SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
COMMISSION FILE NUMBER 0-28720
SALES ONLINE DIRECT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1479833
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
4 Brussels Street, Worcester, Massachusetts 01610
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 791-6710
Common Stock, $0.001 Par Value
(Title of each class)
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
As of May 1, 2002, the issuer had outstanding 112,715,494 shares of its
Common Stock, par value $.001 per share.
Transitional Small Business Disclosure Format
Yes [_] No [X]
Sales Online Direct, Inc.
and Subsidiary
Form 10-QSB
For the Three Months ended March 31, 2002
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001 (unaudited)............ 3
Consolidated Statements of Operations
Three months ended March 31, 2002 and
2001 (unaudited)............................................ 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2002 and
2001 (unaudited)............................................ 5
Consolidated Statements of Changes in Stockholders' Equity
Three months ended March 31, 2002
(unaudited)................................................. 6
Notes to Consolidated Financial Statements
Three months ended March 31, 2002 and 2001.................. 7-14
Item 2. Management's Discussion and Analysis or
Plan of Operation.............................................. 15
Part II - Other Information
Item 1. Legal Proceedings........................................... 20
Item 2. Changes in Securities and Use of Proceeds................... 20
Item 3. Defaults Upon Senior Securities............................. 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
Item 5. Other Information .......................................... 20
Item 6. Exhibits and Reports on Form 8-K............................ 20
Signature.............................................................. 21
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 2002 2001
---- ----
Current assets:
Cash and cash equivalents $ 76,260 $ 47,669
Accounts receivable 14,741 15,295
Marketable securities 1,784 121
Inventory 1,158,718 1,160,810
Prepaid expenses 171,399 37,595
Other current assets 33,592 77,557
------------ ------------
Total current assets 1,456,494 1,339,047
Property and equipment, net 1,151,596 1,136,931
Other intangible assets 2,874,862 3,078,391
Debt financing costs, net -- 30,000
------------ ------------
Total assets $ 5,482,952 $ 5,584,369
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable $ 232,274 $ --
Accounts payable 396,400 359,218
Accrued expenses 860,937 882,433
------------ ------------
Total current liabilities 1,489,611 1,241,651
------------ ------------
Convertible debt 3,703,097 4,544,968
------------ ------------
Stockholders' equity:
Common stock, $.001 par value, 350,000,000 shares
authorized; 110,133,223 and 79,683,494 shares issued
and outstanding at March 31, 2002
and December 31, 2001, respectively 110,133 79,683
Additional paid-in capital 13,469,977 12,010,313
Accumulated deficit (13,102,924) (12,057,863)
Unearned compensation (186,942) (234,383)
------------ ------------
Total stockholders' equity 290,244 (202,250)
------------ ------------
Total liabilities and stockholders' equity $ 5,482,952 $ 5,584,369
============ ============
See accompanying notes to consolidated financial statements
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SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
2002 2001
---- ----
Revenues $ 333,909 $ 386,898
Cost of revenues 159,982 162,270
------------ ------------
Gross profit 173,927 224,628
------------ ------------
Operating expenses:
Selling general and administrative expenses 761,843 959,459
Web site development costs 252,324 170,579
------------ ------------
Total operating expenses 1,014,167 1,130,038
------------ ------------
Loss from operations (840,240) (905,410)
------------ ------------
Other income (expense):
Interest expense (204,890) (147,828)
Other income 69 2,258
------------ ------------
Total other expense (204,821) (145,570)
------------ ------------
Loss before income taxes (1,045,061) (1,050,980)
Provision for income taxes -- --
------------ ------------
Net loss $ (1,045,061) $ (1,050,980)
============ ============
Loss per share (basic) $ (0.01) $ (0.02)
============ ============
Weighted average shares 92,975,922 55,031,516
============ ============
See accompanying notes to consolidated financial statements
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SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
2002 2001
---- ----
Operating activities:
Net loss $(1,045,061) $(1,050,980)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 356,674 364,831
Amortization of unearned compensation 47,441 47,441
Amortization of debt discount 93,403 53,750
Stock issued in payment of services 206,584 --
Stock issued in payment of interest 59,836 60,000
Stock options issued for compensation 220,746 124,032
Unrealized loss on marketable securities (64) (2,181)
Changes in assets and liabilities:
Accounts receivable 554 (22,150)
Inventory 2,093 134,504
Accounts payable 37,182 (2,272)
Accrued expenses (21,497) 404,246
Other, net (89,838) (33,666)
----------- -----------
Net cash provided by (used in) operating activities (131,947) 77,555
----------- -----------
Investing activities:
Purchase of securities (1,599) --
Proceeds from sale of securities -- 18,746
Property and equipment additions (137,810) (37,605)
----------- -----------
Net cash used in investing activities (139,409) (18,859)
----------- -----------
Financing activities:
Proceeds from loan payable 232,274 --
Proceeds from convertible debt 64,726 --
Proceeds from exercise of stock options 2,947 --
----------- -----------
Net cash provided by financing activities 299,947 --
----------- -----------
Net increase in cash and equivalents 28,591 58,696
Cash and equivalents, beginning 47,669 102,534
----------- -----------
Cash and equivalents, ending $ 76,260 $ 161,230
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ -- $ --
=========== ===========
Interest $ -- $ --
=========== ===========
See accompanying notes to consolidated financial statements
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SALES ONLINE DIRECT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(Unaudited)
Common stock Additional
-------------------------- Paid-in Accumulated Unearned
Shares Amount Capital deficit Compensation Total
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 79,683,494 $ 79,683 $ 12,010,313 $(12,057,863) $ (234,383) $ (202,250)
Amortization of stock-based
compensation -- -- -- -- 47,441 47,441
Common stock issued in payment of
interest on convertible debt 2,393,400 2,394 57,442 -- 59,836
Issuance of stock options to
employees for services 2,477,912 2,478 218,268 -- 220,746
Payment of professional and consulting fees 1,367,289 1,367 205,217 206,584
Exercise of stock options 294,750 295 2,653 2,948
Conversion of note payable 23,916,378 23,916 976,084 1,000,000
Net loss -- -- -- (1,045,061) -- (1,045,061)
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2002 110,133,223 $ 110,133 $ 13,469,977 $(13,102,924) $ (186,942) $ 290,244
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
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SALES ONLINE DIRECT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
Note 1. Organization
The Company operates and maintains an internet portal dedicated to collectibles
in a variety of categories. The Company conducts person-to-person online
auctions of its own inventory of collectibles and items posted under consignment
arrangements by third party sellers.
On March 7, 2000, the Company acquired Internet Collectible Awards ("ICA")
www.collectiblenet.com), an internet business that polls consumers and reports
on the best Internet collectibles Web sites in a variety of categories. As
consideration for the acquisition, the Company recorded accounts payable of
$50,000 and issued 200,000 shares of the Company's common stock valued at
$237,500 (based on the Company's stock price at the date of acquisition). The
acquisition has been accounted for under the purchase method of accounting. The
excess of the purchase price, $287,500, over the fair value of the assets
acquired, a web site, has been allocated to other intangible assets. The Company
was involved in litigation related to this transaction. Subsequent to this
acquisition management obtained information that caused it to believe that,
unbeknownst to the Company, the beneficial owner of ICA was an officer and
significant shareholder of the Company at the time of the acquisition. The
litigation was settled late in 2001.
On November 8, 2000, the Company acquired certain assets of ChannelSpace
Entertainment, Inc., a Virginia corporation ("CSEI") and Discribe, Ltd.,
("Discribe") a Canadian corporation wholly owned by CSEI. CSEI and Discribe are
converged Internet content providers and producers of affinity portals,
including the CollectingChannel.com and the CelticChannel.com websites. The
consideration paid by the Company for the acquired assets was 7,530,000
unregistered shares of the Company's common stock valued at $4,648,996 and
$300,000 worth of the Company's common stock to be registered (711,136 shares
based upon the average closing bid price of the stock on the five trading days
prior to February 6, 2001, the date of filing the registration statement). The
assets acquired - consisting principally of software licenses, a video library,
a library of articles, a user list, Domain names, furniture, and fixtures and
equipment - had an estimated fair value of approximately $4,974,000. The fair
values of the individual assets acquired, and the consideration paid, have been
determined by independent appraisal. The excess of the fair value of the assets
acquired over the purchase price, approximately $25,000, has been allocated
pro-rata as a reduction of the fair values of the intangible assets acquired.
On February 1, 2002 the Company entered into a Settlement Agreement and Mutual
Release regarding a variety of claims by both parties to the above transaction.
The settlement discharged the Company from the requirement to issue, and
register, the above mentioned 711,136 shares of common stock and granted to the
Company a call option for 2,283,565 shares of unregistered common stock held by
CSEI as discussed in Note 6. The $300,000 value of the 711,136 common shares has
been accounted for as additional amounts in excess of the fair value of the
assets acquired over the purchase price and has been allocated pro-rata as a
reduction of the intangible assets and property and equipment acquired.
On November 7, 2001, the Company, through a subsidiary, Rotman Collectibles Inc.
(a Delaware Corporation), consummated its merger with Rotman Collectibles, Inc.
(a Massachusetts Corporation) ("RCI"), a seller of movie posters. In connection
with this agreement the Company issued 100 common shares in exchange for the
outstanding common shares of RCI. The acquisition has been accounted for under
the purchase method of accounting. In addition, the Company issued the Rotman
convertible note
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discussed in Note 8 in the amount of $1,000,000 in exchange of a convertible
note previously issued by RCI. The sole stockholder, director, and officer of
RCI was Leslie Rotman, who is the mother of Gregory and Richard Rotman, both of
whom are executive officers and directors of the Company.
Note 2. Summary Of Significant Accounting Policies
General
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the United States
Securities and Exchange Commission for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation. These
financial statements have not been audited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations for interim reporting. The Company believes the
disclosures contained herein are adequate to make the information
presented not misleading. However, these financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's annual report for the year ended December 31,
2001 which, is included in the Company's Form 10-KSB.
Principles of consolidation
The accompanying 2002 financial statements include the accounts of Sales
Online Direct, Inc. and its wholly-owned subsidiary, Rotman Collectibles,
Inc., acquired on November 7, 2001. All material inter-company
transactions have been eliminated.
Inventory
Inventory consists of collectible merchandise for sale and is stated at
the lower of average cost or market on a first-in, first-out (FIFO)
method.
On a periodic basis management reviews inventories on hand to ascertain if
any is slow moving or obsolete. In connection with this review, at March
31, 2002 and December 31, 2001 the Company has provided for reserves
totaling $180,000 and $190,000, respectively.
Revenue Recognition
The Company generates revenue on sales of its purchased inventory, from
fees and commissions on sales of merchandise under consignment type
arrangements, from web hosting services, and from advertising and
promotional services.
For sales of merchandise owned and warehoused by the Company, the Company
is responsible for conducting the auction, billing the customer, shipping
the merchandise to the customer, processing customer returns and
collecting accounts receivable. The Company recognizes revenue upon
verification of the credit card transaction and shipment of the
merchandise, discharging all obligations of the Company with respect to
the transaction.
For sales of merchandise under consignment-type arrangements, the Company
takes physical possession of the merchandise, but is not obligated to, and
does not, take title or ownership of merchandise. When an auction is
completed, consigned merchandise that has been sold is
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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.
Advertising revenues are recognized at the time the advertisement is
initially displayed on the company's web site. Sponsorship revenues are
recognized at the time that the related event is conducted.
Intangible Assets
The Company adopted Financial Accounting Standards Statements Nos. 141,
"Business Combinations" (SFAS No. 141), and 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142), effective January 1, 2002. SFAS No. 142
addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill
and other intangible assets subsequent to acquisition. SFAS No. 142
provides that intangible assets with finite lives be amortized and that
goodwill and intangible assets with indefinite lives not be amortized, but
rather be tested at least annually for impairment.
Advertising Costs
Advertising costs totaling approximately $23,000 in 2002 and $23,500 in
2001, are charged to expense when incurred.
Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities
using the enacted income tax rates expected to be in effect when the taxes
are actually paid or recovered. A deferred tax asset is also recorded for
net operating loss, capital loss and tax credit carry forwards to the
extent their realization is more likely than not. The deferred tax expense
for the period represents the change in the deferred tax asset or
liability from the beginning to the end of the period.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the amounts reported of assets and liabilities as
of the date of the balance sheet and reported amounts of revenue and
expenses during the reporting period. Material estimates that are
particularly susceptible to significant change in the near term relate to
inventory, intangible assets and deferred tax asset valuation. Although
these estimates are based on management's knowledge of current events and
actions, they may ultimately differ from actual results.
Earnings Per Common Share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the
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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 23,643,989 as of March 31, 2002
and 20,689,655 as of March 31, 2001. The number of common shares that
would be included in the calculation of outstanding options and warrants
is determined using the treasury stock method. The assumed conversion of
outstanding dilutive stock options and warrants would increase the shares
outstanding but would not require an adjustment of income as a result of
the conversion. Stock options and warrants applicable to 642,250 shares
and 942,000 shares at March 31, 2002 and 2001, respectively, have been
excluded from the computation of diluted earnings per share, as have the
common shares that would be issued upon conversion of the convertible
debt, because they were antidilutive. Diluted earnings per share have not
been presented as a result of the Company's net loss for each year.
Asset Impairment
The Company adopted Financial Accounting Standards Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets",
effective January 1, 2002. In accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets", long lived assets to
be held and used by the Company are reviewed to determine whether any
events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. For long-lived assets to be held and
used, the Company bases its evaluation on such impairment indicators as
the nature of the assets, the future economic benefits of the assets, any
historical or future profitability measurements, as well as other external
market conditions or factors that may be present. If such impairment
indicators are present or other factors exist that indicate that the
carrying amount of the asset may not be recoverable, the Company
determines whether an impairment has occurred through the use of an
undiscounted cash flow analysis of assets at the lowest level for which
identifiable cash flow exist. If impairment has occurred, the Company
recognizes a loss for the difference between the carrying amount and the
estimated value of the asset. The fair value of the asset is measured
using an estimate of discounted cash flow analysis.
Web Site Development Costs
The Company accounts for website development costs in accordance with the
provisions of EITF 00-2, "Accounting for Web Site Development Costs"
("EITF 00-2"), which requires that costs incurred in planning,
maintaining, and operating stages that do not add functionality to the
site be charged to operations as incurred. External costs incurred in the
site application and infrastructure development stage and graphic
development are capitalized. During the three months ended March 31, 2002
and 2001, the Company capitalized approximately $114,500 and $37,600,
respectively, of Web site development costs. Such capitalized costs are
included in "Property and equipment."
Recent Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations". The Company does not
hold any assets affected by this statement and it is not expected to have
a material impact on the Company's financial statements.
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Note 3. Intangible assets
At March 31, 2002 intangible assets are comprised of the following:
Gross carrying Accumulated
Amount Amortization
---------- ------------
Software License $2,882,660 $821,918
Acquired Web Sites 762,301 254,582
Domain Names 77,025 26,489
Customer & User Lists 327,157 93,280
Other 30,763 8,775
---------- ----------
Total $4,079,906 $1,205,044
========== ==========
Amortization expense for the three months ended March 31, 2002 and 2001 totaled
$203,530 and $223,222, respectively.
Approximate future amortization expense for the remaining life of the intangible
assets is as follows:
Year Ended
December 31, Amortization
------------ ------------
2002 $814,000
2003 814,000
2004 813,000
2005 637,000
2006 --
Note 4. Loan payable
As of March 31, 2002 Augustine Fund L.P. had advanced the Company $232,274 as a
loan. The Company is negotiating final terms in connection with this loan. In
the absence of final terms, as of March 31, 2002 has recorded interest at 8% per
annum on balances outstanding from time to time.
Note 5. Accrued Expenses
At March 31, 2002 and December 31, 2001 accrued expenses are comprised of the
following:
2002 2001
---- ----
General operating expenses $105,961 $118,472
Professional fees 454,720 485,356
Lease termination costs 100,000 100,000
Interest 200,256 178,605
-------- --------
Total $860,937 $882,433
======== ========
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Note 6. Common Stock
Call Option Agreements
In connection with the Settlement Agreement and Mutual Release with CSEI
discussed in note 1, the Company was granted call options for 2,283,565
unregistered common shares held by CSEI at an exercise price of $.001 per
share. The call options are not exercisable until April 14, 2002 and
expire on January 31, 2005.
Stock Options
In July 1999, the Company granted an option to an employee to purchase
471,000 shares of common stock at $.01 per share. The option vests over a
four-year period. The Company recorded unearned compensation of $757,848,
based on the difference between the fair market value of the common stock
at the grant date and the exercise price. The unearned compensation is
being amortized over the vesting period of the option. Amortization
expense related to unearned compensation amounted to $47,441 for each of
the three months ended March 31, 2002 and 2001.
On February 1, 2001 the Company adopted the 2001 Non-Qualified Stock
Option Plan (the "2001 Plan") and has filed Registration Statements on
Form S-8 to register 40,000,000 shares of its common stock. Under the 2001
Plan employees and consultants may elect to receive their gross
compensation in the form of options to acquire the number of shares of the
Company's common stock equal to their gross compensation divided by the
fair value of the stock on the date of grant. During the three months
ended March 31, 2002 and 2001 the Company granted options for 3,845,201
and 349,274 shares, respectively, at various dates aggregating $423,485
and $124,032, respectively, under this plan. All options granted during
the period were exercised.
Note 7. Income Taxes
There was no provision for income taxes for the three months ended March 31,
2002 and 2001 due to the Company's net operating loss and its valuation reserve
against deferred income taxes.
The difference between the provision for income taxes from amounts computed by
applying the statutory federal income tax rate of 34% and the Company's
effective tax rate is due primarily to the net operating loss incurred by the
Company and the valuation reserve against the Company's deferred tax asset.
At March 31, 2002, the Company has federal and state net operating loss carry
forwards of approximately $8,500,000 available to offset future taxable income
that will expire through 2022.
Note 8. Convertible Debt Financing
As of March 31, 2002 the Company has issued $4,000,000 of convertible debt,
which is presented net of unamortized beneficial conversion discounts of
approximately $296,900.
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"). 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. Also
on November 7, 2001, the Company issued a 6% convertible note, due November 7,
2003 (the "Rotman Note"), to Leslie
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Rotman, pursuant to an Agreement and Plan of Merger dated October 23, 2001 (Note
1). The Rotman Note was converted into 23,916,378 shares of common stock at
conversion prices ranging from $.0298 to $.05152 per share in early January
2002.
The Series A Note is convertible into common stock at a conversion price equal
to the lesser of: (1) one hundred ten percent (110%) of the lowest of the
closing bid price for the common stock for the five (5) trading days prior to
the date of issuance, 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.
The Series B Note is convertible into common stock at a conversion price equal
to 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.
Had the Buyer converted the Series B Note at issuance Buyer would have received
$1,369,863 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 $369,863 is being charged to
interest expense over the two-year term of the related note. The total
beneficial conversion discount related to this notes has been recorded as an
increase in additional paid in capital and the unamortized portion as a
reduction of the related note. Since the Rotman Note was fully converted in
January 2002 all of the related beneficial conversion feature of $250,000 has
been charged to interest expense.
In connection with the Agreement, the Company also issued warrants to the Buyer
and Delano Group Securities to purchase 300,000 and 100,000 shares of common
stock, respectively. The purchase price per share of common stock is equal to
one hundred twenty percent (120%) of the lowest of the closing bid prices for
the common stock during the five (5) trading days prior to the closing date. The
warrants expire on March 31, 2005.
In addition, the Company entered into Registration Rights Agreements whereby the
Company agreed to file a Registration Statement with the Securities and Exchange
Commission (SEC), on or before May 6, 2002, covering the common stock to be
issued upon the conversion of the Series B and Rotman notes. The Company will
pay all fees and expenses related to registration of the common stock. Estimated
fees and expenses to be incurred in connection with these agreements in the
amount of $25,000 have been accrued during the year ended March 31, 2002.
On March 24, 2002 the Company and Buyer signed a letter of understanding with
respect to a forbearance of the full payment of the Series A Note discussed
above. The letter of understanding extends settlement of the Series A Note until
June 27, 2002, provides for additional ninety day extensions beyond that date
until March 24, 2003, waives interest for periods after March 31, 2002 on the
Series A Note, and commits Buyer to providing additional convertible financing
in the amount of $1 million on terms identical to those in the Series B note. In
addition, the letter of understanding extends the filing date of the
Registration Rights Agreement with respect to the Series B Note to April 10,
2003.
If the Registration Statement is not declared effective by the SEC on or before
June 10, 2003, then, upon written notice from the Lenders, with respect to any
portion of the notes not previously converted into common stock, the applicable
conversion percentage will decrease by two percent (2%) each thirty day period
beginning June 10, 2003 until the earlier of November 7, 2003 or the date the
Registration Statement is declared effective by the SEC.
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Note 9. Issuance of Common Stock
During the three months ended March 31, 2002 and 2001 the Company issued
2,393,400 and 227,417 shares of common stock, respectively, in connection with
the payment of $59,836 and $60,000 of interest due on its Series A convertible
debt.
Note 10. Litigation
The Company leased its former technology location under an operating lease
commencing on January 1, 2000 and expiring on December 31, 2004. Prior to
December 31, 2000, the Company closed this facility and ceased payments. During
2001, the landlord initiated an action seeking approximately $115,000 in
damages, interest and attorneys' fees. The Company is currently negotiating a
settlement with the landlord. The Company has recorded an estimated liability of
$100,000 in connection with this matter.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Our primary business, based on our revenues, is the purchase and sale of
collectibles and memorabilia. We operate an online auction site that provides a
full range of services to sellers and buyers, and maintain multiple collectibles
portals, offering integrated information and services to the collectibles
community. The collectibles industry includes every person that collects items
having either economic or sentimental value, such as antiques, sports and
entertainment memorabilia, stamps, coins, figurines, dolls, collector plates,
plush and die cast toys, cottage/village reproductions and other decorative or
limited edition items that are intended for collecting and other memorabilia. A
portal is an Internet website that enables visitors to search for, and visit,
other related sites, access related services, and obtain relevant data. Over the
past two years, we have been working on the development and technology of
building portals. Our main focus was portal development in our own industry of
collectibles; to that end, we acquired assets from Channel Space Entertainment,
Inc. ("CSEI") that include the website www.CollectingChannel.com, and we
acquired Rotman Collectibles, Inc. We plan to converge our multiple sites into
one integrated site in 2002. We also plan to build other portals, some that will
charge fees to access their services, and others to leverage company-owned
technology and websites. In 2001, we developed "AuctionInc.," a suite of online
management tools. We also began to sponsor more autograph signing events in
2001. Late in the first quarter of 2002 we began to offer "AuctionInc" to other
online sellers. eBay has selected www.CollectingChannel.com's Ask the
Appraiser(TM) as a provider of online appraisal services. Effective May 2, 2002,
www.CollectingChannel.com will make its "Ask the Appraiser" service available to
eBay's buyers and sellers for appraisals in more than 170 categories of
memorabilia, antiques, and collectibles. The service will help individuals learn
more online about their items before they buy or sell. We will manage the
service and eBay will provide the marketing.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 2 to our
financial statements. However, certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management; as a result, they are subject to an inherent degree of uncertainty.
In applying these policies, our management makes estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures. Those estimates and judgments are based upon our historical
experience, the terms of existing contracts, our observance of trends in the
industry, information that we obtain from our customers and outside sources, and
on various other assumptions that we believe to be reasonable and appropriate
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our critical accounting
policies include:
Inventory: Inventory is stated at the lower of average cost or market on a
first-in, first-out method. On a periodic basis we review inventories on
hand to ascertain if any is slow moving or obsolete. In connection with
this review, we establish reserves based upon our experience and
management's assessment of current product demand.
Property and Equipment and Other Intangible Assets: Property and equipment
and other intangible assets are stated at cost. Depreciation and
amortization are computed over estimated useful lives that are reviewed
periodically. In connection with this review we consider changes in
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the economic environment, technological advances, and management's
assessment of future revenue potential.
Results of Operations
The following discussion compares the Company's results of operations for the
three months ended March 31, 2002 with those for the three months ended March
31, 2001. The Company's financial statements and notes thereto included
elsewhere in this Report contain detailed information that should be referred to
in conjunction with the following discussion.
Revenue. For the three months ended March 31, 2002, revenue was $333,900, 96% of
which is attributable to sales of the Company's own product and fees from buyers
and sellers through the Rotman Auction operations. Gross sales of the Company's
own product were approximately $321,200; gross sales on items on consignment
were de minimus. Sales of the Company's own product represented 96% of gross
sales. Advertising and web hosting fees were approximately $12,500 or 4% of
revenues.
The Company's 2002 first quarter revenues represent a decrease of approximately
$53,000 from the three-month period ended March 31, 2001, in which revenue was
approximately $386,900. For the three month period ended March 31, 2001, sales
of the Company's product were approximately $374,800 and sales of items on
consignment were approximately $80,800, of which the Company received
approximately $12,100 as fees. For that quarter, sales of the Company's own
product represented 82%, and sales of consignment merchandise represented 18%,
of gross sales, but, because the Company only receives a fee for sales on
consignment sales, sales of the Company's own product represented 97% and sales
on consignment represented 3% of the Company's revenue. There were no
advertising or web hosting fees during the quarter ended March 31, 2001.
The reason for the decrease in revenues was a combination of lower sales of
Company owned product of $53,600 from the same period in 2001, and lower sales
of consignment goods of $11,900, offset by $12,500 of advertising and web
hosting fees. Lower sales of Company owned product are the net result of lower
sales of sports memorabilia, partially offset by increases in sales of movie
posters. Gross profit from Company owned product sales for the three months
ended March 31, 2002 was $161,000, which represents a decrease of $52,000 from
the comparable quarter in 2001, in which gross profit from Company owned product
sales was $213,800. Since gross margin percentages on Company owned product were
nearly 6.5% lower in 2002 than in 2001, and sales of company owned product were
$53,600 lower in the quarter ended March 31, 2002, the Company produced $51,000
fewer gross margin dollars. Lower consignment revenues were nearly offset by
higher advertising and web hosting fees.
Operating Expenses. Total operating expenses for the three months ended March
31, 2002 were approximately $1,014,000, compared to $1,130,000 for the
corresponding period in 2001. Sales, general and administrative ("SG&A")
expenses for the three months ended March 31, 2002 were approximately $761,800,
compared to $959,500 for the three months ended March 31, 2001. The decrease in
SG&A costs includes a decrease in professional fees of $145,500, which is
primarily attributable to the resolution of the Company's litigation.
Depreciation and amortization decreased by approximately $36,000 due to certain
assets becoming fully depreciated during 2001. Costs associated with planning,
maintaining and operating our websites for the three months ended March 31, 2002
increased approximately $81,700 from the corresponding period in 2001. This
increase is due primarily to increases in salaries and related costs of $56,000,
amortization of $17,000, and consulting costs of $17,000, offset by decreases in
computer supplies and expense of $10,000.
Interest Expense. For the quarter ended March 31, 2002, the Company incurred
interest charges of approximately $205,000 associated with convertible notes and
warrants, compared to interest charges of
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$148,000 for the corresponding period in 2001. During 2002 the Company carried
about $1,000,000 more in convertible debt than it did in 2001.
Net Loss. The Company realized a net loss for the three months ended March 31,
2002 of approximately $1,045,000, or $.0.01 per share, as compared to a loss of
$1,051,000, or $.02 per share for the three months ended March 31, 2001.
Inflation. The Company believes that inflation has not had a material effect on
its results of operations.
Assets
At March 31, 2002, total assets of the Company were $5,483,000 compared to
$5,584,000 at December 31, 2001. The decrease was primarily due to depreciation
and amortization totaling $357,000 offset by an increases in cash and prepaid
expenses of $28,000 and $134,000, respectively. The increase in prepaid expenses
is attributable to a $123,000 payment in late March for services to be rendered
during the remainder of 2002.
Working Capital and Liquidity
Although gross margins from auctions decreased during the first quarter from
those of a year ago, they have increased from the year ended December 31, 2001
and we anticipate that our suite of management tools, called "AuctionInc.", our
new online appraisal service, Ask the Appraiser(TM), offered through eBay, and
sales from our movie poster inventory, will produce revenues during the 2002.
Management believes that we have sufficient cash commitments to fund operations
during the next 12 months. The Settlement Agreement and Mutual Releases related
to the CSEI assets provided us with call options for approximately 2.3 million
shares of common stock. We believe that the assignment of these call options can
generate between $250,000 and $500,000 of cash during the period ending March
31, 2003. In addition, on March 24, 2002, we entered into a letter of
understanding with Augustine Fund, L.P. ("Augustine"), where Augustine will
provide financing, at the Company's request, of up to an additional $1,000,000.
We believe that these plans will result in obtaining sufficient operating cash.
However, there can be no assurance that an assignment of the call options can be
concluded on reasonably acceptable terms. If these assignments are not completed
we will seek alternative sources of capital to support operations. In addition,
the level of interest expense is not expected to continue at the same levels as
it has for the last two years since, as of March 31, 2002, $1,000,000 of
convertible debt will have been retired through the issuance of common stock,
and $3,000,000 of the convertible debt will be non-interest bearing. The Company
believes that future litigation costs will be substantially less than those
incurred over the past two years due to the resolution of the Company's
litigation.
On March 23, 2000 the Company entered into a Securities Purchase Agreement (the
"Agreement"), whereby the Company sold an 8% convertible note in the amount of
$3,000,000, due March 31, 2002, to Augustine. The note is convertible into
common stock at a conversion price equal to the lesser of: (1) $2.475 per share
or (2) 73% of the average of the closing bid price for the common stock for the
five trading days immediately preceding the conversion date.
In connection with the Agreement, the Company also issued warrants to Augustine
and Delano Group Securities to purchase 300,000 and 100,000 shares of common
stock, respectively. The purchase price per share of common stock is $2.70, 120%
of the lowest of the closing bid prices for the common stock during the five
trading days prior to the closing date. The warrants expire on March 31, 2005.
The $3,000,000 note was due and payable in common stock in March 2002. However,
on March 24, 2002, the Company and Augustine executed a letter of understanding
to forbear the note for up to one year. The note will bear no interest and
Augustine is restricted with respect to trading and conversions.
On November 7, 2001, the Company issued another 8% convertible note to
Augustine, in return for $1,000,000 in financing. This convertible note was
issued on substantially the same terms as the original convertible note and is
secured by all assets. The new funding was used to finance the Company's
operations. On March 24, 2002, the Company received a commitment from Augustine
to increase the permitted draw under this note to $2,000,000.
Also on November 7, 2001, the Company issued a 6% convertible note in the amount
of $1,000,000 to Leslie Rotman (the "Rotman Note"), as the sole stockholder of
Rotman Collectibles, Inc., upon the merger of Rotman Collectibles, Inc. into a
subsidiary of the Company under the same name. Rotman Collectibles, Inc.
obtained a large collection of entertainment memorabilia in connection with this
transaction. In January 2002 the Rotman Note was converted into 23,916,378
shares of common stock of the Company. Management believes that sales from
Rotman Collectibles, Inc. inventory will generate up to $1,000,000 in the next
12 months. The Rotman Note was issued on substantially the same terms as the
original convertible note to Augustine, except that the interest rate was 6%
rather than 8%, and the base
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price at which the note could be converted into shares of common stock of the
Company was 80%, rather than 73%. Interest payments, payable in shares of common
stock or cash, were due March 31, 2002.
The Company is also required to file a new registration statement with respect
to the new convertible notes, or the shares issued upon conversion of the
convertible notes. Pursuant to a letter of understanding dated March 24, 2002
with Augustine, a Registration Statement must be filed no later than April 10,
2003. After April 10, 2003, Augustine will be able to pay a lower conversion
price if we fail to file and register timely the Registration Statement.
Had the two $1,000,000 convertible notes been converted on November 7, 2001, the
holders would have received a total of approximately $2,620,000 in aggregate
value of the Company's common stock upon conversion. As a result, in accordance
with EITF 00-27, the intrinsic value of the beneficial conversion feature of
$620,000 is being charged to interest expense over the two-year term of the
related notes. Since the Rotman note was fully converted in January 2002,
substantially all the related beneficial conversion feature of $250,000 was
charged to interest expense in 2001.
Forward Looking Statements
This Quarterly Report on Form 10-QSB contains certain forward-looking statements
(within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934) regarding the Company and its business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements in this Report. Additionally, statements concerning
future matters such as the development of new services, technology enhancements,
purchase of equipment, credit arrangements, possible changes in legislation and
other statements regarding matters that are not historical are forward-looking
statements.
Although forward-looking statements in this Report reflect the good faith
judgment of the Company's management, such statements can only be based on facts
and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks, contingencies and uncertainties, and
actual results and outcomes may differ materially from results and outcomes
discussed in this Report. Although the Company believes that its plans,
intentions and expectations reflected in these forward-looking statements are
reasonable, the Company can give no assurance that its plans, intentions or
expectations will be achieved. For a more complete discussion of these risk
factors, see
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Exhibit 99.1, "Risk Factors", in the Company's Form 10-KSB for the fiscal year
ended December 31, 2000.
For example, the Company's ability to achieve positive cash flow and to become
profitable may be adversely affected as a result of a number of factors that
could thwart its efforts. These factors include the Company's inability to
successfully implement the Company's business and revenue model, the
collectibles community not accepting the services the Company offers, higher
costs than anticipated, the Company's inability to sell its products and
services to a sufficient number of customers, the Company's failure to attract
sufficient interest in and traffic to its sites, the Company's inability to
complete development of its sites, the failure of the Company's operating
systems, and the Company's inability to increase its revenues as rapidly as
anticipated. If the Company is not profitable, it will not be able to continue
its business operations.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On January 14, 2002, the Company issued 2,393,400 shares of its
common stock, par value $.001 per share, to the Augustine Fund, LP
in payment of $59,836 interest due pursuant to the eight percent
convertible note issued by the Company to the Augustine Fund, LP on
March 23, 2000. Augustine Fund, L.P. is an accredited investor that
represented that it acquired the convertible note and the warrants
issued in connection with the note for its own account. The issuance
of the securities is exempt from registration under Section 4(2) of
the Securities Act of 1933 and Regulation D promulgated thereunder.
In January 2002, the Company issued 23,916,378 shares of its common
stock, par value $.001 per share, to Leslie Rotman, in full payment
of $1,000,000 convertible note issued by the Company to Leslie
Rotman on November 7, 2001. Leslie Rotman is an accredited investor
who represented that she acquired the convertible note for her own
account. The issuance of the securities is exempt from registration
under Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated thereunder.
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:
None
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 15, 2002 SALES ONLINE DIRECT, INC.
Registrant
/s/ Gregory Rotman
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Gregory Rotman, President
/s/ Richard Rotman
----------------------------------------
Richard Rotman, Chief Financial Officer,
Vice President and Secretary
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