SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
COMMISSION FILE NUMBER 0-28720
SALES ONLINE DIRECT, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 73-1479833
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
4 Brussels Street, Worcester, Massachusetts 01610
(Address of principal executive offices)
Issuer's telephone number, including area code: (508) 791-6710
Common Stock, $0.001 Par Value
(Title of each class)
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 |_|
As of August 5, 2002, the issuer had outstanding 120,157,447 shares of its
Common Stock, par value $.001 per share.
Transitional Small Business Disclosure Format
Yes |_| No |X|
Sales Online Direct, Inc.
and Subsidiary
Form 10-QSB
For the Three Months ended June 30, 2002
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 (unaudited) .......... 3
Consolidated Statements of Operations Three and Six months
ended June 30, 2002 and 2001
(unaudited) .............................................. 4
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and
2001 (unaudited) ......................................... 5
Consolidated Statements of Changes in Stockholders' Equity
Six months ended June 30, 2002
(unaudited) .............................................. 6
Notes to Consolidated Financial Statements
Six months ended June 30, 2002 and 2001 .................. 7-12
Item 2. Management's Discussion and Analysis or
Plan of Operation ........................................ 13
Part II - Other Information
Item 1. Legal Proceedings ........................................ 18
Item 2. Changes in Securities and Use of Proceeds ................ 18
Item 3. Defaults Upon Senior Securities .......................... 18
Item 4. Submission of Matters to a Vote of Security Holders ...... 18
Item 5. Other Information ........................................ 18
Item 6. Exhibits and Reports on Form 8-K ......................... 19
Signature ......................................................... 20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 2002 2001
Current assets:
Cash and cash equivalents $ 37,437 $ 47,669
Accounts receivable 17,716 15,295
Marketable securities 718 121
Inventory 1,091,977 1,160,810
Prepaid expenses 134,484 37,595
Other current assets 33,708 77,557
------------ ------------
Total current assets 1,316,040 1,339,047
Property and equipment, net 1,118,890 1,136,931
Other intangible assets 2,687,094 3,078,391
Debt financing costs, net -- 30,000
------------ ------------
Total assets $ 5,122,024 $ 5,584,369
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 308,318 $ 359,218
Accrued expenses 351,350 882,433
------------ ------------
Total current liabilities 659,668 1,241,651
------------ ------------
Convertible debt 3,757,946 4,544,968
------------ ------------
Stockholders' equity:
Common stock, $.001 par value, 350,000,000 shares
authorized; 117,797,468
and 79,683,494 shares issued and outstanding at
June 30, 2002
and December 31, 2001, respectively 117,797 79,683
Additional paid-in capital 14,577,094 12,010,313
Accumulated deficit (13,850,980) (12,057,863)
Unearned compensation (139,501) (234,383)
------------ -------------
Total stockholders' equity 704,410 (202,250)
------------ -------------
Total liabilities and stockholders' equity $ 5,122,024 $ 5,584,369
============ ============
See accompanying notes to consolidated financial statements
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[TABLE GRAPHIC-PICTURE]
[Please provide file with data for conversion to EDGAR]
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SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
2002 2001
---- ----
Operating activities:
Net loss $(1,793,117) $(2,029,977)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 711,219 736,722
Amortization of unearned compensation 94,882 94,882
Amortization of debt discount 47,804 107,500
Beneficial conversion feature 64,677 --
Stock issued in payment of interest 260,566 118,520
Stock issued in payment of professional
and consulting fees 572,157 77,607
Stock options issued for compensation 366,721 328,877
Unrealized loss on marketable securities (64) (2,171)
Changes in assets and liabilities:
Accounts receivable (2,421) (34,401)
Inventory 68,834 121,395
Accounts payable (50,900) 260,047
Accrued expenses (531,084) 39,446
Other, net (53,040) (33,994)
----------- -----------
Net cash used in operating activities (243,766) (215,547)
----------- -----------
Investing activities:
Purchase of securities (533) --
Proceeds from sale of securities -- 18,747
Intangible asset additions (16,000) --
Property and equipment additions (255,881) (79,970)
----------- -----------
Net cash used in investing activities (272,414) (61,223)
----------- -----------
Financing activities:
Net proceeds from convertible debt 503,000 --
Proceeds from loan payable -- 206,220
Proceeds from exercise of stock options 2,948 --
----------- -----------
Net cash provided by financing activities 505,948 206,220
----------- -----------
Net increase (decrease) in cash and equivalents (10,232) (70,550)
Cash and equivalents, beginning 47,669 102,534
----------- -----------
Cash and equivalents, ending $ 37,437 $ 31,984
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ -- $ --
=========== ===========
Interest $ -- $ --
=========== ===========
See accompanying notes to consolidated financial statements
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SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(Unaudited)
Common stock Additional
------------ Paid-in Accumulated Unearned
Shares Amount Capital deficit Compensation Total
------ ------ ------- ------- ------------ -----
Balance, December 31, 2001 79,683,494 $ 79,683 $12,010,313 $(12,057,863) $(234,383) $ (202,250)
Amortization of stock-based
compensation -- -- -- -- 94,882 94,882
Common stock issued in payment of
interest on convertible debt 3,054,556 3,055 257,511 -- -- 260,566
Issuance of stock options to
employees for services 3,530,369 3,530 363,191 -- -- 366,721
Stock issued in payment of 5,570,444 5,570 566,587 -- -- 572,157
professional and consulting fees
Exercise of stock options 294,750 295 2,653 -- -- 2,948
Conversions of notes payable 25,663,855 25,664 1,214,736 -- -- 1,240,400
Beneficial conversion discount 162,103 162,103
Net loss -- -- -- (1,793,117) -- (1,793,117)
----------- -------- ----------- ------------ --------- -----------
Balance, June 30, 2002 117,797,468 $117,797 $14,577,094 $(13,850,980) $(139,501) $ 704,410
=========== ======== =========== ============ ========= ===========
See accompanying notes to consolidated financial statements
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SALES ONLINE DIRECT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
Note 1. Organization
The Company operates and maintains an internet portal dedicated to collectibles
in a variety of categories. The Company conducts person-to-person online
auctions of its own inventory of collectibles and items posted under consignment
arrangements by third party sellers.
On March 7, 2000, the Company acquired Internet Collectible Awards ("ICA")
www.collectiblenet.com, an internet business that polls consumers and reports on
the best internet collectibles web sites in a variety of categories. As
consideration for the acquisition, the Company recorded accounts payable of
$50,000 and issued 200,000 shares of the Company's common stock valued at
$237,500 (based on the Company's stock price at the date of acquisition). The
acquisition has been accounted for under the purchase method of accounting. The
excess of the purchase price, $287,500, over the fair value of the assets
acquired, a web site, has been allocated to other intangible assets. The Company
was involved in litigation related to this transaction. Subsequent to this
acquisition management obtained information that caused it to believe that,
unbeknownst to the Company, the beneficial owner of ICA was an officer and
significant shareholder of the Company at the time of the acquisition. The
litigation was settled late in 2001.
On November 8, 2000, the Company acquired certain assets of ChannelSpace
Entertainment, Inc., a Virginia corporation ("CSEI") and Discribe, Ltd.,
("Discribe") a Canadian corporation wholly owned by CSEI. CSEI and Discribe are
converged Internet content providers and producers of affinity portals,
including the CollectingChannel.com and the CelticChannel.com websites. The
consideration paid by the Company for the acquired assets was 7,530,000
unregistered shares of the Company's common stock valued at $4,648,996 and
$300,000 worth of the Company's common stock to be registered (711,136 shares
based upon the average closing bid price of the stock on the five trading days
prior to February 6, 2001, the date of filing the registration statement). The
assets acquired - consisting principally of software licenses, a video library,
a library of articles, a user list, Domain names, furniture, and fixtures and
equipment - had an estimated fair value of approximately $4,974,000. The fair
values of the individual assets acquired, and the consideration paid, have been
determined by independent appraisal. The excess of the fair value of the assets
acquired over the purchase price, approximately $25,000, has been allocated
pro-rata as a reduction of the fair values of the intangible assets acquired.
On February 1, 2002 the Company entered into a Settlement Agreement and Mutual
Release regarding a variety of claims by both parties to the CSEI transaction.
The settlement discharged the Company from the requirement to issue, and
register, the above mentioned 711,136 shares of common stock and granted to the
Company a call option for 2,283,565 shares of unregistered common stock held by
CSEI as discussed in Note 6. The $300,000 value of the 711,136 common shares has
been accounted for as additional amounts in excess of the fair value of the
assets acquired over the purchase price and has been allocated pro-rata as a
reduction of the intangible assets and property and equipment acquired.
On November 7, 2001, the Company, through a subsidiary, Rotman Collectibles Inc.
(a Delaware Corporation), entered into a merger agreement with Rotman
Collectibles, Inc. (a Massachusetts Corporation) ("RCI"), a seller of movie
posters. In connection with this agreement the Company issued 100 common shares
in exchange for the outstanding common shares of RCI. The acquisition has been
accounted for under the purchase method of accounting. In addition, the Company
issued the Rotman convertible note discussed in Note 8 in the amount of
$1,000,000 in exchange of a convertible note previously issued by RCI. The sole
stockholder, director, and officer of RCI was Leslie Rotman, who is the mother
of Gregory and Richard Rotman, both of whom are executive officers and directors
of the Company.
Note 2. Summary Of Significant Accounting Policies
General
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the United States Securities
and Exchange Commission for interim reporting and include all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation. These financial statements have
not been audited.
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Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting. The Company believes the disclosures contained herein are
adequate to make the information presented not misleading. However, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's annual report for the year ended
December 31, 2001 which is included in the Company's Form 10-KSB.
Principles of consolidation
The accompanying 2002 financial statements include the accounts of Sales Online
Direct, Inc. and its wholly-owned subsidiary, Rotman Collectibles, Inc.,
acquired on November 7, 2001. All material inter-company transactions have been
eliminated.
Inventory
Inventory consists of collectible merchandise for sale and is stated at the
lower of average cost or market on a first-in, first-out (FIFO) method.
On a periodic basis management reviews inventories on hand to ascertain if any
is slow moving or obsolete. In connection with this review, at June 30, 2002 and
December 31, 2001 the Company has provided for reserves totaling $180,000 and
$190,000, respectively.
Revenue Recognition
The Company generates revenue on sales of its purchased inventory, from fees and
commissions on sales of merchandise under consignment type arrangements, from
web hosting services, from appraisal services, and from advertising and
promotional services.
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 charges a fixed monthly amount for web hosting services. This
revenue is recognized on a monthly basis as the services are provided.
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.
Intangible Assets
The Company adopted Financial Accounting Standards Statements Nos. 141,
"Business Combinations" (SFAS No. 141), and 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142), effective January 1, 2002. 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.
-8-
Advertising Costs
Advertising costs totaling approximately $44,000 in 2002 and $39,200 in 2001,
are charged to expense when incurred.
Income Taxes
Deferred tax asset and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities using
the enacted income tax rates expected to be in effect when the taxes are
actually paid or recovered. A deferred tax asset is also recorded for net
operating loss, capital loss and tax credit carry forwards to the extent their
realization is more likely than not. The deferred tax expense for the period
represents the change in the deferred tax asset or liability from the beginning
to the end of the period.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the amounts reported of assets and liabilities as of the date of the
balance sheet and reported amounts of revenue and expenses during the reporting
period. Material estimates that are particularly susceptible to significant
change in the near term relate to inventory, 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.
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
71,150,413 as of June 30, 2002 and 136,986,301 as of June 30, 2001. 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 642,250 shares and
937,000 shares at June 30, 2002 and 2001, 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 period.
Asset Impairment
The Company adopted Financial Accounting Standards Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", effective
January 1, 2002. 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
impairment indicators as the nature of the assets, the future economic benefits
of the assets, any historical or future profitability measurements, 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.
Web Site 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
-9-
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. During
the six months ended June 30, 2002 and 2001, the Company capitalized
approximately $228,000 and $78,600, respectively, of Web site development costs.
Such capitalized costs are included in "Property and equipment."
Recent Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations". The Company does not hold any
assets affected by this statement and it is not expected to have a material
impact on the Company's financial statements.
Note 3. Intangible assets
At June 30, 2002 intangible assets are comprised of the following:
Gross carrying Accumulated
Amount Amortization
------ ------------
Software License $2,882,660 $ 965,692
Acquired Web Sites 762,301 292,637
Domain Names 77,025 30,341
Customer & User Lists 327,157 109,597
Patent pending 16,000 236
Other 30,763 10,309
---------- ----------
Total $4,095,906 $1,408,812
========== ==========
Amortization expense for the six months ended June 30, 2002 and 2001 totaled
$407,297 and $434,960, respectively.
Approximate future amortization expense for the remaining life of the intangible
assets is as follows:
Year ended
December 31 Amortization
----------- ------------
2002 $815,000
2003 815,000
2004 814,000
2005 638,000
2006 and thereafter annually 1,000
Note 4. Accrued Expenses
At June 30, 2002 and December 31, 2001 accrued expenses are comprised of the
following:
June 30, December 31,
2002 2001
-------- --------
General operating expenses $193,457 $218,472
Professional fees 130,750 485,356
Interest 27,143 178,605
-------- --------
Total $351,350 $882,433
======== ========
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Note 5. Common Stock
Call Option Agreements
In connection with the Settlement Agreement and Mutual Release with CSEI
discussed in note 1, the Company was granted call options for 2,283,565
unregistered common shares held by CSEI at an exercise price of $.001 per share.
The call options expire on January 31, 2005.
Stock Options
In July 1999, the Company granted an option to an employee to purchase 471,000
shares of common stock at $.01 per share. The option vests over a four-year
period. The Company recorded unearned compensation of $757,848, based on the
difference between the fair market value of the common stock at the grant date
and the exercise price. The unearned compensation is being amortized over the
vesting period of the option. Amortization expense related to unearned
compensation amounted to $94,882 for each of the six months ended June 30, 2002
and 2001.
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
40,000,000 shares of its common stock. Under the 2001 Plan employees and
consultants may elect to receive their gross compensation in the form of options
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 six months ended June 30, 2002 and 2001 the Company granted options
for 9,100,813 and 3,867,599 shares, respectively, at various dates aggregating
$989,013 and $325,009, respectively, under this plan. All options granted during
the period were exercised.
Note 6. Income Taxes
There was no provision for income taxes for the six months ended June 30, 2002
and 2001 due to the Company's net operating loss and its valuation reserve
against deferred income taxes.
The difference between the provision for income taxes from amounts computed by
applying the statutory federal income tax rate of 34% and the Company's
effective tax rate is due primarily to the net operating loss incurred by the
Company and the valuation reserve against the Company's deferred tax asset.
At June 30, 2002, the Company has federal and state net operating loss carry
forwards of approximately $9,200,000 available to offset future taxable income
that will expire through 2022.
Note 7. Convertible Debt Financing
As of June 30, 2002 the Company has issued $4,197,874 of convertible debt, which
is presented net of unamortized beneficial conversion discounts of approximately
$439,928.
On March 23, 2000, the Company entered into a Securities Purchase Agreement (the
"Agreement"), whereby the Company sold an 8% convertible note in the amount of
$3,000,000 (the "Series A Note"), due in shares of common stock on March 31,
2002 to Augustine Fund, L.P. (the "Buyer"). The Series A Note, as most recently
modified on May 21, 2002, is convertible into common stock at a conversion price
equal to the lesser of: (1) $.375 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. In connection with the
Agreement, the Company also issued warrants to the Buyer and Delano Group
Securities to purchase 300,000 and 100,000 shares of common stock, respectively.
The purchase price per share of common stock is equal to one hundred and twenty
percent (120%) of the lowest of the closing bid prices for the common stock
during the five (5) trading days prior to the closing date. The warrants expire
on March 31, 2005. The May 21, 2002 modification extended the maturity date of
the note until September 30, 2002, provided for additional ninety-day extensions
beyond that date until March 31, 2005, waived interest for periods after March
31, 2002, and released the Company from all requirements to register any common
shares issuable under the note or to keep any existing registration statement
effective. As of June 30, 2002 the outstanding balance of this note was
$2,759,600, since $240,400 had been converted into 1,747,477 shares of the
Company's common stock at conversion prices ranging from $.0729 to $.2261 per
share during the three months ended June 30, 2002.
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On November 7, 2001, the Company entered into a Loan Agreement, whereby it
issued an 8% convertible note in the amount of $1,000,000, due November 7, 2003
(the "Series B Note") to Buyer. This note was modified on May 21, 2002 to, among
other things, allow the Company to borrow up to $2,000,000. The Series B Note,
as modified, 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 June 30,
2002, had the Buyer converted the Series B Note at issuance, Buyer would have
received $1,971,238 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 $532,964 is being
charged to interest expense over the term of the related note. The total
beneficial conversion discount related to this note has been recorded as an
increase in additional paid in capital and the unamortized portion as a
reduction of the related note. In addition, the Company entered into a
Registration Rights Agreements whereby the Company agreed to file a Registration
Statement with the Securities and Exchange Commission (SEC) within sixty (60)
days of a request from the Buyer (Filing Date), covering the common stock to be
issued upon the conversion of the Series B Note. If this Registration Statement
is not declared effective by the SEC within sixty (60) days of the filing dated
the conversion percentage shall decrease by two (2%) for each month that the
Registration Statement is not declared effective. The May 21, 2002 modification
extended the maturity date of the Series B Note to November 7, 2004, provided
the opportunity to extend the maturity date to November 7, 2005, required that
principal and interest be payable in shares of common stock, or cash, at the
discretion of the Company, and provided that any fees or expenses related to any
registration of the common stock will be borne equally by the Company and the
Buyer, or entirely by the Buyer in the case of a filing by Buyer and filed
before April 10, 2003.
On November 7, 2001, the Company entered into a second Loan Agreement whereby it
issued a 6% convertible note, due November 7, 2003 (the "Rotman Note"), to
Leslie Rotman, pursuant to an Agreement and Plan of Merger dated October 23,
2001 (Note 1). The Rotman Note was converted into 23,916,378 shares of common
stock at conversion prices ranging from $.0298 to $.05152 per share in early
January 2002. Since the Rotman Note was fully converted in January 2002 the
related beneficial conversion feature of $250,000 has been charged to interest
expense.
Note 8. Issuance of Common Stock
During the six months ended June 30, 2002 and 2001 the Company issued 3,054,556
and 620,169 shares of common stock, respectively, in connection with the payment
of $260,565 and $118,520 of interest due on its convertible debt.
In addition, during the six months ended June 30, 2002 and 2001 the Company
issued 5,570,444 and 663,930 shares of common stock, respectively, in connection
with the payment of $572,158 and $77,607 of legal and consulting fees.
Note 9. Litigation
The Company leased its former technology location under an operating lease
commencing on January 1, 2000 and expiring on December 31, 2004. Prior to
December 31, 2000, the Company abandoned this facility and ceased payments
required under the lease. During 2001, the landlord initiated an action seeking
approximately $115,000 in damages, interest and attorneys' fees. The Company is
currently negotiating a settlement with the landlord and has recorded an
estimated liability in connection with this matter.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Our primary business, based on our revenues, is the purchase and sale of
collectibles and memorabilia. We operate an online auction site that provides a
full range of services to sellers and buyers, and maintain multiple collectibles
portals, offering integrated information and services to the collectibles
community. The collectibles industry includes every person that collects items
having either economic or sentimental value, such as antiques, sports and
entertainment memorabilia, stamps, coins, figurines, dolls, collector plates,
plush and die cast toys, cottage/village reproductions and other decorative or
limited edition items that are intended for collecting and other memorabilia. A
portal is an Internet website that enables visitors to search for, and visit,
other related sites, access related services, and obtain relevant data. Over the
past two years, we have been working on the development and technology of
building portals and websites. Our main focus was portal development in our own
industry of collectibles; to that end, we acquired assets from Channel Space
Entertainment, Inc. ("CSEI") that include the website www.CollectingChannel.com,
and we acquired Rotman Collectibles, Inc. During 2002 we merged the best of our
different collectibles portals and websites into the Collecting Channel website.
We also plan to build other portals, some that will charge fees to access their
services, and others to leverage company-owned technology and websites.
In 2001, we developed "AuctionInc.," a suite of online management tools
primarily to help companies that we provide web-hosting and order processing
services to. Early in the third quarter of 2002 we began to offer "AuctionInc"
to other online sellers. We also began sponsoring more premium autograph signing
events in 2002, and hosting these in various venues throughout New England. Late
in the first quarter of 2002 we began to offer "AuctionInc" to other online
sellers. eBay has selected www.CollectingChannel.com's Ask the Appraiser(TM) as
a provider of online appraisal services. Effective May 2, 2002,
www.CollectingChannel.com made its "Ask the Appraiser" service available to
eBay's buyers and sellers for appraisals in more than 170 categories of
memorabilia, antiques, and collectibles. This service is designed to help
individuals learn more online about their items before they buy or sell. We
manage the service and eBay provides the marketing.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 2 to our
financial statements. However, certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management; as a result, they are subject to an inherent degree of uncertainty.
In applying these policies, our management makes estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures. Those estimates and judgments are based upon our historical
experience, the terms of existing contracts, our observance of trends in the
industry, information that we obtain from our customers and outside sources, and
on various other assumptions that we believe to be reasonable and appropriate
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our critical accounting
policies include:
Inventory: Inventory is 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 our experience and
management's assessment of current product demand.
Property and Equipment and Other Intangible Assets: Property and equipment
and other 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.
Results of Operations
The Company's financial statements and notes thereto included elsewhere in this
Report contain detailed information that should be referred to in conjunction
with the following discussion.
-13-
Six months ended June 30, 2002 and 2001
The following discussion compares the Company's results of operations for the
six months ended June 30, 2002 with those for the six months ended June 30,
2001.
Revenue. For the six months ended June 30, 2002, revenue was $655,800, 96% of
which is attributable to sales of the Company's own product and fees from buyers
and sellers through the Rotman Auction operations. Gross sales of the Company's
own product were approximately $631,200; gross sales on items on consignment
were de minimus. Sales of the Company's own product represented 96% of gross
sales. Advertising and web hosting fees were approximately $18,600 or 3% of
revenues. Appraisal fees related to Ask the Appraiser were 1% of revenues.
The Company's 2002 revenues represent an increase of approximately $79,100 (14%)
from the comparable period in 2001, in which revenue was approximately $576,600.
For the six month period ended June 30, 2001, sales of the Company's product
were approximately $510,100 and sales of items on consignment were approximately
$96,900, of which the Company received approximately $14,500 as fees. For that
quarter, sales of the Company's own product represented 77%, and sales of
consignment merchandise represented 15%, of gross sales, but, because the
Company only receives a fee for sales on consignment sales, sales of the
Company's own product represented 88% and sales on consignment represented 3% of
the Company's revenue. Advertising and web hosting fees during 2001 were $52,000
or 9% of revenues.
The reason for the increase in revenues was a combination of higher sales of
Company owned product of $121,100 from the same period in 2001 and the Ask the
Appraiser revenues offset by lower sales of consignment goods of $14,100 and
lower advertising and web hosting revenues of $33,400. Higher sales of Company
owned product were the net result of higher sales of both sports memorabilia and
movie posters. Gross profit from Company owned product sales for the six months
ended June 30, 2002 was $259,650, which represents a decrease of $21,300 from
the comparable period in 2001, in which gross profit from Company owned product
sales was $280,900. Since gross margin percentages on Company owned product were
nearly 14% lower in 2002 than in 2001, and sales of company owned product were
$121,100 higher in 2002, the Company produced $21,300 less gross margin dollars.
Lower consignment revenues and web hosting and advertising revenues were
partially offset by the new Appraiser revenues.
Operating Expenses. Total operating expenses for the six months ended June 30,
2002 were approximately $1,821,900, compared to $2,085,873 for the corresponding
period in 2001. Sales, general and administrative ("SG&A") expenses for the six
months ended June 30, 2002 were approximately $1,456,500, compared to $1,709,500
for the six months ended June 30, 2001. The decrease in SG&A costs includes a
decrease in professional fees of $206,400, which is primarily attributable to
the resolution of the Company's litigation and resolution of balances due
various professionals. Depreciation and amortization decreased by approximately
$47,400 due to certain assets becoming fully depreciated during 2001. Costs
associated with planning, maintaining and operating our websites for the six
months ended June 30, 2002 decreased approximately $11,100 from the
corresponding period in 2001. This decrease is due primarily to decreases in
consulting of $62,500, offset by an increase in depreciation and amortization of
$59,400.
Interest Expense. For the six months ended June 30, 2002, the Company incurred
interest charges of approximately $251,600 associated with convertible notes,
compared to interest charges of $293,900 for the corresponding period in 2001.
The decrease of $42,300 is attributable to approximately $3,000,000 of
convertible debt becoming non-interest bearing effective April 1, 2002, and full
recognition as of March 31, 2002 of warrants and deferred finance fees, offset
by charges associated with new convertible debt.
Net Loss. The Company realized a net loss for the six months ended June 30, 2002
of approximately $1,793,000, or $.0.02 per share, as compared to a loss of
$2,030,000, or $.04 per share for the six months ended June 30, 2001.
Inflation. The Company believes that inflation has not had a material effect on
its results of operations.
Three months ended June 30, 2002 and 2001
The following discussion compares the Company's results of operations for the
three months ended June 30, 2002 with those for the three months ended June 30,
2001.
-14-
Revenue. For the three months ended June 30, 2002, revenue was $321,900, 96% of
which is attributable to sales of the Company's own product and fees from buyers
and sellers through the Rotman Auction operations. Gross sales of the Company's
own product were approximately $310,000; gross sales on items on consignment
were de minimus. Sales of the Company's own product represented 96% of gross
sales. Advertising and web hosting fees were approximately $6,000 or 2% of
revenues. Appraisal fees related to Ask the Appraiser were 2% of revenues
The Company's 2002 second quarter revenues represent an increase of
approximately $132,000 (70%) from the three-month period ended June 30, 2001, in
which revenue was approximately $189,700. For the three month period ended June
30, 2001, sales of the Company's product were approximately $161,000 and sales
of items on consignment were approximately $15,900, of which the Company
received approximately $2,000 as fees. For that quarter, sales of the Company's
own product represented 79%, and sales of consignment merchandise represented
8%, of gross sales, but, because the Company only receives a fee for sales on
consignment sales, sales of the Company's own product represented 85% and sales
on consignment represented 1% of the Company's revenue. Advertising and web
hosting fees during the quarter ended March 31, 2001 were $26,500 or 14% of
revenues.
The reason for the increase in revenues was a combination of higher sales of
Company owned product of $149,100 from the same period in 2001 and the Ask the
Appraiser revenues offset by lower sales of consignment goods of $2,200 and
lower advertising and web hosting revenues of $20,500. Higher sales of Company
owned product were the net result of higher sales of both sports memorabilia and
movie posters. Gross profit from Company owned product sales for the three
months ended June 30, 2002 was $98,400, which represents an increase of $4,500
from the comparable quarter in 2001, in which gross profit from Company owned
product sales was $93,900. Since gross margin percentages on Company owned
product were nearly 27% lower in 2002 than in 2001, and sales of company owned
product were $149,100 higher in the quarter ended June 30, 2002, the Company
produced $4,500 more gross margin dollars. Lower consignment revenues and web
hosting and advertising revenues were partially offset by the new Ask the
Appraiser revenues.
Operating Expenses. Total operating expenses for the three months ended June 30,
2002 were approximately $807,700, compared to $955,800 for the corresponding
period in 2001. Sales, general and administrative ("SG&A") expenses for the
three months ended June 30, 2002 were approximately $694,700, compared to
$750,000 for the three months ended March 31, 2001. The decrease in SG&A costs
includes a decrease in professional fees of $60,900, which is primarily
attributable to the resolution of the Company's litigation and resolution of
balances due various professionals. Depreciation and amortization decreased by
approximately $11,400 due to certain assets becoming fully depreciated during
2001. Costs associated with planning, maintaining and operating our websites for
the three months ended June 30, 2002 decreased approximately $92,800 from the
corresponding period in 2001. This decrease is due primarily to decreases in
salaries and related costs of $134,700, offset by an increase in depreciation
and amortization of $42,300.
Interest Expense. For the quarter ended June 30, 2002, the Company incurred
interest charges of approximately $46,700 associated with convertible notes,
compared to interest charges of $146,000 for the corresponding period in 2001.
The decrease of $99,300 is attributable to approximately $3,000,000 of
convertible debt becoming non-interest bearing on effective April 1, 2002, and
full recognition as of March 31, 2002 of Warrants and deferred finance fees,
offset by charges associated with new convertible debt.
Net Loss. The Company realized a net loss for the three months ended June 30,
2002 of approximately $748,000, or $.0.01 per share, as compared to a loss of
$979,000, or $.02 per share for the three months ended June 30, 2001.
Inflation. The Company believes that inflation has not had a material effect on
its results of operations.
Assets
At June 30, 2002, total assets of the Company were $5,122,000 compared to
$5,584,000 at December 31, 2001. The decrease was primarily due to depreciation
and amortization totaling $711,000 and inventory reductions of $69,000 offset by
increases in property and equipment and intangible assets of $272,000 and
prepaid expenses of $97,000. The increase in prepaid expenses is principally
attributable to a $97,000 payment in late March for services to be rendered
during the remainder of 2002.
-15-
Working Capital and Liquidity
Although gross margins from auctions decreased during 2002 from those of a year
ago, they have increased from the year ended December 31, 2001 and we anticipate
that our suite of management tools, called "AuctionInc.", our new online
appraisal service, Ask the Appraiser(TM), offered through eBay, and sales from
our movie poster inventory, will produce revenues during the remainder of 2002
and beyond. Management believes that we have sufficient cash commitments to fund
operations during the next 12 months. The Settlement Agreement and Mutual
Releases related to the CSEI assets provided us with call options for
approximately 2.3 million shares of common stock. We believe that the assignment
of these call options can generate between $250,000 and $500,000 of cash during
the period ending March 31, 2003. In addition, on May 21, 2002, we entered into
modification agreements with Augustine Fund, L.P. ("Augustine"), where Augustine
will provide financing, at the Company's request, of up to an additional
$1,000,000. We believe that these plans will result in obtaining sufficient
operating cash. However, there can be no assurance that an assignment of the
call options can be concluded on reasonably acceptable terms. If these
assignments are not completed we will seek alternative sources of capital to
support operations. In addition, the level of interest expense is not expected
to continue at the same levels as it has for the last two years since, as of
June 30, 2002, $1,240,400 of convertible debt has been retired through the
issuance of common stock, and $2,759,600 of the convertible debt became
non-interest bearing. The Company believes that future legal costs will be
substantially less than those incurred over the past two years due to the
resolution of the Company's litigation.
At June 30, 2002 current liabilities were $660,000 compared with $1,242,000 at
December 31, 2001. During the six months ended June 30, 2002 current liabilities
were reduced primarily through the issuance of common stock for interest and
professional fees, and agreed upon settlements of various professional fee
liabilities.
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, due March 31, 2002, to Augustine. The note is convertible into
common stock at a conversion price equal to the lesser of: (1) $2.475 per share
or (2) 73% of the average of the closing bid price for the common stock for the
five trading days immediately preceding the conversion date.
In connection with the Agreement, the Company also issued warrants to Augustine
and Delano Group Securities to purchase 300,000 and 100,000 shares of common
stock, respectively. The purchase price per share of common stock is $2.70, 120%
of the lowest of the closing bid prices for the common stock during the five
trading days prior to the closing date. The warrants expire on March 31, 2005.
The $3,000,000 note was due and payable in common stock in March 2002. However,
on March 24, 2002, the Company and Augustine executed a letter of understanding
to forbear the note for up to one year. On May 21, 2002 the Company and
Augustine entered into a modification agreement that extended settlement of the
note until September 30, 2002, provided for additional extensions beyond that
date until March 31, 2005, changed the conversion ratio's fixed price from
$2.475 to $.375, and waived interest for periods after March 31, 2002. As of
June 30, 2002 Augustine had converted $240,400 of this note into common stock.
On November 7, 2001, the Company issued another 8% convertible note to
Augustine, in return for $1,000,000 in financing. This convertible note was
issued on substantially the same terms as the original convertible note and is
secured by all assets. The new funding was used to finance the Company's
operations. On May 21, 2002, the Company and Augustine entered into a
modification agreement with respect to this note that, among other things,
increased the amount that can be borrowed to $2,000,000, added a fixed price to
the conversion ratio of $.25, and extended the maturity date to November 7,
2004, within an additional extension to November 7, 2005 permitted by either
party.
Also on November 7, 2001, the Company issued a 6% convertible note in the amount
of $1,000,000 to Leslie Rotman (the "Rotman Note"), as the sole stockholder of
Rotman Collectibles, Inc., upon the merger of Rotman Collectibles, Inc. into a
subsidiary of the Company under the same name. Rotman Collectibles, Inc.
obtained a large collection of entertainment memorabilia in connection with this
transaction. In January 2002 the Rotman Note was converted into 23,916,378
shares of common stock of the Company. Management believes that sales from
Rotman Collectibles, Inc. inventory will generate up to $500,000 in the next 12
months. The Rotman Note was issued on substantially the same terms as the
original convertible note to Augustine, except that the interest rate was 6%
rather than 8%, and the base price at which the note could be converted into
shares of common stock of the Company was 80%, rather than 73%.
-16-
Had periodic advances under the November 7, 2002 convertible notes been
converted upon issuance, the holders would have received a total of
approximately $781,965 more in aggregate value of the Company's common stock
than they had advanced. As a result, in accordance with EITF 00-27, the
intrinsic value of the beneficial conversion feature of $781,965 is being
charged to interest expense over the term of the related notes. Since the Rotman
note was fully converted in January 2002, substantially all the related
beneficial conversion feature of $250,000 was charged to interest expense in
2001.
Forward Looking Statements
This Quarterly Report on Form 10-QSB contains certain forward-looking statements
(within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934) regarding the Company and its business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements in this Report. Additionally, statements concerning
future matters such as the development of new services, technology enhancements,
purchase of equipment, credit arrangements, possible changes in legislation and
other statements regarding matters that are not historical are forward-looking
statements.
Although forward-looking statements in this 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 99.1, "Risk Factors", in the Company's Form 10-KSB for the
fiscal year ended December 31, 2001.
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, the
collectibles community not accepting the services the Company offers, higher
costs than anticipated, the Company's inability to sell its products and
services to a sufficient number of customers, 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, it will not be able to continue
its business operations.
-17-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 14, 2002 and April 1, 2002, the Company issued 2,393,400 and 428,083
shares of its common stock, par value $.001 per share, to the Augustine Fund,
L.P. in payment of $59,836 and $150,000, respectively, of interest due pursuant
to the eight percent convertible note issued by the Company to the Augustine
Fund, L.P. on March 23, 2000. In addition, during the second quarter of 2000,
Augustine Fund, L.P. converted $240,400 the March 23, 2000 eight percent
convertible note into 1,747,477 shares of common stock of the Company. Augustine
Fund, L.P. is an accredited investor that represented that it acquired the
convertible notes and the warrants issued in connection with the note for its
own account. The issuance of the securities is exempt from registration under
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder.
In January 2002, the Company issued 23,916,378 shares of its common stock, par
value $.001 per share, to Leslie Rotman, in full payment of a $1,000,000
convertible note issued by the Company to Leslie Rotman on November 7, 2001.
Leslie Rotman is an accredited investor who represented that she acquired the
convertible note for her own account. Leslie Rotman is the mother of the CEO and
CFO of the Company. The issuance of the securities is exempt from registration
under Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder.
In addition, on May 29, 2002, the Company issued 147,326 and 85,747 shares,
respectively, of its common stock, par value $.001 per share, to the Augustine
Fund, L.P. and Leslie Rotman in payment of $30,974 and $19,756, respectively, of
interest due pursuant to the November 7, 2001 convertible notes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Pursuant to a Third Amended Modification Agreement dated May 21, 2002 between
the Company and Augustine Fund, L.P., the maturity date of the $3,000,000 eight
percent convertible note, dated March 23, 2000, has been extended from March 23,
2002, to September 30, 2002, with additional extensions permitted by either
party until March 31, 2005. The Third Amended Modification Agreement provides
that interest is no longer payable by the Company on the note, and that the
fixed conversion price at which principal may be converted into shares is
decreased to $.375 per share. Augustine Fund, L.P. may convert principal into
shares at a conversion price equal to 73% of the closing bid price for the
Company's common stock for the five (5) trading days immediately preceding the
conversion date if such amount is less than the fixed conversion price.
Pursuant to a Modification Agreement dated May 21, 2002 between the Company and
Augustine Fund, L.P., the Company may borrow up to $2,000,000 rather than
$1,000,000 under its Loan Agreement with Augustine Fund, L.P. dated November 7,
2001. The Modification Agreement also creates a fixed conversion price of $.25,
so that principal on the note is convertible into the lesser of (1) $.25 per
share, or (2) 73% of the average of the closing bid price for the Company's
common stock for the five (5) trading days immediately preceding the conversion
date. The Modification Agreement also extends the maturity date of the loan from
November 7, 2003, to November 7, 2004, with an additional extension to November
7, 2005, permitted by either party. Principal and interest are payable in stock
or cash, in the discretion of the Company, rather than Augustine Fund, L.P., and
any fees and expenses related to registration of the convertible note will be
paid equally by the Company and Augustine Fund, L.P. if the registration is
required by Augustine Fund, L.P. to be filed on or after April 10, 2003, and
solely by Augustine Fund, L.P. if the registration is required by Augustine
Fund, L.P. to be filed before April 10, 2003.
-18-
The Company and Augustine Fund, L.P. entered into a second Loan Agreement, dated
May 21, 2002, for the extension of an additional $1,000,000, pursuant to an
eight percent convertible note, beginning April 1, 2003. Augustine Fund, L.P. is
not required to make the loan if it does not receive, from April 1, 2002 through
April 30, 2003, at least $2,000,000 in aggregate proceeds from its sale of the
Company's securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1 Third Amended Modification Agreement dated May 21, 2002 between the
Company and Augustine Fund, L.P.
4.2 Modification Agreement dated May 21, 2002 between the Company and
Augustine Fund, L.P.
10.1 Loan Agreement dated May 21, 2002 between the Company and Augustine
Fund, L.P.
99.1 Certification of CEO pursuant to Section 906 of the 2002
Sarbanes-Oxley Act
99.2 Certification of CFO pursuant to Section 906 of the 2002
Sarbanes-Oxley Act
(b) Reports on Form 8-K
None
-19-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 13, 2002 SALES ONLINE DIRECT, INC.
Registrant
/s/ Gregory Rotman
Gregory Rotman, President
/s/ Richard Rotman
Richard Rotman, Chief Financial
Officer, Vice President
and Secretary
-20-
LIST OF EXHIBITS
Exhibit No. Description
4.1 Third Amended Modification Agreement dated May 21, 2002 between the
Company and Augustine Fund, L.P.
4.2 Modification Agreement dated May 21, 2002 between the Company and
Augustine Fund, L.P.
10.1 Loan Agreement dated May 21, 2002 between the Company and Augustine
Fund, L.P.
99.1 Certification of CEO pursuant to Section 906 of the 2002
Sarbanes-Oxley Act
99.2 Certification of CFO pursuant to Section 906 of the 2002
Sarbanes-Oxley Act