UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 COMMISSION FILE NUMBER 0-28720 PAID, INC. (Exact Name of Small Business Issuer as specified in its Charter) DELAWARE 73-1479833 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 4 Brussels Street, Worcester, Massachusetts 01610 (Address of principal executive offices) (508) 791-6710 (Issuer's Telephone Number, Including Area Code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| As of May 10, 2005, the issuer had outstanding 178,778,629 shares of its Common Stock, par value $.001 per share. Transitional Small Business Disclosure Format Yes |_| No |X| --------------------------------------------------------------------------- Paid, Inc. and Subsidiary Form 10-QSB For the Three Months ended March 31, 2005 TABLE OF CONTENTS Part I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets March 31, 2005 and December 31, 2004 (unaudited) ............. 3 Consolidated Statements of Operations Three months ended March 31, 2005 and 2004 (unaudited) ............................................. 4 Consolidated Statements of Cash Flows Three months ended March 31, 2005 and 2004 (unaudited) ............................................. 5 Consolidated Statements of Changes in Shareholders' Deficit Three months ended March 31, 2005 (unaudited) .................................................. 6 Notes to Consolidated Financial Statements Three months ended March 31, 2005 and 2004 ................... 7-11 Item 2. Management's Discussion and Analysis or Plan of Operation ................................................ 12 Item 3. Controls and Procedures .......................................... 15 Part II - Other Information Item 1. Legal Proceedings ................................................ 15 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...... 15 Item 3. Defaults Upon Senior Securities .................................. 16 Item 4. Submission of Matters to a Vote of Security Holders .............. 16 Item 5. Other Information ................................................ 16 Item 6. Exhibits ......................................................... 16 Signatures ............................................................... 17 2 --------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAID, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS March 31, December 31, ASSETS 2005 2004 ------------ ------------ (Unaudited) (Audited) Current assets: Cash and cash equivalents $ 30,321 $ 43,558 Accounts receivable 34,355 45,739 Inventories, net 607,050 624,082 Prepaid expenses 40,486 125,180 Due from employees 58,681 55,656 Other current assets 9,073 9,073 ------------ ------------ Total current assets 779,966 903,288 Property and equipment, net 227,587 172,706 Other intangible assets, net 493,619 688,872 ------------ ------------ Total assets $ 1,501,172 $ 1,764,866 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Notes payable $ 130,000 $ 290,000 Accounts payable 218,456 164,829 Accrued expenses 1,043,350 991,196 ------------ ------------ Total current liabilities 1,391,806 1,446,025 ------------ ------------ Convertible debt 2,176,191 2,398,021 ------------ ------------ Shareholders' deficit: Common stock, $.001 par value, 350,000,000 shares authorized; 176,254,836 and 173,320,731 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively 176,255 173,321 Additional paid-in capital 22,139,690 21,166,334 Accumulated deficit (24,362,770) (23,383,835) Unearned compensation (20,000) (35,000) ------------ ------------ Total shareholders' deficit (2,066,825) (2,079,180) ------------ ------------ Total liabilities and shareholders' deficit $ 1,501,172 $ 1,764,866 ============ ============ See accompanying notes to consolidated financial statements 3 --------------------------------------------------------------------------- PAID, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, (Unaudited) 2005 2004 ------------- ------------- Revenues $ 859,653 $ 385,982 Cost of revenues 527,509 200,914 ------------- ------------- Gross profit 332,144 185,068 ------------- ------------- Operating expenses: Selling, general, and administrative expenses 1,105,390 760,132 Web site development costs 111,901 147,603 ------------- ------------- Total operating expenses 1,217,291 907,735 ------------- ------------- Loss from operations (885,147) (722,667) ------------- ------------- Other income (expense): Interest expense (93,789) (128,238) Other income 1 44 ------------- ------------- Total other expense, net (93,788) (128,194) ------------- ------------- Loss before income taxes (978,935) (850,861) Provision for income taxes -- -- ------------- ------------- Net loss $ (978,935) $ (850,861) ============= ============= Loss per share (basic and diluted) $ (0.01) $ (0.01) ============= ============= Weighted average shares 174,303,402 159,978,229 ============= ============= See accompanying notes to consolidated financial statements 4 --------------------------------------------------------------------------- PAID INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, (Unaudited) 2005 2004 --------- --------- Operating activities: Net loss $(978,935) $(850,861) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 229,551 293,409 Amortization of unearned compensation 15,000 -- Beneficial conversion feature 30,062 80,131 Common stock issued in payment of professional and consulting fees 282,222 283,639 Issuance of common stock pursuant to exercise of stock options granted to employees for services 94,430 31,734 Common stock issued in payment of interest 8,000 -- Changes in assets and liabilities: Accounts receivable 11,384 (8,362) Inventories 17,032 33,081 Prepaid expenses and other current assets 81,669 (45,135) Accounts payable 53,627 (133,022) Accrued expenses 52,154 109,125 --------- --------- Net cash used in operating activities (103,804) (206,261) --------- --------- Investing activities: Property and equipment additions (89,179) (359) --------- --------- Financing activities: Net proceeds from notes payable -- (15,000) Proceeds from sale of warrants 50,000 -- Proceeds from sale of common stock 30,000 -- Proceeds from convertible debt -- 65,926 Proceeds from assignment of call options 99,610 164,500 Proceeds from exercise of stock options 136 176 --------- --------- Net cash provided by financing activities 179,746 215,602 --------- --------- Net increase (decrease) in cash and cash equivalents (13,237) 8,982 Cash and cash equivalents, beginning 43,558 104,397 --------- --------- Cash and cash equivalents, ending $ 30,321 $ 113,379 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes $ -- $ -- ========= ========= Interest $ -- $ 1,125 ========= ========= See accompanying notes to consolidated financial statements 5 --------------------------------------------------------------------------- PAID, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 2005 (Unaudited) Common stock Additional ------------------------- Paid-in Accumulated Unearned Shares Amount Capital deficit Compensation Total ----------- ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2004 173,320,731 $ 173,321 $ 21,166,334 $(23,383,835) $ (35,000) $ (2,079,180) Common stock issued puruant to exercise of stock options granted to employees for services 365,260 365 94,065 -- -- 94,430 Common stock issued in payment of professional and consulting fees 1,432,511 1,433 280,789 -- -- 282,222 Common stock issued in payment of interest on note payable 38,095 38 7,962 -- -- 8,000 Common stock issued in payment of note payable 761,905 762 159,238 -- -- 160,000 Issuance of common stock 200,000 200 29,800 -- -- 30,000 Stock options exercised 136,364 136 -- -- 136 Common stock to be issued for payment of convertible debt -- -- 251,892 -- -- 251,892 Amortization of unearned compensation -- -- -- -- 15,000 15,000 Proceeds from sale of warrants -- -- 50,000 -- -- 50,000 Proceeds from assignment of call options -- -- 99,610 -- -- 99,610 Net loss -- -- -- (978,935) -- (978,935) ----------- ------------ ------------ ------------ ------------ ------------ Balance, March 31, 2005 176,254,866 $ 176,255 $ 22,139,690 $(24,362,770) $ (20,000) $ (2,066,825) =========== ============ ============ ============ ============ ============ See accompanying notes to consolidated financial statements 6 --------------------------------------------------------------------------- PAID, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 Note 1. Organization and Summary of Significant Accounting Policies Line of business Paid Inc. and subsidiary (the "Company") provides services to celebrities and sports figures, including hosting and management of official web sites and fan-club services. The Company sponsors autograph signing events and other sports marketing services for sports clientele. The Company also operates and maintains an internet portal dedicated to collectibles in a variety of categories. The Company conducts online auctions of its own merchandise and items posted under consignment arrangements by third party sellers, and provides products and services related to online auction management, and e-commerce and web site development, including technology that streamlines back-office and shipping processes for online auctions and e-commerce. General The financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission for interim financial reporting and include all adjustments (consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation). These financial statements have not been audited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations of 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, 2004, which are included in the Company's Form 10-KSB. Principles of consolidation The accompanying consolidated financial statements include the accounts of Paid, Inc. and its wholly-owned subsidiary, Rotman Collectibles, Inc. Inventories Inventories consist of collectible merchandise for sale and are stated at the lower of average cost or market on a first-in, first-out (FIFO) method. When a purchase contains multiple copies of the same item, they are stated at average cost. On a periodic basis management reviews inventories on hand to ascertain if any is slow moving or obsolete. In connection with this review, at March 31, 2005 and December 31, 2004 the Company has provided for reserves totaling $305,000 and $300,000, respectively. Revenue Recognition The Company generates revenue from sales of its purchased inventories, from fees and commissions on sales of merchandise under consignment type arrangements, from web hosting services, from fan club membership fees, from appraisal services and from advertising and promotional services. For sales of merchandise owned and warehoused by the Company, the Company is responsible for conducting the auction, billing the customer, shipping the merchandise to the customer, processing customer returns and collecting accounts receivable. The Company recognizes revenue upon verification of the credit card transaction and shipment of the merchandise, discharging all obligations of the Company with respect to the transaction. 7 --------------------------------------------------------------------------- For sales of merchandise under consignment-type arrangements, the Company takes physical possession of the merchandise, but is not obligated to, and does not take title or ownership of merchandise. When an auction is completed, consigned merchandise that has been sold is shipped upon receipt of payment. The Company recognizes the net commission and service revenues relating to the consigned merchandise upon receipt of the gross sales proceeds and shipment of the merchandise. The Company then releases the net sales proceeds to the Consignor, discharging all obligations of the Company with respect to the transaction. The Company provides web hosting services under two types of arrangements. Revenue is recognized on a monthly basis as the services are provided for those where payment is to be received in cash. Professional athletes' web sites are hosted under arrangements that are settled by the athlete providing a certain number of autographs on merchandise to be sold by the Company. Revenue related to player websites is recognized upon sale of the autographed merchandise. Appraisal revenues are recognized when the appraisal is delivered to the customer. Advertising revenues are recognized at the time the advertisement is initially displayed on the company's web site. Sponsorship revenues are recognized at the time that the related event is conducted. Fan club membership fees are recognized when the member joins and all direct costs associated with the membership have been incurred. Advertising Costs Advertising costs totaling approximately $43,000 in 2005 and $26,000 in 2004 are charged to expense when incurred. Earnings Per Common Share Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to convertible debt and outstanding stock options and warrants. The number of common shares that would be issued upon conversion of the convertible debt would have been 16,666,667 as of March 31, 2005 and 12,413,286 as of March 31, 2004. The number of common shares that would be included in the calculation of outstanding options is determined using the treasury stock method. The assumed conversion of outstanding dilutive stock options and warrants would increase the shares outstanding but would not require an adjustment of income as a result of the conversion. Stock options and warrants applicable to 27,465,054 shares and 25,066,000 shares at March 31, 2005 and 2004, respectively, have been excluded from the computation of diluted earnings per share, as have the common shares that would be issued upon conversion of the convertible debt, because they were antidilutive. Diluted earnings per share have not been presented as a result of the Company's net loss for each period. Website and Software Development Costs The Company accounts for website development costs in accordance with the provisions of EITF 00-2, "Accounting for Web Site Development Costs" ("EITF 00-2"), which requires that costs incurred in planning, maintaining, and operating stages that do not add functionality to the site be charged to operations as incurred. External costs incurred in the site application and infrastructure development stage and graphic development are capitalized. Such capitalized costs are included in "Property and equipment." During the three months ended March 31, 2005 the Company capitalized approximately $87,000 of website development costs. There was no such capitalization during the three months ended March 31, 2004. Note 2. Notes and Loan Payable At March 31, 2005 and December 31, 2004 the Company was obligated on short-term demand notes payable to a related party totaling $130,000 bearing interest at 8%. Interest expense charged to operations in connection with these related party notes totaled approximately $2,600 for each of the three months ended March 31, 2005 and 2004. 8 --------------------------------------------------------------------------- In addition, at December 31, 2004 the Company was obligated on a short-term note payable, bearing interest at 18%, and due on March 1, 2005. In addition the Company issued 125,000 unregistered shares of stock valued at $17,500 as an origination fee which was amortized over the life of the note. This note and all related accrued interest was repaid through the issuance of 800,000 shares of common stock on March 1, 2005. Note 3. Accrued Expenses Accrued expenses are comprised of the following: March 31, December 31, 2005 2004 ---------- ------------ Interest $ 176,611 $ 129,635 Payroll 140,664 141,818 Professional & Consulting fees 361,166 378,210 Consignments 172,782 173,626 Due to K Sports 62,500 62,500 Commissions 40,000 40,000 Other 89,627 65,407 ---------- ---------- $1,043,350 $ 991,196 ========== ========== Note 4. Common Stock Call Option Agreements In connection with a settlement agreement with CSEI, the Company was granted call options for 2,283,565 unregistered common shares held by CSEI at an exercise price of $.001 per share. All remaining call options were assigned during January 2005. During the three months ended March 31, 2005 and 2004 the Company assigned options to purchase 394,565 and 275,000 shares of stock from CSEI to certain individuals in exchange for $99,611 and $164,500 which was added to the paid in capital of the Company. Stock Options and Warrants On February 1, 2001 the Company adopted the 2001 Non-Qualified Stock Option Plan (the "2001 Plan") and has filed Registration Statements on Form S-8 to register 60,000,000 shares of its common stock. Under the 2001 Plan, employees and consultants may elect to receive their gross compensation in the form of options, exercisable at $.001 per share, to acquire the number of shares of the Company's common stock equal to their gross compensation divided by the fair value of the stock on the date of grant. During the three months ended March 31, 2005 the Company granted options for 1,697,771 shares at various dates aggregating $344,652 under this plan. During the three months ended March 31, 2004 the Company granted options for 1,160,951 shares at various dates aggregating $315,373 under this plan. All options granted during these periods were exercised. During the three months ended March 31, 2005, the Company entered into an Agreement and sold a warrant to purchase common stock ("Warrant") to an investor. The investor paid the Company $50,000 as a deposit ("Deposit") for the right to acquire up to 2,000,000 shares of unregistered common stock at any time within one year of the Agreement at $.15 per share. If exercised, the $50,000 will be applied as partial payment of the exercise price. If the Warrants are not exercised within one year the Deposit will be forfeited. The Deposit has been recorded as an addition to Paid in Capital. 9 --------------------------------------------------------------------------- The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, compensation cost has been recognized only to the extent described above. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by FASB Statement No. 123, the Company's net income and earnings per share would have been adjusted to the pro forma amounts indicated below: Three Months Ended March 31, ---------------------------- 2005 2004 --------- --------- Net loss As reported $(978,935) $(850,861) Stock based compensation cost, as reported (net of tax) 15,000 -- Stock based compensation cost that would have been included in the determination of net net income had the fair value method been applied (net of tax) (15,000) (67,650) --------- --------- Pro forma $(978,935) $(918,511) ========= ========= Loss per share (basic and diluted) as reported $ (.01) $ (.01) ========= ========= Proforma loss per share (basic And diluted), as adjusted $ (.01) $ (.01) ========= ========= Note 5. Income Taxes There was no provision for income taxes for the three months ended March 31, 2005 and 2004 due to the Company's net operating loss and its valuation reserve against deferred income taxes. The difference between the provision for income taxes from amounts computed by applying the statutory federal income tax rate of 34% and the Company's effective tax rate is due primarily to the net operating loss incurred by the Company and the valuation reserve against the Company's deferred tax asset. At March 31, 2005, the Company has federal and state net operating loss carry forwards of approximately $19,600,000 available to offset future taxable income. The state carry-forwards will expire intermittently through 2010, while the federal carry forwards will expire intermittently through 2025. Note 6. Convertible Debt Financing As of March 31, 2005 the Company has outstanding $2,250,000 of convertible debt, which is presented net of unamortized beneficial conversion discounts of $73,809. On March 23, 2000, the Company entered into a Securities Purchase Agreement (the "Agreement"), whereby the Company sold an 8% convertible note in the amount of $3,000,000 (the "Series A Note"), due in shares of common stock on March 31, 2002 to Augustine Fund, L.P. (the "Buyer"). The Series A Note, as most recently modified on May 21, 2002, provided for the extensions of the maturity date until March 31, 2005. As of March 31, 2005 this note has been paid in full through a series of conversions to common stock. During the three months ended March 31, 2005 the Company received conversion requests for the remaining $251,892 balance into 1,412,942 common 10 --------------------------------------------------------------------------- shares that were issued on April 19, 2005 at prices ranging from $.149 to $.213 per share. During 2004, 2003, and 2002 $2,748,108 had been converted into 25,314,096 shares of the Company's common stock at conversion prices ranging from $.028 to $.375 per share. The Company entered into a second Loan Agreement, most recently modified on October 31, 2003, whereby it issued an 8% convertible note in the amount of $2,250,000, due November 7, 2005 (the "Series B Note") to Buyer. The Series B Note is convertible into common stock at a conversion price equal to the lesser of: (1) $.25 per share, or (2) seventy-three percent (73%) of the average of the closing bid price for the common stock for the five (5) trading days immediately preceding the conversion date. Based upon advances through March 31, 2005 totaling $2,250,000, had the Buyer converted the series B Note at issuance, Buyer would have received $3,082,193 in aggregate value of the company's common stock upon conversion of the convertible note. As a result, in accordance with EITF 00-27, the intrinsic value of the beneficial conversion feature of $832,193 is being charged to interest expense over the term of the related note. The beneficial conversion feature that was charged to interest expense totaled $30,062 and $80,131 for the three months ended March 31, 2005 and 2004, respectively. The total beneficial conversion discount related to this note has been recorded as an increase in additional paid in capital and the unamortized portion as a reduction in the related note. In addition, the Company entered into a Registration Rights Agreement whereby the Company agreed to file a Registration Statement with the Securities and Exchange Commission (SEC) within sixty (60) days of a request from the Buyer (Filing Date), covering the common stock to be issued upon conversion of the Series B Note. If this Registration Statement is not declared effective by the SEC within sixty (60) days of the filing date the conversion percentage shall decrease by two percent (2%) for each month that the Registration Statement is not declared effective. The modified Series B Note requires that principal and interest be payable in shares of common stock, or cash, at the discretion of the Company, and provides that any fees or expenses related to any registration of the common stock will be borne equally by the Company and the Buyer. Note 7. Related party transactions During the three months ended March 31, 2004 the Company purchased approximately $40,000 of memorabilia for sale from Steven Rotman, the father of Richard and Greg Rotman. There were no such purchases during the three months ended March 31, 2005. Note 8. Issuance of Common Stock During the three months ended March 31, 2005 the Company issued 1,432,511 shares of common stock in connection with the payment of approximately $282,000 of professional and consulting fees. During the three months ended March 31, 2004 the Company issued 1,017,137 shares of common stock in connection with the payment of approximately $284,000 of professional and consulting fees. Note 9. Subsequent Event On May 9, 2005, the Company entered into a Settlement Agreement and Mutual Release with Leslie Rotman ("Seller") to settle all outstanding disputes regarding the value paid and the value received in the 2001 transaction in which Seller, Rotman Collectibles, Inc., and the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Rotman Collectibles, Inc., a Massachusetts corporation, was merged into the Company's Delaware subsidiary, now named Rotman Collectibles, Inc. Seller is the mother of Gregory Rotman, President of the Company, and Richard Rotman, CFO/Vice President/Secretary of the Company. To settle any possible differences or disputes between the value paid and the value received, Seller has delivered 2,000,000 shares of the Company's common stock into escrow, with a fair market value of $600,000 and has granted the Company an option to purchase the shares for $.001 per share. The option is assignable by the Company and expires one year from the date of grant. 11 --------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Overview Our new celebrity services offer famous people official web sites and fan-club services including e-commerce storefronts, articles, polls, message boards, contests, biographies and custom features to attract tens of thousands of visitors daily. Our innovative products and services are utilized in online auction management, e-commerce and web site development. AuctionInc. provides auction management tools and services to sellers and buyers. The technology is based on our patent-pending process that streamlines back-office and shipping processes for online auctions and e-commerce. Our autograph signing events, working in conjunction with our new sports agent marketing services, known as K Sports, have created more services and opportunities for our sports clientele. Rotman Auction leverages the relationships from celebrity services and K Sports to sell products through distribution and retail outlets. We purchase and sell collectibles and memorabilia through our Rotman Auction brand. Rotman Auction is an eBay Platinum Powerseller that sells thousands of items each week on eBay and provides consignment services, authentication and public and private autograph events. We also build and maintain large database-driven portals across a broad array of industries, including CollectingChannel.com, which is home to our online appraisal service, Ask the Appraiser. Critical Accounting Policies Our significant accounting policies are more fully described in Note 1 to our financial statements. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management; as a result, they are subject to an inherent degree of uncertainty. In applying these policies, our management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. Those estimates and judgments are based upon our historical experience, the terms of existing contracts, our observance of trends in the industry, information that we obtain from our customers and outside sources, and on various other assumptions that we believe to be reasonable and appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies include: Inventories: Inventories are stated at the lower of average cost or market on a first-in, first-out method. On a periodic basis we review inventories on hand to ascertain if any is slow moving or obsolete. In connection with this review, we establish reserves based upon management's experience and assessment of current product demand. Property and Equipment and Intangible Assets: Property and equipment and intangible assets are stated at cost. Depreciation and amortization are computed over estimated useful lives that are reviewed periodically. In connection with this review we consider changes in the economic environment, technological advances, and management's assessment of future revenue potential and a review of the estimated useful lives of the various assets. Results of Operations The following discussion compares the Company's results of operations for the three months ended March 31, 2005 with those for the three months ended March 31, 2004. The Company's financial statements and notes thereto included elsewhere in this quarterly report contain detailed information that should be referred to in conjunction with the following discussion. Revenues. For the three months ended March 31, 2005, revenues were $859,700, 54% of which is attributable to sales of the Company's own product, including products obtained through live autograph signings, and fees from buyers and sellers through the Rotman Auction operations. Gross sales of the Company's own product were $467,100. Fan club membership and related merchandise sales revenues were $268,000, 31% of gross revenues, Sports marketing revenues were $121,100, 14% of gross revenues, and advertising and web hosting fees were $3,500 or less than 1% of gross revenues during the three months ended March 31, 2005. The Company's 2005 revenues represent an increase of $473,700, or 123%, from the three months ended March 31, 2004, in which revenues were $386,000. For the three months ended March 31, 2004, sales of Company 12 --------------------------------------------------------------------------- owned product through the Rotman Auction operations were $383,100, or 99% of gross sales, and advertising and web hosting fees were $2,900, or 1% of gross revenues. The reason for the increase in revenues was higher sales of Company owned product of approximately $84,000 from the same period in 2004 and $389,100 of revenues from our recently established sports marketing and fan club membership services. Gross profit from Company owned product sales for the year ended March 31, 2005 was approximately $90,800, $91,400 less than in 2004. Since gross margin percentages on Company owned product dropped from 48% to 19%, and sales of Company owned product were $84,000 higher in the three months ended March 31, 2005, the Company produced $92,400 fewer gross margin dollars in 2005. The increase in sales is attributable to listing higher priced goods in 2005 than in 2004. The drop in gross profit margin is attributable to a continuing decline in traffic on eBay, resulting in less competitive bidding. In addition, during the fourth quarter of 2004 the Company acquired the operating assets of K Sports & Entertainment LLC ("K Sports"), a sports marketing business and entered into a contract to host and manage the fan club website for a major performing artist. Revenues from these two sources accounted for $389,100 of revenues in 2005. Operating Expenses. Total operating expenses for the three months ended March 31, 2005 were $1,217,300, compared to $907,700 for the corresponding period in 2004, an increase of $309,600. Sales, general and administrative ("SG&A") expenses for the three months ended March 31, 2005 were $1,105,400, compared to $760,100 for the three months ended March 31, 2004. The increase of $345,300 in SG&A costs includes increases in payroll of $150,000, advertising of $16,500, professional fees of $118,800, and other costs of $90,800 offset by a decrease in depreciation and amortization of $31,000 as older assets become fully depreciated and amortized. The additional payroll and other costs are attributable to additional personnel, professional fees, travel, and shipping and postage related to the integration and development of K Sports and fan club services. Costs associated with planning, maintaining and operating our web sites for the three months ended March 31, 2005 decreased $35,700 from 2004. This decrease is due primarily to lower depreciation as certain website development costs became fully depreciated in 2005. Interest Expense. For the three months ended March 31, 2005, the Company incurred interest charges of approximately $93,800 principally associated with one convertible note, compared to interest charges of $128,200 for the corresponding period in 2004. The decrease of $34,500 is attributable to lower amortization of beneficial conversion features in 2005 offset by interest on short term debt. Net Loss. The Company realized a net loss for the three months ended March 31, 2005 of $979,000, or $.01 per share, as compared to a loss of $850,900, or $.01 per share for the three months ended March 31, 2004. Inflation. The Company believes that inflation has not had a material effect on its results of operations. Assets At March 31, 2005, total assets of the Company were $1,501,200, compared to $1,764,900 at December 31, 2004. The decrease was primarily due to depreciation and amortization totaling $229,600. 13 --------------------------------------------------------------------------- Operating Cash Flows A summarized reconciliation of the Company's net losses to cash used in operating activities for the three months ended March 31, 2005 compared to March 31, 2004, is as follows: 2005 2004 --------- --------- Net loss $(978,900) $(850,900) Depreciation and amortization 229,600 293,400 Amortization of unearned compensation 15,000 -- Amortization of beneficial conversion discount and debt discount 30,100 80,100 Common stock issued in payment of services 376,500 315,400 Common stock issued in payment of interest 8,000 -- Changes in current assets and liabilities 215,900 (44,300) --------- --------- Net cash used in operating activities $(103,800) $(206,300) ========= ========= Working Capital and Liquidity The Company had cash and cash equivalents of $30,300 at March 31, 2005, compared to $43,600 at December 31, 2004. The Company had a $612,800 deficit in working capital at March 31, 2005, compared to a working capital deficit of $542,700 at December 31, 2004. At March 31, 2005 current liabilities were $1,391,800 compared to $1,446,000 at December 31, 2004. During the three months ended March 31, 2005 current liabilities decreased primarily due retirement of short-term debt offset by an increase in accounts payable and routine accruals. As discussed in greater detail in Note 6 to the Financial Statements, the Company has outstanding convertible debt held by Augustine Fund, L.P. The Series A Note, in the original principal amount of $3,000,000, has completely retired as of March 31, 2005 through the conversion of principal into common stock. The Series B Note has a principal amount outstanding as of March 31, 2005 of $2,250,000. The Company's independent auditors have issued a going concern opinion on the Company's consolidated financial statements for the year ended December 31, 2004. The Company needs an infusion of $600,000 to $800,000 of additional capital to fund anticipated operating costs over the next 12 months. Management anticipates growth in revenues and gross profits from its celebrity services products and websites; including memberships, fan experiences, ticketing, appearances, and merchandise sales. In addition, the Company hosts a suite of management tools and enhanced shipping calculator solutions for small ecommerce enterprises. These services, coupled with sales of movie posters, both from inventory and on consignment, and web hosting are expected to increase revenues and result in higher gross profit. Subject to the discussion below, Management believes that the Company has sufficient commitments to fund operations during the next 12 months. These commitments include call options for approximately 2,000,000 shares of Company common stock valued at approximately $600,000. Finally, Management believes that it has identified several potential funding sources for additional financing. Management believes that these plans should result in obtaining sufficient operating cash through the next 12 months. However, there can be no assurance that the above mentioned potential financing can be completed on terms reasonably acceptable to the Company. 14 --------------------------------------------------------------------------- Forward Looking Statements This Quarterly Report on Form 10-QSB contains certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) regarding the Company and its business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements in this report. Additionally, statements concerning future matters such as the development of new services, technology enhancements, purchase of equipment, credit arrangements, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements. Although forward-looking statements in this quarterly report reflect the good faith judgment of the Company's management, such statements can only be based on facts and factors currently known by the Company. Consequently, forward-looking statements are inherently subject to risks, contingencies and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in this report. Although the Company believes that its plans, intentions and expectations reflected in these forward-looking statements are reasonable, the Company can give no assurance that its plans, intentions or expectations will be achieved. For a more complete discussion of these risk factors, see Exhibit 99, "Risk Factors", in the Company's Form 10-KSB for the fiscal year ended December 31, 2004. For example, the Company's ability to achieve positive cash flow and to become profitable may be adversely affected as a result of a number of factors that could thwart its efforts. These factors include the Company's inability to successfully implement the Company's business and revenue model, the collectibles community not accepting the services the Company offers, higher costs than anticipated, the Company's inability to sell its products and services to a sufficient number of customers, the introduction of competing products by others, the Company's failure to attract sufficient interest in and traffic to its sites, the Company's inability to complete development of its sites, the failure of the Company's operating systems, and the Company's inability to increase its revenues as rapidly as anticipated. If the Company is not profitable, it will not be able to continue its business operations. ITEM 3. CONTROLS AND PROCEDURES The Company's management, including the President of the Company and the Chief Financial Officer of the Company, has evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time period specified by the Securities and Exchange Commission's rules and forms, and is accumulated and communicated to the Company's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) During the first quarter of 2005, the Company received conversion requests from Augustine Fund, L.P. for $251,892 of the March 23, 2000 convertible note, representing the remaining balance on the $3,000,000 convertible note, into 1,412,942 shares of common stock of the Company. The shares were issued on April 19, 2005 at prices ranging from $.149 to $.213 per share. The shares are freely tradable pursuant to Rule 144 of the Securities Act of 1933. Augustine Fund, L.P. is an accredited investor that represented that it acquired the convertible note for 15 --------------------------------------------------------------------------- its own account. The issuance of the securities is exempt from registration under Section 4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder. The Company did not issue any shares of its common stock to Augustine Fund, L.P., for interest due pursuant to the 8% convertible note in the principal amount of $2,250,000 issued by the Company to the Augustine Fund, L.P. on November 7, 2001. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION On May 9, 2005, the Company entered into a Settlement Agreement and Mutual Release with Leslie Rotman ("Seller"). Seller, Rotman Collectibles, Inc., and the Company had entered into an Agreement and Plan of Merger (the "Merger Agreement") on October 23, 2001, pursuant to which Rotman Collectibles, Inc., a Massachusetts corporation, was merged into the Company's Delaware subsidiary, now named Rotman Collectibles, Inc. on November 7, 2001. Seller is the mother of Gregory Rotman, President of the Company, and Richard Rotman, CFO/Vice President/Secretary of the Company. As consideration for the merger, Seller was issued a 6% Convertible Promissory Note equal to $1,000,000. The note was paid in full through the issuance of stock during the first quarter of 2002. Prior to entering into the Merger Agreement, the Company had engaged an appraiser to appraise the assets of Rotman Collectibles, which consisted primarily of movie posters. The appraised value exceeded $2,000,000. Based on its current sales projections, the Company does not expect to obtain revenues equal to the appraised value. To settle any possible differences or disputes between the value paid and the value received, Seller has delivered 2,000,000 shares of the Company's common stock into escrow, with a fair market value of $600,000, based on a closing bid price of the Company's common stock of $.30 as of Friday, May 6, 2005, and has granted the Company an option to purchase the shares for $.001 per share, which option is assignable by the Company in whole or in part. The Settlement Agreement and Mutual Release, dated May 9, 2005, is attached hereto as Exhibit 10.1. The Escrow Agreement, dated May 9, 2005, is attached hereto as Exhibit 10.2. This information is provided in lieu of a Form 8-K filing with respect to Item 1.01, which would otherwise be required to be filed with respect to this information as of May 13, 2005, which is the date of this filing. ITEM 6. EXHIBITS 10.1 Settlement Agreement and Mutual Release by and between Leslie Rotman and the Company, dated May 9, 2005. 10.2 Escrow Agreement, by and among Leslie Rotman, the Company, and Olde Monmouth Stock Transfer Co., Inc., as Escrow Agent, dated May 9, 2005. 31.1 CEO Certification required under Section 302 of Sarbanes-Oxley Act of 2002 31.2 CFO Certification required under Section 302 of Sarbanes-Oxley Act of 2002 32 CEO and CFO Certification required under Section 906 of Sarbanes-Oxley Act of 2002 16 --------------------------------------------------------------------------- In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 13, 2005 PAID, INC. Registrant /s/ Gregory Rotman -------------------------------- Gregory Rotman, President /s/ Richard Rotman -------------------------------- Richard Rotman, Chief Financial Officer, Vice President and Secretary 17 --------------------------------------------------------------------------- LIST OF EXHIBITS Exhibit No. Description ------------------------- 10.1 Settlement Agreement and Mutual Release by and between Leslie Rotman and the Company, dated May 9, 2005. 10.2 Escrow Agreement, by and among Leslie Rotman, the Company, and Olde Monmouth Stock Transfer Co., Inc., as Escrow Agent, dated May 9, 2005. 31.1 CEO Certification required under Section 302 of Sarbanes-Oxley Act of 2002 31.2 CFO Certification required under Section 302 of Sarbanes-Oxley Act of 2002 32 CEO and CFO Certification required under Section 906 of Sarbanes-Oxley Act of 2002 18 EX-10.1 2 d63858_ex10-1.txt SETTLEMENT AGREEMENT EXHIBIT 10.1 SETTLEMENT AGREEMENT AND MUTUAL RELEASE THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE (the "Agreement") is made and entered into this 9th day of May, 2005, by and between PAID, Inc., a Delaware corporation ("PAID") and Leslie Rotman ("Seller"). Recitals: A. PAID, formerly known as Sales Online Direct, Inc., and Seller are parties to an Agreement and Plan of Merger ("Merger Agreement") dated October 23, 2001, whereby Rotman Collectibles, Inc., a Massachusetts corporation engaged in the movie poster business ("Target"), was merged with and into a subsidiary of PAID. As consideration for such merger, Seller received a 6% Convertible Promissory Note equal to One Million Dollars ($1,000,000) (the "Note"). The principal and interest due under the Note was convertible into shares of common stock of PAID. Seller has converted the entire amount due under the Note into shares of Common Stock of PAID ("Common Stock"). PAID does not owe any additional amount under the Note. B. Pursuant to the Merger Agreement, Seller and PAID engaged an appraiser to appraise the total retail value of certain movie posters (the "Posters"), which were the primary asset of Target. The appraisal provided that the total retail value of the Posters was $2,233,685.18 (the "Appraised Value"). C. The Company anticipates, based on its current history of sales, that the posters will sell for an amount that is less than the Appraised Value; D. Seller contends that the appraisal of the Posters was made independently, based on knowledge at the time, and that if the Posters sold for a lower retail value, it is due to timing of the sales and a general decline in retail sales over the past several years. E. The parties desire to fully settle and resolve all differences and disputes that have been or could have been asserted by the parties arising out of the Merger Agreement or the claims made by PAID, upon the terms and conditions set forth herein. AGREEMENT: IN CONSIDERATION of the recitals, mutual promises, obligations and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and PAID agree as follows: 1. SETTLEMENT. 1.1 Payment of Cash Consideration or Requirement to Escrow Shares. Seller shall pay to PAID, Six Hundred Thousand Dollars ($600,000) in cash, delivered as of the date hereof (the "Cash Consideration"), or, in lieu thereof, in Seller's sole discretion, Seller shall deliver to the Company, in the manner set forth in Section 1.2 hereof, options to purchase 2,000,000 shares of Common Stock of PAID (the "Shares") pursuant to the terms of the Escrow Agreement attached hereto (the "Escrow Agreement"), in which case PAID and Seller shall execute the Escrow Agreement as of the date hereof. 1 --------------------------------------------------------------------------- 1.2 PAID Call Option. In the event that Seller does not pay the Cash Consideration as of the date hereof, Seller hereby grants to PAID or its designee the right, commencing as of the date hereof, to purchase from Seller 2,000,000 shares of Common Stock (as adjusted for any stock split, reverse stock split, stock dividend, reclassification, recapitalization, share exchange, reorganization, or other similar event or transaction) at a purchase price per share of the share's par value, which is $.001, subject only to such other terms agreeable to PAID. PAID may freely transfer or assign all or part of the option. The number of shares is based on a closing bid price as of May 6, 2005 of $.30. This option shall terminate one year from the date hereof. In the event the option expires, the Escrow Agent shall be instructed by PAID and Seller to return the shares to Seller or its designee, at PAID's expense. The purchase price for the shares acquired pursuant to this option shall be paid in immediately available funds to an account designated by Seller. 2. RELEASES. 2.1 Except with respect to the obligations created by or arising out of this Agreement, PAID, for itself and its officers, directors, employees, consultants, attorneys, accountants, agents, affiliates, successors, representatives and assigns, hereby releases and fully discharges Seller, its officers, directors, employees, consultants, attorneys, accountants, agents, affiliates, successors, representatives and assigns from any and all claims, demands, damages, debts, liabilities, accounts, obligations, costs, expenses, liens, attorneys' fees, actions and causes of action of every kind or nature whatsoever, at law or in equity, known or unknown, suspected or unsuspected, that now exist or may arise in the future, arising out of or in any way related to the Merger Agreement or the transactions contemplated therein. 2.2 Except with respect to the obligations created by or arising out of this Agreement, Seller, for itself and its officers, directors, employees, consultants, attorneys, accountants, agents, affiliates, successors, representatives and assigns, hereby releases and fully discharges PAID, its officers, directors, employees, consultants, attorneys, accountants, agents, affiliates, successors, representatives and assigns from any and all claims, demands, damages, debts, liabilities, accounts, obligations, costs, expenses, liens, attorneys' fees, actions and causes of action of every kind or nature whatsoever, at law or in equity, known or unknown, suspected or unsuspected, that now exist or may arise in the future, arising out of or in any way related to the Merger Agreement or the transactions contemplated therein. 3. MISCELLANEOUS. 3.1 No Admissions. It is understood that this Agreement is a full compromise of disputed claims and that neither this Agreement nor its terms shall be construed as an admission of liability, fault or wrongdoing of any nature by any party. 3.2 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective employees, agents, representatives, successors and assigns. 3.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, exclusive of any conflicts of law principle which would apply the substantive law of another jurisdiction. 3.4. Entire Agreement. This Agreement constitutes the entire understanding and agreement of the parties and supersedes all prior agreements or understandings, written or oral, between the parties with respect to this specific subject matter, including without limitation the Merger Agreement and the Note. 2 --------------------------------------------------------------------------- 3.5. Attorneys' Fees. Each party hereto shall bear its own attorneys' fees and costs with respect to the claims and matters referenced herein, and other than as set forth herein, no party shall have any obligation to the attorneys of the other party, or to pay any costs incurred by the other party. 3.6 Amendment; Waiver. Any amendment to this Agreement may be only made upon the written consent of both parties. Any waiver of any provision hereof may be made in writing signed by the party waiving such party's right or condition to performance hereunder. 3.7 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be an original and all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. /s/ Leslie Rotman -------------------------------- Leslie Rotman PAID, INC. By: /s/ Gregory Rotman --------------------------------- Name: Gregory Rotman Title: President 3 EX-10.2 3 d63858_ex10-2.txt ESCROW AGREEMENT EXHIBIT 10.2 ESCROW AGREEMENT THIS ESCROW AGREEMENT (this "Agreement") is dated as of May 9, 2005, by and among Paid, Inc., a corporation organized under the laws of the State of Delaware (the "Company"), Leslie Rotman ("Seller"), and Olde Monmouth Stock Transfer Co., Inc., as escrow agent (the "Escrow Agent"). W I T N E S S E T H: WHEREAS, the Company, formerly known as Sales Online Direct, Inc., and Seller are parties to an Agreement and Plan of Merger ("Merger Agreement") dated October 23, 2001, whereby Rotman Collectibles, Inc., a Massachusetts corporation engaged in the movie poster business ("Target"), was merged with and into a subsidiary of the Company. As consideration for such merger, Seller received a 6% Convertible Promissory Note equal to One Million Dollars ($1,000,000) (the "Note"). The principal and interest due under the Note was convertible into shares of common stock of the Company. Seller has converted the entire amount due under the Note into shares of Common Stock of the Company ("Common Stock"). The Company does not owe any additional amount under the Note. WHEREAS, pursuant to the Merger Agreement, Seller and the Company engaged an appraiser to appraise the total retail value of certain movie posters (the "Posters"), which were the primary asset of Target. The appraisal provided that the total retail value of the Posters was $2,233,685.18 (the "Appraised Value"). WHEREAS, the Company anticipates that the posters will sell for an amount that is less than the Appraised Value; WHEREAS, Seller contends that the appraisal of the Posters was made independently, based on knowledge at the time, and that the Posters sold for a lower retail value because, in part, of timing of the sales and a general economic decline. WHEREAS, the parties entered into a Settlement Agreement and Mutual Release ("Settlement Agreement and Mutual Release") to resolve all differences related to the Merger Agreement; WHEREAS, as part of the settlement terms, Seller agreed to either pay cash consideration equal to Six Hundred Thousand Dollars ($600,000) ("Cash Consideration"), or to grant to the Company certain option rights and, with respect thereto, is required to deposit 2,000,000 shares of Common Stock of the Company beneficially owned by Seller into escrow (the "Escrow Shares"); WHEREAS, the Escrow Agent is willing to act hereunder on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and obligations set forth below, the parties hereto hereby agree as follows: 1 --------------------------------------------------------------------------- I. ESCROW DEPOSIT As of the date hereof, if Seller has not paid the Cash Consideration to the Company, Seller shall promptly deposit the Escrow Shares with the Escrow Agent, to be held in escrow with, and released by, the Escrow Agent, in accordance with this Agreement. II. MAINTENANCE OF ESCROW; RIGHTS WITH RESPECT TO ESCROW SHARES A. The Escrow Agent shall hold the Escrow Shares in certificate form or in a brokerage account, as the Escrow Agent deems appropriate to fulfill its duties hereunder, in either case registered in the name of the Escrow Agent as escrow agent under this Agreement. Seller (or her assignees) shall be the beneficial owner of the Escrow Shares unless and until any Escrow Shares are released to the Company in accordance with this Agreement. B. While held in escrow, Seller (or her assignees) shall have the right to direct the voting of the Escrow Shares and the right to receive any cash dividends paid with respect to the Escrow Shares. Seller shall have no right to assign or otherwise transfer the Escrow Shares in any manner other than upon operation of law or court decree, in which case any and all assignees or transferees shall be bound by the terms of this Agreement without any action of such assignee or transferee. C. In the event that any stock or other securities become issuable with respect to any Escrow Shares, or any stock split, share exchange or other reclassification or recapitalization shall occur with respect to any Escrow Shares, the stock or other securities issued in connection therewith shall be deposited into escrow with the Escrow Agent and held in accordance with this Agreement, and such stock or other securities shall be deemed included within the meaning of the term "Escrow Shares" as used herein. III. RELEASE OF ESCROW SHARES Escrow Shares shall be released from escrow at any time or from time to time, in whole or in part, on or after the date hereof, solely upon written instructions of the Company's President, or, if none, any officer authorized by the Board of Directors of the Company, to the Escrow Agent, to such individual or entity, and upon such terms, as may be reasonably requested by the Company, unless otherwise ordered by a court of competent jurisdiction. Notwithstanding the foregoing, the Escrow Agent shall release the Escrow Shares to Seller only upon written instructions of Seller (or her assignees) at any time after one year from the date hereof. IV. TRANSFERS OF BENEFICIAL INTEREST PRIOR TO RELEASE FROM ESCROW A. Prohibition on Transfers. No Escrow Shares may be sold short, made the subject of put options, or otherwise beneficially sold, transferred, pledged or otherwise alienated or encumbered while held in escrow. B. No Pledge of Right to Receive Escrow Shares. Seller shall not have any right to grant to a lender or any other person a security interest in Seller's right to receive 2 --------------------------------------------------------------------------- Escrow Shares until released to Seller under this Agreement. Seller represents and warrants that the Escrow Shares are not currently subject to a security interest or pledge. V. ESCROW AGENT The acceptance by the Escrow Agent of its duties hereunder is subject to the following terms and conditions, which the parties to this Agreement hereby agree shall govern and control with respect to the rights, duties, liabilities and immunities of the Escrow Agent: A. Validity of Communications. The Escrow Agent shall not be responsible or liable in any manner whatever for the sufficiency, correctness, genuineness or validity of any communication given to the Escrow Agent. B. Genuineness. The Escrow Agent shall be protected in acting upon any written notice, certificate, instruction, request or other paper or document believed by the Escrow Agent to be genuine and to have been signed or presented by the proper party or parties. C. Limitation on Liability. The Escrow Agent shall not be liable for any act done hereunder except in the case of the Escrow Agent's willful misconduct or bad faith. Any release of Escrow Shares by the Escrow Agent pursuant to this Agreement shall fully discharge the Escrow Agent's duties with respect to such shares, and the Escrow Agent shall have no further obligation with respect to such shares. D. No Investigation. The Escrow Agent shall not be obligated to investigate the correctness or accuracy of any document or to determine whether or not the signatures contained in such documents are genuine or to require documentation or evidence substantiating any such document or signature. E. Duties. The Escrow Agent shall have no duties as Escrow Agent except those that are expressly set forth herein or in any modification or amendment hereof; provided, however, that no such modification or amendment hereof shall affect the Escrow Agent's duties unless the Escrow Agent shall have given written consent thereto. F. Controversies. If any controversy arises between two or more of the parties hereto, or between any of the parties hereto and any person not a party hereto, as to whether or not or to whom the Escrow Agent shall deliver any Escrow Shares or as to any other matter arising out of or relating to this Escrow Agreement, the Escrow Agent shall not be required to determine the same and need not make any delivery of the Escrow Shares in dispute or any portion thereof but may retain the same until the rights of the parties to the dispute shall have been finally determined by agreement, by final arbitral decision or by final judgment of a court of competent jurisdiction after all appeals have been finally determined (or the time for further appeals has expired without an appeal having been made). The Escrow Agent shall deliver, in accordance with the terms hereof, that portion of the Escrow Shares not subject to such dispute. The Escrow Agent shall deliver that portion of the Escrow Shares covered by such agreement or final decision or order within five days after the Escrow Agent receives a copy thereof. The Escrow Agent shall assume that no such controversy has arisen unless and until it receives written notice from the Company, Seller or an interested third party that such controversy has arisen, 3 --------------------------------------------------------------------------- which refers specifically to this Agreement and identifies the adverse claimants to the controversy. G. Indemnification. The Company shall indemnify the Escrow Agent for, and to hold the Escrow Agent harmless from and against, any loss incurred without gross negligence, willful misconduct, or bad faith on the Escrow Agent's part, arising out of or in connection with the administration of this Agreement, including the costs and expenses of defending the Escrow Agent against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. This indemnification shall not apply to a direct claim against the Escrow Agent by the Company or Seller alleging in good faith a breach of this Agreement by the Escrow Agent, which claim results in a final non-appealable judgment against the Escrow Agent with respect to such claim. H. Interpleader. In the event of any dispute as to the nature of the rights or obligations of the Seller, the Company or the Escrow Agent hereunder, the Escrow Agent may at any time or from time to time interplead and/or deposit all or any part of the Escrow Shares with or to a court of competent jurisdiction, in accordance with the procedural rules thereof. The Escrow Agent shall give notice of such action to the Company and Seller. Upon such interpleader or deposit, the Escrow Agent shall immediately be relieved and discharged from all further obligations and responsibilities hereunder with respect to the Escrow Shares deposited, including the decision to interplead or deposit such Escrow Shares. VI. TERMINATION This Agreement shall terminate upon the release from escrow in accordance with this Agreement of all of the Escrow Shares, provided that the provisions of this Agreement for the benefit of the Escrow Agent shall survive any termination of this Agreement. VII. MISCELLANEOUS A. Amendment; Third Party Interests. This Agreement may be modified or amended by a written instrument executed by the Company and the Escrow Agent and, as long as Seller owns a beneficial interest in any Escrow Shares, by Seller. If Seller ceases to be the beneficial owner of any Escrow Shares other than through the Company's assignment or exercise of any call option related to such Escrow Shares, modification or amendment of this Agreement also shall require the written consent of any permitted assignee or transferee. B. Notices. All communications required or permitted to be given under this Agreement to any party hereto shall be sent by first class mail, return receipt requested, to the following addresses and facsimile numbers, or such other addresses as the parties may specify by giving written notice: If to the Company: 4 Brussels St. Worcester, Massachusetts 01610 Attention: Greg Rotman, CEO with copies to: Bowditch & Dewey, LLP 311 Main Street P.O. Box 15156 Worcester, MA 01615-0156 Attention: Michael A. Refolo, Esq. 4 --------------------------------------------------------------------------- If to Seller: Leslie Rotman c/o David Bunker, Esq. Gould & Ettenberg, P.C. 370 Main Street Worcester, MA 01608 If to the Escrow Agent: Olde Monmouth Stock Transfer Co., Inc. 200 Memorial Parkway Atlantic Highlands, New Jersey 07716 Attention: Matt Troster C. Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns; provided that the Escrow Agent shall not assign its duties under this Agreement and Seller shall not assign any right or interest in any Escrow Shares except in accordance with the provisions of this Agreement. D. Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the Commonwealth of Massachusetts, excluding any conflicts of law principle that would apply the law of another jurisdiction. E. Counterparts and Facsimile. This Agreement may be executed in two or more counterparts, each of which shall be an original, and all of which together shall constitute one and the same agreement. This Agreement may be executed by facsimile transmission, which shall be deemed an original for all purposes. 5 --------------------------------------------------------------------------- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PAID, INC. By: /s/ Gregory Rotman ------------------------------------- Gregory Rotman, President /s/ Leslie Rotman ---------------------------------------- Leslie Rotman ESCROW AGENT: OLDE MONMOUTH STOCK TRANSFER CO., INC. By: /S/ John Anthony Troster ------------------------------------- John Anthony Troster, President 6 EX-31.1 4 d63858_ex31-1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION I, Gregory Rotman, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Paid, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. /s/ Gregory Rotman Date: May 13, 2005 ------------------------------ Gregory Rotman, President EX-31.2 5 d63858_ex31-2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, Richard Rotman, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Paid, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. /s/ Richard Rotman Date: May 13, 2005 ----------------------------------- Richard Rotman, Chief Financial Officer EX-32 6 d63858_ex32.txt CERTIFICATIONS EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Paid, Inc. (the "Company") on Form 10-QSB for the period ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in their respective capacities as capacity as President and CEO of the Company and as CFO of the Company, certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gregory Rotman - ---------------------------- Gregory Rotman President and CEO May 13, 2005 /s/ Richard Rotman - ----------------------------- Richard Rotman Chief Financial Officer May 13, 2005