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 March 31, 2003
COMMISSION FILE NUMBER 0-28720
SALES ONLINE DIRECT, 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 Number)
4 Brussels Street, Worcester, Massachusetts 01610
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 791-6710
Common Stock, $0.001 Par Value
(Title of each class)
Check whether the issuer: (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 twelve 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 May 1, 2003, the issuer had outstanding 135,574,943 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 March 31, 2003
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 (unaudited) .......... 3
Consolidated Statements of Operations
Three months ended March 31, 2003 and
2002 (unaudited) .......................................... 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2003 and
2002 (unaudited) .......................................... 5
Consolidated Statements of Changes in Shareholders' Deficit
Three months ended March 31, 2003
(unaudited) ............................................... 6
Notes to Consolidated Financial Statements
Three months ended March 31, 2003 and 2002 ................ 7-11
Item 2. Management's Discussion and Analysis or
Plan of Operation ............................................ 12
Item 3. Controls and Procedures ...................................... 16
Part II - Other Information
Item 1. Legal Proceedings ............................................ 16
Item 2. Changes in Securities ........................................ 16
Item 3. Defaults Upon Senior Securities .............................. 16
Item 4. Submission of Matters to a Vote of Security Holders .......... 16
Item 5. Other Information ............................................ 16
Item 6. Exhibits and Reports on Form 8-K ............................. 16
Signatures ........................................................... 17
Certifications ....................................................... 17-19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 2003 2002
---- ----
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 34,079 $ 41,283
Accounts receivable 9,806 7,495
Inventories 1,021,000 966,749
Prepaid expenses 82,283 86,544
Other current assets 13,325 18,413
------------ ------------
Total current assets 1,160,493 1,120,484
Property and equipment, net 765,237 907,785
Other intangible assets 2,026,035 2,279,799
------------ ------------
Total assets $ 3,951,765 $ 4,308,068
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 155,000 $ 115,000
Accounts payable 356,796 260,546
Accrued expenses 479,162 428,005
------------ ------------
Total current liabilities 990,958 803,551
------------ ------------
Convertible debt 3,827,777 3,778,377
------------ ------------
Contingencies -- --
------------ ------------
Shareholders' deficit:
Common stock, $.001 par value, 350,000,000 shares
authorized; 132,963,008 and 128,309,528 shares issued
and outstanding at March 31, 2003
and December 31, 2002, respectively 132,963 128,310
Additional paid-in capital 15,451,071 15,231,677
Accumulated deficit (16,451,004) (15,589,228)
Unearned compensation -- (44,619)
------------ ------------
Total shareholders' deficit (866,970) (273,860)
------------ ------------
Total liabilities and shareholders' deficit $ 3,951,765 $ 4,308,068
============ ============
See accompanying notes to consolidated financial statements
3
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
2003 2002
---- ----
Revenues $ 425,900 $ 333,909
Cost of revenues 212,597 159,982
------------- ------------
Gross profit 213,303 173,927
------------- ------------
Operating expenses:
Selling, general, and administrative expenses 804,018 761,843
Web site development costs 182,591 252,324
------------- ------------
Total operating expenses 986,609 1,014,167
------------- ------------
Loss from operations (773,306) (840,240)
------------- ------------
Other income (expense):
Interest expense (88,477) (204,890)
Other income 7 69
------------- ------------
Total other expense, net (88,470) (204,821)
------------- ------------
Loss before income taxes (861,776) (1,045,061)
Provision for income taxes -- --
------------- ------------
Net loss $ (861,776) $ (1,045,061)
============= ============
Loss per share (basic and diluted) $ (0.01) $ (0.01)
============= ============
Weighted average shares 130,726,073 92,975,922
============= ============
See accompanying notes to consolidated financial statements
4
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
2003 2002
---- ----
Operating activities:
Net loss $(861,776) $(1,045,061)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 396,312 356,674
Amortization of unearned compensation 44,619 47,441
Amortization of debt discount -- 47,804
Beneficial conversion feature 52,673 45,599
Common stock issued in payment of
professional and consulting fees 168,090 206,584
Common stock issued in payment of interest -- 59,836
Issuance of common stock pursuant to exercise of
stock options granted to employees for services 15,984 220,746
Unrealized gain on marketable securities -- (64)
Changes in assets and liabilities:
Accounts receivable (2,311) 554
Inventories (54,251) 2,093
Accounts payable 96,250 37,182
Accrued expenses 51,157 (21,497)
Prepaid expenses and other current assets 9,349 (89,838)
--------- -----------
Net cash used in operating activities (83,904) (131,947)
--------- -----------
Investing activities:
Purchase of securities -- (1,599)
Property and equipment additions -- (137,810)
--------- -----------
Net cash used in investing activities -- (139,409)
--------- -----------
Financing activities:
Net proceeds from notes payable 40,000 232,274
Proceeds from convertible debt 36,700 64,726
Proceeds from exercise of stock options -- 2,947
--------- -----------
Net cash provided by financing activities 76,700 299,947
--------- -----------
Net increase (decrease) in cash and cash equivalents (7,204) 28,591
Cash and cash equivalents, beginning 41,283 47,669
--------- -----------
Cash and cash equivalents, ending $ 34,079 $ 76,260
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ -- $ --
========= ===========
Interest $ 367 $ --
========= ===========
See accompanying notes to consolidated financial statements
5
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(Unaudited)
Common stock Additional
----------------------- Paid-in Accumulated Unearned
Shares Amount Capital deficit Compensation Total
----------- -------- ----------- ------------ -------- ---------
Balance, December 31, 2002 128,309,528 $128,310 $15,231,677 $(15,589,228) $(44,619) $(273,860)
Amortization of stock-based
compensation -- -- -- -- 44,619 44,619
Issuance of common stock pursuant to exercise of stock
options granted to employees for services 360,492 360 15,624 -- -- 15,984
Common stock issued in payment of
professional and consulting fees 3,573,282 3,573 164,517 -- -- 168,090
Conversions of note payable 719,706 720 25,680 -- -- 26,400
Beneficial conversion discount -- -- 13,573 -- -- 13,573
Net loss -- -- -- (861,776) -- (861,776)
----------- -------- ----------- ------------ -------- ---------
Balance, March 31, 2003 132,963,008 $132,963 $15,451,071 $(16,451,004) $ -- $(866,970)
=========== ======== =========== ============ ======== =========
See accompanying notes to consolidated financial statements
6
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
Note 1. Organization and Summary Of Significant Accounting Policies
Line of business
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 merchandise and items posted under
consignment arrangements by third party sellers.
General
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the United States
Securities and Exchange Commission for interim financial reporting and
include all adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair
presentation. These financial statements have not been audited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations for interim reporting. The
Company believes that the disclosures contained herein are adequate to
make the information presented not misleading. However, these financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's annual report for the year ended
December 31, 2002, which are included in the Company's Form 10-KSB.
Principles of consolidation
The accompanying financial statements include the accounts of Sales Online
Direct, Inc. and its wholly-owned subsidiary, Rotman Collectibles, Inc.
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.
On a periodic basis management reviews inventories on hand to ascertain if
any is slow moving or obsolete. In connection with this review, at March
31, 2003 and December 31, 2002 the Company has provided for reserves
totaling $175,000 and $180,000, respectively.
Revenue Recognition
The Company generates revenue from sales of its purchased inventories,
fees and commissions on sales of merchandise under consignment type
arrangements, web hosting services, appraisal services and 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,
7
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.
Advertising Costs
Advertising costs totaling approximately $23,000 in both 2003 and 2002 are
charged to expense when incurred.
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
119,217,282 as of March 31, 2003 and 23,643,989 as of March 31, 2002. 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 25,642,250 and 642,250 shares at March 31, 2003 and
2002, 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 are antidilutive. Diluted
earnings per share have not been presented as a result of the Company's
net loss for each period.
Web Site and Software Development Costs
The Company accounts for web site development costs in accordance with the
provisions of EITF 00-2, "Accounting for Web Site Development Costs"
("EITF 00-2"), which requires that costs incurred in planning,
maintaining, and operating stages that do not add functionality to the
site be charged to operations as incurred. External costs incurred in the
site application and infrastructure development stage and graphic
development are capitalized. During the three months ended
8
March 31, 2002, the Company capitalized approximately $114,500 of web site
development costs. There were no web site development costs capitalized
during the three months ended March 31, 2003. Such capitalized costs are
included in "Property and Equipment."
Recent Accounting Pronouncements
During 2002, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) Nos. 145 "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections", 146 "Accounting for Costs Associated with Exit or
Disposal Activities" and 147 "Acquisitions of Certain Financial
Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9". The Company does not expect their implementation to
have a material impact on the Company's financial statements.
Note 2. Notes Payable
At March 31, 2003 and December 31, 2002, the Company was obligated on short-term
notes payable totaling $155,000 and $115,000, respectively. At March 31, 2003
and December 31, 2002 $130,000 and $115,000, respectively, was to a related
party. The related party notes bear interest at 8%, while the remainder bears
interest at 18%. All of the short-term debt is due in 2003.
Note 3. Common Stock
Call Option Agreements
The Company was granted call options for 2,283,565 unregistered common
shares held by ChannelSpace Entertainment, Inc. at an exercise price of
$.001 per share. The call options expire on January 31, 2005.
Stock Options
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 50,000,000 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 three months
ended March 31, 2003 the Company granted options for 3,933,774 shares at
various dates aggregating $184,074 under this plan. During the three
months ended March 31, 2002 the Company granted options for 3,845,201
shares at various dates aggregating $423,485 under this plan. All options
granted during each period were exercised.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly,
compensation cost has been recognized based on the difference between the
fair market value of the common stock at the grant date and the exercise
price. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under the
plan consistent with SFAS No. 123, the Company's net loss for the three
months ended March 31, 2003 and 2002 would have been ($1,150,894) and
($1,059,552), respectively, and the loss per share would have been ($.01)
for each period.
9
Note 4. Income Taxes
There was no provision for income taxes for the periods ended March 31, 2003 and
2002 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 March 31, 2003, the Company has federal and state net operating loss carry
forwards of approximately $12,710,000 available to offset future taxable income.
The state carry-forwards will expire intermittently through 2008, while the
federal carry forwards will expire intermittently through 2023.
Note 5. Convertible Debt Financing
As of March 31, 2003 the Company has issued $4,193,824 of convertible debt,
which is presented net of unamortized beneficial conversion discounts of
$366,047.
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 $2.70, 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
will expire on March 31, 2005. A May 21, 2002 modification agreement extended
the maturity date of the note until September 30, 2002, provided for additional
ninety-day extensions, the third of which was exercised on March 31, 2003,
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 statements
effective. As of March 31, 2003 the outstanding balance of his note was
$2,544,350, since $455,650 has been converted into 6,502,142 shares of the
Company's common stock at conversion prices ranging from $.028 to $.236 per
share.
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 March 31,
2003, had the Buyer converted the Series B Note at issuance, Buyer would have
received $2,259,555 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 $610,081 is being
charged to interest expense over the term of the related note. The beneficial
conversion feature that was charged to interest expense totaled $52,673 and
$45,599 during the three months ended March 31, 2003 and 2002, respectively. 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 in the related note. In addition, the Company entered into a
10
Registration Rights Agreement 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 conversion of the Series B Note. If this Registration Statement
is not declared effective by the SEC within sixty (60) days of the filing date
the conversion percentage shall decrease by two percent (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.
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, the mother of Gregory and Richard Rotman. 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 early January 2002 the related beneficial conversion
feature of $250,000 was charged to interest expense in 2001.
Note 6. Issuance of Common Stock
During the three months ended March 31 2003 and 2002 the Company issued
3,573,282 and 1,367,289 shares of common stock respectively, in connection with
the payment of approximately $168,000 and $207,000 of professional and
consulting fees, respectively.
During the three months ended March 31, 2003 the Company issued 719,706 shares
of common stock in connection with payments totaling $26,400 on the Series A
Note (Note 5).
In addition, during the three months ended March 31, 2002 the Company issued
2,393,400 shares of common stock in connection with the payment of approximately
$60,000 of interest due on its convertible debt and 294,750 shares of common
stock in connection with the exercise of stock options.
11
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 web site that enables visitors to search for, and visit,
other related sites, access related services, and obtain relevant data. Over the
past two years, our focus has been portal development in our own industry of
collectibles. To that end, we developed our web site www.CollectingChannel.com,
and we acquired a large collection of entertainment memorabilia. We plan to
converge our multiple sites into one integrated site in 2003. We also plan to
build other portals, some that will charge fees to access their services, and
others to leverage company-owned technology and web sites. In 2003, we began to
offer "AuctionInc." software, a suite of online management tools developed by us
during 2001 and 2002, to other online sellers, and we expanded our online
appraisal services and autograph signing events.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 1 to
our financial statements. However, certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management; as a result, they are subject to an inherent degree of uncertainty.
In applying these policies, our management makes estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures. Those estimates and judgments are based upon our historical
experience, the terms of existing contracts, our observance of trends in the
industry, information that we obtain from our customers and outside sources, and
on various other assumptions that we believe to be reasonable and appropriate
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our critical accounting
policies include:
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 following discussion compares the Company's results of operations for
the three months ended March 31, 2003 with those for the three months ended
March 31, 2002. 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.
12
Revenue. For the three months ended March 31, 2003, revenue was $425,900,
97% 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 $415,600. Advertising and web hosting
fees were approximately $6,200 or 1% of gross revenues during the quarter ended
March 31, 2003.
The Company's 2003 first quarter revenues represent an increase of
approximately $92,000, or 28%, from the three-month period ended March 31, 2002,
in which revenue was approximately $333,900. For the three month period ended
March 31, 2002, sales of the Company's product were approximately $321,200, or
96% of gross sales, and advertising and web hosting fees were $12,500, or 4% of
gross revenues.
The reason for the increase in revenues was a combination of higher sales
of Company owned product of $94,400 from the same period in 2002 and $4,000 for
Ask the Appraiser(TM), offset by a decrease of $6,300 in advertising and web
hosting fees. Higher sales of Company owned product are the net result of higher
sales of sports memorabilia, movie posters, and other collectibles. Gross profit
from Company owned product sales for the three months ended March 31, 2003 was
$204,600, which represents an increase of $43,400 from the comparable quarter in
2002, in which gross profit from Company owned product sales was $161,200. Since
gross margin percentages on Company owned product were approximately the same
for the first quarter of 2003 than in 2002, and sales of Company owned product
were $94,400 higher in the quarter ended March 31, 2003, the Company produced
$43,400 more gross margin dollars.
Operating Expenses. Total operating expenses for the three months ended
March 31, 2003 were approximately $986,600, compared to $1,014,200 for the
corresponding period in 2002, a decrease of $27,600. Sales, general and
administrative ("SG&A") expenses for the three months ended March 31, 2003 were
approximately $804,000, compared to $761,800 for the three months ended March
31, 2002. The increase of $42,200 in SG&A costs includes an increase in payroll
and related costs of $51,200 and an increase in professional fees of $65,200,
offset by a decrease in miscellaneous SG&A costs of $71,700. Depreciation and
amortization decreased by approximately $2,500 due to certain assets becoming
fully depreciated during 2002. Costs associated with planning, maintaining and
operating our web sites for the three months ended March 31, 2003 decreased
approximately $69,700 from the corresponding period in 2002. This decrease is
due primarily to a decrease in payroll of $259,200, offset by increases in
consulting fees of $33,000, as certain employees were replaced with consultants,
depreciation of $22,100, computer expenses of $20,500, and the fact that there
were no web site development costs capitalized for the quarter ended March 31,
2003 compared to $114,5000 in web site development costs for the corresponding
quarter in 2002.
Interest Expense. For the quarter ended March 31, 2003, the Company
incurred interest charges of approximately $88,500 associated with one
convertible note, compared to interest charges of $205,000 for the corresponding
period in 2002. The decrease of $116,500 is attributable to approximately
$3,000,000 in convertible debt that became non-interest bearing effective April
1, 2002, and full recognition as of March 31, 2002 of $47,800 related to
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 March
31, 2003 of approximately $861,800, or $.01 per share, as compared to a loss of
$1,045,100, or $.01 per share for the three months ended March 31, 2002.
Inflation. The Company believes that inflation has not had a material
effect on its results of operations.
13
Assets
At March 31, 2003, total assets of the Company were $3,951,800, compared
to $4,308,100 at December 31, 2002. The decrease was primarily due to
depreciation and amortization totaling $396,300 offset by an increase in
inventories of $54,000.
Operating Cash Flows
A summarized reconciliation of the Company's net losses to cash used in
operating activities for the three months ended March 31, 2003 compared to March
31, 2002, is as follows:
2003 2002
---- ----
Net loss $(861,800) $(1,045,100)
Depreciation and amortization 440,900 404,100
Amortization of beneficial conversion discount
and debt discount 52,700 93,400
Common stock issued in payment services 184,100 427,300
Common stock issued in payment of interest -- 59,800
Changes in current assets and liabilities 100,200 (71,500)
--------- -----------
Net cash used in operating activities $ (83,900) $ (132,000)
========= ===========
Working Capital and Liquidity
The Company had cash and cash equivalents of $34,000 at March 31, 2003,
compared to $41,300 at December 31, 2002. The Company had $169,000 of working
capital at March 31, 2003, compared to working capital of $316,000 at December
31, 2002. At March 31, 2003 current liabilities were $991,000 compared to
$803,600 at December 31, 2002. During the quarter ended March 31, 2003 current
liabilities increased primarily due to accrued interest, consulting fees, and
payroll.
As discussed in Note 5 of the Financial Statements, the Company has
outstanding convertible notes held by Augustine Fund, L.P. ("Augustine Fund").
The Series A Note, in the original principal amount of $3,000,000, has been
reduced by $455,650 through the conversion of common stock. The Company has
available approximately $350,000 under the $2,000,000 Series B Note. During
2002, Augustine had refused to honor certain draw requests, citing inadequate
liquidity in the Company's common stock and Augustine's lack of cash resources.
As of March 31, 2003, Augustine Fund was current with all draw requests. If, in
the future, Augustine Fund fails to honor draw requests, the Company may need to
seek alternative financing or seek damages for breach of contract from Augustine
Fund.
The Company's independent auditors have issued a going concern opinion on
the Company's consolidated financial statements for the year ended December 31,
2002. The Company needs an infusion of $500,000 of additional capital to fund
anticipated operating costs over the next 12 months. However, management
anticipates continued growth in gross profit. Management anticipates that its
suite of management tools, called "AuctionInc.", its new online appraisal
service, Ask the Appraiser(TM), offered through eBay, and sales from its movie
poster inventory, will continue to increase revenues and result in higher gross
profit. Subject to the discussion below, management believes that the Company
has sufficient cash commitments to fund operations during the next 12 months.
These commitments include
14
call options for approximately 2.3 million shares of common stock, which, once
assigned by the Company, can generate between $95,000 and $750,000 of cash. In
addition, Augustine Fund is required to provide additional financing, under its
$2,000,000 convertible note at the Company's request in the amount of $350,525.
Management also obtained private financing in 2002 and the first quarter of 2003
in the aggregate amount of $130,000 pursuant to 8% promissory notes held by a
related party, and $25,000 pursuant to an 18% promissory note to an unrelated
party. This short term financing at higher interest rates is for the purpose of
purchasing inventory. We anticipate that this private financing will be repaid
shortly after the related inventory is sold.
Management believes that these plans should result in obtaining sufficient
operating cash through the end of 2003. However, there can be no assurance that
an assignment of the call options can be concluded on reasonably acceptable
terms or that Augustine will honor our draw requests. If these assignments are
not completed or draw requests are not honored, management may need to seek
alternative sources of capital to support operations. In addition, management
believes that operating costs and interest expense will continue to decrease.
Management believes that future software development fees will decrease
substantially because the AuctionInc. software development is substantially
complete, payroll will decline due to changes in benefits and staffing, and
professional fees will decline because the Company has resolved its litigation
issues.
Forward Looking Statements
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements (within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934) regarding the Company and
its business, financial condition, results of operations and prospects. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions or variations of such words are intended to
identify forward-looking statements in this Report. Additionally, statements
concerning future matters such as the development of new services, technology
enhancements, purchase of equipment, credit arrangements, possible changes in
legislation and other statements regarding matters that are not historical are
forward-looking statements.
Although forward-looking statements in this quarterly report reflect the
good faith judgment of the Company's management, such statements can only be
based on facts and factors currently known by the Company. Consequently,
forward-looking statements are inherently subject to risks, contingencies and
uncertainties, and actual results and outcomes may differ materially from
results and outcomes discussed in this Report. Although the Company believes
that its plans, intentions and expectations reflected in these forward-looking
statements are reasonable, the Company can give no assurance that its plans,
intentions or expectations will be achieved. For a more complete discussion of
these risk factors, see Exhibit 99.1, "Risk Factors", in the Company's Form
10-KSB for the fiscal year ended December 31, 2002.
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.
15
ITEM 3. CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and
procedures as of a date within 90 days of the filing date of this quarterly
report, each of Gregory Rotman, the President of the Company, and Richard
Rotman, the Chief Financial Officer of the Company, have concluded that the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities and Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported, within the time period specified
by the Securities and Exchange Commission's rules and forms.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
(c) During the first quarter of 2003, Augustine Fund, L.P. converted
$26,400 of the March 23, 2000 convertible note into 719,706 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. The Company did not issue any shares of its
common stock, par value $.001 per share, to Augustine Fund, L.P., for interest
due pursuant to the eight percent convertible note issued by the Company to the
Augustine Fund, L.P. on November 7, 2001.
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 AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of President and CFO pursuant to Section 906 of the
2002 Sarbanes-Oxley Act.
16
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K with the Securities and Exchange
Commission as of February 3, 2003, under Item 4, announcing that Wolf & Company,
P.C. had been dismissed as the Company's independent accountants effective
January 27, 2003, and that Carlin, Charron & Rosen, LLP has been appointed as
the Company's independent accountants effective January 31, 2003.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 12, 2003 SALES ONLINE DIRECT, INC.
Registrant
/s/ Gregory Rotman
---------------------------------------------
Gregory Rotman, President
/s/ Richard Rotman
---------------------------------------------
Richard Rotman, Chief Financial Officer, Vice
President and Secretary
CERTIFICATIONS
I, Gregory Rotman, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Sales Online
Direct, Inc.
2. Based on my knowledge, this quarterly 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
quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
17
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, 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 in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Gregory Rotman
----------------------------------
Gregory Rotman, President
I, Richard Rotman, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Sales Online
Direct, Inc.
2. Based on my knowledge, this quarterly 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
quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
18
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, 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 in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Richard Rotman
--------------------------------------
Richard Rotman, Chief Financial Officer
19
LIST OF EXHIBITS
Exhibit No. Description
----------- -----------
99.1 Certification of President and CFO pursuant to Section 906
of the 2002 Sarbanes-Oxley Act