Non-accelerated filer |_| Smaller reporting company |_| (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| As of November 2, 2008, the issuer had outstanding 250,297,930 shares of its Common Stock, par value $.001 per share. Paid, Inc. and Subsidiary Form 10-Q For the Three and Nine Months ended September 30, 2008 TABLE OF CONTENTS Part I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets September 30, 2008 (unaudited) and December 31, 2007..................3 Consolidated Statements of Operations Three and Nine Months ended September 30, 2008 and 2007 (unaudited)......................................................4 Consolidated Statements of Cash Flows Nine Months ended September 30, 2008 and 2007 (unaudited)......................................................5 Consolidated Statements of Changes in Shareholders' Equity Nine Months ended September 30, 2008 (unaudited)...........................................................6 Notes to Consolidated Financial Statements Nine Months ended September 30, 2008 and 2007.........................7-16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................................17 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................21 Item 4. Controls and Procedures........................................................22 Part II - Other Information Item 1. Legal Proceedings.................................................................22 Item 1A. Risk Factors......................................................................23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......................23 Item 3. Defaults Upon Senior Securities...................................................23 Item 4. Submission of Matters to a Vote of Security Holders...............................23 Item 5. Other Information ................................................................23 Item 6. Exhibits .........................................................................23 Signatures...................................................................................24
-2- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAID, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
September 30, December 31, ASSETS 2008 2007 ---- ---- (unaudited) (audited) Current assets: Cash and cash equivalents $ 435,741 $ 264,811 Accounts receivable 123,768 -- Inventories, net 1,165,115 1,195,689 Prepaid expenses and other current assets 463,395 185,553 Due from employees 41,732 39,362 ------------ ------------ Total current assets 2,229,751 1,685,415 Property and equipment, net 38,131 74,338 Intangible asset, net 10,123 10,828 ------------ ------------ Total assets $ 2,278,005 $ 1,770,581 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 935,612 $ -- Accounts payable 303,615 272,476 Accrued expenses 835,736 380,276 Deferred revenues 78,780 109,500 ------------ ------------ Total current liabilities 2,153,743 762,252 ------------ ------------ Commitments and contingencies Shareholders' equity: Common stock, $.001 par value, 350,000,000 shares authorized; 241,521,487 and 234,636,742 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively 241,522 234,637 Additional paid-in capital 34,239,703 32,083,880 Accumulated deficit (34,356,963) (31,310,188) ------------ ------------ Total shareholders' equity 124,262 1,008,329 ------------ ------------ Total liabilities and shareholders' equity $ 2,278,005 $ 1,770,581 ============ ============
See accompanying notes to consolidated financial statements -3- PAID, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months Three months Nine months Nine months ended ended ended ended September September September September 30, 2008 30, 2007 30, 2008 30, 2007 ------------- ------------- ------------- ------------- Revenues $ 945,257 $ 1,586,602 $ 1,924,685 $ 2,898,968 Cost of revenues 653,762 1,006,081 1,100,903 1,710,253 ------------- ------------- ------------- ------------- Gross profit 291,495 580,521 823,782 1,188,715 ------------- ------------- ------------- ------------- Operating expenses: Selling, general, and administrative expenses 1,377,195 911,970 3,447,414 2,662,586 Web site development costs 96,145 114,607 356,531 308,585 ------------- ------------- ------------- ------------- Total operating expenses 1,473,340 1,026,577 3,803,945 2,971,171 ------------- ------------- ------------- ------------- Loss from operations (1,181,845) (446,056) (2,980,163) (1,782,456) ------------- ------------- ------------- ------------- Other income (expense): Interest expense (40,636) (1,871) (67,782) (6,210) Other income 394 5,321 1,170 11,623 ------------- ------------- ------------- ------------- Total other income (expense), net (40,242) 3,450 (66,612) 5,413 ------------- ------------- ------------- ------------- Loss before income taxes (1,222,087) (442,606) (3,046,775) (1,777,043) Provision for income taxes -- -- -- -- ------------- ------------- ------------- ------------- Net (loss) (1,222,087) $ (442,606) $ (3,046,775) $ (1,777,043) ============= ============= ============= ============= Loss per share - basic and diluted $ (0.01) $ (0.00) $ (0.01) $ (0.01) ============= ============= ============= ============= Weighted average shares - basic and diluted 240,000,388 227,655,800 237,514,333 225,307,315 ============= ============= ============= =============
See accompanying notes to consolidated financial statements -4- PAID, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (Unaudited)
2008 2007 ---- ---- Operating activities: Net loss $(3,046,775) $(1,777,043) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 58,390 97,301 Bad Debt -- 250 Share based compensation 340,000 -- Amortization of debt discount 52,782 -- Intrinsic value of stock options awarded to professionals and consultants in payment of fees for services provided 1,351,016 1,012,044 Intrinsic value of stock options awarded to employees in payment of compensation 90,308 176,999 Changes in assets and liabilities: Accounts receivable (123,768) 15,788 Inventories, net 30,574 18,571 Prepaid expense and other current assets (280,213) (135,584) Accounts payable 31,139 (49,754) Accrued expenses 455,461 (136,111) Deferred revenue (30,720) 8,241 ----------- ----------- Net cash used in operating activities (1,071,806) (769,298) ----------- ----------- Investing activities: Property and equipment additions (21,478) (9,306) ----------- ----------- Financing activities: Net proceeds (repayments) of notes and loans payable 1,100,000 482,000 Proceeds from assignment of call options 123,464 15,537 Proceeds from exercise of stock options 30,750 20,500 Proceeds from sale of warrants 10,000 -- Proceeds from sale of common stock -- 763,400 ----------- ----------- Net cash provided by financing activities 1,264,214 1,281,437 ----------- ----------- Net increase in cash and cash equivalents 170,930 502,833 Cash and cash equivalents, beginning 264,811 138,326 ----------- ----------- Cash and cash equivalents, ending $ 435,741 $ 641,159 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Income taxes $ 3,283 $ 305 =========== =========== Interest $ -- $ 1,357 =========== ===========
See accompanying notes to consolidated financial statements -5- PAID, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 (Unaudited)
Common stock Additional --------------------------- Paid-in Accumulated Shares Amount Capital Deficit Total ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2007 234,636,742 $ 234,637 $ 32,083,880 $(31,310,188) $ 1,008,329 Issuance of common stock pursuant to exercise of stock options granted to employees for services 387,551 388 89,920 -- 90,308 Issuance of common stock pursuant to exercise of stock options granted to professionals and consultants 5,747,194 5,747 1,345,269 -- 1,351,016 Proceeds from assignment of call options -- -- 123,464 -- 123,464 Options exercised 750,000 750 30,000 -- 30,750 Issuance of warrants in conjunction with loans payable -- -- 217,170 -- 217,170 Proceeds from extension of expiration date of warrants -- -- 10,000 -- 10,000 Share based compensation related to issuance of incentive stock options -- -- 340,000 -- 340,000 Net loss -- -- -- (3,046,775) (3,046,775) ------------ ------------ ------------ ------------ ------------ Balance, September 30, 2008 241,521,487 $ 241,522 $ 34,239,703 $(34,356,963) $ 124,262 =========================================================================
See accompanying notes to consolidated financial statements -6- PAID, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2008 AND 2007 Note 1. Organization and Significant Accounting Policies 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 collectible industries. The Company offers celebrities, musical artists and athletes official web sites and fan-club services including e-commerce, VIP ticketing, fan club management, fan experiences, storefronts, articles, polls, message boards, contests, biographies and custom features. The Company also sells merchandise for celebrities, through official fan websites, on tour or at retail. General The Company has prepared the consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Company's audited financial statements included in the Annual Report on Form 10-KSB for the year ended December 31, 2007. In the opinion of management, the Company has prepared the accompanying consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2008. Liquidity The Company's independent registered public accounting firm has issued a going concern opinion on the Company's consolidated financial statements for the year ended December 31, 2007. 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 for the remainder of 2008 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, our suite of management tools and patented shipping calculator solutions for small ecommerce enterprises, 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 resources to fund operations during the next 12 months. These resources include call options, expiring on May 9, 2009, for approximately 435,000 shares of common stock, which, once assigned by the Company, can generate between $70,000 and $230,000 (based solely upon the 52 week high and low closing prices of the Company's common stock) of cash. In addition, in April 2008 the Company entered into a financing agreement for up to $2,500,000 of additional financing and management is exploring opportunities to monetize its recently issued patent. However, there can be no assurance that all of the financing will be received, that assignment of the call options can be concluded on reasonably acceptable terms, or that the Company will be successful in monetizing its patent. Finally, management is seeking alternative sources of capital to support operations. -7- Principles of Consolidation The accompanying consolidated financial statements include the accounts of Paid, Inc. and its wholly-owned subsidiary, Rotman Collectibles, Inc. On December 27, 2007 Rotman Collectibles was merged into Paid, Inc. All inter-company balances and transactions have been eliminated. Inventories Inventories consist of collectible merchandise for sale and are stated at the lower of average cost or market on a first-in, first-out (FIFO) method. When a purchase contains multiple copies of the same item, they are stated at average cost. On a periodic basis management reviews inventories on hand to ascertain if any is slow moving or obsolete. In connection with this review, at both September 30, 2008 and December 31, 2007 the Company provided for reserves totaling $325,000. Website Development Costs The Company accounts for website development costs in accordance with the provisions of EITF 00-2, "Accounting for Web Site Development Costs", which requires that costs incurred in planning, maintaining, and operating stages that do not add functionality to the site be charged to operations as incurred. External costs incurred in the site application and infrastructure development stage and graphic development are capitalized. Such capitalized costs are included in "Property and equipment." Revenue Recognition The Company generates revenue from sales of fan experiences, from fan club membership fees, from sales of its purchased inventories, and from web hosting services. Fan experiences sales include experiences at concerts and other events conducted by performing artists and/or tickets. Revenues associated with these fan experiences are reported gross 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 ratably over the term of the related membership, generally one year. For sales of merchandise owned and warehoused by the Company, the Company is responsible for conducting the sale, billing the customer, shipping the merchandise to the customer, processing customer returns and collecting accounts receivable. The Company recognizes revenue upon verification of the credit card transaction and shipment of the merchandise, discharging all obligations of the Company with respect to the transaction. The Company provides web hosting services in conjunction with two types of arrangements - cash and receipt of publicly recognized autographs on merchandise. Revenue is recognized on a monthly basis as the services are provided under both arrangements. The amounts of revenues related to arrangements settled in other than cash are determined based upon management's estimate of the fair value of the service provided or the fair value of the autographs received, depending upon which measure is most reliable. Advertising Costs Advertising costs, totaling $44,000 in 2008 and $39,000 in 2007, are charged to expense when incurred. -8- Shipping and Handling Fees and Costs All amounts billed to customers in sales transactions related to shipping and handling represent revenues earned and are reported as revenues. Costs incurred by the Company for shipping and handling totaling $56,100 and $41,100 in 2008 and 2007, respectively, are reported as a component of selling, general and administrative expenses. Segment Reporting The Company has determined that it has only one discreet operating segment consisting of activities surrounding the sale of fan experiences, fan club memberships, and merchandise associated with its relationships with performing artists and publicly recognized people. Concentrations The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and cash equivalents with high credit quality institutions. Approximately 67% of the Company's revenues for the nine months ended September 30, 2008 were generated from fan experiences and sales of merchandise related to two performing artists, Aerosmith and Return to Forever while approximately 89% of the Company's revenues for the nine months ended September 30, 2007 were generated from fan experiences and sales of merchandise related to one performing artist, Aerosmith. Share Based Compensation The Company accounts for share-based compensation in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) 123(R), Share-Based Payment. Under the provisions of SFAS 123(R), share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant). The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company's stock over the option's expected term, the risk-free interest rate over the option's expected term, and the Company's expected annual dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company's stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards. Earnings Per Common Share Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and warrants. The number of common shares that would be included in the calculation of outstanding options and warrants is determined using the treasury stock method. The assumed conversion of outstanding dilutive stock options and warrants would increase the shares outstanding but would not require an adjustment of -9- income as a result of the conversion. Stock options and warrants applicable to 31,486,054 shares and 26,886,054 shares at September 30, 2008 and 2007, respectively, have been excluded from the computation of diluted earnings per share because they were antidilutive. Diluted earnings per share have not been presented as a result of the Company's net loss for each year. Fair Value Measurements On January 1, 2008 the Company adopted the provisions of SFAS No. 157, "Fair Value Measurements," ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. The Statement codifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Adoption of SFAS 157 had no material impact on the Company's financial statements for the nine months ended September 30, 2008. On January 1, 2008 the Company adopted the provisions of SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," ("SFAS 159"). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these financial assets and liabilities would be recognized in earnings when they occur. SFAS 159 further establishes certain additional disclosure requirements. Adoption of SFAS 159 had no material impact on the company's financial statements for the nine months ended September 30, 2008. Recent Accounting Pronouncements In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations", which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for calendar year companies on January 1, 2009. The adoption of SFAS 141(R) will have an impact on accounting for business combinations once adopted, but the effect is dependent upon acquisitions at that time. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51", which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for calendar year companies on January 1, 2009. The Company has not determined the effect that the application of SFAS 160 will have on its consolidated financial statements. In December 2007, the SEC issued Staff Accounting Bulletin 110. SAB 110 expresses the views of the staff regarding the use of a "simplified" method, as discussed in SAB No. 107 ("SAB 107"), in developing an estimate of expected term of "plain vanilla" share options in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004). SAB 110 is not expected to have a significant impact on the consolidated financial statements. -10- Note 2. Patent In January 2008, the United States Patent and Trademark Office issued the Company's patent #7324968 providing the Company with the rights granted to patent holders, including the ability to seek licenses for patent use and to protect the patent from infringement. The Company's patent is for the real-time calculation of shipping costs for items purchased online using a zip code as a destination location indicator. It includes shipping charge calculations across multiple carriers and accounts for additional characteristics of the item being shipped, such as weight, special packaging or handling, and insurance costs. Note 3. Accrued Expenses Accrued expenses are comprised of the following: September 30, December 31, 2008 2007 ------------- ------------ Interest $ 18,879 $ 3,879 Payroll and related costs 177,316 169,969 Professional and consulting fees 481,825 164,145 Commissions 141,804 13,965 Other 15,912 28,318 -------- -------- $835,736 $380,276 ======== ======== Note 4. Note Payable On April 29, 2008 the Company entered into an unsecured $2,500,000 Promissory Note with Lewis Asset Management ("Lender") that is due on April 29, 2009. Amounts outstanding bear interest at 15%, and for each $100,000 advanced, Lender will receive a warrant for 100,000 shares of the Company's common stock. The warrants are exercisable at $.25 per share and will expire three years from the date of issue. At September 30, 2008 the balance outstanding under this arrangement was $1,100,000 which is presented net of the related unamortized warrant valuation of $164,388 (Note 9). The fair value of the warrants was $217,170 estimated at the date of issue using the Black-Scholes option-pricing model with the following weighted average assumptions: 2008 Expected term 3 years Expected volatility 115% Expected dividends None Risk free interest rate 3.88% Note 5. Common Stock Call Option Agreements In connection with a May 9, 2005 settlement with Leslie Rotman regarding the value paid and the value received in a 2001 transaction the Company received a call option for 2,000,000 shares of the Company's common stock at $.001 per share. Leslie Rotman is the mother, of Gregory Rotman, President of the -11- Company, and Richard Rotman, CFO/Vice President/Secretary of the Company. The option is assignable by the Company and, as most recently amended, expires on May 9, 2009. As of September 30, 2008 the Company had assigned options to purchase a total of 1,565,000 shares of stock from Leslie Rotman to certain individuals in exchange for $567,734. The Company assigned 340,000 and 50,000 during the nine months ended September 30, 2008 and 2007 in exchange for $123,500 and $15,500, respectively. The proceeds from the assignments of these options were added to the additional paid in capital of the Company. At September 30, 2008, 435,000 call options remain outstanding. Warrants During the year ended December 31, 2005, the Company entered into an Agreement and sold a warrant to purchase common stock ("Warrant") to an investor. The investor paid the Company $50,000 as a deposit ("Deposit") for the right to acquire up to 2,000,000 shares of unregistered common stock at any time within one year of the Agreement at $.15 per share. During 2006 the expiration date of the Warrant was extended to June 1, 2008 upon receipt of an additional $50,000 payment. On June 1, 2008, the expiration date of the warrant was extended to June 30, 2009 pending receipt of an additional $10,000 deposit. If exercised, all deposits totaling $110,000 will be applied as partial payment of the exercise price. If the Warrants are not exercised by June 1, 2009 the deposits will be forfeited. The deposits have been recorded in Additional Paid in Capital as received. Share-Based Incentive Plans Stock Option Plans At September 30, 2008, the Company had a number of stock option plans that include both incentive and non-qualified options to be granted to certain eligible employees, non-employee directors, or consultants of the Company. The 1999 Plan ("1999 Plan") provides for the award of non-qualified options for up to 1,000,000 shares. The maximum number of shares currently reserved for issuance is 492,000 shares. The options granted have ten-year contractual terms and vested either immediately or annually over a five-year term. There were no options granted under this plan during 2008 and 2007 and at both September 30, 2008 and December 31, 2007 there were 37,000 options outstanding with a weighted average exercise price of $1.625. 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. The 2002 Plan ("2002 Plan") provides for the award of qualified and non-qualified options for up to 30,000,000 shares. As of September 30, 2008 there are no shares currently reserved for issuance. The options granted have ten-year contractual terms and vested either immediately or over a four-year term. Information with respect to stock options granted under the above plans is as follows: -12- Weighted average Number of exercise price shares per share ----------- ---------------- Options outstanding at December 31, 2007 24,000,000 $.041 Granted 5,000,000 $.415 Exercised (750,000) .041 ----------- Options outstanding at September 30, 2008 28,250,000 $.107 =========== The grant date fair value of the Company's 2008 option grants was $1,815,000 estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 2008 ---- Expected term (based upon historical experience) 6 years Expected volatility 120.38% Expected dividends None Risk free interest rate 3.75% The incremental fair value calculated using the above assumptions over the intrinsic value was determined to be $1,815,000 which is being amortized over the four year vesting period of the grant resulting in $340,000 being charged to operations during the nine months ended September 30, 2008. On February 1, 2001 the Company adopted the 2001 Non-Qualified Stock Option Plan (the "2001 Plan") and has filed Registration Statements on Form S-8 to register 90,000,000 shares of its common stock. Under the 2001 Plan, employees and consultants may elect to receive their gross compensation in the form of options, exercisable at $.001 per share, to acquire the number of shares of the Company's common stock equal to their gross compensation divided by the fair value of the stock on the date of grant. Information with respect to stock options granted under the above plans is as follows: Weighted average Number of exercise price shares per share ----------- ---------------- Options outstanding at December 31, 2007 99,054 $.001 Granted 6,134,745 .001 Exercised (6,134,745) .001 ---------- Options outstanding at September 30, 2008 99,054 $.001 ========== A summary of the awards granted under this plan during the nine months ended September 30, 2008 and 2007 is as follows: -13- Number of Intrinsic Shares Value --------- --------- 2008 ---- Employee payroll 387,551 $ 90,308 Consulting and professional fees 5,747,194 1,351,017 ---------- ---------- Total 6,134,745 $1,441,325 ========== ========== 2007 ---- Employee payroll 559,077 $ 176,999 Consulting and professional fees 4,916,299 982,044 ---------- ---------- Total 5,475,376 $1,159,043 ========== ========== At September 30, 2008 the maximum number of shares reserved for issuance was 1,232,061 shares. The options granted have ten-year contractual terms and vest immediately. The fair value of the Company's 2008 and 2007 option grants was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 2008 2007 ---- ---- Expected term (based upon historical experience) <1 week <1 week Expected volatility 115% 114% Expected dividends None None Risk free interest rate 3.77% 4% The incremental fair value calculated using the above assumptions over the intrinsic value was determined to be immaterial and no related additional share based compensation has been recorded. All but 5,000,000 options outstanding at September 30, 2008 are fully vested and exercisable. Information pertaining to options outstanding at September 30, 2008 is as follows: Options Outstanding Weighted Average Remaining Contractual Aggregate Exercise Prices Number of Shares Life Intrinsic Value --------------- ---------------- ----------------- --------------- $1.62 37,000 .75 -- .001 99,054 6.00 $ 24,070 .041 23,250,000 4.00 4,719,750 .415 5,000,000 9.25 -- ---------- 28,386,054 ========== The total intrinsic value of options exercised during the nine months ended September 30, 2008 under all plans was $167,000 in exchange for $30,750 of cash. -14- Note 6. Income Taxes On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 "Accounting for the Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN No. 48")". FIN No. 48 requires that the impact of tax positions be recognized in the financial statements if they are more likely than not of being sustained based upon the technical merits of the position. The Company has a valuation allowance against the full amount of its net deferred taxes. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some portion, or all, of its deferred tax assets will not be realized. The implementation of FIN No. 48 had no impact on the Company's financial statements due to the valuation allowances that have historically been provided against all deferred tax assets. The Company has not been audited by the Internal Revenue Service ("IRS") or any states in connection with income taxes. The Company files income tax returns in the U.S. federal jurisdiction and Massachusetts. The periods from 2005-2007 remain open to examination by the IRS and state jurisdictions. The Company believes it is not subject to any tax risk beyond the preceding discussion. The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN No. 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any significant interest expense recognized during the nine months ended September 30, 2008. There was no provision for income taxes for the three and nine months ended September 30, 2008 and 2007 due to the Company's net operating loss and its valuation reserve against deferred income taxes. The difference between the provision for income taxes using amounts computed by applying the statutory federal income tax rate of 34% and the Company's effective tax rate is due primarily to the net operating loss incurred by the Company and the valuation reserve against the Company's deferred tax asset. The tax effects of significant temporary differences and carry forwards that give rise to deferred taxes are as follows: September 30, December 31, 2008 2007 ---- ---- Federal net operating loss carry forwards $ 9,152,000 $ 8,206,000 State net operating loss carry forwards 1,568,000 1,273,000 ------------ ------------ 10,720,000 9,479,000 Valuation reserve (10,720,000) (9,479,000) ------------ ------------ Net deferred tax asset $ -- $ -- ============ ============ The valuation reserve applicable to net deferred tax asset as of September 30, 2008 and December 31, 2007 is due to the likelihood of the deferred tax not to be utilized. At September 30, 2008, the Company has federal and state net operating loss carry forwards of approximately $26,900,000 and $16,500,000, respectively, available to offset future taxable income. The state carry-forwards will expire intermittently through 2014, while the federal carry forwards will expire intermittently through 2029. -15- Note 7. Related Party Transactions Steven Rotman is the father, and Leslie Rotman is the mother, of Gregory Rotman, President of the Company, and Richard Rotman, CFO/Vice President/Secretary of the Company. The Company entered into a number of transactions over the past two years with both Steven Rotman and Leslie Rotman. Management believes that these transactions are fair and reasonable to the Company and no less favorable than could have been obtained by an unaffiliated third party. The Company leases facilities, as a tenant at will, from a company in which Steven Rotman is a shareholder. During each of the nine months ended September 30, 2008 and 2007 the Company charged $22,700 to operations under this arrangement. In December 2001, the Company engaged Steven Rotman to provide consulting services to the Company. During the nine months ended September 30, 2008 and 2007, the Company incurred $50,000 and $144,000, respectively, of consulting fees paid to Steven Rotman, who elected to receive this compensation in the form of options under the 2001 Plan. As of December 31, 2006, the Company owed Steven Rotman $80,000 in principal, and $40,322 in interest at 8%. Interest expense charged to operations during the nine months ended September 30, 2007 related to this obligation was $4,900. Late in 2007 the Company repaid the $80,000 of principal plus $46,598 of then outstanding interest through the issuance of 527,488 restricted shares of the Company's common stock. Note 8. Commitments and Contingencies Lease Commitment The Company leases office facilities in Boston Massachusetts under a five year lease requiring monthly payments of approximately $5,800, plus increases in real estate taxes and operating expenses, through April 2011. Legal Matters In the normal course of business, the Company periodically becomes involved in litigation. As of September 30, 2008, in the opinion of management, the Company had no pending litigation that would have a material adverse effect on the Company's financial position, results of operations, or cash flows. Note 9. Subsequent Event On October 14, 2008 the Company converted the $1,100,000 outstanding balance of the notes payable (Note 4) plus all outstanding interest as of that date totaling $15,006 into 7,436,042 shares of restricted company stock at a conversion price of $.15 per share. The Company's stock on the date of conversion was trading at $.20 resulting in an additional interest charge to earnings of $372,000. -16- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward Looking Statements This Quarterly Report on Form 10-Q contains certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) regarding the Company and its business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements in this report. Additionally, statements concerning future matters such as the development of new services, technology enhancements, purchase of equipment, credit arrangements, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements. Although forward-looking statements in this quarterly report reflect the good faith judgment of the Company's management, such statements can only be based on facts and factors currently known by the Company. Consequently, forward-looking statements are inherently subject to risks, contingencies and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in this report. Although the Company believes that its plans, intentions and expectations reflected in these forward-looking statements are reasonable; the Company can give no assurance that its plans, intentions or expectations will be achieved. For a more complete discussion of these risk factors, see Exhibit 99, "Risk Factors", in the Company's Form 10-KSB for the fiscal year ended December 31, 2007. For example, the Company's ability to achieve positive cash flow and to become profitable may be adversely affected as a result of a number of factors that could thwart its efforts. These factors include the Company's inability to successfully implement the Company's business and revenue model, tour or event cancellations, higher costs than anticipated, the Company's inability to sell its products and services to a sufficient number of customers, the introduction of competing products by others, the Company's failure to attract sufficient interest in and traffic to its sites, the Company's inability to complete development of its sites, the failure of the Company's operating systems, and the Company's inability to increase its revenues as rapidly as anticipated. If the Company is not profitable in the future, it will not be able to continue its business operations. Overview Our primary focus is to provide businesses and clients with marketing, management, merchandising, auction management, website hosting, and authentication services for the entertainment, sports and collectible industries. We offer entertainers and athletes official web sites and fan club services including e-commerce, VIP ticketing, fan club management, fan experiences, storefronts, articles, polls, message boards, contests, biographies and custom features. We also sell merchandise for celebrities, through official fan websites, on tour or at retail. 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. We provide business management tools for online retailers, through AuctionInc, which utilizes our patented shipping calculator and automated auction checkout and order processing system. Critical Accounting Policies Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included in our Form 10-KSB filed on March 31, 2008. 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 -17- inherent degree of uncertainty. In applying these policies, our management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. Those estimates and judgments are based upon our historical experience, the terms of existing contracts, our observance of trends in the industry, information that we obtain from our customers and outside sources, and on various other assumptions that we believe to be reasonable and appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies include: Inventories: Inventories are stated at the lower of average cost or market on a first-in, first-out method. On a periodic basis we review inventories on hand to ascertain if any is slow moving or obsolete. In connection with this review, we establish reserves based upon management's experience and assessment of current product demand. The Company's inventories are comprised of merchandise and collectibles that relates to performing artists and athletes and valuation of it is more subjective than with more standard inventories. General economic conditions, tour schedules of performing artists, and the reputation of the performing artists/athletes, might make sale or disposition of these inventories more or less difficult. Any increases in the reserves would cause a decline in profitability, since such increases are recorded as charges against operations. Revenue recognition: Certain components of revenues are recognized based upon estimates of value, since they are received in non-monetary transactions. Management estimates the amount of revenue based upon its historical experience in comparable cash transactions or its estimation of the value received, whichever is more reliable in the circumstances. Variations in the reliability of these judgments may result in enhancement or impairment of gross margins and results of operations in future periods. Results of Operations Three months ended September 30, 2008 to three months ended September 30, 2007 The following discussion compares the Company's results of operations for the three months ended September 30, 2008 with those for the three months ended September 30, 2007. The Company's financial statements and notes thereto included elsewhere in this quarterly report contain detailed information that should be referred to in conjunction with the following discussion. Revenues. For the three months ended September 30, 2008, revenues were $945,300, 95% of which was attributable to sales of fan club memberships, merchandise, and fan experiences related to tours of performing artists. Sales of the Company's own product and fees from buyers and sellers represented 5% of revenues. Gross sales of the Company's own product were $43,100. Fan experience, fan club membership and related merchandise sales revenues were $899,300. Management anticipates increases from fan club memberships, merchandise, and fan experiences from tours, products and services related to several other performing artists during the remainder of 2008 and into 2009. Performing artists typically do not announce tour plans until two to four months in advance of the first show. Several performing artists represented by the Company have announced tours that are scheduled to continue into the fourth quarter of 2008 and another to begin during the first quarter of 2009. In addition, celebrities represented by the Company have announced events for the fourth quarter of 2008 and first quarter of 2009. Some of these tours are expected to continue beyond the first quarter of 2009. The Company's revenues for the three months ended September 30, 2008 represent a decrease of $641,300 from the same period in 2007 when revenues were $1,586,600. For the three months ended September 30, 2007, sales of the Company's product were $56,100 or 4% of gross sales and fan club membership and related merchandise sales revenues were $1,526,100, 96% of gross revenues. -18- The main reasons for the decrease in revenues was a $626,800 decrease related to the tours of performing artists, and a decrease in sales of Company owned product of approximately $13,100 from the same period in 2007. Fan experience packages marketed for certain artists include a ticket of admission, while for others they do not. Fan experiences for artists on tour in 2008 did not include tickets, while those for the artist on tour in 2007 did. Revenues related to tours of performing artists are dependent upon tour schedules, the popularity of the artist(s) on tour, and whether the tour(s) are domestic or international. There were several artists touring during the three months ended September 30, 2008 and one artist touring during the third quarter of 2007. Gross Profit from celebrity services for the three months ended September 30, 2008 and 2007 was approximately $256,200 and $514,100, respectively. As a result of the lower sales of Company owned products, gross profit from Company owned product sales for the three months ended September 30, 2008 was approximately $32,400, $29,800 less than in 2007. Operating Expenses. Total operating expenses for the three months ended September 30, 2008 were $1,473,300 compared to $1,026,600 in 2007, an increase of $446,800. Sales, general and administrative ("SG&A") expenses for the three months ended September 30, 2008 were $1,377,200, compared to $912,000 for the three months ended September 30, 2007. The increase of $466,200 in SG&A costs includes increases in payroll and related costs of $90,500, share based compensation of $113,000, and professional fees, principally related to business development, of $222,000. Costs associated with planning, maintaining and operating our web sites for the three months ended September 30, 2008 decreased by $18,500 from 2007. This decrease is due primarily to a decrease in depreciation of $12,500. Interest expense. Interest expense was $40,600 for the three months ended September 30, 2008, $38,800 greater than in the comparable 2007 period. This increase is due to $38,700 of amortization of debt discount. Net Loss. The Company realized a net loss for the three months ended September 30, 2008 of $1,222,100 compared to a net loss of $442,600 for the three months ended September 30, 2007. The loss for 2008 represents $.01 per share while the loss for 2007 represents less than $.01 per share. Inflation. The Company believes that inflation has not had a material effect on its results of operations. Nine months ended September 30, 2008 to nine months ended September 30, 2007 The following discussion compares the Company's results of operations for the nine months ended September 30, 2008 with those for the nine months ended September 30, 2007. The Company's financial statements and notes thereto included elsewhere in this quarterly report contain detailed information that should be referred to in conjunction with the following discussion. Revenues. For the nine months ended September 30, 2008, revenues were $1,924,700, 92% of which was attributable to sales of fan club memberships, merchandise, and fan experiences related to tours of performing artists. Sales of the Company's own product and fees from buyers and sellers represented 6% of revenues. Gross sales of the Company's own product were $124,400. Fan experience, fan club membership and related merchandise sales revenues were $1,771,500. Management anticipates increases from fan club memberships, merchandise, and fan experiences from tours, products and services related to several other performing artists during the remainder of 2008 and into 2009. Performing artists typically do not announce tour plans until two to four months in advance of the first show. Several performing artists represented by the Company have announced tours that are scheduled to continue into the fourth quarter of 2008 and another to begin during the first quarter of 2009. In addition, celebrities -19- represented by the Company have announced events for the fourth quarter of 2008 and first quarter of 2009. Some of these tours are expected to continue beyond the first quarter of 2009. The Company's revenues for the nine months ended September 30, 2008 represent a decrease of approximately $974,300 from the same period in 2007 when revenues were $2,899,000. Fan experience packages marketed for certain artists include a ticket of admission, while for others they do not. Fan experiences for the several artists on tour in 2008 did not include tickets, while those for the artist on tour in 2007 did. For the nine months ended September 30, 2007, sales of the Company's product were $139,000 or 5% of gross sales, fan club membership and related merchandise sales revenues were $2,698,600, 93% of gross revenues, and sports marketing revenues were $35,800, or 1% of gross revenues. The main reasons for the decrease in revenues was a $927,100 decrease related to the tours of performing artists and lower revenues related to sports marketing services of $35,800 from the same period in 2007. Revenues related to tours of performing artists are dependent upon tour schedules, the popularity of the artist(s) on tour, and whether the tour(s) are domestic or international. There were several artists touring during the nine months ended September 30, 2008 and two different artists touring during the comparable period in 2007. Gross profit from celebrity services for the nine months ended September 30, 2008 and 2007 was approximately $693,600 and $1,009,300, respectively. Operating Expenses. Total operating expenses for the nine months ended September 30, 2008 were $3,803,900 compared to $2,971,200 in 2007, an increase of $832,700. Sales, general and administrative ("SG&A") expenses for the nine months ended September 30, 2008 were $3,447,400, compared to $2,662,600 for the nine months ended September 30, 2007. The increase of $784,800 in SG&A costs includes increases in professional fees, principally related to business development, of $437,000, share based compensation of $340,000 and payroll and related costs of $68,900, offset by decreases in credit card commissions of $55,300 and tour expenses of $24,600. Costs associated with planning, maintaining and operating our web sites for the nine months ended September 30, 2008 increased by $47,900 from 2007. This increase is due primarily to increases in computer costs of $16,100 and payroll and related costs of $73,600 offset by a $38,800 decrease in depreciation. Interest expense. Interest expense was $67,800 for the nine months ended September 30, 2008, $61,600 greater than in the comparable 2007 period. This increase is due to $52,800 of amortization of debt discount and higher levels of borrowing in 2008. Net Loss. The Company realized a net loss for the nine months ended September 30, 2008 of $3,046,800 compared to a net loss of $1,777,000 for the nine months ended September 30, 2007. Losses for both years represent $.01 per share. Inflation. The Company believes that inflation has not had a material effect on its results of operations Assets At September 30, 2008, total assets of the Company were $2,278,000 compared to $1,771,000 at December 31, 2007. Operating Cash Flows A summarized reconciliation of the Company's net losses to cash used in operating activities for the nine months ended September 30, 2008 compared to September 30, 2007, is as follows: -20-
2008 2007 ---- ---- Net loss $(3,046,800) $(1,777,000) Depreciation and amortization 58,400 97,300 Share based compensation 340,000 -- Amortization of debt discount 52,800 -- Intrinsic value of stock options awarded in payment of outside services and compensation 1,441,300 1,189,000 Net current assets and liabilities associated with advance ticketing (30,700) 8,200 Changes in current assets and liabilities 113,200 (286,800) ----------- ----------- Net cash used in operating activities $(1,071,800) $ (769,300) =========== ===========
Working Capital and Liquidity The Company had cash and cash equivalents of $436,000 at September 30, 2008, compared to $265,000 at December 31, 2007. The Company had $76,000 of working capital at September 30, 2008 compared to $923,000 at December 31, 2007. At September 30, 2008 current liabilities were $2,154,000 compared to $762,000 at December 31, 2007. Current liabilities increased at September 30, 2008 compared to December 31, 2007 primarily due to new short term debt and higher levels of accrued expenses. The Company's independent registered public accounting firm has issued a going concern opinion on the Company's consolidated financial statements for the year ended December 31, 2007. 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 for the remainder of 2008 and into 2009 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, our suite of management tools and patented shipping calculator solutions for small ecommerce enterprises, 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 resources to fund operations during the next 12 months. These resources include call options, expiring on May 9, 2009, for approximately 435,000 shares of common stock, which, once assigned by the Company, can generate between $71,000 and $231,000 (based solely upon the 52 week high and low closing prices of the Company's common stock) of cash. In addition, in April 2008 the Company entered into a financing agreement for up to $2,500,000 of additional financing and management is exploring opportunities to monetize its recently issued patent. However, there can be no assurance that all of the financing will be received, that assignment of the call options can be concluded on reasonably acceptable terms, or that the Company will be successful in monetizing its patent. Finally, management is seeking alternative sources of capital to support operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. No discussion is required pursuant to Form 10-Q Instruction to paragraph 305(c). -21- ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure 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, except with respect to material weaknesses in internal control over financial reporting described below, for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time period specified by the Securities and Exchange Commission's rules and forms, and is accumulated and communicated to the Company's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There were no significant changes in the Company's internal controls during the last fiscal quarter and as of the end of the period covered by this quarterly report 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. Management, with the participation of our principal executive officer and principal financial officer, is required to evaluate the effectiveness of our internal controls based on criteria established under the COSO framework, an integrated framework for evaluation of internal controls issued to identify the risks and control objectives related to the evaluation of the control environment by the Committee of Sponsoring Organizations of the Treadway Commission. Management has concluded that our internal controls over financial reporting were not effective as of September 30, 2008 due to our inability to perform sufficient testing of internal controls on financial reporting. A factor for our internal control deficiencies is the small size of the Company and the lack of a financial expert on the Audit Committee of the Board of Directors and other corporate governance controls. As defined by the Public Company Accounting Oversight Board Auditing Standard No. 5, a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Management continues to monitor and assess the controls to ensure compliance. Please refer to Item 8A(T) of the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 for a further description of this material weakness in internal control over financial reporting. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is engaged in lawsuits from time to time in the ordinary course of business. There have been no material developments with respect to any previously reported legal proceedings. -22- ITEM 1A. RISK FACTORS There are no material changes for the risk factors previously disclosed on Form 10-KSB for the year ended December 31, 2007. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Effective October 14, 2008, the Company sold 6,059,167 shares of the Company's restricted common stock to Lewis Opportunity Fund, LP, 691,944 shares of the Company's restricted common stock to LAM Opportunity Fund, Ltd., and 684,931 shares of the Company's restricted common stock to LAM Waiting Game Fund, Ltd., each at $.15 per share. No underwriting discounts or commissions were paid. All proceeds, equal to $1,115,406, were used to pay off all outstanding principal and interest on a line of credit with such funds. The Company's stock on the date of conversion was trading at $.20 resulting in an additional interest charge to earnings of $372,000. Related to the transaction and pursuant to the line of credit, effective April 29, 2008, the Company granted warrants to each of Lewis Opportunity Fund, LP, LAM Opportunity Fund, Ltd., and LAM Waiting Game Fund, Ltd., for the purchase at $.25 per share of 300,0000, 100,000 and 100,000 shares of common stock, respectively, and effective August 12, 2008, the Company granted warrants to Lewis Opportunity Fund, LP for the purchase at $.25 per share of 600,000 shares of common stock. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS 31.1 CEO Certification required under Section 302 of Sarbanes-Oxley Act of 2002 31.2 CFO Certification required under Section 302 of Sarbanes-Oxley Act of 2002 32 CEO and CFO Certification required under Section 906 of Sarbanes-Oxley Act of 2002 -23- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PAID, INC. Registrant Date: November 10, 2008 /s/ Gregory Rotman ---------------------- ------------------------------------- Gregory Rotman, President Date: November 10, 2008 /s/ Richard Rotman ---------------------- ------------------------------------- Richard Rotman, Chief Financial Officer, Vice President and Secretary -24- LIST OF EXHIBITS Exhibit No. Description ----------- ----------- 31.1 CEO Certification required under Section 302 of Sarbanes-Oxley Act of 2002 31.2 CFO Certification required under Section 302 of Sarbanes-Oxley Act of 2002 32 CEO and CFO Certification required under Section 906 of Sarbanes-Oxley Act of 2002 -25- EX-31.1 2 d75275_ex31-1.txt CEO CERTIFICATION REQUIRED UNDER SECTION 302 OF SARBANES-OXLEY ACT OF 2002 EXHIBIT 31.1 CERTIFICATION I, Gregory Rotman, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 registrant as of, and for, the periods presented in this report; 4. The registrant'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)) and internal control over financial reporting (as defined in Exchange Act Rules 1a-15(f)) for the registrant 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 registrant, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant'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 (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant'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 registrant'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 registrant's internal control over financial reporting. Date: November 10, 2008 /s/ Gregory Rotman ---------------------------- Gregory Rotman, President EX-31.2 3 d75275_ex31-2.txt CFO CERTIFICATION REQUIRED UNDER SECTION 302 OF SARBANES-OXLEY ACT OF 2002 EXHIBIT 31.2 CERTIFICATION I, Richard Rotman, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 registrant as of, and for, the periods presented in this report; 4. The registrant'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)) and internal control over financial reporting (as defined in Exchange Act Rules 1a-15(f)) for the registrant 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 registrant, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant'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 (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant'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 registrant'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 registrant's internal control over financial reporting. Date: November 10, 2008 /s/ Richard Rotman --------------------------------------- Richard Rotman, Chief Financial Officer EX-32 4 d75275_ex32.txt CEO AND CFO CERTIFICATION REQUIRED UNDER SECTION 906 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 Quarterly Report of Paid, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2008 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 November 10, 2008 /s/ Richard Rotman - ----------------------------- Richard Rotman Chief Financial Officer November 10, 2008 -----END PRIVACY-ENHANCED MESSAGE-----