UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2013
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________________ to ________________
Commission file number 000-50494
usell.com, Inc.
(Exact name of registrant as specified in its charter)
Delaware | | 98-0412432 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
33 East 33rd Street, Suite 1101 New York, New York | | 10016 |
(Address of principal executive offices) | | (Zip Code) |
(212) 213-6805
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class | | Outstanding as of November 14, 2013 |
Common Stock, $0.0001 par value per share | | 74,123,575 shares |
usell.com, Inc. and Subsidiaries
TABLE OF CONTENTS
| | | Page |
| PART I - FINANCIAL INFORMATION | | |
| | | |
Item 1. | Financial Statements. | | 3 |
| | | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | | 21 |
| | | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | | 26 |
| | | |
Item 4. | Controls and Procedures. | | 26 |
| | | |
| PART II - OTHER INFORMATION | | |
| | | |
Item 1. | Legal Proceedings. | | 26 |
| | | |
Item 1A. | Risk Factors. | | 26 |
| | | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | | 20 |
| | | |
Item 3. | Defaults Upon Senior Securities. | | 27 |
| | | |
Item 4. | Mine Safety Disclosures. | | 27 |
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Item 5. | Other Information. | | 27 |
| | | |
Item 6. | Exhibits. | | 27 |
| | | |
SIGNATURES | | | 28 |
Explanatory Note: In our Consumer Electronics Referral business, we offer access to our innovative database to independent third parties engaged in the business of buying used electronics. While as customary in the business we would sometimes refer to these buyers as “partners,” they are not legally considered partners. Our use of that word does not create a legal partnership.
PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements. |
usell.com, Inc. and Subsidiaries
Consolidated Balance Sheets
| | September 30, 2013 | | December 31, 2012 | |
| | (Unaudited) | | | | |
Assets | | | | | | | |
Current Assets: | | | | | | | |
Cash and cash equivalents | | $ | 842,442 | | $ | 1,604,587 | |
Accounts receivable - net | | | 162,752 | | | 154,481 | |
Other receivables | | | 19,524 | | | 269 | |
Prepaid expenses and other current assets | | | 125,442 | | | 88,705 | |
Total Current Assets | | | 1,150,160 | | | 1,848,042 | |
| | | | | | | |
Property and Equipment - net | | | 8,334 | | | 6,506 | |
| | | | | | | |
Other Assets: | | | | | | | |
Intangible assets - net | | | 747,078 | | | 624,153 | |
Other assets | | | 34,965 | | | 34,875 | |
Total Other Assets | | | 782,043 | | | 659,028 | |
| | | | | | | |
Total Assets | | $ | 1,940,537 | | $ | 2,513,576 | |
| | | | | | | |
Liabilities and Stockholders' (Deficit) Equity | | | | | | | |
Current Liabilities: | | | | | | | |
Accounts payable | | $ | 632,486 | | $ | 634,083 | |
Accrued expenses | | | 665,092 | | | 553,749 | |
Deferred revenue | | | 37,345 | | | 2,309 | |
Derivative liability | | | 935,343 | | | 153,776 | |
Total Current Liabilities | | | 2,270,266 | | | 1,343,917 | |
| | | | | | | |
Convertible notes payable, net of discount | | | 118,218 | | | - | |
Total Liabilities | | | 2,388,484 | | | 1,343,917 | |
| | | | | | | |
Stockholders' (Deficit) Equity: | | | | | | | |
Convertible Series A preferred stock, ($0.0001 par value, 10,000,000 shares authorized, 0 and 177,906 shares issued and outstanding, respectively) | | | - | | | 18 | |
Convertible Series B preferred stock, ($0.0001 value per share, 4,000,000 shares authorized, 976,250 and 2,076,250 shares issued and outstanding, respectively) Liquidation preference $976,250 and $2,076,250, respectively | | | 98 | | | 208 | |
Series D preferred stock, ($0.0001 value per share, 350,000 shares authorized, 0 and 350,000 shares issued and outstanding, respectively) Liquidation preference $0 and $3,500,000, respectively | | | - | | | 35 | |
Common stock, ($0.0001 par value, 650,000,000 shares authorized, 75,870,870 and 52,646,233 shares issued, respectively, and 72,485,870 and 47,146,233 shares outstanding, respectively) | | | 7,250 | | | 4,715 | |
Additional paid in capital | | | 43,556,052 | | | 41,655,960 | |
Accumulated deficit | | | (44,011,347) | | | (40,491,277) | |
Total Stockholders' (Deficit) Equity | | | (447,947) | | | 1,169,659 | |
| | | | | | | |
Total Liabilities and Stockholders' (Deficit) Equity | | $ | 1,940,537 | | $ | 2,513,576 | |
See accompanying notes to unaudited interim condensed consolidated financial statements.
usell.com, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2013 | | | 2012 | | 2013 | | | 2012 | |
Revenue | | $ | 1,636,386 | | $ | 729,297 | | $ | 3,907,124 | | $ | 1,565,336 | |
| | | | | | | | | | | | | |
Costs and Expenses | | | | | | | | | | | | | |
Cost of revenue | | | 133,244 | | | 68,804 | | | 304,408 | | | 147,720 | |
Sales and marketing expenses | | | 1,316,086 | | | 779,681 | | | 3,271,162 | | | 1,787,711 | |
General and administrative expenses | | | 900,806 | | | 2,329,799 | | | 3,792,413 | | | 4,831,967 | |
Total operating expenses | | | 2,350,136 | | | 3,178,284 | | | 7,367,983 | | | 6,767,398 | |
Loss from Operations | | | (713,750) | | | (2,448,987) | | | (3,460,859) | | | (5,202,062) | |
| | | | | | | | | | | | | |
Other Income (Expense): | | | | | | | | | | | | | |
Interest income | | | 391 | | | 1,694 | | | 1,616 | | | 5,749 | |
Interest expense | | | (101,734) | | | (26) | | | (102,257) | | | (398,751) | |
Gain on settlements of accounts payable | | | - | | | 11,424 | | | 4,772 | | | 190,203 | |
Derivative expense - convertible notes payable | | | (28,134) | | | - | | | (28,134) | | | - | |
Change in fair value of derivative liability - embedded conversion feature of convertible Series A preferred stock | | | - | | | 2,043,790 | | | 47,876 | | | (2,266,358) | |
| | | | | | | | | | | | | |
Change in fair value of derivative liability - convertible notes payable | | | 16,916 | | | - | | | 16,916 | | | 14,329 | |
Total Other Income (Expense) - Net | | | (112,561) | | | 2,056,882 | | | (59,211) | | | (2,454,828) | |
Net Loss | | $ | (826,311) | | $ | (392,105) | | $ | (3,520,070) | | $ | (7,656,890) | |
| | | | | | | | | | | | | |
Basic and Diluted Loss per Common Share: | | | | | | | | | | | | | |
Net loss | | $ | (826,311) | | $ | (392,105) | | $ | (3,520,070) | | $ | (7,656,890) | |
Preferred stock dividends - Series A | | | - | | | - | | | - | | | (222,996) | |
Net loss available to common stockholders | | $ | (826,311) | | $ | (392,105) | | $ | (3,520,070) | | $ | (7,879,886) | |
| | | | | | | | | | | | | |
Net loss per common share - basic and diluted | | $ | (0.01) | | $ | (0.01) | | $ | (0.05) | | $ | (0.39) | |
| | | | | | | | | | | | | |
Weighted average number of common shares outstanding during the period - basic and diluted | | | 72,098,805 | | | 41,061,091 | | | 65,794,740 | | | 20,077,174 | |
See accompanying notes to unaudited interim condensed consolidated financial statements.
usell.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| | Nine Months Ended September 30, | |
| | 2013 | | 2012 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | |
Net loss | | $ | (3,520,070) | | $ | (7,656,890) | |
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: | | | | | | | |
Depreciation and amortization | | | 262,481 | | | 101,829 | |
(Recovery of) Provision for bad debt | | | (48,299) | | | 68,877 | |
Stock based compensation expense | | | 1,818,577 | | | 2,935,361 | |
Amortization of debt issue costs into interest expense | | | - | | | 2,858 | |
Amortization of debt discount into interest expense | | | 92,343 | | | 395,470 | |
Lease termination expense | | | 9,000 | | | - | |
Gain on settlement of accounts payable | | | (4,772) | | | (190,203) | |
Derivative expense pertaining to convertible notes payable | | | 28,134 | | | - | |
Change in fair value of derivative liability - embedded conversion feature of convertible Series A preferred stock issuance | | | (47,876) | | | 2,266,358 | |
Change in fair value of derivative liability - convertible notes payable | | | (16,916) | | | (14,329) | |
Changes in operating assets and liabilities: | | | | | | | |
Decrease (increase) in: | | | | | | | |
Accounts receivable | | | (15,271) | | | (172,909) | |
Other receivables | | | 36,044 | | | - | |
Inventory | | | - | | | 16,876 | |
Prepaid and other current assets | | | (58,750) | | | (24,079) | |
Increase (decrease) in: | | | | | | | |
Accounts payable | | | 3,175 | | | (324,485) | |
Accrued expenses | | | 111,343 | | | 53,586 | |
Deferred revenues | | | 35,036 | | | - | |
Net Cash and Cash Equivalents Used In Operating Activities | | | (1,315,821) | | | (2,541,680) | |
| | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | |
Website development costs | | | (381,589) | | | (177,030) | |
Cash paid to purchase property and equipment | | | (5,645) | | | (6,900) | |
Net Cash and Cash Equivalents Used In Investing Activities | | | (387,234) | | | (183,930) | |
See accompanying notes to unaudited interim condensed consolidated financial statements.
usell.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Continued)
(Unaudited)
| | Nine Months Ended September 30, | |
| | 2013 | | 2012 | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | |
Principal repayments toward note payable | | | - | | | (35,000) | |
Cash paid for debt issue costs | | | (9,090) | | | - | |
Proceeds from convertible notes payable | | | 950,000 | | | - | |
Proceeds from sale of convertible Series A preferred stock | | | - | | | 3,361,000 | |
Cash paid for direct offering costs of Series A preferred stock | | | - | | | (6,713) | |
Net Cash and Cash Equivalents Provided By Financing Activities | | | 940,910 | | | 3,319,287 | |
| | | | | | | |
Net (Decrease) Increase in Cash and Cash Equivalents | | | (762,145) | | | 593,677 | |
Cash and Cash Equivalents - Beginning of Period | | | 1,604,587 | | | 1,791,623 | |
| | | | | | | |
Cash and Cash Equivalents - End of Period | | $ | 842,442 | | $ | 2,385,300 | |
| | | | | | | |
SUPPLEMENTARY CASH FLOW INFORMATION: | | | | | | | |
Cash Paid During the Period for: | | | | | | | |
Interest | | $ | - | | $ | - | |
Taxes | | $ | - | | $ | - | |
| | | | | | | |
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | |
Debt discount recorded on convertible notes payable | | $ | 924,125 | | $ | - | |
Derivative liability reclassified to Additional Paid in Capital upon conversion of Series A preferred stock | | $ | 105,900 | | $ | 2,338,136 | |
Common stock issued for services | | $ | 23,625 | | $ | 610,400 | |
Equipment acquired through issuance of Series D Preferred Stock in connection with acquisition - related party | | $ | - | | $ | 500,000 | |
Derivative liability arising from convertible Series A preferred stock | | $ | - | | $ | 222,996 | |
Derivative liability reclassified to Additional Paid in Capital upon conversion of Convertible Notes Payable | | $ | - | | $ | 15,508 | |
Warrants issued in connection with settlement of accounts payable | | $ | - | | $ | 24,999 | |
Conversion of Convertible Notes Payable to Series A preferred stock | | $ | - | | $ | 800,000 | |
| | | | | | | |
Accrued interest on Convertible Notes Payable reclassified to Additional Paid in Capital | | $ | - | | $ | 1,770 | |
Sale of stock for subscriptions receivable | | $ | - | | $ | 50,000 | |
Conversion of Series A preferred stock into common stock | | $ | 18 | | $ | 683 | |
Conversion of Series B preferred stock into common stock | | $ | 110 | | $ | 55 | |
Conversion of Series C preferred stock into common stock | | $ | - | | $ | 1 | |
Conversion of Series D preferred stock into common stock | | $ | 35 | | $ | - | |
See accompanying notes to unaudited interim condensed consolidated financial statements.
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
Note 1 - Organization and Business
usell.com, Inc., through our wholly-owned subsidiaries (collectively, “usell,” “Company,” “we,” “us,” and/or “our”), helps individuals (“Consumers”) monetize household items, such as small consumer electronics, that they are no longer using.
From the inception of our business in 2008 through 2010, substantially all of our revenue came from the procurement, aggregation and resale of precious metals. In mid-2010, we diversified our business by introducing a service, similar to our precious metals business, for cellular phones. We stopped offering to purchase precious metals in the United Kingdom and European markets during the fourth quarter of 2010 and in Canada and the United States in early 2011. By mid-2011 we further adapted our business strategy and stopped offering to purchase cellular phones directly, although through the end of 2012 we continued to service packs coming in from prior precious metals and cellular phone advertising campaigns.
We utilize consumer oriented advertising efforts, such as direct response television commercials and various forms of internet advertising, to attract individuals to our website. Our services are free for Consumers and we partner with electronics buying companies to offer them a cost-efficient customer acquisition model.
Note 2 Going Concern
As reflected in the accompanying financial statements, the Company had a net loss of approximately $3,520,000 and net cash and cash equivalents used in operations of approximately $1,316,000 for the nine months ended September 30, 2013. The Company has an accumulated deficit of approximately $44,011,000 and a working capital deficit of approximately $1,120,000 at September 30, 2013. The Company does not yet have a history of financial stability. Historically, the principal source of liquidity has been the issuance of debt and equity securities. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on management's plans, which include further implementation of its business plan and continuing to raise funds through debt and/or equity raises.
The accompanying 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. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3 - Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Certain information or 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 the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is our opinion, however, that the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.
The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC, which contains the audited financial statements and notes thereto, together with Management’s Discussion and Analysis, for the years ended December 31, 2012 and 2011. The financial information as of December 31, 2012 is derived from the audited financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2012. The interim results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 or for any future interim periods.
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
Principles of Consolidation
The accompanying unaudited interim condensed consolidated financial statements include the accounts of uSell and its wholly-owned subsidiaries. All significant intracompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets at liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the unaudited interim condensed consolidated financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from our estimates.
Reclassification
We have reclassified certain prior period amounts to conform to the current period presentation. These reclassifications have no effect on the financial position or on the results of operations or cash flows for the periods presented.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of 90 days or less when purchased are considered to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. Cash equivalents generally consist of money market accounts.
We minimize credit risk associated with cash by periodically evaluating the credit quality of our primary financial institution. At times, our cash may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. On September 30, 2013 and December 31, 2012, our deposits exceeded the FDIC limit by approximately $519,000 and $1.4 million, respectively.
Accounts Receivable and Other Receivables
Accounts receivable and other receivables represent obligations from our customers. We periodically evaluate the collectability of our accounts receivable and other receivables and consider the need to record an allowance for doubtful accounts based upon historical collection experience and specific information. Actual amounts could vary from the recorded estimates. Our allowance for doubtful accounts was $51,400 and $100,299 at September 30, 2013 and December 31, 2012, respectively.
Intangible Assets
Our intangible assets pertain to capitalized software costs and our website domain address. We capitalize costs related to software developed or obtained for internal use when management commits to funding the project, the project completes the preliminary project stage and the software will be used to perform the function intended. Capitalization of such costs ceases when the project is substantially complete and ready for its intended use.
We periodically review the carrying values of our long-lived assets when events or changes in circumstances indicate that it is more likely than not that their carrying values may exceed their fair values, and record an impairment charge when considered necessary. When circumstances indicate that an impairment of value may have occurred, we test such assets for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of such assets and their eventual disposition to their carrying amounts. If the undiscounted future cash flows are less that the carrying amount of the asset, an impairment loss, measured as the excess of the carrying amount of the asset over its estimated fair value, is recognized. Fair value, for purposes of calculating impairment, is measured based on estimated future cash flows, discounted at a market rate of interest.
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
Convertible Instruments
We review all of our convertible instruments for the existence of an embedded conversion feature which may require bifurcation, if certain criteria are met. These criteria include circumstances in which:
| a) | The economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, |
| | |
| b) | The hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under otherwise applicable GAAP with changes in fair value reported in earnings as they occur, and |
| | |
| c) | A separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to certain requirements (except for when the host instrument is deemed to be conventional). |
A bifurcated derivative financial instrument may be required to be recorded at fair value and adjusted to market at each reporting period end date. In addition, we may be required to classify certain stock equivalents issued in connection with the underlying debt instrument as derivative liabilities.
For convertible instruments that we have determined should not be bifurcated from their host instruments, we record discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. Also when necessary, we record deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the financing transaction and the effective conversion price embedded in the preferred shares.
Finally, if necessary, we will determine the existence of liquidated damage provisions. Liquidated damage provisions are not marked to market, but evaluated based upon the probability that a related liability should be recorded.
Common Stock Purchase Warrants and Derivative Financial Instruments
We review any common stock purchase warrants and other freestanding derivative financial instruments at each balance sheet date and classify them on our balance sheet as:
| a) | Equity if they (i) require physical settlement or net-share settlement, or (ii) gives us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement), or |
| b) | Assets or liabilities if they (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). |
We assess classification of our common stock purchase warrants and other freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required. Revenue Recognition
Revenue is recognized when all of the following conditions exist: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured.
Consumer Electronics Referrals
Individuals responding to our advertising campaigns come to our website where they search our database for the item they wish to sell. They are prompted to answer a number of questions regarding the condition of the item and which associated accessories they have, if any. Upon completion of the appraisal questions, they are presented with a listing of offers to purchase their item from our partners. We earn a fee for providing our partners with customers and recognize revenue upon acceptance of the partner’s offer by the Consumer. We receive this fee regardless of whether the Consumer ultimately sends in the device. We record payments received from partners in advance of offer acceptance as deferred revenue at the time payment is received.
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
Until January 2013, all our partners paid similar fees per referral. The Company received a higher fee for premium electronics, such as smartphones and iPhones, and a lower fee for non-premium electronics.
Beginning in January 2013, we changed our fee structure with our partners. Our partners now pay fees based on the demand for the individual item which the Consumer is seeking to sell. Fees are no longer based on the value of the item sold. All other terms of our agreements with our partners remained the same.
Fulfillment Revenue
In December 2012, we began to offer fulfillment services on behalf of our partners for the items sold by Consumers. We act as the agent in these transactions, passing orders booked by our partners to our vendors, who then assemble the kits and mail them directly to the consumers. We earn a standard fee from our partners and recognize revenue upon shipment of the kits to the Consumers. We evaluated the presentation of revenue on a gross versus net basis and determined that since we perform as an agent without assuming the risks and rewards of ownership of the goods, revenue should be reported on a net basis.
Advertising Revenue
Advertising revenues primarily come from payments for text-based sponsored links and display advertisements. Generally, our advertisers pay us on a cost per click, or CPC basis, which means advertisers pay us only when someone clicks on one of their advertisements, or on a cost per thousand impression basis, or CPM. Paying on a CPM basis means that advertisers pay us based on the number of times their advertisements appear on our websites or mobile applications.
Cost of Revenue
Our cost of revenue pertaining to Consumer Electronics Referral revenue consists primarily of costs to maintain our website, including depreciation expense on technology platform software.
Advertising
Advertising costs are expensed as they are incurred and are included in sales and marketing expenses. Advertising expense amounted to $1,276,099 and $699,148 for the three months ended September 30, 2013 and 2012, respectively, and $3,166,895 and $1,640,702 for the nine months ended September 30, 2013 and 2012, respectively.
Share-Based Payment Arrangements
We account for stock options in accordance with Accounting Standards Codification (“ASC”) 718: Compensation - Stock Compensation. ASC 718 requires generally that all equity awards be accounted for at their “fair value.” This fair value is measured on the grant date for stock-settled awards, and at subsequent exercise or settlement for cash-settled awards. Fair value is equal to the underlying value of the stock for “full-value” awards such as restricted stock and performance shares, and estimated using an option-pricing model with traditional inputs for “appreciation” awards such as stock options and stock appreciation rights.
Costs equal to these fair values are recognized ratably over the requisite service period based on the number of awards that are expected to vest, or in the period of grant for awards that vest immediately and have no future service condition. For awards that vest over time, cumulative adjustments in later periods are recorded to the extent actual forfeitures differ from our initial estimates: previously recognized compensation cost is reversed if the service or performance conditions are not satisfied and the award is forfeited. The expense resulting from share-based payments is recorded in cost of goods sold or general and administrative expense, depending on the nature of the services provided.
Subsequent modifications to outstanding awards result in incremental cost if the fair value is increased as a result of the modification. Thus, a value-for-value stock option repricing or exchange of awards in conjunction with an equity restructuring does not result in additional compensation cost.
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
Net Loss per Share
Basic loss per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants) and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.
The computation of basic and diluted loss per share at September 30, 2013 and 2012 excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:
| | For the Three and Nine Months Ended September 30, | |
| | 2013 | | 2012 | |
Convertible Notes Payable | | 4,750,000 | | - | |
Convertible Series A Preferred Stock | | - | | 889,530 | |
Convertible Series B Preferred Stock | | 930,035 | | 1,977,961 | |
Convertible Series C Preferred Stock | | - | | - | |
Unvested restricted stock | | 3,385,000 | | - | |
Stock Warrants | | 8,144,053 | | 8,254,562 | |
Stock Options | | 7,147,746 | | 6,309,147 | |
| | 24,356,834 | | 17,431,200 | |
Legal Proceedings
From time to time, we are a party to or otherwise involved in legal proceedings arising in the normal and ordinary course of business. As of the date of this report, we are not aware of any proceeding, threatened or pending, against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position.
In August 2011, the Florida Attorney General (the “AG”) initiated an official investigation into whether or not we engaged in unfair trade practices in violation of its “Little FTC Act.” The investigation was due to consumer complaints. Under Florida law, the remedies included actual damages, civil penalties, and attorneys’ fees. We provided a comprehensive response to the AG demonstrating that we acted properly. In April 2012, we met with the AG to discuss the matter and address their concerns. The AG submitted a proposed settlement in which the Company would reimburse the AG $20,000 for the costs of the investigation. In March 2013, we entered into a Settlement Agreement with the AG, pursuant to which we agreed to reimburse the AG $20,000 for investigative costs and My Gold Envelope, Inc., our subsidiary, agreed not to engage in the precious metals business. The Company paid the amount owed to the AG during the nine months ended September 30, 2013.
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
Customer Concentrations
The following table shows significant concentrations in our revenues and accounts receivable for the periods indicated.
| | Percentage of | | Percentage of | | | | | | | |
| | Revenue During the | | Revenue During the | | Percentage of Accounts | |
| | Three Months Ended | | Nine Months Ended | | Receivable at | |
| | September 30, | | September 30, | | September 30, | | December 31, | |
| | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | |
Partner A | | | 27 | % | | - | | | 27 | % | | - | | | 24 | % | | 22 | % |
Partner B | | | 20 | % | | 19 | % | | 20 | % | | 16 | % | | 28 | % | | 15 | % |
Partner C | | | 9 | % | | 20 | % | | 8 | % | | 19 | % | | 7 | % | | 11 | % |
Partner D | | | - | | | 15 | % | | 1 | % | | 14 | % | | 3 | % | | 17 | % |
Partner E | | | - | | | 11 | % | | - | | | 5 | % | | - | | | - | |
Partner F | | | - | | | 11 | % | | 2 | % | | 5 | % | | - | | | 4 | % |
Partner G | | | - | | | 4 | % | | - | | | 21 | % | | - | | | - | |
Partner H | | | - | | | - | | | - | | | - | | | 19 | % | | - | |
Recent Accounting Pronouncements
There are no recent accounting pronouncements that have had a material impact on our unaudited condensed consolidated financial statements.
Note 4 - Fair Value
The fair value of our financial assets and liabilities reflects our estimate of amounts that we would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of our assets and liabilities, we seek to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
| Level 1: | Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| | |
| Level 2: | Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active. |
| | |
| Level 3: | Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability. |
The following are the major categories of assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2013 and December 31, 2012, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
| | At September 30, 2013 | | At December 31, 2012 | |
| | Assets | | Liabilities | | Assets | | Liabilities | |
Level 1 | | | | | | | | | | | | | |
None | | $ | - | | $ | - | | $ | - | | $ | - | |
Level 2 | | | | | | | | | | | | | |
None | | | - | | | - | | | - | | | - | |
Level 3 | | | | | | | | | | | | | |
Derivative liability | | | - | | | 935,343 | | | - | | | 153,776 | |
| | $ | - | | $ | 935,343 | | $ | - | | $ | 153,776 | |
The following table reflects the change in fair value of our derivative liabilities for the nine months ended September 30, 2013:
| | Liabilities | |
| | | | |
Balance at beginning of period | | $ | 153,776 | |
Change in value of derivative liability - Series A preferred stock | | | (47,876) | |
Reclassification of beneficial conversion feature to additional paid in capital - Series A preferred stock | | | (105,900) | |
Derivative liability arising from issuance of convertible notes payable | | | 952,259 | |
Change in value of derivative liability - convertible notes | | | (16,916) | |
Balance at end of period | | $ | 935,343 | |
We have determined the estimated fair value amounts using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. We have based these fair value estimates on pertinent information available as of the respective balance sheet dates and have determined that, as of such dates, the carrying value of all financial instruments approximates fair value.
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
Note 5 Other Receivables
During the nine months ended September 30, 2013, the Company entered into two promissory notes with two partners, whereby certain accounts receivable due to the Company were converted into promissory notes. One of the promissory notes, entered into on February 27, 2013 for $65,771, requires weekly payments of $1,028, including interest, has a stated interest rate of 5% per year, and is due on June 4, 2014. As of September 30, 2013, the balance owing on this note is $43,767. The second promissory note, entered into on February 14, 2013, as amended on May 8, 2013, requires weekly payments of $500, has no stated interest rate and is due to be repaid on July 30, 2014. As of September 30, 2013, the balance owing on this note is $20,757.
Based upon the uncertainty of the collectability of these amounts, the Company has recorded an allowance for doubtful accounts of $45,000 as of September 30, 2013.
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
Note 6 Intangible Assets
Intangible assets consist of the following:
| | Capitalized Software | | Website Domain | |
Gross value at September 30, 2013 | | $ | 1,158,622 | | $ | 67,752 | |
Accumulated amortization at September 30, 2013 | | | (411,544) | | | (67,752) | |
Net value at September 30, 2013 | | $ | 747,078 | | $ | - | |
| | | | | | | |
Gross value at December 31, 2012 | | $ | 777,033 | | $ | 67,752 | |
Accumulated amortization at December 31, 2012 | | | (155,102) | | | (65,530) | |
Net value at December 31, 2012 | | $ | 621,931 | | $ | 2,222 | |
Our intangible assets all have a definite life and are amortized on a straight-line basis over their estimated useful lives of three years. Amortization expense amounted to $116,593 and $258,664 for the three and nine months ended September 30, 2013, respectively, and $55,746 and $96,353 for the three and nine months ended September 30, 2012, respectively.
Future annual estimated amortization expense is summarized as follows:
Years ending December 31, | | | | |
2013 (remaining three months) | | $ | 96,169 | |
2014 | | | 384,275 | |
2015 | | | 233,733 | |
2016 | | | 32,901 | |
| | $ | 747,078 | |
Note 7 Convertible Notes
During the three months ended September 30, 2013, we borrowed $950,000 and issued convertible notes payable (the “Convertible Notes”) which we used for working capital purposes. The Convertible Notes are convertible at $0.20 per share, are due two years from the date of the investment and bear interest of 5% per annum payable in common stock upon maturity or conversion. The Convertible Notes automatically convert if the Company consummates (i) a financing of at least $1 million in which it issues common stock or common stock equivalents for a price greater than $0.25 per share or (ii) a change of control transaction whereby a majority of the Company’s outstanding voting stock is sold or there is a sale of substantially all of the Company’s assets, or (iii) the closing price of the Company’s common stock is more than $0.30 for 10 consecutive trading days. Additionally, investors will have price protection on future non-exempted issuances at a price lower than $0.20 per share of common stock or common stock equivalent.
At the time of issuance, we determined that the price protection feature on the Convertible Notes constituted a derivative liability and estimated the fair value of such liability to be $952,259 using the Black-Scholes option pricing model using the following weighted average assumptions:
Risk-free interest rate | 0.32 - 0.40 | % |
Expected dividend yield | 0.0 | % |
Expected volatility | 273.15 276.15 | % |
Expected life | 2 years | |
Expected forfeitures | 0 | % |
We recorded the fair value of the liability of $952,259 as a derivative liability since the price protection feature of the Convertible Notes represents a variable conversion feature. Of this amount, we recorded $924,125 as a discount to the Convertible Notes and $28,134 as derivative expense.
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
On September 30, 2013, we determined that the fair value of the derivative liability pertaining to the Convertible Notes was $935,343 using the Black-Scholes option pricing model using the following weighted average assumptions:
Risk-free interest rate | 0.33 | % |
Expected dividend yield | 0.0 | % |
Expected volatility | 276.00 | % |
Expected life | 1.8 2.0 years | |
Expected forfeitures | 0 | % |
We recorded a gain of $16,916 during the three months ended September 30, 2013, representing the net change in the fair value of the derivative liability from inception through September 30, 2013.
The discount of $924,124 is being accreted to non-cash interest expense over the contractual term of the Convertible Notes. During the three and nine months ended September 30, 2013, accretion of the discount amounted to $92,343. Contractual interest expense on the Convertible Notes amounted to $9,363 for the three and nine months ended September 30, 2013.
The Company incurred fees associated with the closing of the Convertible Notes of $9,090. These amounts have been recorded as other assets in the accompanying condensed consolidated balance sheet, and are being amortized to interest expense over the contractual term of the Convertible Notes.
The components of Convertible Notes at September 30, 2013 are as follows:
| | | | | | Interest | | | | | | Conversion | |
| | | Balance | | | Rate | | | Maturity | | | Price | |
| | | | | | | | | | | | | |
Balance - December 31, 2012 | | $ | - | | | | | | | | | | |
Borrowings | | | 950,000 | | | 5 | % | | July 5, 2015 through Septempber 19, 2015 | | $ | 0.20 | |
Unamortized debt discount | | | (831,782) | | | | | | | | | | |
Balance - September 30, 2013 | | | 118,218 | | | | | | | | | | |
Note 8 - Stockholders’ Equity (Deficit)
Convertible Series A Preferred Stock
On November 18, 2011, our Board authorized the sale of up to 10,000,000 shares of Convertible Series A Preferred Stock (“2011 Series A PS”), with a par value of $0.0001 per share. The 2011 Series A PS had:
| a) | Seniority and a liquidation preference over all classes of common stock, but subordinate to our Series B Preferred Stock and Series C Preferred Stock; |
| | |
| b) | Voting rights and powers equal to the voting rights and powers of our common stock. Each share of 2011 Series A PS is entitled to the number of votes that the holder would be entitled to upon the conversion of the shares into common stock; |
| | |
| c) | A stated liquidation value of $1 per share; |
| | |
| d) | No stated dividends; and |
| | |
| e) | Automatic conversion (subject to blocking provisions for certain significant shareholders) into common shares upon the consummation of the 1-for-52.4846 reverse stock split effected on June 8, 2012 at a rate of five common shares for each share of 2011 Series A PS. Shares of the 2011 Series A PS were not subject to the Reverse Split. |
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
During March 2013, as a result of the conversion of our 2012 Series D PS (discussed below), all of the outstanding 177,906 shares of our Convertible Series A Preferred Stock (“2011 Series A PS”) automatically converted (as a result of no longer being subject to a 9.99% conversion blocker) into 889,530 shares of our common stock, at a conversion rate of 5 common shares for each share of Series 2011 A PS. Accordingly, we reclassified $105,900 of derivative liability, representing the fair value of the 177,906 shares of 2011 Series A PS immediately prior to the conversion, to additional paid in capital, and recorded a gain of $47,876 for the remaining derivative liability pertaining to the 2011 Series A PS during the nine months ended September 30 2013.
We determined that the fair value of the derivative liability pertaining to the 177,906 shares of 2011 Series A PS immediately prior to the conversion was $105,900 using the Black-Scholes option pricing model based on the following weighted average variables:
Expected dividends | 0 | % |
Expected volatility | 214.26 | % |
Expected term | 4 years | |
Risk free interest rate | 0.81 | % |
Convertible Series B Preferred Stock
On August 3, 2010, our Board authorized the sale of up to $4,000,000 of Units in a private placement (the “August 2010 PP”), whereby each Unit consisted of 100,000 shares of Convertible Series B Preferred Stock, with a par value of $0.0001 per share, (“2010 Series B PS”) and 47,633 warrants to purchase our common stock.
The 2010 Series B PS had:
| (a) | Seniority to all classes of common and preferred stock existing or issued in the future; |
| | |
| (b) | Voting rights and powers equal to the voting rights and powers of our common stock. Each share of 2010 Series B PS is entitled to the number of votes that the holder would be entitled to upon the conversion of the shares into common stock; |
| | |
| (c) | A stated liquidation value of $1 per share, and a liquidation preference of the greater of $1 per share, or the amount that would be due if all 2010 Series B PS shares had been converted to common stock immediately prior to the liquidation event; |
| | |
| (d) | No stated dividends; |
| | |
| (e) | An option by the holder to convert each share into common shares at a rate of 0.9527 shares of common for each share of 2010 Series B PS; |
| | |
| (f) | Conversion price protection whereby if, in the twelve months following the date of the filing of the amended certificate of designation with the State of Delaware (August 16, 2010), we sell any stock for a price less than $0.02 per share, then the conversion price will be adjusted to reflect the lowest price for which the shares were sold. |
In March 2013, holders of 1,100,000 shares of our Convertible Series B Preferred Stock (“2010 Series B PS”) converted their shares into 1,047,966 shares of common stock, at a conversion rate of .9527 common shares for each share of 2010 Series B PS.
Series D Preferred Stock
On April 24, 2012, our Board authorized the sale of up to 350,000 shares of Series D Preferred Stock (“2012 Series D PS”), with a par value of $0.0001 per share. The 2012 Series D PS had:
| a) | A liquidation preference equal to $10.00 per share; | | |
| | | | |
| b) | No voting rights; and | | |
| | | | |
| c) | No stated dividends; and | | |
| | | | |
| d) | Were convertible into common shares at a rate of 50 shares of common for each share of 2012 Series D PS (see below). | | |
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
During the third quarter of 2012, our Board amended the conversion rights on the 2012 Series D PS such that it becomes convertible immediately prior to the closing of a combined transaction or the occurrence of the Liquidation Event, both as defined in the Certificate of Designation, as amended.
In March 2013, the Company amended the conversion rights on its outstanding 2012 Series D PS giving its holders the option to convert their 2012 Series D PS shares at their discretion. Subsequently, holders of all 350,000 shares of 2012 Series D PS elected to convert their 2012 Series D PS into 17,500,000 shares of common stock, at a conversion rate of 50 common shares for each share of 2012 Series D PS.
Shares Granted to Directors, Consultants and Employees
During February 2013, we granted 3,500,000 fully vested shares of common stock, having a fair value of $437,500 based on the quoted closing trading price of our common stock as of the grant date, to our Chief Executive Officer. We recorded $437,500 as compensation expense pertaining to this grant during the nine months ended September 30, 2013.
In June 2013, the Company entered into a one year Investor Relations agreement with a third party consultant. Pursuant to the terms of the agreement, the Company is required to pay a monthly cash fee of $3,000 and issued 270,000 shares of its common stock, with 67,500 shares vesting on a quarterly basis, beginning on the effective date of June 10, 2013. As of September 30, 2013, 135,000 shares, having a fair value of $23,625 based on the quoted closing trading price of our common stock as of the grant date, have vested. This amount has been recorded as a prepaid expense and is being amortized over the service term. We recorded $12,938 and $15,188 as professional fees expense pertaining to this grant during the three and nine months ended September 30, 2013, respectively.
In June 2013, the Company granted 20,000 fully-vested shares of common stock, having a fair value of $4,000 based on the quoted closing trading price of our common stock as of the grant date, to a third party consultant for services provided. We recorded $4,000 as professional fees expense pertaining to this grant during the nine months ended September 30, 2013.
Including prior period grants and the above grant, we recorded non-cash compensation expense of $102,938 and $917,161 for the three months ended September 30, 2013 and 2012, respectively, and $757,138 and $,1867,097 for the nine months ended September 30, 2013 and 2012, respectively, pertaining to stock grants.
Warrants
The following summarizes our warrant activity for the nine months ended September 30, 2013:
| | | | | | | | Weighted | |
| | | | | | | | Average | |
| | | | | Weighted | | Remaining | |
| | Number of | | Average | | Contractual Life | |
| | Warrants | | Exercise Price | | (in Years) | |
Outstanding - December 31, 2012 | | | 8,218,837 | | $ | 0.27 | | | 4.0 | |
Granted | | | - | | | - | | | | |
Exercised | | | - | | | - | | | | |
Cancelled/Forfeited | | | (74,784) | | | 7.86 | | | | |
Outstanding - September 30, 2013 | | | 8,144,053 | | $ | 0.20 | | | 3.3 | |
| | | | | | | | | | |
Exercisable - September 30, 2013 | | | 8,144,053 | | $ | 0.20 | | | 3.3 | |
The aggregate intrinsic value of the warrants at September 30, 2013 and December 31, 2012 was $81,250 and $0, respectively. There was no expense pertaining to warrants recorded during the nine months ended September 30, 2013.
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
Stock Option Grants
During the first quarter of 2013, we granted 600,000 stock options to employees for future services. The options are exercisable at an exercise price of $0.20 per share over a five-year term and vest over 4 years. These options had a fair value of $82,399 using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate | 0.85 | % |
Expected dividend yield | 0 | % |
Expected volatility | 214.25-214.78 | % |
Expected life | 5 years | |
Expected forfeitures | 0 | % |
We recorded $5,149 and $11,343 during the three and nine months ended September 30, 2013, respectively, as compensation expense pertaining to this grant.
During the second quarter of 2013, we granted 175,000 stock options to employees for future services. The options are exercisable at an exercise prices ranging from $0.20 to $0.30 per share over a five-year term and vest over 4 years. These options had a fair value of $33,400 using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate | | 0.54-0.58 | % |
Expected dividend yield | | 0 | % |
Expected volatility | | 204.36-214.90 | % |
Expected life | | 5 years | |
Expected forfeitures | | 0 | % |
We recorded $2,088 and $7,394 during the three and nine months ended September 30, 2013, respectively, as compensation expense pertaining to this grant.
During the third quarter of 2013, we granted 125,000 stock options to employees for future services. The options are exercisable at an exercise price of $0.20 per share over a five-year term and vest over 4 years. These options had a fair value of $22,145 using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate | | 1.33 | % |
Expected dividend yield | | 0 | % |
Expected volatility | | 216.60 | % |
Expected life | | 5 years | |
Expected forfeitures | | 0 | % |
Including prior period grants and the above grants, we recorded non-cash compensation expense of $295,961 and $714,903 for the three months ended September 30, 2013 and 2012, respectively, and $1,061,440 and $1,068,264 for the nine months ended September 30, 2013 and 2012, respectively, pertaining to stock option grants.
usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
September 30, 2013
(Unaudited)
The following table summarizes our stock option activity for the nine months ended September 30, 2013:
| | | | | | | | Weighted Average | | | | |
| | | | | Weighted | | Remaining | | | | |
| | Number of | | Average Exercise | | Contractual Life | | Aggregate | |
| | Options | | Price | | (in Years) | | Intrinsic Value | |
Outstanding - December 31, 2012 | | | 6,594,165 | | $ | 0.41 | | | 4.8 | | $ | - | |
Granted | | | 900,000 | | | 0.20 | | | | | | | |
Exercised | | | - | | | - | | | | | | | |
Forfeited or Canceled | | | (346,419) | | | 0.26 | | | | | | | |
Outstanding - September 30, 2013 | | | 7,147,746 | | $ | 0.39 | | | 4.1 | | $ | - | |
| | | | | | | | | | | | | |
Exercisable - September 30, 2013 | | | 4,456,444 | | $ | 0.48 | | | 4.3 | | $ | - | |
The following table summarizes our stock option activity for non-vested options for the nine months ended September 30, 2013:
| | | | | Weighted | |
| | Number of | | Average Grant | |
| | Options | | Date Fair Value | |
Balance at December 31, 2012 | | | 3,956,481 | | $ | 0.56 | |
Granted | | | 900,000 | | | | |
Vested | | | (1,836,698) | | | | |
Forfeited or Canceled | | | (328,481) | | | | |
Balance at September 30, 2013 | | | 2,691,302 | | $ | 0.42 | |
Restricted Stock Awards
On December 21, 2012, we granted 6,000,000 shares of restricted common stock to our Chief Executive Officer. Of these shares, 500,000 were fully vested on the date of grant and the remaining shares were scheduled to vest in equal increments of 250,000 shares over a 22-month period, with the first vesting date being January 10, 2013, subject to continued employment on each applicable vesting date. The fair value of the common stock at the date of grant was $0.12 per share based upon our closing market price on the date of grant. The aggregate grant date fair value of the award amounted to $720,000, which will be recognized as compensation expense over the vesting period. We recorded $90,000 and $270,000 of compensation expense during the three and nine months ended September 30, 2013, respectively, with respect to this award. On October 16, 2013, our Chief Executive Officer resigned from his position and all unvested shares were forfeited (see Note 9).
A summary of the restricted stock award activity for the nine months ended September 30, 2013 is as follows:
| | Number of Shares |
| | | |
Unvested Outstanding at December 31, 2012 | | | 5,500,000 |
Granted | | | 290,000 |
Vested | | | (2,405,000) |
Unvested Outstanding at September 30, 2013 | | | 3,385,000 |
Note 9 Subsequent Events
In October 2013, Mr. Sergio Zyman resigned as Chairman of the Board of Directors, a director and as Chief Executive Officer of the Company. In connection with his resignation as Chairman and Chief Executive Officer, 4,500,000 shares of restricted common stock were forfeited. In connection with his resignation, 1,000,000 fully vested options were also cancelled. The Company and Mr. Zyman are in disagreement over the terms on which Mr. Zyman agreed to cancel shares of common stock and options. On October 16, 2013, Mr. Michael Brauser was appointed Chairman of the Board of the Company, replacing Mr. Zyman. Additionally, on the same date, Mr. Daniel Brauser, the Company’s President, was appointed interim Chief Executive Officer and replaced Mr. Zyman.
On October 18, 2013 the Company granted an aggregate of 1,000,000 shares of restricted common stock to two of its advisors for future services to be provided. The restricted stock vests quarterly over a three year period with the first vesting date being December 31, 2013, subject to continued service on each applicable vesting date. Additionally, the restricted stock will automatically vest under certain circumstances including in the event of a change of control of the Company.
On October 30, 2013, the Company amended its 2008 Equity Incentive Plan (the “Plan”) to increase the aggregate number of shares of common stock by 3,750,000. The Company is now authorized to issue 4,264,437 shares under the Plan.
Effective October 31, 2013, the Company granted 2,750,000 restricted stock units (“RSUs”) to its directors. The RSUs vest annually over a five year period with the first vesting date being October 31, 2014, subject to continued service on each applicable vesting date. Additionally, the RSUs will automatically vest under certain circumstances including in the event of a change of control of the Company. The RSUs will have no voting rights or dividend rights. The fair value of the common stock at the date of grant is $0.23 per share based upon our closing market price on the date of grant. The aggregate grant date fair value of the award amounts to $632,500, which will be recognized as compensation expense over the vesting period.
During October 2013, we issued $170,000 of Convertible Notes, pursuant to the same terms and conditions as those described in Note 7.
On November 11, 2013, one of our investors converted $100,000 of his Convertible Notes, plus accrued interest, into 502,705 shares of the Company’s common stock.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” in our Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or the SEC.
Company Overview
usell.com, Inc. (“usell”) is a technology based company focused on creating an online marketplace (similar to Kayak.com in the travel industry) where consumers interested in selling small consumer electronics that they are no longer using can:
· Research the current market value for their items, based on the make, model and condition of each item,
· Efficiently find and compare offers for those items from buyers, who we sometimes refer to as our partners,
· Review satisfaction ratings and customer reviews of each buyer,
· Determine the offer they wish to accept, and
· Immediately complete their transaction on our website directly with the buyer of their choice.
We have a low cost, highly scalable and flexible business model that allows us to quickly and efficiently adapt to entry into new markets, changes in economic conditions, supply and demand levels and other similar factors. We utilize consumer oriented advertising efforts, such as direct response television commercials and various forms of Internet advertising, to attract individuals to our website. Our services are free for consumers. We “partner” with, or provide listing in our database to, reputable electronics buying companies that require a cost efficient customer acquisition model. The economies of scale that we generate by combining the buying power of multiple companies allow us to pass savings on to our partners which, in turn, allows them to offer the highest possible prices to consumers.
When a consumer visits our website and accepts an offer from one of our partners, we receive a fee. We receive this fee regardless of whether the consumer ultimately sends in the device. Until January 2013, all our partners paid similar fees per referral. The Company received a higher fee for premium electronics, such as smartphones and iphones, and a lower fee for non-premium electronics. Beginning in January 2013, we changed our fee structure with our partners. Our partners now pay fees based on the demand for the individual item which the consumer is seeking to sell. Fees are no longer based on the value of the item sold. The Company does not believe that this has or will have a material effect on revenues.
Our corporate headquarters are located at 33 East 33rd Street, New York, New York 10016 and our phone number is (212) 213-6805. Our website can be found at www.usell.com. The information on our website is not incorporated in this report.
Description of Revenue Since Inception and Changes in Business Model
We help consumers monetize household items, such as small consumer electronics that they are no longer using. We were incorporated in Delaware on November 18, 2003. We started our business operations in 2008, buying precious metals directly from the public and selling them to a partner company. On May 7, 2009, we acquired My Gold Envelope, Inc. (“MGE”). MGE brought a management team with extensive experience in creating and growing businesses that provide shareholder value in a broad array of industries, including direct response, Internet marketing and national retail distribution and sales. MGE’s ability to reach a broader number of consumers through its management’s experience in multi-language television advertising, direct response, and retail distribution and sales greatly accelerated our growth and increased our depth of management experience. In mid-2010, we changed our name to Upstream Worldwide, Inc. and diversified our business by introducing a service similar to our precious metals business, for cellular phones. The response rates to the cellular phone offering far outpaced the responses on our precious metals campaigns. Hence, we began to focus our efforts on the domestic market for cellular phones and small consumer electronics. Through the end of 2010 and into 2011, our revenues began to shift substantially toward cellular phones. By mid-2011 we adapted our business strategy and stopped offering to purchase cellular phones directly. In July 2011, we began to focus more intently on our core strength of cost-effective customer acquisition, and created an online marketplace where consumers interested in selling small consumer electronics that they are no longer using can educate themselves on current market values and sell their items to top-rated, reputable buyers. This strategy also allowed us to quickly expand into new product categories beyond cellular phones; we now offer a place to sell smartphones, iPads and other tablets, Kindles and other e-readers, digital cameras, MP3 players, and handheld game consoles. In April 2012, we acquired ecoSquid Inc. (“Acquisition Corp.”). Acquisition Corp owned the intellectual property that we licensed in order to implement our comparison technology platform. On July 23, 2012, we changed our name to usell.com, Inc.
Critical Accounting Policies
In response to financial reporting release FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, from the SEC, we have selected our more subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on the our financial condition. The accounting estimates involve certain assumptions that, if incorrect, could have a material adverse impact on our results of operations and financial condition. Our more significant accounting policies can be found in Note 3 of our unaudited interim condensed consolidated financial statements found elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC. There have been no material changes to our Critical Accounting Policies during the period covered by this report.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2013 to the Three and Nine Months Ended September 30, 2012
The following tables set forth, for the periods indicated, results of operations information from our unaudited interim condensed consolidated financial statements:
| | Three Months Ended | | | | | | | |
| | September 30, | | Change | | Change | |
| | 2013 | | 2012 | | (Dollars) | | (Percentage) | |
Revenue | | $ | 1,636,386 | | $ | 729,297 | | $ | 907,089 | | | 124 | % |
Cost of Revenue | | | 133,244 | | | 68,804 | | | 64,440 | | | 94 | % |
Gross Profit | | | 1,503,142 | | | 660,493 | | | 842,649 | | | 128 | % |
Sales and Marketing | | | 1,316,086 | | | 779,681 | | | 536,405 | | | 69 | % |
General and Administrative | | | 900,806 | | | 2,329,799 | | | (1,428,993) | | | -61 | % |
Operating Loss | | | (713,750) | | | (2,448,987) | | | 1,735,237 | | | -71 | % |
Other (Expense) Income | | | (112,561) | | | 2,056,882 | | | (2,169,443) | | | -105 | % |
Net Loss | | $ | (826,311) | | $ | (392,105) | | $ | (434,206) | | | 111 | % |
| | Nine Months Ended | | | | | | | |
| | September 30, | | Change | | Change | |
| | 2013 | | 2012 | | (Dollars) | | (Percentage) | |
Revenue | | $ | 3,907,124 | | $ | 1,565,336 | | $ | 2,341,788 | | | 150 | % |
Cost of Revenue | | | 304,408 | | | 147,720 | | | 156,688 | | | 106 | % |
Gross Profit | | | 3,602,716 | | | 1,417,616 | | | 2,185,100 | | | 154 | % |
Sales and Marketing | | | 3,271,162 | | | 1,787,711 | | | 1,483,451 | | | 83 | % |
General and Administrative | | | 3,792,413 | | | 4,831,967 | | | (1,039,554) | | | -22 | % |
Operating Loss | | | (3,460,859) | | | (5,202,062) | | | 1,741,203 | | | -33 | % |
Other (Expense) Income | | | (59,211) | | | (2,454,828) | | | 2,395,617 | | | -98 | % |
Net Loss | | $ | (3,520,070) | | $ | (7,656,890) | | $ | 4,136,820 | | | -54 | % |
Revenue by Type
The following table breaks down our revenue by type:
| | For the Three Months Ended | |
| | September 30, | |
| | 2013 | | | 2012 | |
Consumer Electronics Referrals | | $ | 1,505,509 | | | 92 | % | | $ | 728,712 | | | 100 | % |
Fulfillment Revenue | | | 51,057 | | | 3 | % | | | - | | | 0 | % |
Other | | | 79,820 | | | 5 | % | | | 585 | | | 0 | % |
| | $ | 1,636,386 | | | 100 | % | | $ | 729,297 | | | 100 | % |
| | For the Nine Months Ended | |
| | September 30, | |
| | 2013 | | | 2012 | |
Consumer Electronics Referrals | | $ | 3,653,892 | | | 94 | % | | $ | 1,549,427 | | | 99 | % |
Precious Metals | | | - | | | 0 | % | | | 11,000 | | | 1 | % |
Fulfillment Revenue | | | 118,398 | | | 3 | % | | | - | | | 0 | % |
Other | | | 134,834 | | | 3 | % | | | 4,909 | | | 0 | % |
| | $ | 3,907,124 | | | 100 | % | | $ | 1,565,336 | | | 100 | % |
Comparison of Revenue and Sales and Marketing Spend
The following table compares our revenue to the amount of sales and marketing expenses for the corresponding periods.
| | Three Months Ended Sept. 30, | | | Nine Months Ended Sept. 30, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Revenue | | $ | 1,636,386 | | | $ | 729,297 | | | $ | 3,907,124 | | | $ | 1,565,336 | |
Sales and Marketing Expenses | | $ | 1,316,086 | | | $ | 779,681 | | | $ | 3,271,162 | | | $ | 1,787,711 | |
Percentage of Revenue | | | 80 | % | | | 107 | % | | | 84 | % | | | 114 | % |
As we increase our sales and marketing expenses, our revenues increase which demonstrates a strong correlation between revenue and our spending on advertising and marketing. Comparison of revenue, cost of revenue and the resulting gross margins for the three and nine months ended September 30, 2013 to the same period in 2012 highlights the effects of the growth of our business over the last year. We have increased our revenues by more than 150% over the prior year, while improving our gross margin percentage. Our revenues for the three and nine months ended September 30, 2013 and 2012 were primarily generated by earning fees for providing our partners with consumers. Additionally, during the nine months ended September 30, 2013 we began to generate advertising revenues primarily from text-based sponsored links and display advertisements.
Cost of Revenue
Our cost of revenue for generating leads for our partners consists primarily of costs to access and maintain our website, as well as amortization expense on our technology platform software.
Sales and Marketing Expenses
Our sales and marketing expenditures represent one of our most significant costs, amounting to 80% and 107% of revenue for the three months ended September 30, 2013 and 2012, respectively, and 84% and 114% of revenues for the nine months ended September 30, 2013 and 2012, respectively. We utilize direct response advertising and marketing campaigns, including television, print and Internet to attract consumers to our website. Our sales and marketing costs include production costs to produce and edit advertisements as well as the costs to run them. We manage our advertising and marketing campaigns, and make allocation decisions, by measuring their effectiveness based on a variety of metrics, including response rates, conversion rates and average revenue statistics. During 2012, our advertising and marketing costs exceeded our revenue as we incurred significant production costs to generate advertisements promoting our new online marketplace and optimized the placement of those advertisements. We have seen improvement in the return on our advertising and marketing expenses through 2013, as evidenced by the decline in total sales and marketing costs as a percentage of revenue as noted in the above table, “Comparison of Revenue and Sales and Marketing Spend.” Factors such as the time of year and significant local or nationally televised events can influence the effectiveness of our advertising campaigns. Our marketing spending will continue to vary during the end of 2013 and 2014 as we add new partners and increase our conversion rates. As we continue to invest in and improve our infrastructure, we believe it will improve our efficiency and expand the buyers on our site; this will allow us to increase our marketing spend and, accordingly, increase our revenues.
General and Administrative Expenses
General and administrative expenses include professional fees for technology, legal and accounting services as well as consulting and internal personnel costs for our back office support functions. Our general and administrative expenses for the three and nine months ended September 30, 2013 were impacted by non-cash compensation expense pertaining to share grants and option grants for services.
Excluding non-cash compensation expense, our general and administrative expenses for the three months ended September 30, 2013 decreased compared to the three months ended September 30, 2012. The three months ended September 30, 2013 includes a recovery of bad debt expense of approximately $28,000, whereas the three months ended September 30, 2012 includes a provision for bad debt expense of approximately $69,000, in relation to our ongoing assessment of the recoverability and collectability of our accounts receivable. Additionally, there was a decrease of approximately $50,000 in recruiting fee expense during the three months ended September 30, 2013, compared to the three months ended September 30, 2012, as we did not hire any new employees during the third quarter of 2013 for which we were required to pay such fees.
Excluding non-cash compensation expense, our general and administrative expenses for the nine months ended September 30, 2013 increased, compared to the nine months ended September 30, 2012, as we began to invest in our infrastructure by increasing our headcount to support our business model. By the same token, we are continuing to seek out ways to reduce our other overhead costs by closing our Florida office, and reducing other expenses, such as travel, wherever practical. Additionally, the nine months ended September 30, 2013 includes a recovery of bad debt expense of approximately $48,000, whereas the nine months ended September 30, 2012 includes a provision for bad debt expense of approximately $69,000, in relation to our ongoing assessment of the recoverability and collectability of our accounts receivable.
Other Income (Expense)
Other income (expense) during the three and nine months ended September 30, 2013 was primarily attributable to our Convertible Notes. We recorded approximately $92,000 of non-cash interest expense related to the accretion of the discount associated with our Convertible Notes. Additionally, we recorded approximately $28,000 of derivative expense in connection with the initial valuation of the derivative liability pertaining to the price protection feature on our Convertible Notes and approximately $16,000 related to the change in the market value of the derivative liability pertaining to our Convertible Notes. Other income (expense) during the nine months ended September 30, 2013 includes the change in the market value of the derivative liability pertaining to our 2011 Series A preferred stock (“2011 Series A”). The derivative liability related to the price protection provided to investors in the 2011 Series A offering. In March 2013, all 177,906 shares of outstanding 2011 Series A were converted into common stock.
Other income (expense) during the three and nine months ended September 30, 2012 was attributable to interest expense associated with our 2011 Convertible Notes and the change in the market value of the derivative liability pertaining to our 2011 Series A, partially offset by a gain on the settlement of certain accounts payable.
Liquidity and Capital Resources
We utilize direct response advertising and marketing campaigns, including television, print and Internet to attract consumers to our website where we help them monetize household items, such as small consumer electronics that they are no longer using. These advertising and marketing campaigns are our most significant use of cash from operations. Payment policies for these campaigns vary by advertising medium and by vendor. Payment terms vary as well, but in general payment for our advertisements is due within two-weeks or less of when the advertisement airs. Other significant uses of cash include production costs to create our advertisements, salary expense for our employees, and professional fees.
Cash receipts from our partners, for providing them with consumers, are generally received by us within seven to 10 days of the order being placed with the partner by the consumer.
Cash Flows from Operating Activities
We used approximately $1,316,000 of cash in operating activities during the nine months ended September 30, 2013, a decrease from approximately $2,542,000 of cash used in operating activities during the nine months ended September 30, 2012. Our net loss of approximately $3.5 million was mainly offset by approximately $1.8 million of stock-based compensation and $262,000 of depreciation and amortization. Changes in working capital provided approximately $112,000 of cash during the nine months ended September 30, 2013. During the nine months ended September 30, 2012 we had a net loss of approximately $7.7 million, which was mainly offset by approximately $2.9 million of stock-based compensation and approximately $2.3 million from the change in the market value of the derivative liability pertaining to our 2011 Series A. The 2012 net loss was also impacted by a gain on the settlement of certain accounts payable and offset by amortization of our debt discount. Changes in working capital used approximately $451,000 of cash during the nine months ended September 30, 2012. The significant components which affect our working capital are revenues derived from the leads to our partners, capital raised in private offerings, offset by marketing expenses, expenses spent on our technology infrastructure and public company expenses including audit and legal expenses.
Cash Flows from Investing Activities
During the nine months ended September 30, 2013, we capitalized approximately $382,000 of website development costs, compared to approximately $177,000 in 2012. We currently do not have any capital obligations or commitments that will require a significant amount of capital.
Cash Flows from Financing Activities
During the nine months ended September 30, 2013, our financing activities generated approximately $941,000 in net proceeds from our Convertible Notes. During the nine months ended September 30, 2012, our financing activities generated approximately $3.3 million in net proceeds, mainly comprised of proceeds from the sale of our 2011 Series A, partially offset by the repayment of an outstanding note payable to an investor.
Liquidity
We do not yet have a sustained history of financial stability. Historically our principal source of liquidity has been the issuances of debt and equity securities (including to related parties), including preferred stock, common stock and various debt financing transactions. Losses from operations are continuing subsequent to September 30, 2013. We anticipate that we will continue to generate losses from operations in the near future. If necessary, we will reduce operating expenses other than marketing and advertising expenses. As we continue to invest in and improve our infrastructure, we believe it will improve our efficiency and expand the number of buyers on our site; which will allow us to increase our marketing spend and, accordingly, increase our revenues.
We expect that we have enough cash to sustain operations at present level for approximately six months. To meet our working capital needs as our business and revenues expand we have been conducting a “best-efforts, partial-all-or-none” offering to accredited investors seeking to raise up to $4 million from the sale of convertible notes. The notes are convertible at $0.20 per share, are due two years from the date of the investment and bear interest of 5% per annum payable in common stock upon maturity or conversion. The notes automatically convert if the Company consummates (i) a financing of at least $1 million in which it issues common stock or common stock equivalents for a price greater than $0.25 per share or (ii) a change of control transaction whereby a majority of the Company’s outstanding voting stock is sold or there is a sale of substantially all of the Company’s assets, or (iii) the closing price of the Company’s common stock is more than $0.30 for 10 consecutive trading days. Additionally, investors will have price protection on future non-exempted issuances at a price lower than $0.20 per share of common stock or common stock equivalent. As of the date of this report, we have sold $1,120,000 of notes to accredited investors in this offering. There can be no assurance we will continue to be successful in raising money in this offering.
There can be no assurance that the plans and actions proposed by management will be successful, that we will generate profitability and positive cash flows in the future, that our diversification and expansion plans will not require substantial amounts of capital beyond our current capabilities, or that unforeseen circumstances will not require us to seek additional funding sources in the future or effectuate plans to conserve liquidity. Future efforts to raise additional funds may not be successful or, in the event additional sources of funds are needed to continue operations, they may not be available on acceptable terms, if at all.
The ability of the Company to continue as a going concern is dependent on management's plans, which include further implementation of its business plan and continuing to raise capital.
The 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. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Recent Accounting Pronouncements
See Note 3 to our unaudited interim condensed consolidated financial statements regarding recent accounting pronouncements.
Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements including statements regarding liquidity, anticipated revenues and cash flows.
The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.
The results anticipated by any or all of these forward-looking statements might not occur. Important factors that could cause actual results to differ from those in the forward-looking statements include providing consumers with a sufficient number of partners that furnish offers on our sites, the effectiveness of our advertising campaigns and the willingness of people to use us to help them monetize and recycle their small consumer electronic items. Further information on our risk factors is contained in our filings with the SEC, including our Annual Report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to smaller reporting companies.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management carried out an evaluation with the participation of our Principal Executive Officer and Principal Financial Officer, required by Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act.
Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
| Item 1. | Legal Proceedings. |
From time to time, we are a party to, or otherwise involved in, legal proceedings arising in the normal and ordinary course of business. As of the date of this report, we are not aware of any proceeding, threatened or pending, against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position. Additionally, there were no material changes during the period covered by this report to any pending legal proceedings previously reported.
In March 2013, we entered into a Settlement Agreement with the Florida Attorney General. In connection with the Settlement Agreement, we reimbursed the Attorney General $20,000 for investigative costs and MGE, our subsidiary, agreed not to engage in the precious metals business.
Not applicable to smaller reporting companies.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
We did not sell any securities during the period covered by this report which have not been previously reported.
Subsequent to the period covered by this report (which has not yet been reported), we sold $170,000 of convertible notes, as further described in Note 9 to the Consolidated Financial Statements contained in this report. The Convertible Notes are convertible at $0.20 per share, are due two years from the date of the investment and bear interest of 5% per annum payable in common stock upon maturity or conversion.
Additionally, on October 18, 2013, we issued 1,000,000 shares of restricted common stock to two director advisers for future services.
On October 31, 2013, the Company granted 2,750,000 restricted stock units to its directors.
All securities were issued in reliance upon the exemption provided by Section 4(a)(2) and Rule 506(b) under the Securities Act.
| Item 3. | Defaults Upon Senior Securities. |
None.
| Item 4. | Mine Safety Disclosures. |
Not Applicable.
| Item 5. | Other Information. |
None.
See the exhibits listed in the accompanying “Index to Exhibits.”
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | usell.com, Inc. |
| | |
November 14, 2013 | | /s/ Daniel Brauser |
| | Daniel Brauser |
| | Chief Executive Officer (Principal Executive Officer) |
| | |
November 14, 2013 | | /s/ Jennifer Calabrese |
| | Jennifer Calabrese |
| | Executive Vice President of Finance (Principal Financial Officer) |
INDEX TO EXHIBITS
Exhibit | | | | Incorporated by Reference | | Filed or Furnished |
No. | | Exhibit Description | | Form | | Date | | Number | | Herewith |
3.1 | | Certificate of Incorporation | | 10-QSB | | 6/7/06 | | 3.1 | | |
3.2 | | Certificate of Amendment Increase in Capital | | 10-QSB | | 6/7/06 | | 3.1 | | |
3.3 | | Certificate of Amendment Effective Profitable Software | | 10-QSB | | 6/7/06 | | 3.1 | | |
3.4 | | Certificate of Amendment Money4Gold Holdings, Inc. | | 8-K | | 7/29/08 | | 3.1 | | |
|