SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 1, 2003, the issuer had outstanding 147,660,407 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 Six Months ended June 30, 2003
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2003 (unaudited) and December 31, 2002 (audited) ..... 3
Consolidated Statements of Operations
Three and Six months ended June 30, 2003 and
2002 (unaudited) .............................................. 4
Consolidated Statements of Cash Flows
Six months ended June 30, 2003 and
2002 (unaudited) .............................................. 5
Consolidated Statements of Changes in Stockholders' Deficit
Six months ended June 30, 2003
(unaudited) ................................................... 6
Notes to Consolidated Financial Statements
Six months ended June 30, 2003 and 2002 .................... 7-12
Item 2. Management's Discussion and Analysis or
Plan of Operation ............................................ 13
Item 3. Controls and Procedures ...................................... 18
Part II - Other Information
Item 1. Legal Proceedings ............................................ 18
Item 2. Changes in Securities and Use of Proceeds .................... 18
Item 3. Defaults Upon Senior Securities .............................. 18
Item 4. Submission of Matters to a Vote of Security Holders .......... 18
Item 5. Other Information ............................................ 18
Item 6. Exhibits and Reports on Form 8-K ............................. 18
Signatures ........................................................... 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 32,275 $ 41,283
Accounts receivable 8,069 7,495
Inventories, net 860,247 966,749
Prepaid expenses 67,037 86,544
Other current assets 24,272 18,413
------------ ------------
Total current assets 991,900 1,120,484
Property and equipment, net 622,872 907,785
Other intangible assets 1,822,267 2,279,799
------------ ------------
Total assets $ 3,437,039 $ 4,308,068
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 180,000 $ 115,000
Accounts payable 334,561 260,546
Accrued expenses 506,959 428,005
------------ ------------
Total current liabilities 1,021,520 803,551
------------ ------------
Convertible debt 3,606,583 3,778,377
------------ ------------
Contingencies -- --
------------ ------------
Shareholders' deficit:
Common stock, $.001 par value, 350,000,000 shares
authorized; 145,574,151 and 128,309,528 shares issued
and outstanding at June 30, 2003
and December 31, 2002, respectively 145,574 128,310
Additional paid-in capital 16,051,957 15,231,677
Accumulated deficit (17,388,595) (15,589,228)
Unearned compensation -- (44,619)
------------ ------------
Total shareholders' deficit (1,191,064) (273,860)
------------ ------------
Total liabilities and shareholders' deficit $ 3,437,039 $ 4,308,068
============ ============
See accompanying notes to consolidated financial statements
3
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Six months Three months Six months
ended June ended June ended June ended June
30, 2003 30, 2003 30, 2002 30, 2002
------------- ------------- ------------- -------------
Revenues $ 461,225 $ 887,125 $ 321,863 $ 655,772
Cost of revenues 278,997 491,594 214,497 374,479
------------- ------------- ------------- -------------
Gross profit 182,228 395,531 107,366 281,293
------------- ------------- ------------- -------------
Operating expenses:
Selling, general, and administrative expenses 853,176 1,657,194 694,669 1,456,512
Web site development costs 174,317 356,908 113,017 365,341
------------- ------------- ------------- -------------
Total operating expenses 1,027,493 2,014,102 807,686 1,821,853
------------- ------------- ------------- -------------
Loss from operations (845,265) (1,618,571) (700,320) (1,540,560)
------------- ------------- ------------- -------------
Other income (expense):
Interest expense (92,345) (180,822) (46,694) (251,584)
Other income (expense) 19 26 (1,042) (973)
------------- ------------- ------------- -------------
Total other expense, net (92,326) (180,796) (47,736) (252,557)
------------- ------------- ------------- -------------
Loss before income taxes (937,591) (1,799,367) (748,056) (1,793,117)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net loss $ (937,591) $ (1,799,367) $ (748,056) $ (1,793,117)
============= ============= ============= =============
Loss per share (basic and diluted) $ (0.01) $ (0.01) $ (0.01) $ (0.02)
============= ============= ============= =============
Weighted average shares 136,287,217 133,516,738 114,651,420 109,933,294
============= ============= ============= =============
See accompanying notes to consolidated financial statements
4
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
2003 2002
---- ----
Operating activities:
Net loss $(1,799,367) $(1,793,117)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 742,445 711,219
Amortization of unearned compensation 44,619 94,882
Amortization of debt discount -- 47,804
Beneficial conversion feature 106,696 64,677
Common stock issued in payment of interest -- 260,566
Common stock issued in payment of professional
and consulting fees 465,180 572,157
Issuance of common stock pursuant to exercise of
stock options granted to employees for services 37,174 366,721
Unrealized loss on marketable securities -- 1,002
Changes in assets and liabilities:
Accounts receivable (574) (2,421)
Inventories 106,502 68,834
Accounts payable 74,015 (50,900)
Accrued expenses 78,954 (531,084)
Prepaid expense and other current assets 13,648 (53,040)
----------- -----------
Net cash used in operating activities (130,708) (242,700)
----------- -----------
Investing activities:
Purchase of securities -- (1,599)
Intangible asset additions -- (16,000)
Property and equipment additions -- (255,881)
----------- -----------
Net cash used in investing activities -- (273,480)
----------- -----------
Financing activities:
Net proceeds from notes payable 65,000 --
Proceeds from convertible debt 56,700 503,000
Proceeds from exercise of stock options -- 2,948
----------- -----------
Net cash provided by financing activities 121,700 505,948
----------- -----------
Net decrease in cash and equivalents (9,008) (10,232)
Cash and equivalents, beginning 41,283 47,669
----------- -----------
Cash and equivalents, ending $ 32,275 $ 37,437
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ -- $ --
=========== ===========
Interest $ 2,250 $ --
=========== ===========
See accompanying notes to consolidated financial statements
5
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 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 pusuant to exercise of
stock options granted to employees for services 796,022 796 36,378 -- -- 37,174
Common stock issued in payment of
professional and consulting fees 10,746,459 10,746 454,434 -- -- 465,180
Conversions of notes payable 5,722,142 5,722 308,498 -- -- 314,220
Beneficial conversion discount 20,970 -- -- 20,970
Net loss -- -- -- (1,799,367) -- (1,799,367)
----------- -------- ----------- ------------ -------- -----------
Balance, June 30, 2003 145,574,151 $145,574 $16,051,957 $(17,388,595) $ -- $(1,191,064)
=========== ======== =========== ============ ======== ===========
See accompanying notes to consolidated financial statements
6
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June
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
7
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 $55,000 in 2003 and $44,000 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
30,671,907 as of June 30, 2003, and 71,150,413 as of June 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 June 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 six months ended June 30, 2002,
the Company capitalized approximately $228,000 of Web site development
costs. There
8
were no website development costs capitalized during the six months ended
June 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 six months ended June 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 Payable
At June 30, 2003 and December 31, 2002, the Company was obligated on
short-term notes payable totaling $180,000 and $115,000, respectively. At
June 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 bears interest at 18%. All of the short-term debt is due in
2003.
Note 3. Common Stock
Call Option Agreements
The Company was granted call options for 2,283,565 unregistered common
shares held by ChannelSpace Entertainment, Inc. at an exercise price of
$.001 per share. The call options expire on January 31, 2005.
Stock Options
On February 1, 2001 the Company adopted the 2001 Non-Qualified Stock
Option Plan (the "2001 Plan") and has filed Registration Statements on
Form S-8 to register 50,000,000 shares of its common stock. Under the 2001
Plan employees and consultants may elect to receive their gross
compensation in the form of options to acquire the number of shares of the
Company's common stock equal to their gross compensation divided by the
fair value of the stock on the date of grant. During the six months ended
June 30, 2003, the Company granted options for 11,542,481 shares at
various dates aggregating $502,354 under this plan. During the six months
ended June 30, 2002 the Company granted options for 9,100,813 shares at
various dates aggregating $938,878 under this plan. All options granted
during each period were exercised.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly,
compensation cost has been recognized based on the difference between the
fair market value of the common stock at the grant date and the exercise
price. The following table reflects proforma net loss and loss per share
had the Company elected to adopt the fair value approach of SFAS No. 123,
as amended by SFAS No. 148:
9
For the six months ended
------------------------
June 30, 2003 June 30, 2002
------------- -------------
Net loss, as reported ($ 1,799,367) ($ 1,793,117)
Add stock compensation costs
on options granted below
fair market value 44,619 94,882
Less stock compensation costs
had option expense been
measured at fair value (529,571) (123,864)
------------- -------------
Proforma net loss, as adjusted ($ 2,284,319) ($ 1,822,099)
============= =============
Weighted average shares 133,516,738 109,933,294
============= =============
Loss per share (basic
and diluted), as reported ($ .01) ($ .02)
============= =============
Proforma loss per share (basic
and diluted), as adjusted ($ .02) ($ .02)
============= =============
For the three months ended
------------------------
June 30, 2003 June 30, 2002
------------- -------------
Net loss, as reported ($ 937,591) ($ 748,056)
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 (189,684) (61,932)
------------- -------------
Proforma net loss, as adjusted ($ 1,127,275) ($ 762,547)
============= =============
Weighted average shares 136,287,217 114,651,420
============= =============
Loss per share (basic
and diluted), as reported ($ .01) ($ .01)
============= =============
Proforma loss per share (basic
and diluted), as adjusted ($ .01) ($ .01)
============= =============
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.
10
Note 4. Income Taxes
There was no provision for income taxes for the periods ended June 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 June 30, 2003, the Company has federal and state net operating loss
carry forwards of approximately $13,600,000 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 June 30, 2003 the Company has issued $3,926,004 of convertible debt,
which is presented net of unamortized beneficial conversion discounts of
$319,421.
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
fourth of which was exercised on June 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 June 30, 2003 the outstanding balance of this note was
$2,256,530, since $743,470 has been converted into 11,504,400 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 June 30, 2003, had the Buyer
converted the Series B Note at issuance, Buyer would have received
$2,286,952 in aggregate value of the company's common stock upon
conversion of the convertible note. As a result, in accordance with EITF
00-27, the intrinsic value of the beneficial conversion feature of
$617,478 is being charged to interest expense over the term of the related
note. The beneficial conversion feature that was charged to interest
expense totaled $54,023 and $106,696 during the three and six months ended
March 31, 2003, respectively. The beneficial conversion feature that
11
was charged to interest expense totaled $19,078 and $64,677 during the
three and six months ended June 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 six months ended June 30, 2003 and 2002 the Company issued
10,746,459 and 5,570,444 shares of common stock respectively, in
connection with the payment of approximately $465,180 and $572,157 of
professional and consulting fees, respectively.
In addition, during the six months ended June 30, 2002 the Company issued
3,054,556 shares of common stock in connection with the payment of
approximately $260,566 of interest due on its convertible debt.
12
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 six months ended June 30, 2003, with those for the three and six
months ended June 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.
13
Three months ended June 30, 2003 and 2002
Revenue. For the three months ended June 30, 2003, revenue was $461,200,
96% of which is attributable to sales of the Company's own product and fees from
buyers and sellers through the Rotman Auction operations. Gross sales of the
Company's own product were approximately $440,600. Advertising and web hosting
fees were approximately $19,000 or 4% of gross revenues during the quarter ended
June 30, 2003.
The Company's 2003 second quarter revenues represent an increase of
approximately $139,300, or 43%, from the three-month period ended June 30, 2002,
in which revenue was approximately $321,900. For the three month period ended
June 30, 2002, sales of the Company's product were approximately $310,000, or
96% of gross sales, and advertising and web hosting fees were $6,000, or 2% of
gross revenues.
The reason for the increase in revenues was a combination of higher sales
of Company owned product of $130,600 from the same period in 2002, a $13,000
increase in advertising and web hosting fees, offset by $4,400 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 June 30, 2003 was
$161,700, which represents an increase of $63,300 from the comparable quarter in
2002, in which gross profit from Company owned product sales was $98,400. Since
gross margin percentages on Company owned product were approximately 5% better,
and sales of Company owned product were $130,600 higher in the quarter ended
June 30, 2003, the Company produced $63,400 more gross margin dollars, a 64%
increase.
Operating Expenses. Total operating expenses for the three months ended
June 30, 2003 were approximately $1,027,500, compared to $807,700 for the
corresponding period in 2002, an increase of $219,800. Sales, general and
administrative ("SG&A") expenses for the three months ended June 30, 2003 were
approximately $853,200, compared to $694,700 for the three months ended June 30,
2002. The increase of $158,500 in SG&A costs include increases in consulting and
professional fees of $194,200 and other SG&A costs of $53,500, offset by a
decrease in payroll and related costs of $87,200. 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 June 30, 2003 increased
approximately $61,300 from the corresponding period in 2002. This increase is
due primarily to an increase in consulting fees of $43,100, offset by decreases
in payroll of $51,900, computer expense of $18,600, depreciation of $6,400, and
the fact that there were no web site development costs capitalized for the
quarter ended June 30, 2003 compared to $94,500 in web site development costs
for the corresponding quarter in 2002.
Interest Expense. For the quarter ended June 30, 2003, the Company
incurred interest charges of approximately $92,300 principally associated with
one convertible note, compared to interest charges of $46,700 for the
corresponding period in 2002. The increase of $45,600 is attributable to $34,900
more amortization of beneficial conversion discounts and charges associated with
higher borrowing balances.
Net Loss. The Company realized a net loss for the three months ended June
30, 2003 of approximately $937,600, or $.01 per share, as compared to a loss of
$748,100, or $.01 per share for the three months ended June 30, 2002.
Inflation. The Company believes that inflation has not had a material
effect on its results of operations.
14
Six months ended June 30, 2003 and 2002
Revenue. For the six months ended June 30, 2003, revenue was $887,100, 96%
of which is attributable to sales of the Company's own product and fees from
buyers and sellers through the Rotman Auction operations. Gross sales of the
Company's own product were approximately $856,200. Advertising and web hosting
fees were approximately $25,200 or 3% of gross revenues during the six months
ended June 30, 2003.
The Company's 2003 revenues represent an increase of approximately
$231,300, or 35%, from the six-month period ended June 30, 2002, in which
revenue was approximately $655,800. For the six month period ended June 30,
2002, sales of the Company's product were approximately $631,200, or 96% of
gross sales, and advertising and web hosting fees were $18,600, or 3% of gross
revenues.
The reason for the increase in revenues was a combination of higher sales
of Company owned product of $225,000 from the same period in 2002 and $6,600 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 six months
ended June 30, 2003 was $366,400, which represents an increase of $106,800 from
the comparable period in 2002, in which gross profit from Company owned product
sales was $259,600. Since gross margin percentages on Company owned product were
approximately the same for the first six months of 2003 and 2002, and sales of
Company owned product were $225,000 higher in the period ended June 30, 2003,
the Company produced $106,800 more gross margin dollars, a 41% increase.
Operating Expenses. Total operating expenses for the six months ended June
30, 2003 were approximately $2,014,100, compared to $1,821,900 for the
corresponding period in 2002, an increase of $192,200. Sales, general and
administrative ("SG&A") expenses for the six months ended June 30, 2003 were
approximately $1,657,200, compared to $1,456,500 for the six months ended June
30, 2002. The increase of $200,700 in SG&A costs includes decreases in payroll
and related costs of $46,500 and miscellaneous SG&A costs of $19,000, offset by
an increase in consulting and professional fees of $259,300. Depreciation and
amortization decreased by approximately $4,500 due to certain assets becoming
fully depreciated during 2002. Costs associated with planning, maintaining and
operating our web sites for the six months ended June 30, 2003 decreased
approximately $8,400 from the corresponding period in 2002. This decrease is due
primarily to a decrease in payroll of $311,100, offset by increases in
consulting fees of $76,100, as certain employees were replaced with consultants,
depreciation of $15,700, computer expenses of $19,000, and the fact that there
were no web site development costs capitalized for the six months ended June 30,
2003 compared to $209,000 in web site development costs for the corresponding
six months in 2002.
Interest Expense. For the six months ended June 30, 2003, the Company
incurred interest charges of approximately $180,800 principally associated with
one convertible note, compared to interest charges of $251,600 for the
corresponding period in 2002. The decrease of $70,800 is attributable to
approximately $3,000,000 in convertible debt that became non-interest bearing
effective April 1, 2002, and full recognition as of June 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 six months ended June
30, 2003 of approximately $1,799,400, or $.01 per share, as compared to a loss
of $1,793,100, or $.02 per share for the six months ended June 30, 2002.
Inflation. The Company believes that inflation has not had a material
effect on its results of operations.
15
Assets
At June 30, 2003, total assets of the Company were $3,437,000, compared to
$4,308,100 at December 31, 2002. The decrease was primarily due to depreciation
and amortization totaling $742,400 and a decrease in inventories of $106,500.
Operating Cash Flows
A summarized reconciliation of the Company's net losses to cash used in
operating activities for the six months ended June 30, 2003 compared to June 30,
2002, is as follows:
2003 2002
---- ----
Net loss $(1,799,400) $(1,793,100)
Depreciation and amortization 787,100 806,100
Amortization of beneficial conversion
Discount and debt discount 106,700 112,500
Common stock issued in payment services 502,400 938,900
Common stock issued in payment of interest -- 260,600
Changes in current assets and liabilities 272,500 (567,700)
----------- -----------
Net cash used in operating activities $ (130,700) $ (242,700)
=========== ===========
Working Capital and Liquidity
The Company had cash and cash equivalents of $32,300 at June 30, 2003,
compared to $41,300 at December 31, 2002. The Company had a deficit in working
capital of $29,700 at June 30, 2003, compared to working capital of $316,900 at
December 31, 2002. At June 30, 2003 current liabilities were $1,021,500 compared
to $803,600 at December 31, 2002. During the six months ended June 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 $743,470 through the conversion of common stock. As of June 30, 2003,
the Company has available approximately $330,000 under the $2,000,000 Series B
Note. During 2002, Augustine had refused to honor certain draw requests, citing
inadequate liquidity in the Company's common stock and Augustine's lack of cash
resources. As of June 30, 2003, Augustine Fund was current with all draw
requests. If, in the future, Augustine Fund fails to honor draw requests, the
Company may need to seek alternative financing or seek damages for breach of
contract from Augustine Fund.
The Company's independent auditors have issued a going concern opinion on
the Company's consolidated financial statements for the year ended December 31,
2002. The Company needs an infusion of $500,000 of additional capital to fund
anticipated operating costs over the next 12 months. However, management
anticipates continued growth in gross profit. Management anticipates that its
suite of management tools, called "AuctionInc.", its new online appraisal
service, Ask the Appraiser(TM), offered through eBay, and sales from its movie
poster inventory, will continue to increase revenues and result in
16
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 $95,000 and $525,000 of cash. In addition, Augustine Fund is required to
provide additional financing, under its $2,000,000 convertible note at the
Company's request in the amount of $330,000. Management also obtained private
financing in 2002 and the first six months of 2003 in the aggregate amount of
$130,000 pursuant to 8% promissory notes held by a related party, and $50,000
pursuant to an 18% promissory note 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 end of 2003. However, there can be no assurance that
an assignment of the call options can be concluded on reasonably acceptable
terms or that Augustine will honor our draw requests. If these assignments are
not completed or draw requests are not honored, management may need to seek
alternative sources of capital to support operations. In addition, management
believes that operating costs and interest expense will continue to decrease.
Management believes that future software development fees will decrease
substantially because the AuctionInc. software development is substantially
complete, payroll will decline due to changes in benefits and staffing, and
professional fees will decline because the Company has resolved its litigation
issues.
Forward Looking Statements
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements (within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934) regarding the Company and
its business, financial condition, results of operations and prospects. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions or variations of such words are intended to
identify forward-looking statements in this Report. Additionally, statements
concerning future matters such as the development of new services, technology
enhancements, purchase of equipment, credit arrangements, possible changes in
legislation and other statements regarding matters that are not historical are
forward-looking statements.
Although forward-looking statements in this quarterly report reflect the
good faith judgment of the Company's management, such statements can only be
based on facts and factors currently known by the Company. Consequently,
forward-looking statements are inherently subject to risks, contingencies and
uncertainties, and actual results and outcomes may differ materially from
results and outcomes discussed in this Report. Although the Company believes
that its plans, intentions and expectations reflected in these forward-looking
statements are reasonable, the Company can give no assurance that its plans,
intentions or expectations will be achieved. For a more complete discussion of
these risk factors, see Exhibit 99.1, "Risk Factors", in the Company's Form
10-KSB for the fiscal year ended December 31, 2002.
For example, the Company's ability to achieve positive cash flow and to
become profitable may be adversely affected as a result of a number of factors
that could thwart its efforts. These factors include the Company's inability to
successfully implement the Company's business and revenue model, the
collectibles community not accepting the services the Company offers, higher
costs than anticipated, the Company's inability to sell its products and
services to a sufficient number of customers, the 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.
17
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the second quarter of 2003, Augustine Fund, L.P. converted
$287,820 of the March 23, 2000 convertible note into 5,002,436 shares of common
stock of the Company. Augustine Fund, L.P. is an accredited investor that
represented that it acquired the convertible notes and the warrants issued in
connection with the note for its own account. The issuance of the securities is
exempt from registration under Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder. The Company did not issue any shares of its
common stock, par value $.001 per share, to Augustine Fund, L.P., for interest
due pursuant to the eight percent convertible note issued by the Company to the
Augustine Fund, L.P. on November 7, 2001.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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
32.1 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 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
19
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
32.1 CEO and CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
20