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, 2000
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 August 1, 2000, the issuer had outstanding 47,056,140 shares of
its Common Stock, par value $.001 per share.
Transitional Small Business Disclosure Format
Yes No X
---- ----
<PAGE>
Sales Online Direct, Inc.
Form 10-QSB
For the three months ended June 30, 2000
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Balance Sheet -
June 30, 2000 (unaudited)...................................3
Statements of Operations--
Three and Six months ended June 30, 2000 and
1999 (unaudited)............................................4
Statements of Cash Flows -
Six-months ended June 30, 2000 and
1999 (unaudited)..........................................5-6
Statements of Shareholders' Equity -
Six-months ended June 30, 2000 and 1999
(unaudited).................................................7
Notes to Financial Statements
Six-months ended March 31, 2000 and 1999.................8-13
Item 2. Management's Discussion and Analysis or
Plan of Operations .....................................14-17
Part II - Other Information
Item 1. Legal Proceedings......................................18
Item 2. Changes in Securities and Use of Proceeds..............19
Item 3. Defaults Upon Senior Securities........................19
Item 4. Submission of Matters to a Vote of Security Holders....19
Item 5. Other Information .....................................19
Item 6. Exhibits and Reports on Form 8-K.......................19
Signatures...........................................................20
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC.
BALANCE SHEET
June 30, 2000
(unaudited)
Assets
Current assets:
<S> <C>
Cash and cash equivalents $ 1,467,180
Accounts receivable 28,494
Inventory 726,749
Marketable securities 127,178
Prepaid expenses 98,484
Other current assets 45,806
------
Total current assets 2,493,891
Property and equipment, net 605,118
Goodwill 38,281
Other intangible assets 268,925
Debt financing costs, net 232,500
Other assets 16,667
------
Total assets $ 3,655,382
===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 47,288
Accrued expenses 420,401
-------
Total current liabilities 467,689
-------
Convertible Debt 2,629,696
---------
Stockholders' equity:
Common stock, $.001 par value, 100,000,000 shares
authorized; 47,056,140 shares issued and outstanding 47,056
Additional paid-in capital 5,809,211
Accumulated deficit (4,776,425)
Unearned compensation (521,845)
--------
Total stockholders' equity 557,997
-------
Total liabilities and stockholders' equity $ 3,655,382
===========
See accompanying notes to unaudited financial statements
</TABLE>
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SALES ONLINE DIRECT, INC
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months Six months Three months Six months
ended June 30, ended June 30, ended June ended June
2000 2000 30, 1999 30, 1999
---- ---- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 327,927 $ 770,297 $ 155,189 $ 312,644
Cost of revenues 356,532 585,098 46,582 73,831
------- ------- ------ ------
Gross Profit (Loss) (28,605) 185,199 108,607 238,813
Selling, general and
adminsitrative expenses 903,223 1,620,323 583,458 790,367
------- --------- ------- -------
Loss from operations (931,828) (1,435,124) (474,851) (551,554)
-------- ---------- -------- --------
Other income (expense)
Interest expense (147,501) (1,162,456) -- --
Other income 17,033 28,326 45,706 45,706
------ ------ ------ ------
Total other income (expense) (130,468) (1,134,130) 45,706 45,706
-------- ---------- ------ ------
Loss before income taxes (1,062,296) (2,569,254) (429,145) (505,848)
Provision for taxes on income -- -- -- --
---------- ---------- ------------ --------
Net loss (1,062,296) (2,569,254) $ 429,145 (505,848)
---------- ---------- ------------ --------
Loss per share
Basic $ (0.02) $ (0.05) $ (0.01) $ (0.01)
------------ ------------ ------------ ------------
Weighted average shares 47,056,140 46,946,167 46,711,140 43,820,727
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited financial statements
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<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC.
STATEMENTS OF CASH FLOWS
For the six months ended
(unaudited)
June 30, 2000 June 30, 1999
Operating activities:
<S> <C> <C>
Net (loss) $(2,569,254) $ (505,848)
Adjustments to reconcile net (loss)
to net cash (used in) operating
activities
Depreciation and amortization 138,763 12,038
Amortization of unearned compensation 92,066
Realized (gain) on marketable securities (20,112) (18,823)
Unrealized (gain) loss on marketable securities 20,952 (18,557)
Beneficial converstion feature 1,000,000
Amortization of debt discount 59,696
Changes in assets and liabilities:
Accounts receivable 20,188 (6,392)
Inventory (97,020) (98,177)
Due from related parties -- 4,006
Accounts payable (306,381) 9,065
Accrued expenses 338,918 106,456
Other, net (60,062) (112,227)
------- --------
Net cash (used in) operations (1,391,246) (628,459)
---------- --------
Investing activities:
Acquisition of marketable securities (382,575) (987,391)
Proceeds from sales of marketable securities 263,557 789,992
Acqusition of Securities Resolution Advisors, Inc. -- 488
Merger with Rotman Auction, Inc. -- 9,864
Property and equipment additions (60,957) (50,697)
------- -------
Net cash (used in) investing activities (179,975) (237,744)
-------- --------
Financing activities:
Proceeds from assignment of common stock call options 87,188 2,450,000
Net proceeds from convertible securities 2,300,000 --
Proceeds form sale of warrants 430,000 --
------- ---------
Net cash provided by financing activities 2,817,188 2,450,000
--------- ---------
Net increase in cash and equivalents 1,245,967 1,583,797
Cash and equivalents, beginning 221,213 --
------- ----------
Cash and equivalents, ending $ 1,467,180 $ 1,583,797
=========== ===========
See accompanying notes to unaudited financial statements
</TABLE>
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SALES ONLINE DIRECT, INC.
STATEMENTS OF CASH FLOWS (continued)
For the six months ended
(unaudited)
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for :
<S> <C> <C>
Interest $ -- $ --
========= ==========
Income taxes $ 5,185 $ --
========= ==========
Supplemental schedule of Non-cash Investing and Financing Activities:
Contributions of inventories $ -- $ 769,764
========= ==========
Contribution of the net assets of World Wide Collectors Digest, Inc. were
recorded at their fair values as follows:
Due form shareholder $ -- $ 2,737
Other current assets -- 1,000
Property and equipment -- 29,877
Liabilities assumed -- (385)
Paid-in capital -- 33,229
Merger of Rotman Auction, Inc. accounted for utilizing the purchase
method of accounting. The assets were recorded at their fair values
as follows:
Cash received in the transaction -- 9,864
Accounts receivable -- 11,841
Inventory -- 31,454
Due from affiliate -- 10,919
Other current assets -- 7,115
Property and equipment -- 1,697
Due to shareholder -- (11,820)
Other liabilities assumed -- (129,975)
Goodwill -- 68,905
Acquisition of Internet Collectible Awards
for Common stock and liabilities $ 287,500
Consulting fees paid in common stock 44,835
See accompanying notes to unaudited financial statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the six months ended June 30, 2000
(unaudited)
Common Stock Additional
------------------ Paid-in Accumulated Unearned
Shares Amount Capital Deficit Compensation Total
------ ------ ------- ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 46,711,140 $ 46,711 $ 4,010,033 $(2,207,171) $ (613,911) $ 1,235,662
Common stock issued in connection with
call option agreement 110,000 110 (110) -- -- --
Common stock issued to consultant for services 35,000 35 44,800 -- -- 44,835
Acqusition of Internet Collectible Awards 200,000 200 237,300 -- -- 237,500
Proceeds from assignment of options -- -- 87,188 -- -- 87,188
Beneficial conversion discount -- -- 1,000,000 -- -- 1,000,000
Issuance of warrants -- -- 430,000 -- -- 430,000
Amortization of stock-based compensation -- -- -- -- 92,066 92,066
Net loss -- -- -- (2,569,254) -- (2,569,254)
---------- -------- ------------ ----------- ----------- -----------
Balance, June 30, 2000 47,056,140 $ 47,056 $ 5,809,211 $(4,776,425) $ (521,845) $ 557,997
========== ======== =========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited financial statements
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<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Six months ended June 30, 2000 and 1999
1. ORGANIZATION
On February 25, 1999, Securities Resolution Advisors, Inc. ("SRAD")
purchased all of the outstanding common stock of Internet Auction, Inc.
("Internet Auction"). The acquisition was made pursuant to an Agreement and Plan
of Reorganization (the "Agreement") dated January 31, 1999 between SRAD and the
principal shareholders ("IA Shareholders") of Internet Auction. Pursuant to the
Agreement, SRAD acquired all of the issued and outstanding shares of Internet
Auction in exchange for the issuance to the IA Shareholders of an aggregate of
37,368,912 shares, representing approximately 80%, of SRAD's issued and
outstanding common stock, and the business of Internet Auction became the
business of SRAD. In accordance with the Agreement, after the transaction
described above, the IA Shareholders were appointed to SRAD's Board of Directors
and became officers of SRAD. The previously serving directors resigned from the
Board.
SRAD subsequently changed its name to Sales OnLine Direct, Inc. (the
"Company"). For accounting purposes, the transaction described above is
considered, in substance, a capital transaction rather than a business
combination. It is equivalent to the issuance of common stock by Internet
Auction for the net assets of the Company, accompanied by a recapitalization.
This accounting treatment is identical to that resulting from a reverse
acquisition, except that no goodwill or other intangible asset has been
recorded. Accordingly, the accompanying financial statements reflect the
acquisition by Internet Auction of the net assets of the Company and the
recapitalization of Internet Auction's common stock based on the exchange ratio
in the Agreement.
On March 7, 2000, the Company acquired Internet Collectible Awards
(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 has been allocated to other intangible assets. (See Note 6)
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.
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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 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, 1999 which is included in the Company's Form 10KSB.
Marketable Securities
Marketable securities are classified as trading and are stated at fair
value.
Goodwill
Goodwill is being amortized on a straight-line basis over an estimated
useful lives of three to five years.
Other intangible assets
The other intangible assets acquired from Internet Collectible Awards
are being amortized over their estimated useful life of five years.
Debt financing costs
Debt financing costs associated with the convertible debt are being
amortized over the two year term of the related debt.
Revenue Recognition
The Company generates revenue on sales of its purchased inventory and
from fees and commissions on sales of merchandise under consignment type
arrangements.
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 merchandise returns and
collecting accounts receivable. The Company recognizes the gross sales amount as
revenue upon verification of the credit card transaction and shipment of the
merchandise.
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 to or ownership of the merchandise. When an auction is
completed, consigned merchandise which has been sold is shipped to the customer
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. The Company then releases the net sales proceeds to the Consignor.
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<PAGE>
Income Taxes
Deferred tax asset 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 the inventory valuation and the 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 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
outstanding stock options, convertible debt and common stock warrants and are
determined using the treasury stock method. The potential common shares have
been excluded from the computation of earnings per share because they were
antidilutive as a result of the Company's net loss for the period.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, and marketable
securities, approximate fair value. The fair value of the convertible debt,
based upon the market value of the common stock and the terms of the note, is
estimated to be $4.0 million.
3. COMMON STOCK
Call Option Agreement
In connection with the agreement described in Note 1, on February 25,
1999 SRAD entered into a Call Option Agreement ("Option Agreement") with
Universal Funding, Inc. (Universal), a shareholder of SRAD and a beneficial
owner of 3,000,000 shares of SRAD's common stock. Under the Agreement, Universal
agreed to grant certain options to SRAD to acquire 2,000,000 shares of SRAD's
common stock owned by Universal. The options consist of 1,000,000 shares at $.50
per share exercisable through February 25, 2000 and 1,000,000 shares at $.75 per
share exercisable through February 25, 2001. The exercise price was reduced to
.375 per share through April 30, 1999.
In addition, the Company assigned options to purchase 160,000 shares of
stock from Universal to Richard Singer, the former President of SRAD, for
services rendered to SRAD in connection with the acquisition of Internet
Auction, Inc. Also, the Company assigned options to purchase 700,000 shares of
stock from Universal to Steven Rotman, the father of Richard and Gregory Rotman,
in connection with the acquisition of certain inventories.
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<PAGE>
In April 1999, the Company assigned options to purchase 500,000 shares
of stock from Universal to certain individuals in exchange for $2,450,000, which
was added to the paid-in capital of the Company.
In March 2000 the Company assigned options to purchase 142,500 shares
of stock from Universal to certain individuals in exchange for $87,188, which
was added to the paid-in capital of the Company.
At June 30, 2000, the Company had a balance of 497,500 shares remaining
under the agreement with an exercise price of $.75 and an expiration date of
February 25, 2001.
Issuance of Common Stock
On February 17, 2000, the Company issued 75,000 shares of its common
stock to Universal Funding, Inc. for payment of certain fees due in connection
with the granting of the common stock call options and temporary reduction of
the call option exercise price. In addition, the Company issued 35,000 shares of
its common stock to an investment consultant for service rendered in connection
with the common stock option grant transactions. The aggregate value of the
common stock issued was $140,000 treated as a cost of raising capital, with no
impact on the net worth of the Company. Also, the Company issued 35,000 shares
to a consultant for services rendered in the first quarter of 2000.
The fair value of the shares issued, $44,800, was charged to expense
and added to additional paid in capital in the first quarter of 2000.
4. INCOME TAXES
There was no provision for income taxes for the periods ended June 30,
2000 or 1999 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, 2000 the Company has federal and state net operating loss
carryforwards of approximately $3,260,000 available to offset future taxable
income that will expire in 2020.
5. CONVERTIBLE DEBT FINANCING
On March 23, 2000, the Company entered into a Securities Purchase
Agreement (the "Agreement"), whereby the Company issued an 8% convertible
note in the amount of $3,000,000, due March 31, 2002 to Augustine Fund, L.P.
(the "Buyer").
The 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
March 23, 2000, or (2) seventy-five percent (75%) of the
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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 note on March 23, 2000, the Buyer would
have received $4,000,000 in aggregate value of the company's common stock upon
the conversion of the $3,000,000 convertible note. As a result, for the period
ended March 31, 2000, the intrinsic value of the beneficial conversion feature
of $ 1,000,000 has been allocated to debt discount and additional paid-in
capital. Since the debt was convertible at date of issuance, the debt discount
was charged to interest expense in the period ended March 31, 2000.
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 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 are exercisable on June 23, 2000 and expire on March
31, 2005. The fair value of the warrants granted is estimated to be $430,000
using the Black-Scholes option-pricing model. The amount of the proceeds
allocated to the warrants results in a debt discount of $430,000 which will be
amortized as additional interest expense during the two years ending March 23,
2002. Amortization of $5,945 and $59,696 has been charged to operations during
the three and six months ended June 30, 2000, respectively.
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 180 days of the closing date, covering the
common stock to be issued upon the conversion of the convertible note and stock
purchase warrants. All fees and expenses related to the registration of the
common stock will be paid by the Company. Estimated fees and expenses to be
incurred in connection with this agreement in the amount of $35,000 have been
accrued during the six months ended June 30, 2000.
If the Registration Statement is not declared effective by the SEC on
or before September 30, 2000, then with respect to any portion of the note not
previously converted into common stock, the applicable conversion percentage
will decrease by two percent (2%) each thirty day period until the Registration
Statement is declared effective by the SEC. If the SEC has not declared the
Registration Statement effective within one year after March 23, 2000, the
applicable conversion percentage shall be fifty percent (50%).
Also, if the Registration Statement is not filed by the filing date and
not declared effective by the SEC on or prior to September 30, 2000, the Company
shall pay cash, as liquidating damages, for such failure. The required payment
will be equal to two (2%) of the purchase price of the note and warrant for each
thirty-day period, until the breach of the Registration Rights Agreement is
cured.
Expenses incurred in connection with the sale of this convertible note
amounted to $270,000. These expenses are being amortized to interest expense
over the term of the convertible note.
6. LITIGATION
On June 1, 2000, the Company filed a lawsuit against Marc Stengel, a
director, stockholder and Executive Vice President of the Company seeking
damages against Stengel for actions taken, or not taken, that the Company
alleges are in breach of his fiduciary duty and
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otherwise adversely impact the Company. The lawsuit also alleges that the
acquisition of the Internet Collectible Awards discussed in note 1 was a related
party transaction.
Various motions and responses have been filed in connection with this
matter. As of August 11, 2000 the Court has not ruled on these matters and
discovery has not yet begun.
Greg Rotman, President and CEO of the Company, has called a special
meeting of the stockholders to be held on September 7, 2000 for the election of
directors. Greg and Richard Rotman, who are brothers, have filed proxy
solicitation materials with the SEC. No other party has filed any proxy
solicitation materials.
The Company is unable to predict the ultimate outcome of the litigation
described above.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
----------------------------------------------------------
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 Form 10-QSB. 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, 1999.
Overview
The Company's primary business is collectibles. The Company's online
collectibles site is located at "www.salesonlinedirect.com." In order to take
advantage of the tremendous growth in both the online auction and e-commerce
industries, the Company is now focused on the creation of a unique and
multi-faceted internet collectibles market place that services all aspects of
the purchase, ownership and sale of collectibles. Our mission is to become the
premier internet collectibles site consisting not only of a collectibles portal
but also a global auction search and research center. We will derive revenues
from the sale at auction of collectibles from our own inventory as well as from
merchandise under consignment type arrangements with the public through our
Rotman Auction division; sale of advertising on our website; and fees for
services such as appraisals and gradings. The Company's new website, which can
also be accessed through the Company's primary website, is located at
"www.collectingexchange.com".
Results of Operations
The following discussion compares the Company's results of operations
for the three months ended June 30, 2000, with those for the three months ended
June 30, 1999. 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 June 30, 2000 revenue was
$328,000, substantially all of which is attributable to sales of the Company's
own product and fees from buyers and sellers through the Rotman Auction
operations. This represents an increase of approximately $173,000, or 112% from
the three-month period ended June 30, 1999, in which revenue was $155,000. The
primary reason for the increase is that, since the third quarter 1999, the
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Company switched from an 80% consignment model to approximately 20% consignment
sales. We purchase these collectibles from dealers and collectors and assume the
inventory and price risks of these items sold. Due to the inherently
unpredictable nature of auctions, it is impossible to determine with certainty
whether an item will sell for more than the price we paid. Most of the Company's
sales consist of Company-owned product. Loss from product sales (gross loss) for
the three months ended March 31, 2000 was $28,000, compared with a gross profit
of $109,000 for the comparable 1999 quarter. The loss is a result of the Company
auctioning lower margin, slower moving merchandise during the second quarter
while reserving the higher margin and faster moving inventory for sale in the
third and fourth quarters. The Company believes this will result in better
prices and gross profit.
Sales, General, and Administrative Expenses. Sales, general and
administrative ("SG&A") expenses for the three months ended June 30, 2000 were
$903,000, compared to $583,000 for the three months ended June 30, 1999. The
increase in SG&A costs includes an increase in professional fees of $163,000,
which are primarily attributable to the Company's legal activities. Marketing
and advertising costs decreased by approximately $37,000 from the three months
ended June 30, 1999. Marketing expenses were primarily attributable to print and
online marketing and advertising programs designed to create brand awareness for
the Company's online sites. The Company also incurred expenses relating to the
closing of the Maryland office and moving of the Company's Internet
infrastructure to Massachusetts in June 2000. In addition the Company made
investments in product development that it believes are required to remain
competitive and handle increased growth.
Interest expense. The Company sustained charges associated with the
issuance of a $3,000,000 convertible note and warrants. See "Working Capital and
Liquidity" below.
Loss. The Company realized a loss for the three months ended June 30,
2000 of $1,062,000, or ($.02) per share as compared to a loss of $429,000, or
($.01) per share for the three months ended June 30, 1999.
The following discussion compares the Company's results of operations
for the six months ended June 30, 2000, with those for the six months ended June
30, 1999.
Revenue. For the six months ended June 30, 2000 revenue was $770,000,
substantially all of which is attributable to sales of the Company's own product
and fees from buyers and sellers through the Rotman Auction operations. This
represents an increase of approximately $457,000 or 146% from the six-month
period ended June 30, 1999 in which revenue was $313,000. The primary reason for
the increase is that, since the third quarter 1999, the Company switched from an
80% consignment model to approximately 20% consignment sales. As a result, most
of the Company's sales consist of Company-owned product. Gross profit for the
six months ended June 30, 2000 was $185,000 compared with $239,000 for the six
months ended June 30, 1999.
Sales, General, and Administrative Expenses. Sales, general and
administrative ("SG&A") expenses during the six months ended June 30, 2000 were
$1,620,000 compared to $790,000 for the six months ended June 30, 1999. The
increase in SG&A costs includes professional fees ($158,000), which are
primarily attributable to the Company's legal activities, personnel related
costs ($306,000), depreciation and amortization ($89,000) and computer expenses
($89,000). Marketing and advertising costs decreased by approximately $69,000
from the six months ended June 30, 1999. The Company also incurred expenses
relating to the closing of the Maryland office and moving of the Company's
Internet infrastructure to Massachusetts in June 2000. In
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<PAGE>
addition the Company made investments in product development that it believes
are required to remain competitive and handle increased growth.
Interest expense. The Company sustained charges associated with the
issuance of a $3,000,000 convertible note and warrants as well as a $1,000,000
one time charge associated with the beneficial conversion feature in that debt.
See "Working Capital and Liquidity" below.
Loss. The Company realized a loss for the six months ended June 30,
2000 of $2,569,000, or ($.05) per share, compared to $506,000 or ($.01) per
share for the six months ended June 30, 1999.
Inflation. The Company believes that inflation has not had a material
effect of its results of operations.
Working Capital and Liquidity
Cash and cash equivalents were $1,467,000 at June 30, 2000, compared to
$1,584,000 at June 30, 1999.
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 Fund, L.P. (the
"Buyer"). The 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
March 23, 2000, or (2) seventy-five percent (75%) 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 note on March 23,
2000, the Buyer would have received $4,000,000 in aggregate value of the
company's common stock upon the conversion of the $3,000,000 convertible note.
As a result, the intrinsic value of the beneficial conversion feature of
$1,000,000 has been allocated to debt discount and additional paid-in capital.
Since the debt was convertible at date of issuance, the debt discount was
charged to earnings during the quarter ended March 31, 2000.
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 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 expire on March 31, 2005.
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 180 days of the closing date, covering the
common stock to be issued upon the conversion of the convertible note and stock
purchase warrants.
If the Registration Statement is not declared effective by the SEC on
or before September 30, 2000, then, with respect to any portion of the note not
previously converted into common stock, the applicable conversion percentage
will decrease by two percent (2%) each thirty day period until the Registration
Statement is declared effective by the SEC. If the SEC has not declared the
Registration Statement effective within one year after March 23, 2000, the
applicable conversion percentage shall be fifty percent (50%).
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<PAGE>
Also, if the Registration Statement is not filed by the filing date and
not declared effective by the SEC on or prior to September 30, 2000, the Company
shall pay cash, as liquidating damages, for such failure. The required payment
will be equal to two (2%) of the purchase price of the note and warrant for each
thirty-day period, until the breach of the Registration Rights Agreement is
cured.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company's Board of Directors consists of Gregory Rotman and Richard
Rotman, who are brothers, and Hannah Kramer ("Kramer") and Marc Stengel
("Stengel"), who are aunt and nephew. On May 5, 2000, the Company's President
and CEO advised Stengel in writing that the Company's Maryland office was being
closed and that Stengel was relieved of his duties at that office.
On June 1, 2000, the Company filed a lawsuit against Stengel, a
director, stockholder and the Executive Vice President of the Company, Case No.
WMN00CV1621, in the US District Court for the District of Maryland (Northern
Division). The complaint seeks damages against Stengel for actions taken or
failed to be taken that the Company alleges are in breach of his fiduciary duty.
The complaint further alleges that Stengel made intentional misrepresentations
to, and concealed material facts from, the other executive officers of the
Company, engaged in constructive fraud with the respect to the Company and
converted the Company's property to his own benefit.
On June 7, 2000, the Company's President and CEO advised Stengel in
writing that his employment with the Company was terminated. On June 16, 2000
Stengel commenced an action in the Delaware Court of Chancery, C.A. No. 18109
(the "Delaware Action") seeking, among other things, a determination from the
Court that he was improperly removed as an officer and director of the Company
and should be reinstated as such, and that the Rotmans be ordered to dismiss the
Maryland action.
On June 26, 2000, Stengel filed a Motion to Dismiss the Maryland
lawsuit on the basis that the Company lacked the authority to bring the action
in that the Board did not authorize the filing of the suit.
On July 10, 2000, the Company filed an Opposition to Stengel's Motion
to Dismiss asserting, among other things, that the filing of suit was properly
authorized by the Company's President and CEO acting in his capacity as such. On
July 21, 2000, Stengel filed a Memorandum in Reply to the Company's Opposition
to Stengel's Motion to Dismiss. As of August 11, 2000, the Court has not ruled
on Stengel's Motion to Dismiss.
On July 20, 2000, Gregory Rotman, the President and CEO of the Company,
called a special meeting of its stockholders to be held on September 7, 2000 for
the election of directors. Gregory Rotman and Richard Rotman have nominated
themselves, Andrew Pilaro and John Martin for election to the Company's board
and have filed proxy soliciting materials with the SEC in support of their
slate. No other nominations have been received by the Company and no proxy
soliciting materials have been filed by any other party. On July 27, 2000, the
Court of Chancery entered an order staying the Delaware Action pending the
outcome of the special meeting of shareholders.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
None
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:
Exhibit No.
-----------
27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 11, 2000 SALES ONLINE DIRECT INC.
Registrant
/s/ Gregory Rotman
---------------------------------------------
Gregory Rotman, President
/s/ Richard Rotman
---------------------------------------------
Richard Rotman, Chief Financial Officer,
Vice President and Secretary
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LIST OF EXHIBITS
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
