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 September 30, 2003
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)
(508) 791-6710
(Issuer's telephone number, including area code)
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 November 5, 2003, the issuer had outstanding 156,800,112 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 and Nine Months ended September 30, 2003
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2003 (unaudited) and December 31, 2002 (audited) ........ 1
Consolidated Statements of Operations
Three and Nine months ended September 30, 2003 and 2002 (unaudited) ... 2
Consolidated Statements of Cash Flows
Nine months ended September 30, 2003 and
2002 (unaudited) ...................................................... 3
Consolidated Statements of Changes in Stockholders' Deficit
Nine months ended September 30, 2003 (unaudited) ...................... 4
Notes to Consolidated Financial Statements
Nine months ended September 30, 2003 and 2002 ......................... 5-10
Item 2. Management's Discussion and Analysis or
Plan of Operation ..................................................... 11
Item 3. Controls and Procedures ............................................... 16
Part II - Other Information
Item 1. Legal Proceedings .................................................... 16
Item 2. Changes in Securities and Use of Proceeds ............................. 16
Item 3. Defaults Upon Senior Securities ...................................... 16
Item 4. Submission of Matters to a Vote of Security Holders ................... 16
Item 5. Other Information .................................................... 17
Item 6. Exhibits and Reports on Form 8-K ..................................... 17
Signatures .................................................................... 17
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2003 2002
------------- ------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 186,094 $ 41,283
Accounts receivable 8,125 7,495
Inventories, net 836,029 966,749
Prepaid expenses 68,595 86,544
Other current assets 24,272 18,413
------------ ------------
Total current assets 1,123,115 1,120,484
Property and equipment, net 495,168 907,785
Other intangible assets 1,618,503 2,279,799
------------ ------------
Total assets $ 3,236,786 $ 4,308,068
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 165,000 $ 115,000
Loan payable 48,474 --
Accounts payable 146,667 260,546
Accrued expenses 576,673 428,005
------------ ------------
Total current liabilities 936,814 803,551
------------ ------------
Convertible debt 2,985,898 3,778,377
------------ ------------
Shareholders' deficit:
Common stock, $.001 par value, 350,000,000 shares
authorized; 156,782,094 and 128,309,528 shares issued
and outstanding at September 30, 2003
and December 31, 2002, respectively 156,782 128,310
Additional paid-in capital 17,447,532 15,231,677
Accumulated deficit (18,290,240) (15,589,228)
Unearned compensation -- (44,619)
------------ ------------
Total shareholders' deficit (685,926) (273,860)
------------ ------------
Total liabilities and shareholders' deficit $ 3,236,786 $ 4,308,068
============ ============
See accompanying notes to consolidated financial statements
1
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Nine months Three months Nine months
ended ended ended ended
September September September September
30, 2003 30, 2003 30, 2002 30, 2002
------------- ------------- ------------- -------------
Revenues $ 304,680 $ 1,191,805 $ 275,185 $ 930,958
Cost of revenues 112,878 604,472 149,473 523,952
------------- ------------- ------------- -------------
Gross profit 191,802 587,333 125,712 407,006
------------- ------------- ------------- -------------
Operating expenses:
Selling, general, and administrative expenses 809,524 2,466,718 715,276 2,171,788
Web site development costs 176,534 533,442 230,170 595,511
------------- ------------- ------------- -------------
Total operating expenses 986,058 3,000,160 945,446 2,767,299
------------- ------------- ------------- -------------
Loss from operations (794,256) (2,412,827) (819,734) (2,360,293)
------------- ------------- ------------- -------------
Other income (expense):
Interest expense (107,417) (288,239) (80,501) (332,085)
Other income (expense) 28 54 25,644 24,671
------------- ------------- ------------- -------------
Total other expense, net (107,389) (288,185) (54,857) (307,414)
------------- ------------- ------------- -------------
Loss before income taxes (901,645) (2,701,012) (874,591) (2,667,707)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net loss $ (901,645) $ (2,701,012) $ (874,591) $ (2,667,707)
============= ============= ============= =============
Loss per share (basic and diluted) $ (0.01) $ (0.02) $ (0.01) $ (0.02)
============= ============= ============= =============
Weighted average shares 149,659,365 139,069,209 120,464,189 113,482,167
============= ============= ============= =============
See accompanying notes to consolidated financial statements
2
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2003 2002
----------- -----------
Operating activities:
Net loss $(2,701,012) $(2,667,707)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 1,075,775 1,073,869
Amortization of unearned compensation 44,619 142,323
Amortization of debt discount -- 47,804
Beneficial conversion feature 170,785 113,145
Common stock issued in payment of interest -- 260,565
Common stock issued in payment of professional
and consulting fees 835,473 716,807
Issuance of common stock pursuant to exercise of
stock options granted to employees for services 58,366 529,938
Unrealized loss on marketable securities -- 1,428
Changes in assets and liabilities:
Accounts receivable (630) 7,482
Inventories 130,720 48,674
Accounts payable (113,879) (59,141)
Accrued expenses 148,668 (508,621)
Prepaid expense and other current assets 12,090 (4,539)
----------- -----------
Net cash used in operating activities (339,025) (297,973)
----------- -----------
Investing activities:
Purchase of securities -- (1,627)
Intangible asset additions -- (16,000)
Property and equipment additions (1,864) (344,081)
----------- -----------
Net cash used in investing activities (1,864) (361,708)
----------- -----------
Financing activities:
Net proceeds from notes payable 50,000 130,000
Proceeds from loans payable 48,474 --
Proceeds from convertible debt 387,226 549,900
Proceeds from exercise of stock options -- 2,948
----------- -----------
Net cash provided by financing activities 485,700 682,848
----------- -----------
Net increase in cash and equivalents 144,811 23,167
Cash and equivalents, beginning 41,283 47,669
----------- -----------
Cash and equivalents, ending $ 186,094 $ 70,836
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ -- $ --
=========== ===========
Interest $ 4,500 $ --
=========== ===========
See accompanying notes to consolidated financial statements
3
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 947,935 948 57,418 -- -- 58,366
Common stock issued in payment of
professional and consulting fees 14,399,868 14,400 821,073 -- -- 835,473
Conversions of notes payable 13,124,773 13,124 1,194,145 -- -- 1,207,269
Beneficial conversion discount 143,219 -- -- 143,219
Net loss -- -- -- (2,701,012) -- (2,701,012)
----------- -------- ----------- ------------ -------- -----------
Balance, September 30, 2003 156,782,104 $156,782 $17,447,532 $(18,290,240) $ -- $ (685,926)
=========== ======== =========== ============ ======== ===========
See accompanying notes to consolidated financial statements
4
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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
September 30, 2003 and December 31, 2002 the Company has provided for
reserves totaling $170,000 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, processing customer returns and
collecting accounts receivable. The Company recognizes
5
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 $86,600 in 2003 and $73,500 in
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
24,197,698 as of September 30, 2003, and 89,484,553 as of September 30,
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
September 30, 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 website development costs in accordance with the
provisions of EITF 00-2, "Accounting for Web Site Development Costs"
("EITF 00-2"), which requires that costs incurred in planning,
maintaining, and operating stages that do not add functionality to the
site be charged to operations as incurred. External costs incurred in the
site application and infrastructure development stage and graphic
development are capitalized. During the nine months ended September 30,
2002, the Company capitalized approximately $316,000 of Web site
6
development costs. There were no website development costs capitalized
during the nine months ended September 30, 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". During the nine months ended September 30, 2003,
the Financial Accounting Standards Board issued SFAS Nos. 149 "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities" and 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". The Company does not expect implementation of
these standards to have a material impact on the Company's financial
statements.
Note 2. Notes and Loan Payable
At September 30, 2003 and December 31, 2002, the Company was obligated on
short-term notes payable totaling $165,000 and $115,000, respectively. At
September 30, 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 bear interest at 18%. All of the
short-term debt is due in 2003.
In addition, on September 30, 2003 Augustine Fund L.P. advanced the
Company $48,474 as a loan. The Company is negotiating final terms in
connection with this loan. In the absence of final terms, as of September
30, 2003 the Company has recorded interest at 8% per annum.
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 60,000,000 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 nine months ended
September 30, 2003, the Company granted options for 15,347,803 shares at
various dates aggregating $893,839 under this plan. During the nine months
ended September 30, 2002 the Company granted options for 13,267,722 shares
at various dates aggregating $1,246,745 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. The following table reflects proforma net loss and loss per share
had the
7
Company elected to adopt the fair value approach for SFAS No. 123, as
amended by SFAS No. 148.
For the nine months ended
-------------------------
September 30, 2003 September 30, 2002
------------------ ------------------
Net loss, as reported ($2,701,012) ($2,667,707)
Add stock compensation costs
on options granted below
fair market value 44,619 142,323
Less stock compensation costs
had option expense been
measured at fair value (637,254) (210,396)
------------- -------------
Proforma net loss, as adjusted ($3,293,647) ($2,735,780)
============= =============
Weighted average shares 139,069,209 113,482,167
============= =============
Loss per share (basic and diluted),
as reported ($.02) ($.02)
============= =============
Proforma loss per share (basic
And diluted), as adjusted ($.02) ($.02)
============= =============
For the three months ended
--------------------------
September 30, 2003 September 30, 2002
------------------ ------------------
Net loss, as reported ($901,645) ($874,591)
Add stock compensation costs
on options granted below
fair market value -- 47,441
Less stock compensation costs
had option expense been
measured at fair value (107,684) (70,132)
------------- -------------
Proforma net loss, as adjusted ($1,009,329) ($897,282)
============= =============
Weighted average shares 149,659,365 120,464,189
============= =============
Loss per share (basic and diluted),
as reported ($.01) ($.01)
============= =============
Proforma loss per share (basic
and diluted), as adjusted ($.01) ($.01)
============= =============
8
These proforma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period, and additional options may be granted in future
years.
Note 4. Income Taxes
There was no provision for income taxes for the periods ended September
30, 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 September 30, 2003, the Company has federal and state net operating
loss carry forwards of approximately $14,550,000 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 September 30, 2003 the Company has issued $3,363,480 of convertible
debt, which is presented net of unamortized beneficial conversion
discounts of $377,582.
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
fifth of which was exercised on September 30, 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 September 30, 2003 the outstanding balance of this note
was $1,363,480, since $1,636,520 has been converted into 18,907,031 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 September 30, 2003, had the
Buyer converted the Series B Note at issuance, Buyer would have received
$2,739,727 in aggregate value of the Company's common stock upon
conversion of the convertible note. As a
9
result, in accordance with EITF 00-27, the intrinsic value of the
beneficial conversion feature of $739,727 is being charged to interest
expense over the term of the related note. The beneficial conversion
feature that was charged to interest expense totaled $64,089 and $170,785
during the three and nine months ended September 30, 2003, respectively.
The beneficial conversion feature that was charged to interest expense
totaled $48,468 and $113,145 during the three and nine months ended
September 30, 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 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.
Note 6. Issuance of Common Stock
During the nine months ended September 30 2003 and 2002 the Company issued
14,399,868 and 7,421,572 shares of common stock respectively, in
connection with the payment of approximately $835,473 and $716,807 of
professional and consulting fees, respectively.
In addition, during the nine months ended September 30 2002 the Company
issued 3,054,556 shares of common stock in connection with the payment of
approximately $260,565 of interest due on its convertible debt.
10
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 and nine months ended September 30, 2003, with those for the three and
nine months ended September 30, 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.
11
Three months ended September 30, 2003 and 2002
Revenue. For the three months ended September 30, 2003, revenue was
$304,700, 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 $295,800. Advertising and web
hosting fees were approximately $3,600 or 1% of gross revenues during the
quarter ended September 30, 2003.
The Company's 2003 third quarter revenues represent an increase of
approximately $29,500, or 11%, from the three-month period ended September 30,
2002, in which revenue was approximately $275,200. For the three month period
ended September 30, 2002, sales of the Company's product were approximately
$261,000, or 95% of gross sales, and advertising and web hosting fees were
$7,900, or 3% of gross revenues.
The reason for the increase in revenues was a combination of higher sales
of Company owned product of $34,800 from the same period in 2002, offset by a
$4,300 decrease in advertising and web hosting fees and $4,200 less in appraisal
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 September 30, 2003 was
$183,900, which represents an increase of $68,300 from the comparable quarter in
2002, in which gross profit from Company owned product sales was $115,600. Since
gross margin percentages on Company owned product were approximately 18% better,
and sales of Company owned product were $34,800 higher in the quarter ended
September 30, 2003, the Company produced $68,300 more gross margin dollars, a
59% increase.
Operating Expenses. Total operating expenses for the three months ended
September 30, 2003 were approximately $986,100, compared to $945,400 for the
corresponding period in 2002, an increase of $40,600. Sales, general and
administrative ("SG&A") expenses for the three months ended September 30, 2003
were approximately $809,500, compared to $715,300 for the three months ended
September 30, 2002. The increase of $94,300 in SG&A costs include increases in
consulting and professional fees of $158,200 and other SG&A costs of $3,600,
offset by a decrease in payroll and related costs of $65,400. Depreciation and
amortization decreased by approximately $2,000 due to certain assets becoming
fully depreciated during 2002. Costs associated with planning, maintaining and
operating our web sites for the three months ended September 30, 2003 decreased
approximately $53,600 from the corresponding period in 2002. This decrease is
due primarily to reductions in payroll of $139,900, computer expense of $14,000,
depreciation of $27,100, and the fact that there were no web site development
costs capitalized for the quarter ended September 30, 2003 compared to $79,200
in web site development costs for the corresponding quarter in 2002 offset by an
increase in consulting fees of $48,200.
Interest Expense. For the quarter ended September 30, 2003, the Company
incurred interest charges of approximately $107,400 principally associated with
one convertible note, compared to interest charges of $80,500 for the
corresponding period in 2002. The increase of $26,900 is attributable to $15,600
more amortization of beneficial conversion discounts and $11,300 of charges
associated with higher borrowing balances.
Net Loss. The Company realized a net loss for the three months ended
September 30, 2003 of approximately $901,600, or $.01 per share, as compared to
a loss of $874,600, or $.01 per share for the three months ended September 30,
2002.
Inflation. The Company believes that inflation has not had a material
effect on its results of operations.
12
Nine months ended September 30, 2003 and 2002
Revenue. For the nine months ended September 30, 2003, revenue was
$1,191,800, 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 $1,152,000. Advertising
and web hosting fees were approximately $28,900 or 2% of gross revenues during
the nine months ended September 30, 2003.
The Company's 2003 revenues represent an increase of approximately
$260,800, or 28%, from the nine-month period ended September 30, 2002, in which
revenue was approximately $931,000. For the nine month period ended September
30, 2002, sales of the Company's product were approximately $892,200, or 96% of
gross sales, and advertising and web hosting fees were $26,500, or 3% of gross
revenues.
The reason for the increase in revenues was a combination of higher sales
of Company owned product of $259,800 from the same period in 2002 and $2,400 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 nine months
ended September 30, 2003 was $550,300, which represents an increase of $175,000
from the comparable period in 2002, in which gross profit from Company owned
product sales was $375,300. Since gross margin percentages on Company owned
product were approximately 5.7% better for the first nine months of 2003 than in
2002, and sales of Company owned product were $259,800 higher in the period
ended September 30, 2003, the Company produced $175,000 more gross margin
dollars, a 47% increase.
Operating Expenses. Total operating expenses for the nine months ended
September 30, 2003 were approximately $3,000,200, compared to $2,767,300 for the
corresponding period in 2002, an increase of $232,900. SG&A expenses for the
nine months ended September 30, 2003 were approximately $2,466,700, compared to
$2,171,800 for the nine months ended September 30, 2002. The increase of
$295,000 in SG&A costs includes increases in consulting and professional fees of
$417,500 and advertising of $13,100 offset by decreases in payroll and related
costs of $113,700 and miscellaneous SG&A costs of $15,400. Depreciation and
amortization decreased by approximately $6,700 due to certain assets becoming
fully depreciated during 2002. Costs associated with planning, maintaining and
operating our web sites for the nine months ended September 30, 2003 decreased
approximately $62,100 from the corresponding period in 2002. This decrease is
due primarily to decreases in payroll of $451,000, depreciation of $11,400, and
computer expenses of $12,000, offset by increases in consulting fees of $96,300,
as certain employees were replaced with consultants, and the fact that there
were no web site development costs capitalized for the nine months ended
September 30, 2003 compared to $316,200 in web site development costs for the
corresponding nine months in 2002.
Interest Expense. For the nine months ended September 30, 2003, the
Company incurred interest charges of approximately $288,200 principally
associated with one convertible note, compared to interest charges of $332,100
for the corresponding period in 2002. The decrease of $43,900 is attributable to
approximately $3,000,000 in convertible debt that became non-interest bearing
effective April 1, 2002, and full recognition as of September 30, 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 nine months ended
September 30, 2003 of approximately $2,701,000, or $.02 per share, as compared
to a loss of $2,667,700, or $.02 per share for the nine months ended September
30, 2002.
Inflation. The Company believes that inflation has not had a material
effect on its results of operations.
13
Assets
At September 30, 2003, total assets of the Company were $3,236,800,
compared to $4,308,100 at December 31, 2002. The decrease was primarily due to
depreciation and amortization totaling $1,075,800.
Operating Cash Flows
A summarized reconciliation of the Company's net losses to cash used in
operating activities for the nine months ended September 30, 2003 compared to
September 30, 2002, is as follows:
2003 2002
----------- -----------
Net loss $(2,701,000) $(2,667,700)
Depreciation and amortization 1,120,400 1,216,200
Amortization of beneficial conversion
Discount and debt discount 170,800 160,900
Common stock issued in payment services 893,800 1,246,700
Common stock issued in payment of interest 260,600
Changes in current assets and liabilities 177,000 514,700
----------- -----------
Net cash used in operating activities $ (339,000) $ (298,000)
Working Capital and Liquidity
The Company had cash and cash equivalents of $186,100 at September 30,
2003, compared to $41,300 at December 31, 2002. The Company had $186,300 of
working capital at September 30, 2003, compared to $316,900 at December 31,
2002. At September 30, 2003 current liabilities were $936,800 compared to
$803,600 at December 31, 2002. During the nine months ended September 30, 2003
current liabilities increased primarily due to accrued interest, consulting
fees, and payroll, and increases in short term borrowings.
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 $1,636,500 through the conversion of common stock. As of September
30, 2003 the Company had drawn all of the $2,000,000 available under the Series
B note. Management is in discussions with Augustine Fund in connection with
additional financing of $250,000 under the same terms as the Series B note.
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 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 call options for approximately 2.3 million shares of common
stock, which, once assigned by the Company, can generate between $80,000 and
$500,000 of cash as well as the additional Augustine Fund financing discussed
above. Management also obtained private financing in 2002 and the first nine
months
14
of 2003 in the aggregate amount of $130,000 pursuant to 8% promissory notes held
by a related party, and $35,000 pursuant to 18% promissory notes to unrelated
parties. This short term financing at higher interest rates is for the purpose
of purchasing inventory.
Management believes that these plans should result in obtaining sufficient
operating cash through the next 12 months. However, there can be no assurance
that an assignment of the call options can be concluded on reasonably acceptable
terms. If this assignment is not completed, management may need to seek
alternative sources of capital to support operations.
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 introduction of competing
products by others, the Company's failure to attract sufficient interest in and
traffic to its sites, the Company's inability to complete development of its
sites, the failure of the Company's operating systems, and the Company's
inability to increase its revenues as rapidly as anticipated. If the Company is
not profitable, it will not be able to continue its business operations.
ITEM 3. CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and
procedures as of the end of the quarterly period covered by this 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.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the third quarter of 2003, Augustine Fund, L.P. converted
$893,050 of the March 23, 2000 convertible note into 7,402,631 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
On October 31, 2003, stockholders representing a majority of the issued
and outstanding shares of common stock of the Company approved by written
consent a proposal to amend the Company's Certificate of Incorporation to change
the name of the Company to Paid, Inc., with the voting results as follows:
Broker Non-Votes/
For Against Abstain/Withheld
--- ------- ----------------
87,487,646 238,235 8,000
Also on October 31, 2003, stockholders representing a majority of the
issued and outstanding shares of common stock of the Company approved by written
consent a proposal to amend the Company's Certificate of Incorporation to effect
a reverse stock split of all of the outstanding shares of capital stock of the
Company at a ratio of one-for-six, to be effective at any time prior to 12
months after the date of stockholder approval, in the discretion of the Board of
Directors, with the voting results as follows:
Broker Non-Votes/
For Against Abstain/Withheld
--- ------- ----------------
80,013,537 7,177,344 543,000
Also on October 31, 2003, stockholders representing a majority of the
issued and outstanding shares of common stock of the Company approved by written
consent the Company's 2002 Stock Option Plan, with the voting results as
follows:
Broker Non-Votes/
For Against Abstain/Withheld
--- ------- ----------------
81,171,778 5,573,592 988,511
16
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 CEO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
31.2 CFO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
32 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
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: November 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
17
LIST OF EXHIBITS
Exhibit No. Description
31.1 CEO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
31.2 CFO Certification required under Section 302 of Sarbanes-Oxley
Act of 2002
32 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
18