SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 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 nine months ended September 30, 2000
TABLE OF CONTENTS
-----------------
Part I - Financial Information
Item 1. Financial Statements
Balance Sheet -
September 30, 2000 (unaudited)......................3
Statements of Operations -
Three and Nine months ended September 30, 2000 and
1999 (unaudited)....................................4
Statements of Cash Flows -
Nine months ended September 30, 2000 and
1999 (unaudited)..................................5-6
Statements of Changes in Stockholders' Deficit -
Nine months ended September 30, 2000 and 1999
(unaudited).........................................7
Notes to Financial Statements
Nine-months ended September 30, 2000 and 1999....8-15
Item 2. Management's Discussion and Analysis or
Plan of Operations.................................16
Part II - Other Information
Item 1. Legal Proceedings.........................................19
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
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC
BALANCE SHEET
SEPTEMBER 30, 2000
Assets
<S> <C>
Current assets:
Cash and cash equivalents $ 831,589
Inventory 729,812
Marketable securities 31,041
Prepaid expenses 97,348
Other current assets 46,105
-----------
Total current assets 1,735,895
Property and equipment, net 581,625
Goodwill 32,539
Other intangible assets 254,550
Debt financing costs, net 198,750
Other assets 15,667
-----------
Total assets $ 2,819,026
===========
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 87,081
Accrued expenses 357,781
------------
Total current liabilities 444,862
------------
Convertible Debt 2,683,446
------------
Stockholders' deficit:
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 (5,691,145)
Unearned compensation (474,404)
------------
Total stockholders' deficit (309,282)
------------
Total liabilities and stockholders' deficit $ 2,819,026
=============
</TABLE>
See accompanying notes to unaudited financial statements
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<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC.
STATEMENTS OF OPERATION
(unaudited)
Three months Nine months Three months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 2000 1999 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 461,554 $ 1,007,692 $ 380,148 $ 692,792
Cost of revenues 429,511 790,449 363,232 437,063
------- ---------- ------- -------
Gross Profit 32,043 217,243 16,916 255,729
Selling, general and
administrative expenses 825,169 2,445,492 665,520 1,456,714
------- --------- ------- ---------
Loss from operations (793,126) (2,228,249) (648,604) (1,200,985)
-------- --------- ------- ---------
Other income (expense)
Interest expense (147,500) (1,309,956) - -
Other income (expense) 25,905 54,231 (89,927) (43,394)
------- --------- ------ ------
Total other income (expense) (121,595) (1,255,725) (89,927) (43,394)
------- --------- ------ ------
Loss before income taxes (914,721) (3,483,974) (738,531) (1,244,379)
Provision for taxes on income - - - -
-------- --------- ------- ---------
Net loss $ (914,721) $ (3,483,974) (738,531) $(1,244,379)
================ ================ ================ ============
Loss per share
Basic $ (0.019) $ (0.074) $ (0.016) $ (0.028)
================ ================ =============== ==============
Weighted average shares 47,056,140 46,983,093 46,711,140 44,794,786
================ ================ =============== ==============
</TABLE>
See accompanying notes to unaudited financial statements
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<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC
STATEMENT OF CASH FLOWS
For the nine months ended
(unaudited)
September 30, September 30,
2000 1999
------------ -------------
<S> <C> <C>
Operating activities:
Net (loss) $ (3,483,974) $ (1,244,379)
Adjustments to reconcile net (loss)
to net cash (used in) operating
activities
Depreciation and amortization 230,626 33,314
Amortization of unearned compensation 139,507 -
Realized (gain) loss on marketable securities 26,286 15,069
Unrealized (gain) loss on marketable securities (41,098) 49,912
Beneficial conversion feature 1,000,000 -
Amortization of debt discount 113,446 -
Changes in assets and liabilities:
Accounts receivable 48,682 (81,942)
Inventory (100,083) 28,739
Due from related parties - 4,006
Accounts payable (266,588) 11,351
Accrued expenses 276,298 89,952
Other, net (59,225) (51,262)
---------- -----------
Net cash (used in) operations (2,116,123) (1,145,240)
---------- ----------
Investing activities:
Acquisition of marketable securities (407,975) (2,149,446)
Proceeds from sales of marketable securities 391,746 1,710,029
Acquisition of Securities Resolution Advisors, Inc. - 488
Merger with Rotman Auction, Inc. - 9,864
Other assets - (70,000)
Property and equipment additions (74,460) (230,994)
---------- ----------
Net cash (used in) investing activities (90,689) (730,059)
---------- ----------
Financing activities:
Proceeds from assignment of common stock call options 87,188 2,450,000
Stock subscription receivable - 1,000
Repayment of officer loan - (12,000)
Net proceeds from convertible securities 2,300,000 -
Proceeds from sale of warrants 430,000 -
---------- ----------
---
Net cash provided by financing activities 2,817,188 2,439,000
---------- ----------
---
Net increase in cash and equivalents 610,376 563,701
Cash and equivalents, beginning 221,213 -
---------- ----------
Cash and equivalents, ending $ 831,589 $ 563,701
========== ==========
See accompanying notes to unaudited financial statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC
STATEMENTS OF CASH FLOWS (continued)
For the nine months ended
(unaudited)
September 30, September 30,
2000 1900
------------- -------------
Supplemental disclosures of cash flow information:
<S> <C> <C>
Cash paid during the period for:
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 from 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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<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the nine months ended September 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 110,000 110 (110) - - -
call option agreement
Common stock issued to consultant 35,000 35 44,800 - - 44,835
for services
Acquisition 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 - - - - 139,507 139,507
Net loss - - - (3,483,974) - (3,483,974)
---------- ------- ---------- ----------- --------- ----------
Balance, September 30, 2000 47,056,140 $47,056 $5,809,211 $(5,691,145) $(474,404) $ (309,282)
========== ======= ========== =========== ========= ==========
See accompanying notes to unaudited financial statements
</TABLE>
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<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Nine months ended September 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.
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.
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<PAGE>
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
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<PAGE>
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.
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 September 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 September 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 September 30, 2000 the Company has federal and state net operating loss
carryforwards of approximately $4,175,000 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 average of the closing bid price
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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 $53,750 and $113,446 has been charged to operations during
the three and nine months ended September 30, 2000, respectively.
In addition, the Company entered into a Registration Rights Agreement
(modified on September 19, 2000), whereby the Company agreed to file a
Registration Statement with the Securities and Exchange Commission (SEC) on or
before October 25, 2000 covering the common stock to be issued upon the
conversion of the convertible note and stock purchase warrants. A Registration
Statement was filed on October 25, 2000. 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 nine months ended September 30, 2000.
If the Registration Statement is not declared effective by the SEC on or
before December 15, 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 declared effective by the SEC on
or prior to December 15, 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
The Company is currently involved in a dispute with Marc Stengel
("Stengel") and Hannah Kramer ("Kramer"), each of whom is a substantial
shareholder of the Company, and with Whirlwind Collaborative Design, Inc. and
Silesky Marketing, Inc., two entities affiliated with Stengel.
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Stengel and Kramer are former directors of the Company. Stengel is also a former
officer and employee.
The lawsuit was initially filed against Stengel alone in June 2000. It
remains pending in the US District Court for the District of Maryland ("the
Maryland Action"). A First Amended Complaint ("Complaint") was filed on October
11, 2000, which added the defendants other than Stengel identified above. The
Complaint seeks rescission of the transactions pursuant to which Stengel and
Kramer obtained their substantial stock interests in the Company, and seeks
damages against them for misrepresentations and omissions under the common law
of fraud, the Maryland Securities Act and certain contractual warranties and
representations. The Complaint also seeks damages and remedies against Stengel
for breach of his contractual duties as an employee of the Company and for
misrepresentations he made to the Company while acting as an employee. The
Complaint also seeks to recover damages from Stengel and the two corporate
defendants for conversion of certain of the Company's assets, resources and
employee services, and for unjust enrichment. The Complaint also alleges that
the acquisition of Internet Collectible Awards discussed in note 1 is a related
party transaction. The Complaint has not yet been responded to by any of the
defendants and the Court has not ruled on any of these claims.
On or about June 16, 2000, Stengel commenced an action in the Delaware
Chancery Court pursuant to Section 225 of the Delaware General Corporation Law
seeking a determination from the Court that he was improperly removed as an
officer and director of the Company, should be reinstated as such, and that
Gregory and Richard Rotman (Rotmans) be ordered to dismiss the Maryland Action
(the "Delaware 225 Action"). The Delaware 225 Action was stayed pending the
outcome of a special meeting of shareholders, discussed below. Following the
results of that meeting, the Company moved for summary judgment and asked that
the Delaware 225 Action be dismissed. That motion is pending.
On July 20, 2000, Gregory Rotman, called a special meeting of the
stockholders to be held on September 19, 2000 for the election of directors. The
Rotmans nominated themselves, Andrew Pilaro and John Martin for election to the
Company's Board of Directors and filed soliciting materials with the SEC. No
proxy soliciting materials were filed by any other party. The meeting was held
on September 19, 2000 and the nominated slate of directors was elected as the
Company's Board of Directors.
A special Board of Directors meeting was called by Gregory Rotman
immediately following the special meeting of stockholders on September 19, 2000.
At that meeting, the new Board removed Stengel as an officer of the Company,
formally ratified and approved the initiation and prosecution of the Maryland
Action against Stengel, authorized the president and CEO to take all actions
necessary to prosecute the Company's claims against Stengel and others and
authorized the reimbursement of approximately $75,000 of Rotmans' expenses in
connection with the aforementioned solicitation.
On or about October 3, 2000, Stengel submitted to the Company a demand for
advancement of certain expenses (including attorneys' fees) he allegedly
incurred in connection with the Delaware 225 Action and the Maryland Action. On
October 20, 2000, the Company notified Stengel that the Board of Directors had
denied Stengel's advancement request.
On or about October 24, 2000, Stengel filed a second action in the Delaware
Court of Chancery pursuant to Section 145 of the Delaware General Corporation
Law seeking a determination from the court that he is entitled pursuant to the
Company's by-laws to be advanced his expenses, including attorneys' fees,
incurred by him in connection with the Delaware 225 Action and the Maryland
Action (the "Delaware 145 Action"). The Company and Stengel have each moved for
summary judgment in the Delaware 145 action. A hearing on these motions is
scheduled for December 22 2000.
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On November 1, 2000, the Company filed with the Maryland Court a Motion for
a Preliminary Injunction requesting that the Court enjoin Stengel and Kramer
from selling, attempting to sell, or otherwise disposing of their shares of the
Company's stock pending resolution of the merits of the Company's claim for
rescission. On November 9, 2000, Stengel filed an Opposition to the Company's
Motion for a Preliminary Injunction. On November 9, 2000, Stengel also filed a
Motion for Preliminary Injunction requesting that the Court (i) order the
Company to instruct its transfer agent to implement and complete all measures
necessary to sell his restricted stock in compliance with Rule 144 and (ii)
enjoin the Company from interfering with or preventing the sale of stock by
Stengel in accordance with Rule 144. The Company's preliminary injunction motion
is scheduled to be heard by the Court on November 20, 2000.
The Company is unable to predict the ultimate outcome of the litigation
described above. The Company's financial statements do not include any
adjustments related to these matters.
7. RESTATEMENT
Historically, the Company recognized the revenue relating consignment-type
arrangements on a net commission basis.
In connection with its review of the current quarter, the Company found
that certain consignment-type arrangements were recorded in first and second
quarters of 2000 on a gross basis rather than on a net basis. As a result, the
revenues and cost of revenues were overstated for these quarters. Accordingly,
the restatement of the financial statements for the first and second quarters of
2000 did not have any impact on the previously reported loss from operations or
net loss for those quarters.
The Company has properly reflected the net commission service revenue
relating consignment-type arrangements in the current quarter and has adjusted
the year-to-date revenues and cost of revenues in the quarter ended September
30, 2000.
The items in the financial statements that are affected by the restatement
are as follows:
for the quarter ended
---------------------
3/30/00 3/31/00 6/30/00 6/30/00
Previously AS Previously AS
Reported Restated Reported Restated
INCOME STATEMENT
--------------------------------------------------------------------------------
Revenue $ 442,370 $402,743 $327,927 $143,395
Cost of revenue 228,566 188,939 356,532 172,000
Net loss (1,506,958) (1,506,958) (1,062,296) (1,062,296)
for the six-months ended
------------------------
6/30/00 6/30/00
Previously AS
Reported Restated
INCOME STATEMENT
--------------------------------------------------------------------------------
Revenue $ 770,297 $546,138
Cost of revenue 585,098 360,939
Net loss (2,569,254) (2,569,254)
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8. SUBSEQUENT EVENT
On November 9, 2000, the Company acquired a substantial portion of the
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 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 and $300,000 worth of the
Company's common stock which is to be registered.
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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 primary
online collectibles site is located at "www.collectingexchange.com", which can
also be accessed through "www.rotmanauction.com" and
"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.
Subsequent Event
On November 9, 2000, the Company acquired a substantial portion of the
assets of Channel Space 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.
Results of Operations
The following discussion compares the Company's results of operations for
the three months ended September 30, 2000, with those for the three months ended
September 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 September 30, 2000 revenue was
$462,000, 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 $82,000, or 21% from
the three-month period ended September 30, 1999, in which revenue was $380,000.
The primary reason for the increase is that the Company is focused on selling
higher end auction lots. Most of the Company's sales consist of Company-owned
product. Gross profit from product sales for the three months ended September
30, 2000 was $32,000, which represents an increase of $15,000 from the
comparable quarter in 1999, in which gross profit was $17,000. The increase in
gross profit is a result of the Company selling higher end auction lots.
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<PAGE>
Sales, General, and Administrative Expenses. Sales, general and
administrative ("SG&A") expenses for the three months ended September 30, 2000
were $825,000, compared to $665,000 for the three months ended September 30,
1999. The increase in SG&A costs includes an increase in professional fees of
$52,000, which are primarily attributable to the Company's legal activities.
Marketing and advertising costs decreased by approximately $35,000 from the
three months ended September 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. 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 incurred interest charges associated with the
$3,000,000 convertible note and warrants during the three months ended September
30, 2000 while no such charges were incurred in the prior year.
Loss. The Company recognized a loss for the three months ended September
30, 2000 of $915,000, or ($.02) per share as compared to a loss of $739,000, or
($.02) per share for the three months September 30, 1999.
The following discussion compares the Company's results of operations for
the nine months ended September 30, 2000, with those for the nine months ended
September 30, 1999.
Revenue. For the nine months ended September 30, 2000 revenue was
$1,008,000, 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 $315,000 or 45% from
the nine-month period ended September 30, 1999 in which revenue was $693,000.
The primary reason for the increase is the Company is offering more lots during
each auction and has increased the amount of the average dollars sold per lot.
Gross profit for the nine months ended September 30, 2000 was $217,000 compared
with $256,000 for the nine months ended September 30, 1999.
Sales, General, and Administrative Expenses. Sales, general and
administrative ("SG&A") expenses during the nine months ended September 30, 2000
were $2,445,000 compared to $1,457,000 for the nine months ended September 30,
1999. The increase in SG&A costs includes professional fees ($211,000), which
are primarily attributable to the Company's legal activities, personnel related
costs ($348,000), and depreciation and amortization ($126,000). Marketing and
advertising costs decreased by approximately $104,000 from the nine months ended
September 30, 1999. The Company also incurred significant 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
significant investments in product development that it believes are required to
remain competitive and handle increased growth.
Interest expense. The Company incurred $310,000 of interest 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 "Liquidity and Capital Resources" below.
Loss. The Company realized a loss for the nine months ended September 30,
2000 of $3,484,000, or ($.07) per share, compared to $1,244,000, or ($.03) per
share for the nine months ended September 30, 1999.
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<PAGE>
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 approximately $832,000 at September 30,
2000, compared to $564,000 at September 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
(modified on September 19, 2000), whereby the Company agreed to file a
Registration Statement with the Securities and Exchange Commission (SEC) by
October 25, 2000 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 December 15, 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 declared effective by the SEC on
or prior to December 15, 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.
Management believes that the proceeds from this Convertible Note and cash
from operations will provide sufficient liquidity and capital resources to
finance the Company's operations through the end of the current fiscal year.
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<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company is currently involved in a dispute with Marc Stengel
("Stengel") and Hannah Kramer ("Kramer"), each of whom is a substantial
shareholder of the Company, and with Whirlwind Collaborative Design, Inc. and
Silesky Marketing, Inc., two entities affiliated with Marc Stengel. Mr. Stengel
and Ms. Kramer are former directors of the Company. Stengel is also a former
officer and employee.
The lawsuit was initially filed against Stengel alone in June 2000. It
remains pending in the US District Court for the District of Maryland (the
"Maryland Action"). A First Amended Complaint ("Complaint") was filed on October
11, 2000, which added the defendants other than Stengel identified above. The
Complaint seeks rescission of the transactions pursuant to which Stengel and
Kramer obtained their substantial stock interests in the Company, and seeks
damages against Stengel and Kramer for misrepresentations and omissions under
the common law of fraud, the Maryland Securities Act and certain contractual
warranties and representations. The Complaint also seeks damages and remedies
against Stengel for breach of his contractual duties as an employee of the
Company and for misrepresentations he made to the Company while acting as an
employee. The Complaint also seeks to recover damages from Stengel and the two
corporate defendants for conversion of certain of the Company's assets,
resources and employee services, and for unjust enrichment. The Complaint has
not yet been responded to by any of the defendants; the Court has not ruled on
any of these claims.
On or about June 16, 2000, Stengel commenced an action in the Delaware
Chancery Court pursuant to Section 225 of the Delaware General Corporation Law
seeking a determination from the Court that he was improperly removed as an
officer and director of the Company, should be reinstated as such, and that
Gregory and Richard Rotman (the "Rotmans") be ordered to dismiss the Maryland
Action (the "Delaware 225 Action"). The Delaware 225 Action was stayed pending
the outcome of a special meeting of shareholders, discussed below. Following the
results of that meeting, the Company moved for summary judgment and asked that
the Delaware 225 Action be dismissed. That motion is pending.
On July 20, 2000, in accordance with the Company's Amended and Restated
Bylaws, Gregory Rotman, called a special meeting of the stockholders to be held
on September 19, 2000 for the election of directors. The Rotmans nominated
themselves, Andrew Pilaro and John Martin for election to our Board of Directors
and filed soliciting materials with the SEC. No proxy soliciting materials were
filed by any other party. The meeting was held on September 19, 2000 and the
nominated slate of directors were elected as the Company's Board of Directors.
A special Board of Directors meeting was called by Gregory Rotman
immediately following the special meeting of stockholders on September 19, 2000.
At that meeting, the new Board removed Stengel as an officer of Sales Online,
formally ratified and approved the initiation and prosecution of the Maryland
Action against Stengel and authorized Gregory Rotman, as president and CEO to
take all actions necessary to prosecute Sales Online's claims against Stengel
and others.
On or about October 3, 2000, Stengel submitted to the Company a demand for
advancement of certain expenses (including attorneys' fees) he allegedly
incurred in connection with the Delaware 225 Action and Maryland Action. On
October 20, 2000, the Company notified Stengel that the Board of Directors had
denied his advancement request.
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<PAGE>
On or about October 24, 2000, Stengel filed a second action in the Delaware
Court of Chancery pursuant to Section 145 of the Delaware General Corporation
Law seeking a determination from the Court that he is entitled pursuant to the
Company's by-laws to be advanced his expenses, including attorneys' fees,
incurred by him in connection with the Delaware 225 Action and the Maryland
Action (the "Delaware 145 Action"). The Company and Stengel have each moved for
summary judgment in the Delaware 145 Action. A hearing on these motions is
scheduled for December 22, 2000.
On November 1, 2000, the Company filed with the Maryland Court a Motion for
a Preliminary Injunction requesting that the Court enjoin Stengel and Kramer
from selling, attempting to sell, or otherwise disposing of their shares of the
Company's stock pending resolution of the merits of the Company's claim for
rescission. On November 9, 2000, Stengel filed an Opposition to the Company's
Motion for a Preliminary Injunction. On November 9, 2000, Stengel also filed a
Motion for Preliminary Injunction requesting that the Court (i) order the
Company to instruct its transfer agent to implement and complete all measures
necessary to sell his restricted stock in compliance with Rule 144 and (ii)
enjoin the Company from interfering with or preventing the sale of stock by
Stengel in accordance with Rule 144. The Company's preliminary injunction motion
is scheduled to be heard by the Court on November 20, 2000.
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
---------------------------------------------------
On September 19, 2000, a special meeting of stockholders was held for the
election of four directors. At the meeting, the holders of 26,551,585 shares of
the company's common stock were represented in person or by proxy, constituting
a quorum. The following table indicates the names of the individuals elected and
the number of votes cast for or against and the number of abstentions:
Directors For Against Abstained
--------- --- ------- ---------
Gregory Rotman 26,450,117 0 101,468
Richard Rotman 26,450,117 0 101,468
John Martin 26,450,117 0 101,468
Andrew Pilaro 26,450,117 0 101,468
ITEM 5. OTHER INFORMATION
-----------------
On November 9, 2000, the Company acquired a substantial portion of the
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, and $300,000 worth of the
Company's common stock which is to be registered.
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: November 14, 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 Financial Data Schedule
<PAGE>
