N
OTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
September 30, 2017
Note 1. Organization and Significant Accounting
Policies
PAID,
Inc. (“PAID”, the “Company”,
“we”, “us”, “our”) has
developed AuctionInc, which is a suite of online shipping and tax
management tools assisting businesses with e-commerce storefronts,
shipping solutions, tax calculation, inventory management, and
auction processing. The product has tools to assist with other
aspects of the fulfillment process, but the main purpose of the
product is to provide accurate shipping and tax calculations and
packaging algorithms that provide customers with the best possible
shipping and tax solutions.
BeerRun
Software is a brewery management and Alcohol and Tobacco Tax and
Trade Bureau tax reporting software. Small craft brewers can
utilize the product to manage brewery schedules, inventory,
packaging, sales and purchasing. Tax reporting can be processed
with a single click and is fully customizable by state or province.
The software is designed to integrate with QuickBooks accounting
platforms by using our powerful sync engine. We currently offer two
versions of the software BeerRun and BeerRun Light which excludes
some of the enhanced features of BeerRun without disrupting the
core functionality of the software. Additional features include
Brewpad and Kegmaster and can be added on to the base product.
Craft brewing is on the rise in North America and we feel that
there is a large potential to grow this portion of our
business.
SpiritRun is a
product of BeerRun and is designed specifically for distilleries.
This product was recently enhanced, and we feel that with
additional marketing and visibility in the distillery industry,
SpiritRun has the right core resources to be a valuable tool in
distilleries around the United States.
ShipTime Inc. has
developed a SaaS based application, which focuses on the small and
medium business segments. This offering allows members to quote,
process, generate labels, dispatch and track courier and LTL
shipments all from a single interface. The application provides
customers with a choice of today’s leading couriers and
freight carriers all with discounted pricing allowing members to
save on every shipment. ShipTime can also be integrated into
on-line shopping carts to facilitate sales via ecommerce. We
actively sell directly to small and medium businesses and through
long standing partnerships with selected associations throughout
Canada.
General Presentation and Basis of Consolidated Financial
Statements
The
accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”), and to the rules and regulations of the
Securities and Exchange Commission ("SEC") regarding interim
financial reporting. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial
statements and should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto
included in the Annual Report on Form 10-K for the year ended
December 31, 2016, that was filed on March 31, 2017.
In the
opinion of management, the Company has prepared the accompanying
unaudited condensed consolidated financial statements on the same
basis as its audited consolidated financial statements, and these
unaudited condensed consolidated financial statements include all
adjustments, consisting of normal recurring adjustments necessary
for a fair presentation of the results of the interim periods
presented. The operating results for the interim periods presented
are not necessarily indicative of the results expected for the full
year 2017.
On
November 9, 2016, the Company’s board of directors agreed to
effectuate a reverse split immediately followed by a forward split.
The process was completed with FINRA on January 23, 2017. As a
result of the split, every ten shares of common stock outstanding
prior to the reverse split were consolidated into one share,
reducing the number of common shares outstanding on the effective
date from 10,989,608 to 1,098,960. All share and per share
information in this Form 10-Q has been retroactively adjusted to
reflect the reverse stock split.
Going Concern and Management's Plan
The
accompanying unaudited condensed consolidated financial statements
have been prepared on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. The Company has continued to incur
losses, although it has taken significant steps to reduce them. For
the nine months ended September 30, 2017, the Company reported a
net loss of $594,302. The Company has an accumulated deficit of
$55,911,801 and has a working capital deficit of $(1,343,259) as of
September 30, 2017. These factors raise substantial doubt about the
Company’s ability to continue as a going
concern.
Management feels
that the addition of ShipTime’s services will return a
valuable impact on the Company’s growth in the near future.
The positive cash flow from operations is a significant indicator
of our successful transition to the new shipping services. In
addition to the existing services provided, ShipTime will launch
products that are complementary to the current offering of
AuctionInc, BeerRun and SpiritRun. Combined, the Company believes
that all segments of the operations will benefit from
ShipTime.
Although there can
be no assurances, the Company believes that the above management
plan will be sufficient to meet the Company's working capital
requirements through the end of 2017 and will have a positive
impact on the Company for 2017 and future years.
Principles of Consolidation
The
consolidated financial statements include the accounts of PAID,
Inc. and its wholly owned subsidiaries, PAID Run, LLC and ShipTime
Canada, Inc. All intercompany accounts and transactions have been
eliminated.
Foreign Currency
The currencies of ShipTime, the Company’s international
subsidiary, are in Canadian dollars. Foreign currency denominated
assets and liabilities are translated into U.S. dollars using the
exchange rates in effect at September 30, 2017. Results of
operations and cash flows are translated using the average exchange
rates throughout the period. The effect of exchange rate
fluctuations on translation of assets and liabilities is included
as a component of shareholders’ equity in accumulated other
comprehensive income (loss).
During the quarter
ended September 30, 2017, management of the Company determined that
the intangible assets, goodwill and deferred tax liability
generated from the ShipTime acquisition were not properly
translated into U.S. dollars as of March 31, 2017 and June 30,
2017. As the translation error did not have an impact on the
condensed consolidated statements of operations, including no
impact on revenues, net loss, net loss available to common
stockholders or net loss per share, management of the Company
concluded that it was not considered material to the condensed
consolidated financial statements as of and for the periods ended
March 31, 2017 and June 30, 2017. The net impact would have been an
increase in total assets, total liabilities and shareholders’
equity of $127,042, $10,270, and $116,772, respectively, as of
March 31, 2017 and $540,351, $44,184, and $496,167, respectively,
as of June 30, 2017. In addition, the net impact on the foreign
currency translation adjustment for the three months ended March
31, 2017 was $116,772 and the six months ended June 30, 2017 was
$496,167. The condensed consolidated statements of comprehensive
income (loss) will be recast to effect the above changes in future
filings.
Long-Lived Assets
The
Company reviews the carrying values of its long-lived assets for
possible impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the
expected future cash flow from the use of the asset and its
eventual disposition is less than the carrying amount of the asset,
an impairment loss is recognized and measured using the fair value
of the related asset. No impairment charges were incurred during
the nine months ended September 30, 2017 and 2016. There can be no
assurance, however, that market conditions will not change or
demand for the Company’s services will continue, which could
result in impairment of long-lived assets in the
future.
Revenue Recognition
The
Company generates revenue principally from fees for coordinating
shipping services, sales of shipping calculator subscriptions,
brewery management software subscriptions, and client
services.
The
Company recognizes revenues in accordance with the FASB ASC Topic
605. Accordingly, the Company recognizes revenues when there is
persuasive evidence that an arrangement exists, product delivery
and acceptance have occurred, the sales price is fixed or
determinable, and collectability of the resulting receivable is
reasonably assured.
ShipTime recognizes
revenues primarily from fees for shipping coordination services.
Customers use an online tool to calculate shipping and generate a
shipping label. The majority of the transactions are paid via
credit card when the label is generated. Revenues are recognized
when the customer completes the online transaction.
For
shipping calculator revenues and brewery management software
revenues the Company recognizes subscription revenue on a monthly
basis. Shipping calculator customers’ renewal dates are
based on their date of installation and registration of the
shipping calculator line of products. The payments for shipping
calculator services are made via credit card for the month
preceding the service and are recorded as deferred revenues until
the service has been provided. Brewery management software
subscribers are billed on a calendar month at the first of the
month with payments processed via credit card for the month
following.
Client
services revenues include web development and design, creative
services, marketing services and general business consulting
services. For contracts that are of a short duration and fixed
price, revenue is recognized when there are no significant
obligations and upon acceptance by the customer of the completed
project. Services that are performed on a time and material basis
are recognized as the related services are performed.
Earnings (Loss) Per Common Share
Basic
earnings (loss) per share represent income (loss) available to
common stockholders divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings
(loss) 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 (loss) that would
result from the assumed issuance. The potential common shares that
may be issued by the Company relate to outstanding stock options
and have been excluded from the computation of diluted earnings
(loss) per share because they would reduce the reported loss per
share and therefore have an anti-dilutive effect.
For the three
months ended September 30, 2017 and 2016 and the nine months ended
September 30, 2017 and 2016, there were approximately 61,000 and
32,000 and 67,000 and 34,000, respectively, dilutive shares that
were excluded from the diluted earnings (loss) per share as their
effect would have been antidilutive for the periods then
ended.
The
Company computes its loss applicable to common stockholders by
subtracting dividends on preferred stock, including undeclared or
unpaid dividends if cumulative, and any deemed dividends or
discounts on redeemed preferred stock from its reported net loss
and reports the same on the face of the condensed consolidated
statements of operations.
Segment Reporting
The
Company reports information about segments of its business in its
annual consolidated financial statements and reports selected
segment information in its quarterly reports issued to
shareholders. The Company also reports on its entity-wide
disclosures about the products and services it provides and reports
revenues and its major customers. The Company’s four
reportable segments are managed separately based on fundamental
differences in their operations. At September 30, 2017, the Company
operated in the following four reportable segments:
a.
Client
services
b.
Shipping
calculator services
c.
Brewery management
software
d.
Shipping
coordination and label generation services
The
Company evaluates performance and allocates resources based upon
operating income. The accounting policies of the reportable
segments are the same as those described in this summary of
significant accounting policies. The Company’s chief
operating decision makers are the Chief Executive Officer and Chief
Financial Officer.
The
following table compares total revenue for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
Client
services$
|
3,639
|
$
2,275
|
$
20,192
|
$
12,937
|
|
Shipping calculator
services
|
46,990
|
46,141
|
153,023
|
135,862
|
|
Brewery management
software
|
78,211
|
78,830
|
235,026
|
242,210
|
|
Shipping
coordination and label generation services
|
1,820,975
|
-
|
5,057,566
|
-
|
|
Total
revenues
|
$
1,949,815
|
$
127,246
|
$
5,465,807
|
$
391,009
|
The
following table compares total loss from operations for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
Client
services$
|
2,898
|
$
3,404
|
$
15,499
|
$
11,971
|
|
Shipping calculator
services
|
(356,028
)
|
(110,655
)
|
(855,778
)
|
(442,629
)
|
|
Brewery management
software
|
14,462
|
10,629
|
27,028
|
24,262
|
|
Shipping
coordination and label generation services
|
112,227
|
-
|
240,891
|
-
|
|
Total loss from
operations
|
$
(226,391
)
|
$
(96,622
)
|
$
(572,360
)
|
$
(406,396
)
|
Recent Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-02, Leases, which requires the lease
rights and obligations arising from lease contracts, including
existing and new arrangements, to be recognized as assets and
liabilities on the balance sheet. ASU 2016-02 is effective for
reporting periods beginning after December 15, 2018 with early
adoption permitted. While the Company is still evaluating ASU
2016-02, the Company expects the adoption of ASU 2016-02 to have a
material effect on the Company’s financial condition due to
the recognition of the lease rights and obligations as assets and
liabilities. The Company does not expect ASU 2016-02 to have a
material effect on the Company’s results of operations and
cash flows.
In
January 2016, the FASB issued ASU 2016-01, Financial Instruments:
Recognition and Measurement of Financial Assets and Financial
Liabilities, which addresses certain aspects of recognition,
measurement, presentation and disclosure of financial statements.
This guidance will be effective in the first quarter of fiscal year
2019 and early adoption is not permitted. The Company is currently
evaluating the impact that this guidance will have on its
consolidated financial statements.
In May
2014, the FASB issued ASU 2014-09, Revenue from Contracts with
Customers. This updated guidance supersedes the current revenue
recognition guidance, including industry-specific guidance. The
updated guidance introduces a five-step model to achieve its core
principal of the entity recognizing revenue to depict the transfer
of goods or services to customers at an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. The updated guidance is
effective for interim and annual periods beginning after December
15, 2016, and early adoption is not permitted. In July 2015, the
FASB decided to delay the effective date of ASU 2014-09 until
December 15, 2017. The FASB also agreed to allow entities to choose
to adopt the standard as of the original effective date. The
Company is currently evaluating which transition method it will
adopt and the expected impact of the updated guidance, but does not
believe the adoption of the updated guidance will have a
significant impact on its consolidated financial
statements.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations
(Topic 805): Clarifying the definition of a business
.
The amendments in this updated
guidance clarify the definition of a business with the objective of
adding guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals)
of businesses. The guidance in this update is effective for fiscal
years beginning after December 15, 2017, and interim periods within
those years.
In
January 2017, the FASB also issued ASU 2017-04, Intangibles -
Goodwill and other (Topic 350): Simplifying the test for goodwill
impairment. The amendments in this Update remove the second step of
the current goodwill impairment test. An entity will apply a
one-step quantitative test and record the amount of goodwill
impairment as the excess of a reporting unit's carrying amount over
its fair value, not to exceed the total amount of goodwill
allocated to the reporting unit. The new guidance does not amend
the optional qualitative assessment of goodwill impairment. This
guidance is effective for impairment tests in fiscal years
beginning after December 15, 2019.
Note 2. Accrued Expenses
Accrued
expenses are comprised of the following:
|
|
September
30,
2017
(unaudited)
|
December 31,
2016
(audited)
|
|
Payroll and related
costs
|
$
1,538
|
$
3,136
|
|
Royalties
|
51,838
|
51,838
|
|
Stock price
guarantee
|
883,439
|
867,403
|
|
Other
|
162,225
|
55,514
|
|
Total
|
$
1,099,040
|
$
977,891
|
Note 3. Acquisitions and Intangible Assets
The
Company holds several patents for the real-time calculation of
shipping costs for items purchased through online auctions using a
zip code as a destination location indicator. It includes shipping
charge calculations across multiple carriers and accounts for
additional characteristics of the item being shipped, such as
weight, special packaging or handling, and insurance costs. These
patents help facilitate rapid and accurate estimation of shipping
costs across multiple shipping carriers and also include real-time
calculation of shipping.
On
October 7, 2015, the Company, through a newly formed limited
liability company named PAID Run, LLC, entered into an asset
purchase agreement to purchase assets related to BeerRun Software
and SpiritRun Software and related intellectual property. The
purchase price and additional development for these assets was
$297,500, which include all of the client lists, along with all
rights, benefits and privileges associated with the software and
intellectual property, associated contracts, and books and
records.
On
December 30, 2016, the Company completed a merger with ShipTime
Inc. and its subsidiary to acquire assets related to the
technology, client base and other intellectual property. The
Company engaged an outside independent third party valuation firm
to assist in establishing a value for the ShipTime
Inc.
At
September 30, 2017 and December 31, 2016, intangible assets
consisted of the following:
|
|
|
|
|
Patents
|
$
16,000
|
$
16,000
|
|
Software
|
83,750
|
83,750
|
|
Trade
Name
|
797,000
|
797,000
|
|
Technology
|
509,000
|
509,000
|
|
Client list /
relationship
|
4,687,750
|
4,687,750
|
|
|
(745,936
)
|
(136,729
)
|
|
|
5,347,564
|
5,956,771
|
|
Effect of exchange
rate changes
|
389,132
|
-
|
|
|
$
5,736,696
|
$
5,956,771
|
Amortization
expense of intangible assets for all subsidiaries for the nine
months ended September 30, 2017, and 2016 was $609,206 and $75,081,
respectively.
Goodwill
Of the
total estimated purchase price, $9,989,685 was allocated to
goodwill and is attributable to expected synergies between the
combined companies, including the ability for the combined
companies to estimate and process shipping calculations and support
eCommerce shopping cart platforms in addition to the acquired
workforce. Goodwill represents the excess of the purchase price of
the acquired business over the estimated fair value of the
underlying net tangible and intangible assets acquired. In the
event the Company determines that the value of goodwill has become
impaired, it will incur an accounting charge for the amount of the
impairment during the fiscal quarter in which the determination is
made. None of the goodwill is expected to be deductible for income
tax purposes.
For the
nine months ended September 30, 2017, goodwill activity was as
follows:
|
|
For the Nine
Months
Ended
September
30,
|
|
|
|
|
Beginning
Balance
|
$
9,989,685
|
|
Effect of exchange
rate changes
|
741,021
|
|
Ending
Balance
|
$
10,730,706
|
Pro Forma Financial Information
The
following table presents the Company’s unaudited pro forma
results (including ShipTime) for the three and nine month periods
ended September 30, 2016 as though the companies had been combined
as of the beginning of the periods presented.
The pro
forma information is presented for informational purposes only and
is not indicative of the results of operations that would have been
achieved if the acquisition had taken place at the beginning of
each period presented, nor is it indicative of results of
operations which may occur in the future. The unaudited pro forma
results presented include amortization charges for intangible
assets and eliminations of intercompany transactions.
|
|
For
the Three Months
Ended September
30,
2016
|
For
the Nine Months
Ended September
30,
2016
|
|
Total
revenues
|
$
1,609,400
|
$
4,580,962
|
|
Net
loss
|
$
(247,239
)
|
$
(768,011
)
|
Note 4. Commitments and Contingencies
Notes Payable
In
October 2016, the Company entered into a $30,000 note payable with
a financial institution. The term of the note is for a period of
one year and is payable in 10 monthly installments of $2,632 at an
interest rate of 3%. The note was paid in full as of September 30,
2017.
In August 2017 the
Company entered into a $120,000 CAD ($95,931 USD) note payable with
a shareholder to repurchase common and preferred shares (see Note
5). The term of the note is for a period of one year and is payable
in 12 monthly installments of $10,327.97 CAD at an interest rate of
3%. The balance due on the note payable as of September 30, 2017
was $100,495 CAD ($80,338 USD)
.
Due to Related Parties
Prior to the
Company’s acquisition of ShipTime, two notes were issued. One
note was issued at an 8% interest rate and was due to mature in
December 2017. During the quarter ended September 30, 2017, the
Company repaid the note in full. A second note was issued in 2014
with a 6% interest rate and was due to mature in June 2014. In June
2017, the Company agreed make monthly payments of $5,000 CAD for
seven months followed by monthly payments of $15,000 CAD with one
final payment in May 2018. As of September 30, 2017, the note
balance is $65,445.
Stock Price Guarantee
In
connection with the Company’s advance royalties with a
client, the Company guaranteed that shares of common stock
would sell for at least $60.00 per share as adjusted for the
reverse stock split. If the shares are not at the required
$60.00 per share when they are sold, the Company has the option of
issuing additional shares at their fair value or making cash
payments for the difference between the guaranteed price per share
and the fair value of the stock. As of September 30, 2017 and
December 31, 2016, the stock price guarantee was $883,439 and
$867,403, respectively, as the Company’s stock price was
below $60.00 per share at September 30, 2017 and December 31, 2016,
although some or all of the stock may already be sold and no longer
subject to a guaranty and any required payment would be disputed by
the Company. For the nine months ended September 30, 2017 and 2016,
the Company recorded an unrealized (loss)/gain on stock price
guarantee of ($16,036) and $28,541, respectively.
Legal Matters
In the
normal course of business, the Company periodically becomes
involved in litigation. As of September 30, 2017, in the opinion of
management, the Company had no pending litigation that would have a
material adverse effect on the Company's consolidated financial
position, results of operations, or cash flows.
Indemnities and Guarantees
The
Company has made certain indemnities and guarantees, under which it
may be required to make payments to a guaranteed or indemnified
party, in relation to certain actions or transactions. The Company
indemnifies its directors, officers, employees and agents, as
permitted under the laws of the State of Delaware. In connection
with its facility leases, the Company has agreed to indemnify its
lessors for certain claims arising from the use of the facilities.
The duration of the guarantees and indemnities varies, and is
generally tied to the life of the agreements. These guarantees and
indemnities do not provide for any limitation of the maximum
potential future payments the Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any
payments for these obligations and, therefore, no liabilities have
been recorded for these indemnities and guarantees in the
accompanying consolidated balance sheets.
Note 5. Shareholders’ Equity
Preferred Stock
On
December 19, 2016, the Company filed an amendment to its
Certificate of Incorporation to authorize the issuance of
20,000,000 shares of blank-check preferred stock at $.001 par
value, of which 3,825,000 shares have been reserved for future
issuance. The Board of Directors will be authorized to fix the
designations, rights, preferences, powers and limitations of each
series of the preferred stock.
The Company filed a
Certificate of Designations effective on December 30, 2016 which
sets aside 5,000,000 shares of Preferred Stock as Series A
Preferred Stock. The Series A Preferred Stock holders have no
voting rights and have an aggregate liquidation value of
approximately $11,430,863 and $11,581,000 as of September 30, 2017
and December 31, 2017. The Series A Preferred Stock also carries a
coupon payment obligation of 1.5% per year calculated by taking the
30-day average closing price for an equal number of shares of
common stock for the month immediately preceding the coupon payment
date, which is made annually. Payout of the coupon may be made out
of existing cash or in shares of Series A Preferred stock of the
Company. The Series A Preferred Stock have no voting or conversion
rights. If purchased, redeemed, or otherwise acquired (other than
conversion), the preferred stock may be
reissued.
Common Stock
In
November 2016, the majority shareholders approved an amendment to
the Company’s Certificate of Incorporation to increase the
Company’s authorized shares of common stock from 1,100,000 to
25,000,000, to issue up to 2,000,000 shares of blank check
preferred stock and to make effective, a reverse stock split at a
range of 1 for 500 through 1 for 3,000 immediately followed by a
forward split of the outstanding common stock at an exchange rate
of 50 for 1 through 300 for 1 to reduce the number of authorized
shares of the Company’s common stock, subject to the Board of
Directors’ discretion.
In
January 2017, the Company completed a reverse split of 1-for 3,000
immediately followed by a forward split of 300 for 1. As a result
of the split every ten shares of common stock outstanding were
consolidated into one share, reducing the number of common shares
outstanding on the effective date from 10,989,608 to 1,098,960. All
share and per share information on this Form 10-Q has been
retroactively adjusted to reflect the reverse stock
split.
The Company has
authorized and reserved for future issuance 550,000 shares of
common stock and 3,825,000 shares of preferred stock with respect
to the exchangeable shares issued as a result of the
merger.
Share Repurchase
In August 2017, the
Company entered into an agreement to repurchase 157 exchangeable
shares of ShipTime Canada common stock. Based on the amalgamation
agreement, each exchangeable share exchanges into 334 preferred
shares and 48 common shares, totaling 52,438 preferred shares and
7,536 common shares. The shares were repurchased through a note
payable of $120,000 CAD ($95,931 USD) (see Note 4). The discount on
the repurchase of the preferred stock was $1.12 and is recorded in
Company’s accumulated deficit and was added to the net loss
available to common stockholders in accordance with ASC
260-10-S99-2. The repurchase of the common shares was recorded at
its cost of $1.90.
Share-based Incentive Plans
During the period
ended September 30, 2017, the Company had three stock option plans
that include both incentive and non-qualified options to be granted
to certain eligible employees, non-employee directors, or
consultants of the Company. The Company issued 37,500 stock options
to board members during the three months ended September 30, 2017.
The options vested immediately and expire if not exercised within
ten years, the exercise price is $3.30 per share. As a result of
the issuance, the Company recorded a share-based compensation
expense of $118,572.
Note 6. Subsequent Events
The
Company has evaluated subsequent events through the filing date of
this Form 10-Q, and have determined that no subsequent events have
occurred that would require recognition in the condensed
consolidated financial statements or disclosure in the notes
thereto, other than as disclosed herein.