UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
COMMISSION FILE NUMBER 0-28720
(Exact Name of Registrant as Specified in its Charter)
DELAWARE | 73-1479833 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
40 Washington Street, Westborough, Massachusetts 01581
(Address of Principal Executive Offices) (Zip Code)
(617) 861-6050
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | o | Accelerated Filer | o |
Non-accelerated filer | T | Smaller reporting company | o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No T
As of August 7, 2012, the issuer had outstanding 325,205,612 shares of its Common Stock, par value $.001 per share.
PAID, INC.
FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 2012
TABLE OF CONTENTS
Part I – Financial Information | |||
Item 1. | Condensed Financial Statements | ||
Condensed Balance Sheets | |||
June 30, 2012 (unaudited) and December 31, 2011 (audited) | |||
Condensed Statements of Operations | |||
Three and Six months ended June 30, 2012 and 2011 (unaudited) | |||
Condensed Statements of Cash Flows | |||
Six months ended June 30, 2012 and 2011 (unaudited) | |||
Six months ended June 30, 2012 (unaudited) | |||
Notes to Condensed Financial Statements (unaudited) | |||
Six months ended June 30, 2012 and 2011 | 7-14 | ||
Item 2. | 14 | ||
Item 3. | |||
Item 4. | |||
Part II – Other Information | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 3. | 19 | ||
Item 4. | |||
Item 5. | |||
Item 6. | |||
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAID, INC.
CONDENSED BALANCE SHEETS
ASSETS | June 30, 2012 | December 31, 2011 | |||||
(Unaudited) | (Audited) | ||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 153,300 | $ | 996,000 | |||
Investments | 153,400 | 205,000 | |||||
Accounts receivable, net | 433,400 | 194,300 | |||||
Inventories, net | 1,060,600 | 876,700 | |||||
Prepaid expenses and other current assets | 577,100 | 574,100 | |||||
Prepaid royalties | 1,630,300 | 522,100 | |||||
Total current assets | 4,008,100 | 3,368,200 | |||||
Property and equipment, net | 264,500 | 91,000 | |||||
Intangible asset, net | 6,600 | 7,100 | |||||
Prepaid facility costs | 1,237,500 | 1,468,000 | |||||
Total assets | $ | 5,516,700 | $ | 4,934,300 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 826,500 | $ | 491,400 | |||
Capital leases - current portion | 27,800 | 13,800 | |||||
Accrued expenses | 1,711,600 | 1,332,500 | |||||
Deferred revenues | 541,100 | 303,400 | |||||
Total current liabilities | 3,107,000 | 2,141,100 | |||||
Long-term liabilities: | |||||||
Capital leases - net of current | 61,100 | 21,000 | |||||
Commitments and contingencies (note 9) | |||||||
Shareholders' equity: | |||||||
Common stock, $.001 par value, 350,000,000 shares authorized; 324,172,532 and 308,736,705 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively | 324,200 | 308,800 | |||||
Additional paid-in capital | 51,509,000 | 49,273,300 | |||||
Accumulated deficit | (49,484,600 | ) | (46,809,900 | ) | |||
Total shareholders' equity | 2,348,600 | 2,772,200 | |||||
Total liabilities and shareholders' equity | $ | 5,516,700 | $ | 4,934,300 | |||
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PAID, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, 2012 | June 30, 2011 | June 30, 2012 | June 30, 2011 | ||||||||||||
Revenues | $ | 2,286,700 | $ | 1,674,500 | $ | 3,567,600 | $ | 2,385,800 | |||||||
Cost of revenues | 1,653,800 | 1,082,900 | 2,429,300 | 1,583,100 | |||||||||||
Gross profit | 632,900 | 591,600 | 1,138,300 | 802,700 | |||||||||||
Operating expenses | 1,915,800 | 1,402,300 | 3,521,700 | 2,633,800 | |||||||||||
Loss from operations | (1,282,900 | ) | (810,700 | ) | (2,383,400 | ) | (1,831,100 | ) | |||||||
Other income (expense): | |||||||||||||||
Interest expense | (1,800 | ) | (800 | ) | (3,500 | ) | (1,200 | ) | |||||||
Unrealized loss on investment | (179,100 | ) | — | (51,600 | ) | — | |||||||||
Unrealized loss on stock price guarantee | (178,700 | ) | — | (236,200 | ) | 10 | |||||||||
Total other income (expense), net | (359,600 | ) | (800 | ) | (291,300 | ) | (1,200 | ) | |||||||
Loss before income taxes | (1,642,600 | ) | (811,400 | ) | (2,674,700 | ) | (1,832,300 | ) | |||||||
Provision for income taxes | — | — | — | — | |||||||||||
Net loss | $ | (1,642,600 | ) | $ | (811,400 | ) | $ | (2,674,700 | ) | $ | (1,832,300 | ) | |||
Loss per share - basic | $ | (0.01 | ) | $ | — | $ | (0.01 | ) | $ | (0.01 | ) | ||||
Weighted average shares - basic and diluted | 317,968,817 | 289,434,362 | 314,051,404 | 288,710,776 | |||||||||||
See accompanying notes to condensed financial statements
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PAID, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(Unaudited)
2012 | 2011 | |||||||
Operating activities: | ||||||||
Net loss | $ | (2,674,700 | ) | $ | (1,832,300 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 33,700 | 18,100 | ||||||
Unrealized loss on investment | 51,600 | — | ||||||
Share based compensation | 180,200 | 226,000 | ||||||
Change in fair value of stock price guarantee | 236,200 | — | ||||||
Fair value of stock options awarded to professionals and consultants in payment of fees for services provided | 2,030,900 | 843,400 | ||||||
Fair value of stock options awarded to employees in payment of compensation | 40,000 | 162,700 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (239,100 | ) | 106,300 | |||||
Inventories | (183,900 | ) | 54,000 | |||||
Prepaid expense and other current assets | 99,000 | (121,100 | ) | |||||
Prepaid royalties | (1,108,200 | ) | (57,100 | ) | ||||
Prepaid facility costs | 128,500 | — | ||||||
Accounts payable | 335,200 | 41,200 | ||||||
Accrued expenses | 142,900 | 28,000 | ||||||
Deferred revenue | 237,700 | 278,200 | ||||||
Net cash used in operating activities | (690,000 | ) | (252,600 | ) | ||||
Investing activities: | ||||||||
Property and equipment additions | (145,100 | ) | (11,400 | ) | ||||
Financing activities: | ||||||||
Payments on capital leases | (7,600 | ) | (5,000 | ) | ||||
Proceeds from the exercise of stock options | — | 1,000 | ||||||
Net cash used in financing activities | (7,600 | ) | (4,000 | ) | ||||
Net decrease in cash and cash equivalents | (842,700 | ) | (268,000 | ) | ||||
Cash and cash equivalents, beginning | 996,000 | 747,300 | ||||||
Cash and cash equivalents, ending | $ | 153,300 | $ | 479,300 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | — | $ | — | ||||
Interest | $ | 3,500 | $ | 1,200 | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INFORMATION | ||||||||
Acquisition of property and equipment under capital lease | $ | 61,600 | 28,500 | $ | 30,400 | |||
See accompanying notes to condensed financial statements
-5-
PAID, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2012
(Unaudited)
Common stock | Additional Paid-in Capital | Accumulated Deficit | Total | |||||||||||||||
Shares | Amount | |||||||||||||||||
Balance, December 31, 2011 | 308,736,705 | $ | 308,800 | $ | 49,273,300 | $ | (46,809,900 | ) | $ | 2,772,200 | ||||||||
Issuance of common stock pursuant to exercise of stock options granted to employees for services | 249,097 | 200 | 39,800 | — | 40,000 | |||||||||||||
Issuance of common stock pursuant to exercise of stock options granted to professionals and consultants | 15,186,730 | 15,200 | 2,015,700 | — | 2,030,900 | |||||||||||||
Share based compensation related to issuance of incentive stock options | — | — | 180,200 | — | 180,200 | |||||||||||||
Net loss | — | — | — | (2,674,700 | ) | (2,674,700 | ) | |||||||||||
Balance, June 30, 2012 | 324,172,532 | $ | 324,200 | $ | 51,509,000 | $ | (49,484,600 | ) | $ | 2,348,600 | ||||||||
See accompanying notes to condensed financial statements
-6-
PAID, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2012 and 2011
Note 1. Business
The Company's primary focus is to provide brand-related services to businesses, celebrity clients in the entertainment industry as well as charitable organizations. PAID's brand management, brand marketing, social media marketing, product design and merchandising, website design, development and hosting services are designed to grow each client's customer base in size, loyalty and revenue generation. We offer entertainers and business entities comprehensive web-presence and related services supporting and managing clients' official websites and fan-community services including e-commerce, VIP ticketing, live event fan experiences, user-generated content, client content publishing and distribution, fan forums, social network management, social media marketing, customer data capture, management and analysis.
Management's Plan
The Company has continued to incur significant losses. For the six months ended June 30, 2012, the Company reported a net loss of $2,675,000, and the Company has an accumulated deficit of $49,484,600 at June 30, 2012.
Management believes that its efforts over the past two years has positioned the Company to take advantage of growth opportunities within the music and entertainment related industries. With the consolidation of facilities into our new Westborough location, management believes that the Company will be able to increase productivity and will be able to create efficiencies without having to incur additional overhead to support our client base. Our intention was to have a direct cash savings in 2012 of approximately $75,000 due to the Company's prior payment of rent in stock as outlined in Note 9; however, due to the decrease in our stock price we had to extend the guarantee period to our landlord until December 31, 2012, and will be unable to realize any cash saving this year.
As part of the strategic plan for 2012, the Company will form two subsidiaries, one for its celebrity services business and the other for managing its patent portfolio. The Company has also developed a strategic plan to better use its Intellectual Property to generate cash flow. In addition, the Company has filed for a third patent application which is currently in progress with the U.S. Patent and Trademark Office (USPTO).
Management believes that these changes will have a positive impact on revenues and gross profits, and with the recoupment of advanced royalties, an increase in inventory turns, and cost reductions, the Company should have sufficient resources to generate positive cash flow.
Although there can be no assurances, the Company believes that the above management plan will be sufficient to meet the Company's working capital requirements through the end of 2012.
Note 2. Significant Accounting Policies
General Presentation and Basis of Financial Statements
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and to the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Company's audited financial statements included in the Annual Report on Form 10-K for the years ended December 31, 2011, 2010 and 2009 that was filed on May 15, 2012.
In the opinion of management, the Company has prepared the accompanying financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2012.
-7-
Use of estimates
In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and reported amounts of revenue and expenses during the reporting periods. Material estimates that are particularly susceptible to significant change in the near term relate to inventories, deferred tax asset valuation, assumptions used in the determination of fair value of stock options and warrants using the Black-Scholes option-pricing model, and forfeiture rates related to unvested stock options. Although these estimates are based on management's knowledge of current events and actions, they may ultimately differ from actual results.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Investments
As of June 30, 2012, the Company's investments consisted of trading securities that were stated at fair value, with gains or losses resulting from changes in fair value recognized in earnings as other income (expense), net. Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Marketable debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized as earnings. Debt securities are classified as held for maturity when the Company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are recorded as either short term or long term on the balance sheet based on contractual maturity dates and are stated at cost. Securities not classified as held to maturity or as trading, are classified as available-for-sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in shareholders' equity.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Accounts receivable are presented net of an allowance for doubtful collections of $48,300, at June 30, 2012, and December 31, 2011. In determining this allowance, objective evidence that a single receivable is uncollectible as well as a historical pattern of collections of accounts receivable that indicates the entire face amount of a portfolio of accounts receivable may not be collectible is considered at each balance sheet date. Accounts are written off when significantly past due after exhaustive efforts at collection.
Inventories
Inventories consist of merchandise for sale and are stated at the lower of average cost or market determined on a first-in, first-out (FIFO) method.
Management periodically reviews inventories on hand to ascertain if any are slow moving or obsolete. Inventories are presented net of reserve for inventory obsolescence of, $655,100 at June 30, 2012, and December 31, 2011.
Advanced royalties
In accordance with GAAP, advanced royalties, which consist of artist royalty advances are deferred when paid and expensed based on the completion of performances, shows or other milestones. Certain stock advances contain guarantees related to the proceeds from the sale of the stock, and are accounted for at fair value on the date of issuance.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of 3 to 5 years. Leasehold improvements are depreciated over the lesser of the useful life of the asset or the respective lease term.
Intangible Assets
Intangible assets consist of patents which are being amortized on a straight-line basis over their estimated useful life of 17 years.
-8-
Asset Impairment
Long lived assets to be held and used are reviewed to determine whether any events or changes in circumstances indicate that their carrying amount may not be recoverable. The Company bases its evaluation on indicators about the future economic benefits that the assets can be expected to provide including historical or future profitability measurements. Management reviews the estimated useful lives, as well as other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, if impairment is indicated, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset.
Fair Value Measurement
Financial instruments and certain non-financial assets and liabilities are measured at their fair value as determined based on the assets highest and best use. GAAP has established a framework for measuring fair value that is based on a hierarchy which requires that the valuation technique used be based on the most objective inputs available for measuring a particular asset or liability. There are three broad levels in the fair value hierarchy which describe the degree of objectivity of the inputs used to determine fair value. The fair value hierarchy is set forth below:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement. They are based on best information available in the absence of level 1 and 2 inputs.
The fair value of the Company's cash and cash equivalents, accounts receivable, investments, accounts payable, accrued expenses, and capital leases are approximately the same as their carrying amounts. In addition, the Company's derivative instruments, consisting of stock options, stock purchase warrants, and a stock price guarantee, are all valued using the Black-Scholes option pricing model.
Income Taxes
Income taxes are accounted for under the liability method. Under this method, deferred income taxes are provided for temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using enacted laws and rates that will be in effect when the differences are expected to reverse. A valuation allowance is provided when management believes it is more likely than not that some or all of the deferred tax assets will not be realized. GAAP requires that, in applying the liability method, the financial statement effects of an uncertain tax position be recognized based on the outcome that is more likely than not to occur. Under this criterion the most likely resolution of an uncertain tax position should be analyzed based on technical merits and on the outcome that would likely be sustained under examination. The Company has no uncertain tax positions as of December 31, 2011.
Revenue recognition
The Company generates revenue principally from sales of fan experiences, fan club membership fees, sales of its purchased inventories, and from consulting services.
Fan experience sales generally include tickets and related experiences at concerts and other events conducted by performing artists associated with these fan experience revenues. These revenues are deferred until the related event has been concluded, at which time the revenues and related direct costs are recognized.
Fan club membership fees are recognized ratably over the term of the related membership, generally one year.
The Company recognizes merchandise sales revenue upon verification of the credit card transaction, shipment of the merchandise, and the discharge of all obligations of the Company with respect to the transaction.
Client services revenues include web development and design, creative services, film and video services, marketing services and general business consulting services. For contracts that are of a short duration and fixed price, revenue is recognized when there are no significant obligations and upon acceptance by the customer of the completed project. Revenues on longer-term fixed price contracts are recognized using the percentage-of-completion method. Services that are preformed on a time and material basis are recognized as the related services are performed.
-9-
Cost of Revenues
Cost of revenues include event tickets, ticketing and venue fees, shipping and handling fees associated with e-commerce sales, merchandise and royalties paid to clients.
Selling and Administration Expenses
Selling, general, and administrative expenses include indirect client related expenses, including credit card processing fees, payroll, travel, facility costs, and other general and administrative expenses.
Advertising costs
Advertising costs, totaling approximately $4,000 and $5,500 for the six months ended June 30, 2012 and 2011, respectively, are charged to expense when incurred.
Share-Based Compensation
Share-based compensation cost is measured at the fair value of the equity instrument awarded on the grant date, and is recognized as an expense over the recipients required service period (generally the vesting period of the equity grant).
Concentrations
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and cash equivalents with stable high credit quality institutions, and management believes that the risk of loss is negligible
For the six months ended June 30, 2012 and 2011 revenues from a limited number of clients accounted for approximately 60% and 50%, respectively, of total revenues. In addition advanced royalties are 60% to one client at June 30, 2012 and 0% to that same client at December 31, 2011.
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. The potential common shares that may be issued by the Company relate to outstanding stock options and warrants, and have been excluded from the computation of diluted earnings per share because they would reduce the reported loss per share and therefore have an anti-dilutive effect.
Reclassifications
Certain amounts in the 2011 financial statements have been reclassified to conform to the 2012 presentation with no effect on previously reported net loss or accumulated deficit.
Note 3. Accrued Expenses
Accrued expenses are comprised of the following:
June 30, 2012 | December 31, 2011 | ||||||
Payroll and related costs | $ | 99,400 | $ | 41,600 | |||
Professional and consulting fees | 79,200 | 51,200 | |||||
Royalties | 263,700 | 587,300 | |||||
Stock payment guarantee liability | 1,076,700 | 505,900 | |||||
Other | 192,600 | 146,500 | |||||
Total | $ | 1,711,600 | $ | 1,332,500 | |||
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Note 4. Income Taxes
There was no provision for income taxes for the six months ended June 30, 2012 and 2011 due to the Company's net operating losses and its valuation reserve against deferred income taxes.
The difference between the provision for income taxes using amounts computed by applying the statutory federal income tax rate of 34% and the Company's effective tax rate is due primarily to the net operating losses incurred by the Company and the valuation allowance against the Company's deferred tax asset. The valuation allowance has been recognized to fully reserve against net deferred tax assets at June 30, 2012 and December 31, 2011 is due to the likelihood that the benefit from the deferred tax asset will not be realized.
Net operating losses are the only temporary differences and the related carry forwards that give rise to deferred taxes.
The Company has not been audited by the Internal Revenue Service ("IRS") or any states in connection with income taxes. The Company files income tax returns in the U.S. federal jurisdiction and Massachusetts. The periods from 2008-2011 remain open to examination by the IRS and state jurisdictions.
At June 30, 2012, the Company has federal and state net operating loss carry forwards of approximately $41,017,000 and $19,850,000, respectively, available to offset future taxable income. The state carry-forwards will expire intermittently through 2015, while the federal carry forwards will expire intermittently through 2030.
Note 5. Related party transactions
Steven Rotman is the father of Gregory Rotman, President of the Company, and Richard Rotman, Vice-President/Secretary of the Company. The Company pays rent, at approximately $2,500 per month, as a tenant at will, to a company in which Steven Rotman is a shareholder. On June 30, 2012 the Company terminated the tenant at will agreement, and vacated the premises as part of the facility consolidation to Westborough, Massachusetts. Rent expense for the six months ended June 30, 2012 and 2011 was approximately $15,000.
Note 6. Advance Royalties
Advance royalties represent amounts the Company has advanced to certain clients and are recoupable against future royalties earned by the clients. Advances are issued in either cash or stock and advance amounts are calculated based on the clients' projected earning potential over a fixed period of time. Advances made by issuing stock or stock options are recorded at the fair value on the date of issue. During the second quarter of 2012 the Company issued options to purchase common stock at an exercise price of $0.001 per share for both advance and previously earned royalties. The options were exercised immediately along with a Company guarantee that the shares acquired would sell for at least $1,246,118 within 6 months. If the shares do not reach the require $0.12 per share within that period, the Company has the option of issuing additional shares at their fair value at the end of the period or making a cash payment for the difference between the guaranteed sales price and the fair value of the stock at the end of the 6 month period.
Note 7. Fair Value Disclosure
The following table presents fair values for those assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the measurements fall. No transfers among the levels within the fair value hierarchy occurred during the six months ended June 30, 2012.
Fair Value | ||||||||
Level | June 30, 2012 | December 31, 2011 | ||||||
Investments | 1 | 153,400 | 205,000 | |||||
Royalty guarantee | 2 | (397,500 | ) | — | ||||
Stock lease payment guarantee | 2 | (781,200 | ) | (505,900 | ) | |||
The fair value of the Company's investments classified as trading securities is determined based on the closing market prices of the respective common stocks as of June 30, 2012.
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The fair value of the rent guarantee was calculated using the Black-Scholes Option Pricing Model with the following assumptions:
Term of guarantee | 5 months | |
Historical volatility | 0.8373 | |
Expected dividend | None | |
Risk free interest rate | 0.0001 | |
In 2011 the Company recorded $442,600 in additional pre-paid rent expense due to the fair value of the guarantee, and will be amortized over the life of the lease. The fair value adjustment of the offsetting derivative liability will be recorded in the statement of operations as a component of other income.
The fair value of the royalty guarantee was calculated using the Black-Scholes Option Pricing Model with the following assumptions:
Term of guarantee | 8 months | |
Historical volatility | 116.58% | |
Expected dividend | None | |
Risk free interest rate | 0.07% | |
In the second quarter of 2012 the Company recorded $401,100 in additional pre-paid rent expense due to the fair value of the guarantee, and will be amortized over the guarantee period. The fair value adjustment of the offsetting derivative liability will be recorded in the statement of operations as a component of other income.
Note 8. Common Stock
Share-based Incentive Plans
The Company has two stock option plans that include both incentive and non-qualified options to be granted to certain eligible employees, non-employee directors, or consultants of the Company.
The 2011 Non-Qualified Stock Option Plan (the "2011 Plan"), was adopted to replace an earlier plan. Under the 2011 Plan, employees and consultants may elect to receive their gross compensation in the form of options, exercisable at $0.001 per share, to acquire the number of shares of the Company's common stock equal to their gross compensation divided by the fair value of the stock on the date of grant. At June 30, 2012 there were 3,611,620 shares reserved for issuance under this plan.
The 2002 Stock Option Plan (“2002 Plan”) provided for the award of qualified and non-qualified options for up to 30,000,000 shares. The options granted have a ten-year contractual term and had a vesting schedule of either immediately, two years, or four years from the date of grant. As of June 30, 2012 options for 13,121,952 shares are outstanding.
Information with respect to stock options granted and exercised under these plans during the six months ended June 30, 2012 is as follows:
Number of shares | Weighted average exercise price per share | |||||
Options outstanding at December 31, 2011 | 17,183,284 | $ | 0.105 | |||
Granted | 15,435,827 | 0.001 | ||||
Exercised | (15,435,827 | ) | 0.001 | |||
Options outstanding at June 30, 2012 | 17,183,284 | $ | 0.105 | |||
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Fair value of issuances
The fair value of the Company's option grants under the 2011 Plan was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
2012 | 2011 | ||
Expected term (based upon historical experience) | <1 week | <1 week | |
Expected volatility | 115.86% | 103.98% | |
Expected dividends | None | None | |
Risk free interest rate | 0.08% | 0.01% | |
The stock volatility for each grant is determined based on a review of the experience of the weighted average of historical daily price changes of the Company's common stock over the expected option term.
All but 5,500,000 options outstanding at June 30, 2012 are fully vested and exercisable. Information pertaining to options outstanding at June 30, 2012 is as follows:
Exercise Prices | Number of shares | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||
0.001 | 1,061,332 | 6.23 | $ | 115,700 | ||||||
0.041 | 5,121,952 | 0.28 | 353,400 | |||||||
0.145 | 11,000,000 | 7.62 | — | |||||||
17,183,284 | ||||||||||
Note 9. Commitments and contingencies
Lease commitment
The Company leased an office facility in Boston, Massachusetts under a tenant at will agreement. In November 2011 the Landlord was notified under the provisions of the agreement that the Company would terminate the tenant at will agreement and vacate the premises in January 2012. The tenant at will agreement required monthly payments of approximately $5,800, plus increases in real estate taxes and operating expenses.
On January 21, 2012 the Company closed its Boston office and moved to its new facility in Westborough, Massachusetts. During the second quarter, the Company completed the move of its fulfillment center located in Worcester, Massachusetts, to its new facility in Westborough, Massachusetts.
Prepaid facility costs
In 2011, the Company entered into a lease for premises located at 40 Washington Street, Westborough, Massachusetts (the “Washington Street Location”). The lease is for an initial five year term, with an option to renew for one additional five year term. Monthly rent is $13,856 for the initial five year term, plus applicable taxes and operating expenses, all of which has been paid in shares of restricted stock of the Company.
The original lease payment consisted of 6,082,985 shares of common stock, having a closing market price of $0.21 per share, on August 22, 2011. The payment was for rent over five years, projected taxes and operating expenses, and a security deposit.
Stock price guarantee
The Company has guaranteed the landlord that the shares would sell on the open market for at least $1,386,500, given the landlord sells the shares within a period of three months after the initial six month restriction on transfer has expired. Subsequently, the Company entered into the first amendment to the lease agreement, to extend the guarantee period to December 31, 2012.
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Legal matters
In the normal course of business, the Company periodically becomes involved in litigation. As of June 30, 2012, in the opinion of management, the Company had no pending litigation that would have a material adverse effect on the Company's financial position, results of operations, or cash flows.
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Forward Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) regarding the Company and its business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates", "could", "may", "should", "will", "would", 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 Item 1A, "Risk Factors", in the Company's Form 10K for the fiscal years ended December 31, 2011, 2010, and 2009 that was filed on May 15, 2012.
For example, the Company's ability to achieve positive cash flow and to become profitable may be adversely affected as a result of a number of factors that could thwart its efforts. These factors include the Company's inability to successfully implement the Company's business and revenue model, tour or event cancellations, higher costs than anticipated, the Company's inability to sell its products and services to a sufficient number of customers, the introduction of competing products or services by others, the Company's failure to attract sufficient interest in, and traffic to, its sites, the Company's inability to complete development of its sites, the failure of the Company's operating systems, and the Company's inability to increase its revenues as rapidly as anticipated. If the Company is not profitable in the future, it will not be able to continue its business operations.
Overview
The primary focus of PAID, Inc. (the “Company" or "PAID”) is to provide brand-related services to businesses and celebrity clients in the entertainment, sports and collectible industries. PAID's brand management, brand marketing, social media marketing, product design and merchandising, fulfillment services, website design, development and hosting, and authentication services are designed to grow each client's customer base in size, loyalty and revenue generation. We offer entertainers, celebrity athletes and business entities a comprehensive web-presence and related services by supporting and managing clients' official websites and fan-community services including e-commerce, VIP ticketing, live event fan experiences, user-generated content, and client content publishing and distribution.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 3 to our financial statements included in our Form 10-K filed on May 15, 2012. 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:
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Inventories
Inventories are stated at the lower of average cost or market on a first-in, first-out method. On a periodic basis we review inventories on hand to ascertain if any is slow moving or obsolete. In connection with this review, we establish reserves based upon management's experience and assessment of current product demand. A substantial portion of the Company's inventories is comprised of movie posters for which valuation is more subjective than with more standard inventories. The balance is comprised of merchandise and collectibles that relate to performing artists. General economic conditions, tour schedules of performing artists, and the reputation of the performing artists/athletes, might make sale or disposition of these inventories more or less difficult. Any increases in the reserves would cause a decline in profitability, since such increases are recorded as charges against operations.
Prepaid royalties
Prepaid royalties represent amounts paid in advance to certain clients against future royalties earned by the clients. Advances are issued in either cash or stock and advance amounts are calculated based on the client's projected earning potential over a fixed period of time. Advances issued in stock are recorded at the fair value on the date of issue.
Results of Operations
Comparison of the three months ended June 30, 2012 and 2011.
The following discussion compares the Company's results of operations for the three months ended June 30, 2012 with those for the three months ended June 30, 2011. The Company's financial statements and notes thereto included elsewhere in this quarterly report contain detailed information that should be referred to in conjunction with the following discussion.
Revenues
The following table compares total revenue for the periods indicated.
Three Months Ended June 30, | ||||||||||
2012 | 2011 | % Change | ||||||||
Merchandising and fulfillment | $ | 645,000 | $ | 548,500 | 18 | % | ||||
Client services | 211,100 | 126,400 | 67 | % | ||||||
Touring revenue | 1,430,600 | 999,600 | 43 | % | ||||||
Total revenues | $ | 2,286,700 | $ | 1,674,500 | 37 | % | ||||
Revenues increased 37% in the second quarter due to a 67% increase in client services, a 43% increase in touring revenues, and an 18% increase in merchandising and fulfillment.
Merchandising and fulfillment revenues increased $96,500 or 18% to $645,000 compared to $548,500 in 2011. Revenues from existing clients increased $89,900 or 20% to $545,464 compared to $455,568 in 2011, due to our continued efforts in marketing and social media campaigns, which resulted in reaching new customers. Revenues from the acquisition of new clients in 2012 resulted in $98,500 in additional revenue for the second quarter, these revenues were offset by $89,800 due to revenues earned in the second quarter of 2011 but did not recur in 2012. This offset decreased the year over year percentage change by 2 percentage points from 20% to 18%.
Client services revenues increased $84,700 or 67% to $211,100 compared to $126,400 in 2011. Revenues generated from existing services clients decreased $21,000 or 26% to 63,800 from $85,800 in the second quarter of 2011 compared to 2011. The decrease is attributable to a decrease in client activities in the second quarter 2012 compared to 2011. Revenues from new client services projects was $129,500 in the second quarter of 2012 of which $123,400 are non-recurring. The increase in new revenues for 2012 are offset by $30,600 of revenues earned in 2011 but did not reoccur in 2012. The percentage change decrease of 26% in existing clients was offset by a 41% increase in new revenues in the second quarter of 2012.
Touring revenues increased $431,000 or 43% to $1,430,600, compared to $999,600 in 2011. The Company has generated a consistent touring base and revenues are directly impacted by our client's touring schedules and frequency. In the second quarter of 2012 the Company had several clients on tour which was the primary reason for the increase in revenues as compared to 2011.
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Gross Profit
Gross profit increased $41,300 or 7% to $632,900 compared to $591,600 in 2011. Gross margin decreased 7.7 percentage points to 27.7% from 35.3% in 2011. The decrease was mainly attributable due to a higher concentration of touring revenues which have much lower margins than merchandising and client services revenues.
Operating Expenses
Total operating expenses in 2012 were $1,915,800 compared to $1,402,300 in 2011, an increase of $513,500 or 37%. The increase is due to increases of $131,400 in payroll and related costs due to personnel additions and salary adjustments, $65,400 in consulting costs, $99,700 in facility and relocation costs associated with the consolidation of our offices, and one time costs of $263,900 in accounting fees due the the resignation of Grant Thornton, and the re-audit of 2009, 2010, and 2011. These increases were offset by decreases of $31,800 in administrative operating expenses and, $15,100 in client expenses.
Net Loss
The Company realized a net loss in the second quarter of 2012 of $1,642,600 compared to a net loss of $811,400 for the same period in 2011. The losses for the second quarter of 2012 represents $0.01 per share, as compared to the losses in the second quarter of 2011 which were less than $0.01 per share.
Comparison of the six months ended June 30, 2012 and 2011.
The following discussion compares the Company's results of operations for the six months ended June 30, 2012 with those for the six months ended June 30, 2011. The Company's financial statements and notes thereto included elsewhere in this quarterly report contain detailed information that should be referred to in conjunction with the following discussion.
Revenues
The following table compares total revenue for the periods indicated.
Six Months Ended June 30, | ||||||||||
2012 | 2011 | % Change | ||||||||
Merchandising and fulfillment | $ | 1,325,500 | $ | 1,039,000 | 28 | % | ||||
Client services | 278,500 | 182,100 | 53 | % | ||||||
Touring revenue | 1,963,600 | 1,164,700 | 69 | % | ||||||
Total revenues | $ | 3,567,600 | $ | 2,385,800 | 50 | % | ||||
Revenues increased 50% in the first two quarters of 2012 due to a 69% increase in touring revenues, a 53% increase in client services, and a 28% increase in merchandising and fulfillment.
Merchandising and fulfillment revenues increased $286,500 or 28% to $1,325,500 compared to $1,039,000 in 2011. Revenues from existing clients increased $323,100 or 39% to $1,154,500 compared to $831,400 in 2011, due to our continued efforts in marketing and social media campaigns, which resulted in reaching new customers. Revenues from the acquisition of new clients in the first two quarters of 2012 resulted in $168,000 in additional revenue, these revenues were offset by $194,600 due to revenues earned in the first two quarters of 2011 but did not recur in 2012. This offset decreased the year over year percentage by 10 percentage points from 39% to 28%.
Client services revenues increased $96,400 or 53% to $278,500 compared to $182,100 in 2011. Revenues generated from existing services clients decreased $14,800 or 10% to $128,100 from $142,900 in the second quarter of 2011 compared to 2011. The decrease is attributable to a decrease in client activities in the first two quarters of 2012 compared to 2011. Revenues from new client services projects was $149,300 in the first two quarters of 2012 of which $123,400 are non-recurring. The increase in new revenues for 2012 are offset by $39,100 of revenues earned in the first two quarters of 2011 but did not reoccur in 2012. The percentage change decrease of 10% in existing clients was offset by a 43% increase in new revenues in the first two quarters of 2012.
Touring revenues increased $798,900 or 69% to $1,963,600 compared to $1,164,700 in 2011. The Company has generated a
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consistent touring base and revenues are directly impacted by our client's touring schedules and frequency. In the first two quarters of 2012 the Company had several clients on tour which was the primary reason for the increase in revenues as compared to 2011.
Gross Profit
Gross profit increased $335,600 or 42% to $1,138,300 compared to $802,700 in 2011. Gross margin decreased 1.7 percentage points to 31.9% from 33.6% in 2011. The decrease was mainly attributable due to a higher concentration of touring revenues which have much lower margins than merchandising and client services revenues.
Operating Expenses
Total operating expenses in 2012 were $3,521,700 compared to $2,633,800 in 2011, an increase of $887,900 or 34%. The increase is due to increases of $372,200 in payroll and related costs due to personnel additions and salary adjustments, $108,000 in consulting costs, $25,300 in client expenses due to an increase in client activities, $168,300 in facility and relocation costs associated with the consolidation of our offices, and one time costs of $266,000 in accounting fees due the the resignation of Grant Thornton, and the re-audit of 2009, 2010, and 2011. These increases were offset by decreases of $51,900 in administrative operating expenses.
Net Loss
The Company realized a net loss in the first two quarters of 2012 of $1,642,600 compared to a net loss of $811,400 for the same period in 2011. The losses for the first two quarters of 2012 and 2011 each represent $0.01 per share.
Operating Cash Flows
A summarized reconciliation of the Company's net loss to cash used in operating activities for the six months ended June 30, 2012, and 2011 is as follows:
2012 | 2011 | ||||||
Net loss | $ | (2,674,700 | ) | $ | (1,832,300 | ) | |
Depreciation and amortization | 33,700 | 18,100 | |||||
Unrealized gain on investment | 51,600 | — | |||||
Share based compensation | 180,200 | 226,000 | |||||
Change in fair value of stock price guarantee | 236,200 | — | |||||
Fair value of stock options awarded | |||||||
in payment of outside services and compensation | 2,070,900 | 1,006,100 | |||||
Deferred revenues, net of prepaid royalties | (870,500 | ) | 221,100 | ||||
Changes in current assets and liabilities | 282,600 | 108,400 | |||||
Net cash used in operating activities | $ | (690,000 | ) | $ | (252,600 | ) | |
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Working Capital and Liquidity
The Company had cash and cash equivalents of $153,300 at June 30, 2012, compared to $996,000 at December 31, 2011. The Company had approximately $901,100 of working capital at June 30, 2012, a decrease of $326,000, compared to $1,227,100 at December 31, 2011. The decrease in working capital is attributable to the use of cash to fund operating activities for the first two quarters of 2012.
The Company may need an infusion of additional capital to fund anticipated operating costs over the next 12 months. Management believes that that there are sufficient resources to generate positive cash flow through the continued growth in new business, through the recoupment of advanced royalties, increasing inventory turns, and through cost cutting. Subject to the discussion below, management believes that the Company has adequate cash resources to fund operations during the next 12 months. In addition, the Company has filed a third patent application with the U.S. Patent and Trademark Office, and management has developed a strategic plan with respect to its Intellectual Property to generate cash flow. However, there can be no assurance that anticipated growth in new business will occur, and that the Company will be successful in utilizing its Intellectual Property to generate cash flow. Management continues to seek alternative sources of capital to support operations. Finally, world economic conditions, in particular those in the United States, may impact sales of fan experiences and the availability of financing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency rates, interest rates, and other relevant market rates or price changes. In the ordinary course of business, the Company is not exposed to market risk resulting from changes in foreign currency exchange rates. The Company's overall risk management strategy seeks to balance the magnitude of the exposure and the costs and availability of appropriate financial instruments.
Impact of Inflation and Changing Prices
Historically, our business has not been materially impacted by inflation. We price and provide our service within a short time frame.
Foreign Currency Fluctuation
Our revenue is primarily denominated in U.S. dollars. However, fluctuations in foreign exchange rates may have an effect on tour merchandise and VIP ticket sales for concerts occurring outside the U.S. We do not believe that foreign exchange fluctuations will materially affect our results of operations.
Derivative Instrument
The Company accounts for derivative instruments on the balance sheet at fair value using the Black-Scholes option pricing model calculation. Changes in fair value of the Company's stock price guaranties are recorded each period in the statement of operations as a component of other income.
Seasonality
Our revenue is subject to seasonality and fluctuations during the year primarily related to artist touring activities. Our clients typically tour between March and October. In addition, the timing of tours for top-grossing acts could impact comparability of quarterly results year over year.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management, including the President of the Company, as its principal executive officer, and the Chief Financial Officer of the Company, as its principal financial officer, have evaluated the effectiveness of the Company's “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, the President and Chief Financial Officer concluded that, as of June 30, 2012, the Company's disclosure controls and procedures were not effective, due to material weaknesses in internal
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control over financial reporting, for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time period specified by the Securities and Exchange Commission's rules and forms, and is accumulated and communicated to the Company's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
The Company has identified five material weaknesses in internal control over financial reporting as described in the Company's Form 10-K for the year ended December 31, 2011.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, the Company periodically becomes involved in litigation. As of June 30, 2012, in the opinion of management, the Company had no material pending litigation other than ordinary litigation incidental to the business.
ITEM 1A. RISK FACTORS
There are no material changes for the risk factors previously disclosed on Form 10-K for the year ended December 31, 2011.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 | CEO Certification required under Section 302 of Sarbanes-Oxley Act of 2002 |
31.2 | CFO Certification required under Section 302 of Sarbanes-Oxley Act of 2002 |
32.0 | CEO and CFO Certification required under Section 906 of Sarbanes-Oxley Act of 2002 |
101.INS | XBRL Instance Document (furnished herewith) |
101.SCH | XBRL Taxonomy Extension Schema (furnished herewith) |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase (furnished herewith) |
101.DEF | XBRL Taxonomy Extension Definition Linkbase (furnished herewith) |
101.LAB | XBRL Taxonomy Extension Label Linkbase (furnished herewith) |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase (furnished herewith) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PAID, INC. | |||
Registrant | |||
Date: | August 9, 2012 | By: | /s/ W. Austin Lewis IV |
W. Austin Lewis IV, Chief Executive Officer | |||
Date: | August 9, 2012 | By: | /s/ Christopher R. Culross |
Christopher R. Culross, Chief Financial Officer | |||
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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 |
101.INS | XBRL Instance Document (furnished herewith) |
101.SCH | XBRL Taxonomy Extension Schema (furnished herewith) |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase (furnished herewith) |
101.DEF | XBRL Taxonomy Extension Definition Linkbase (furnished herewith) |
101.LAB | XBRL Taxonomy Extension Label Linkbase (furnished herewith) |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase (furnished herewith) |
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