As filed with the Securities and Exchange Commission on September 20, 2012

 

Registration No. 333-

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

USELL.COM, INC.

(Exact name of registrant as specified in its charter)

  

Delaware 7389 98-0412432
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

 

 

245 North Ocean Blvd., Suite 306

Deerfield Beach, Florida 33441

(954) 915-1550

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Daniel Brauser

245 North Ocean Blvd., Suite 306

Deerfield Beach, Florida 33441

(954) 915-1550

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:  

Michael D. Harris, Esq.

Brian S. Bernstein, Esq.

Nason, Yeager, Gerson, White & Lioce, P.A.

1645 Palm Beach Lakes Boulevard, Suite 1200

West Palm Beach, Florida 33401

(561) 686-3307  

 

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.

 

 
 

  

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: þ

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.   ¨

 

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x

 

CALCULATION OF REGISTRATION FEE
 
Title of Each
Class of Securities
to be Registered
 

Amount to be

Registered (1)

  

Proposed

Maximum

Offering Price

Per Share (2)

  

Proposed

Maximum

Aggregate

Offering Price

(2)

   Amount of 
Registration Fee
 
Common stock, $0.0001 par value per share   35,000,000   $0.20   $7,000,000   $802.20 
                     

 

(1)   Under Rule 416 of the Securities Act of 1933, the shares being registered include such indeterminate number of shares of common stock as may be issuable with respect to the shares being registered in this registration statement as a result of any stock splits, stock dividends.

(2)  The proposed maximum offering price per share and the proposed maximum aggregate offering price have been estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rules 457(c) under the Securities Act of 1933.

 

The registrant hereby amends this registration statement on such date or date(s) as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.   

 

 
 

 

The information in this prospectus is not complete and may be changed.  These securities may not be sold until the registration statement filed with the Securities and Exchange Commission of which this prospectus is a part becomes effective.  This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, Dated September 20, 2012

 

USELL.COM, INC.

 

PROSPECTUS

 

35,000,000 Shares of Common Stock

 

This prospectus relates to the sale of up to 35,000,000 shares of usell.com, Inc. common stock being offered by usell directly to investors on a “best efforts” self-underwritten basis at a price of $0.___ per share. There is no minimum amount that is required to be sold in this primary offering. The offering of these shares will terminate on no later than ___________ ___, 20__ (90 days from the date of this prospectus). No commissions or fees will be paid in connection with the sale of such shares.

 

Our common stock trades on the Over-the-Counter Bulletin Board under the symbol “USEL”.  As of the last trading day before the date of this prospectus, the closing price of our common stock was $0.20 per share.

 

The common stock offered in this prospectus involves a high degree of risk.  See “Risk Factors” beginning on page 5 of this prospectus to read about factors you should consider before buying shares of our common stock.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined whether this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.

 

The date of this prospectus is ________________, 2012

 

 
 

 

 

TABLE OF CONTENTS

 

    Page
PROSPECTUS SUMMARY   1
RISK FACTORS   5
FORWARD-LOOKING STATEMENTS   14
DILUTION   14
USE OF PROCEEDS   16
CAPITALIZATION   16
MARKET FOR COMMON STOCK   17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   19
BUSINESS   26
MANAGEMENT   33
EXECUTIVE COMPENSATION   37
DIRECTOR COMPENSATION   40
PRINCIPAL SHAREHOLDERS   41
RELATED PERSON TRANSACTIONS   44
DESCRIPTION OF SECURITIES   46
PLAN OF DISTRIBUTION   47
LEGAL MATTERS   48
EXPERTS   49
ADDITIONAL INFORMATION   49

 

You should rely only on information contained in this prospectus.  We have not authorized anyone to provide you with information that is different from that contained in this prospectus.  We are not offering to sell or seeking offers to buy shares of common stock in jurisdictions where offers and sales are not permitted.  The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

 

 
 

 

PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus.  You should read the entire prospectus carefully including the section entitled “Risk Factors” before making an investment decision.  usell.com, Inc. is referred to throughout this prospectus as “usell,” “we,” “our” or “us.”   Except for our audited financial statements, all numbers of shares of our common stock and common stock equivalents have been adjusted to give effect to a one-for-52.4846 reverse stock split effective June 8, 2012.

 

Our Company

 

usell.com, Inc., formerly known as Upstream Worldwide, Inc., is a technology based company focused on creating an online marketplace where individuals, which we refer to as 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 top-rated buyers,

·          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.

 

Our business model is similar to successful ecommerce websites, such as KAYAK (www.kayak.com) in the travel industry, Bankrate (www.bankrate.com) in the finance industry, and Insurance.com (www.insurance.com) in the insurance industry. Rather than offer the product or service directly to the consumer, these companies all serve consumers seeking to complete a transaction by providing them with an easy way to (i) find information to help them make an informed decision, (ii) compare offers from various companies that offer the respective product or service, and (iii) help them easily complete their transaction. Our services are free for consumers.

 

We utilize consumer oriented advertising efforts, such as direct response television commercials and various forms of Internet advertising, to attract consumers to our website. Effective consumer oriented advertising requires significant expertise and up-front capital to efficiently create, produce, edit and air the advertising campaigns.  Ineffective advertisements can result in significant costs that do not generate revenue sufficient to cover costs.

 

We partner with electronics buying companies and provide them with a low risk, cost-efficient customer acquisition model. Through participation in the uSell marketplace, our partners can benefit from the high volume response rates to our national television advertising and broad-based Internet advertising campaigns, while minimizing the investment and risk associated with creating and running their own branded advertising campaign.  When consumers enter the information about the device they intend to sell on our website, they are presented with offers from our partners that are interested in buying that item. A partner pays us only when a consumer accepts an offer on our website and provides us with the consumer’s name and address.  We believe that this model provides our partners with a competitive customer acquisition cost which, in turn, allows them to offer higher prices to consumers.

 

Corporate Information

 

Our corporate headquarters are located at 245 North Ocean Blvd., Suite 306, Deerfield Beach, Florida 33441 and our phone number is (954) 915-1550. Our website can be found at www.usell.com. The information on our website is not incorporated in this prospectus.

 

1
 

 

THE OFFERING

 

Common stock outstanding prior to the offering:   42,238,056 shares
     
Common stock offered by usell.com:   35,000,000 shares
     

Common stock outstanding immediately following

the offering:

  77,568,056 shares (1)
     
Use of proceeds:   We intend to use the net proceeds of this offering for marketing, improving our platform technology, working capital and general corporate purposes.  See “Use of Proceeds” on page 16.
     
Risk Factors:   See “Risk Factors” beginning on page 5 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.
     
Stock Symbol:   OTCBB: USEL

 

(1) Includes approximately 330,000 shares of common stock underlying Series A preferred stock which will no longer be subject to a 9.99% conversion blocker.

 

The number of shares of common stock to be outstanding prior to and after this offering excludes:

 

  · a total of 6,309,147 shares of common stock issuable upon the exercise of outstanding stock options;
  · a total of 227,844 shares of common stock reserved for future issuance under our 2008 Equity Incentive Plan, which we refer to as the “Plan”;
  · a total of 8,305,529 shares of common stock issuable upon the exercise of warrants; and
  · a total of 2,406,658 shares of common stock issuable upon the conversion Series B preferred stock.

 

2
 

 

SUMMARY FINANCIAL DATA

 

The following summary of our financial data should be read in conjunction with, and is qualified in its entirety by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements, appearing elsewhere in this prospectus.  The data for the years ended December 31, 2011 and December 31, 2010 has been taken from our audited financial statements.

 

Statements of Operations Data

 

   Three
Months
Ended
June 30,
2012
(Unaudited)
   Three
Months
Ended
June 30,
2011
(Unaudited)
   Six
Months 
Ended
June 30,
2012
(Unaudited)
   Six
Months
Ended
June 30,
2011
(Unaudited)
   Year Ended
December 31,
2011
(Audited) (1)
  

Year Ended

 December 31,

 2010

(Audited) (1)

 
Revenue  $591,432   $1,789,048   $836,039   $5,510,759   $5,876,660   $32,547,898 
                               
Gross profit  $543,840   $911,111   $757,123   $2,756,008   $2,608,016   $21,021,684 
                               
Net loss  $(5,690,610)  $(956,715)  $(6,805,410)  $(2,656,576)  $(4,378,200)  $(16,791,253)
                               
Net loss per common share – basic and diluted  $(0.43)  $(0.23)  $(0.72)  $(0.66)  $(0.90)  $(4.46)
                               
Weighted average common shares outstanding (basic and diluted)   13,149,571    4,246,002    9,469,919    4,137,050    4,847,263    3,766,619 

  

(1) The net loss per common share (basic and diluted) and the weighted average common shares outstanding (basic and diluted) have been adjusted to reflect the 52.4846 for 1 reverse stock split.

 

3
 

 

Balance Sheet Data

 

   June 30,
2012
   December 31,
2011
 
   (Unaudited)   (Audited) 
Cash  $3,156,459   $1,791,623 
           
Working capital (deficit)  $(1,478,100)  $(257,004)
           
Total assets  $4,605,656   $1,898,626 
           
Total current liabilities  $5,476,822   $2,115,094 
           
Accumulated deficit  $(38,478,682)  $(31,450,276)
           
Total stockholders’ deficit  $(871,166)  $(216,468)

 

4
 

 

RISK FACTORS

 

Investing in our common stock involves a high degree of risk.  You should carefully consider the following Risk Factors before deciding whether to invest in usell.  Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition.  If any of the events discussed in the Risk Factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected.  In such case, the value and marketability of the common stock could decline.

 

Risks Relating to Our Business

 

Because we have a limited operating history to evaluate our company and are implementing a new business model, the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delay frequently encountered by a new company.

 

In the third quarter in 2011, we began testing our platform which aggregates offers from our partners to customers who we attract to our website. While our results to date have been positive, we have not committed significant marketing resources and cannot predict the degree of our ultimate success. Since we have a limited operating history, we cannot assure you that our business will be profitable. Early stage companies often are unsuccessful and encounter unanticipated expenses and difficulties, investors should consider this risk in determining whether to purchase or sell our common stock.

 

If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.

 

We believe that our cash on hand and cash flow from operations, together with the proceeds from this offering, will be sufficient to meet our anticipated cash needs for the next 12 months. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities. Because of the ongoing financial issues in Europe, difficulties which microcap companies have in raising capital, the lack of available credit for companies like us and our stock price, we may be hampered in our ability to raise the necessary working capital. Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments will dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. For example, the Series A Preferred Stock, which we refer to as “2011 Series A PS”, offering was extremely dilutive to common shareholders and any future financing may be equally or more dilutive. The investors in the 2011 Series A PS received certain price protection features as well. In the event that we sell securities in the future below a value of $0.20 per share, we will be required to issue additional shares of common stock to these investors, to the extent they are still holding the common stock derived from the shares purchased in the offering. In addition, new equity or debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock.  

 

We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us. If we require additional financing and such financing is not available on reasonable terms or at all, we may have to reduce our marketing efforts and we will have to modify our business plans accordingly.

 

5
 

 

We may be unable to maintain or establish relationships with partners, which would adversely affect our results of operations.

 

In July 2011, we focused our business on creating an online marketplace where consumers could sell their small electronics which was a new, unproven market for us. Our ability to attract sellers of small electronics to our website depends in large part on providing a sufficient number of partners (buyers) to make our online marketplace efficient and providing customers with the best available pricing and service. The loss of existing relationships with partners, or an inability to continue to add new ones, may cause our platform to provide limited pricing, availability and other information important to customer’s visiting our website. This deficiency could reduce customer confidence in the offers provided by partners on our website, making customers less likely to sell to our partners and come back to our website, which would limit the revenues we are able to generate from our platform. In turn, this will adversely affect our business.

 

Because we operate a platform or marketplace, we do not purchase devices directly from consumers. We rely on our partners to provide offers to our consumers and to complete the transactions with the consumers.

 

If our partners limit the number of devices on which they provide offers, consumers may not receive offers on the devices they are trying to sell. In addition, we rely on our partners’ ability to service all of the consumers visiting our website. As we grow our marketing campaigns, we expect the volume of transactions to increase. If consumers do not receive offers to buy their devices, or if our partners are unable to service the increased volume, they may be forced to go elsewhere to sell their devices, or abandon the transaction altogether.

 

If any of our partners provide poor customer service to our customers, it could hurt the usell brand and adversely affect our business.

 

We believe the importance of customer service in order to generate business and repeat customers is paramount to our ability to be successful. If any of our partners provides poor customer service including delayed and/or reduced payments, or poor website performance, we may lose customers. In particular, customers may think their electronics are in better condition than they are or may not know the exact model, which could result in our partners paying customers less than the customer anticipated. Although we provide customers with the ability to rate our partners after they have completed their transaction, there is no assurance that this rating system provides an accurate depiction of the service provided by our partners.

 

Because we cannot control key elements of our business, we may not be successful.

 

Although we are responsible for creating effective marketing campaigns and for providing a robust, secure and easy to use website for consumers, we have no ability to control our partners which are a key part of our business model. If our partners do not provide excellent service and prices which consumers perceive to be fair, it would affect the reputation of our business, as well as possibly helping our competitors.

 

If we cannot manage our growth effectively, we may not become profitable.

 

Businesses which grow rapidly often have difficulty managing their growth.  If we grow as rapidly as we anticipate, we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support.  We cannot assure you that our management will be able to manage our growth effectively or successfully.  Our failure to meet these challenges could cause us to lose money, and your investment could be lost.

 

Additionally, the majority of our partners are small electronic recycling companies which are not largely capitalized and do not have the infrastructure to adapt to our expected rapid growth. If our partners do not have the liquidity to pay all of the customers that come to our site, customers may not get paid in time which would hurt the usell brand. If any of our partners’ websites were unable to handle all of the traffic that our platform referred to them, their website could crash which would also negatively affect the usell brand. All of these factors could adversely affect our ability to become profitable.

 

6
 

 

If we do not have sufficient capital to market our service, our revenue will be insufficient to support our operations.

 

We currently are not spending enough money to market our service in a manner which we expect will generate enough revenue to support our operations. However, we plan to increase our spending through the course of 2012. If these efforts do not generate the revenue level we anticipate, or if we lack sufficient capital, our revenue will be insufficient to support our operations.

 

Our future growth and profitability will depend in large part upon the effectiveness of our marketing and advertising expenditures.

 

Our future growth and profitability will depend in large part upon our media performance, including our ability to:

 

  create greater awareness of our platform;

 

  identify the most effective and efficient level of spending in each market and specific media channel;

 

  determine the appropriate creative message and media mix for advertising, marketing and promotional expenditures; and

 

  effectively manage marketing costs (including creative and media).

 

Our planned marketing expenditures may not result in increased revenue.  If our media performance is not effective, our future results of operations and financial condition will be adversely affected.

 

If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

 

Our future depends, in part, on our ability to attract and retain key personnel and the continued contributions of our executive officers, each of whom may be difficult to replace.  In particular, Daniel Brauser, our Chief Executive Officer, Sergio Zyman, our Executive Chairman, Nik Raman, our Chief Operating Officer, Michael Brachfeld, our Chief Financial Officer, and Christian Croft, our Vice President of Product Development and User Experience are important to the management of our business and operations and the development of our strategic direction.  The loss of the services of any of these officers and the process to replace any key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives. 

  

Our business could be negatively affected by changes in general search engine algorithms and dynamics or termination of traffic-generating arrangements.

 

We use Internet search engines, principally through the purchase of branded and smart phone related keywords, to generate traffic to our websites. Search engines, such as Google, frequently update and change the logic which determines the placement and ordering of results of a user’s search, which may reduce the effectiveness of the keywords we have purchased. If a major search engine, such as Google, changes its algorithms in a manner that negatively affects the search engine ranking of our website, or changes its pricing, operating or competitive dynamics to our disadvantage, our business, results of operations and financial condition could be adversely affected.

 

7
 

 

Because we face intense competition for business, our future results of operations and our future financial condition may be adversely affected.

 

We compete with eBay and other online auction companies, Gazelle, a leading platform for selling used small electronics, and with many small websites including our partners. In addition, cellular service providers, such as AT&T, Verizon and Sprint, and large retail companies, such as Best Buy and Radio Shack, have introduced trade-in programs for used smartphone devices. Our smaller size, lack of established brand name, shorter operating history and limited working capital may limit our advertising levels, our ability to expand successfully into new markets or effectively compete against these other companies. If we are not able to compete effectively, our future business will be adversely affected and our future results of operations and financial condition will be adversely affected.

 

Because we rely on the continuing rapid pace of technological development in the cell phone and tablet industries, if innovation in these industries were to decrease, our future results of operation will be adversely affected.

 

We believe that one of the driving factors for the potential success of our platform is the continued improvements in the smartphone industry and tablet market. Because many consumers have in the past expressed a continual need to have the latest generation phones and iPads or other tablets, the opportunity for providing these consumers with an outlet to sell their used electronics is promising. However, we cannot guarantee that consumers will visit our website to sell their used electronics. If innovation in cell phone or tablet device technology were to level off, the purchase of new phones and tablets could be diminished reducing the need for an online marketplace for selling used electronics. In such event, our results of operations would suffer and we may not be able to continue operations.

 

Because we rely on information technology to operate our businesses and maintain our competitiveness, and any failure to adapt to technological developments or industry trends could harm our business.

 

We depend upon the use of sophisticated information technology including software. As our operations grow in both size and scope, we must continuously improve and upgrade our systems including our hardware and infrastructure to offer our customers enhanced products, services, features and functionality, while maintaining the reliability and integrity of our systems and infrastructure. Our future success also depends on our ability to adapt our services and infrastructure to meet rapidly evolving industry standards while continuing to improve the performance, features and reliability of our service in response to competitive service and product offerings and the changing demands of the marketplace. In particular, expanding our systems and infrastructure to meet any potential increases in business volume will require us to commit additional financial, operational and technical resources before those increases materialize, with no assurance that they actually will. Furthermore, our use of this technology could be challenged by claims that we have infringed upon the patents, copyrights or other intellectual property rights of others. See Risk Factor beginning at page 10.

 

In addition, we may not be able to maintain our existing systems, obtain new technologies and systems, or replace or introduce new technologies and systems as quickly as our competitors or in a cost-effective manner. Also, we may fail to achieve the benefits anticipated or required from any new technology or system, or we may be unable to devote financial resources to new technologies and systems in the future.

 

Additionally, our business is heavily reliant on application program interfaces with our partners.  If we experience information technology problems with one or more of our partners, it could adversely affect our business.

 

8
 

 

If we experience system interruptions, it may cause us to lose customers and harm our business.  

 

Our inability to maintain and improve our information technology systems and infrastructure may result in system interruptions. System interruptions and slow delivery times, unreliable service levels, prolonged or frequent service outages, or insufficient capacity may prevent us from efficiently providing services to our customers, which could result in our losing customers and revenue.

 

 We lease space for our data center and rely on a co-location partner for power, security, connectivity and other services. We also rely on third party providers for bandwidth and content delivery. We do not control these vendors and it would take significant time and effort to replace them. We have experienced, and may in the future experience, website disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints. Our systems are vulnerable to damage or interruption from terrorist attacks, floods, fires, power loss, telecommunications failures, hurricanes, computer viruses, computer denial of service attacks or other attempts to harm our systems. If the site is unavailable when consumers attempt to access it or access is slower than a consumer expects, consumers may stop visiting our site and become less likely to return, if at all. We expect to continue to make significant investments in our technology infrastructure to maintain and improve all aspects of user experience and site performance. To the extent that our disaster recovery systems are not adequate, or we do not effectively address capacity constraints, upgrade our systems and continually develop our technology and network architecture to accommodate increasing traffic, our business and operating results may suffer.

 

Our software is highly technical and undetected errors, if any, could adversely affect our business.

 

Our service incorporates software that is highly technical and complex. Our software has contained, and may now or in the future contain, undetected errors, bugs, flaws, corrupted data or vulnerabilities. Some errors in our software code may only be discovered after the code has been released. Any errors, bugs, flaws or corrupted data could result in damage to our reputation, loss of users, or loss of revenue, any of which could adversely affect our business and financial results.

 

Our networks and IT systems may be vulnerable to unauthorized persons hacking our systems, which could disrupt our operations and result in the theft of our proprietary information.

 

A party who is able to breach the security measures on our networks could misappropriate either our proprietary information or the personal information of our customers, or cause interruptions or malfunctions in our operations. We may be required to expend significant capital and other resources to protect against such threats or to alleviate problems caused by breaches in security, which could have a material adverse effect on our financial performance and operating results.

 

Our business is subject to a variety of U.S. and other laws, rules and regulations that could subject us to claims or otherwise harm our business.

 

Government regulation of the Internet and e-commerce is evolving and unfavorable changes could substantially harm our business and results of operations. We are subject to a variety of laws in the U.S. and elsewhere that affect advertising, that are costly with which to comply, can result in negative publicity and diversion of management time and effort, and can subject us to claims or other remedies.  In addition, the laws relating to the liability of providers of online services are currently unsettled both within the U.S. and elsewhere.  Claims can be brought under both U.S. and foreign law for defamation and other tort claims, unlawful activity, copyright and trademark infringement.

 

The Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, our liability for listing or linking to third-party websites that include materials that infringe copyrights or other rights, so long as we comply with the statutory requirements of this act.  The Child Online Protection Act and the Children’s Online Privacy Protection Act restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors. In the area of data protection, the European Union and many states have passed laws requiring notification to users when there is a security breach for personal data, such as California’s Information Practices Act. We must comply with the Federal Trade Commission’s unfair trade practices rules and state consumer protection laws including “little” unfair trade practice rules.   Any failure on our part to comply with these laws, rules and regulations may subject us to additional liabilities.

 

9
 

 

As Internet commerce develops, federal, state and foreign governments may draft and propose new laws to regulate Internet commerce, which may negatively affect our business.

 

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign governments becomes more likely.  Our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws applicable to email marketing.  The cost to comply with such laws or regulations could be significant and would increase our operating expenses.

 

A new tax treatment of companies engaged in Internet commerce could adversely affect the commercial use of our marketing services and our financial results.

 

Due to the global nature of the Internet, it is possible that governments might attempt to tax our activities. New or revised tax regulations may subject us to additional sales, income and other taxes.  Recently there has been movement toward Congress permitting States and localities to impose sale taxes on online purchases principally due to the poor economy in the U.S., the impact of substantially lower prices on real estate or tax revenue and soaring state budget deficits. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet. New or revised taxes and especially sales taxes would likely increase the cost of doing business online, and increase advertising and marketing costs over the Internet. Any of these events will increase our costs and adversely affect our business and results of operations.

 

If a third party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or require us to obtain expensive licenses, and our business may be adversely affected.

 

The Internet industry is characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. A party may assert patent and other intellectual property infringement litigation against us claiming our platform infringes on its patents or otherwise violates its intellectual property rights.  Any lawsuit, whether or not successful, could:

 

  · Divert management’s attention;

 

  · Result in prohibitive costs;

 

  · Require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all; or

 

  · Require us to redesign our platform to avoid infringement.

 

As a result, any third-party intellectual property claims against us could increase our expenses and adversely affect our business. In addition, agreements with third parties require us to indemnify them for intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling on any such claim. Even if we have not infringed any intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management time. Finally, if a claimant successfully asserts a claim that our services infringe their proprietary rights, royalty or licensing agreements might not be available on terms we find acceptable, or at all.

 

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If we cannot protect our intellectual property rights, we may be unable to compete with competitors developing similar technologies.

 

We regard the protection of our trade secrets and other intellectual property rights as critical to our success. A substantial amount of our processes and technologies is protected by trade secret laws. In order to protect these technologies and processes, we rely in part on confidentiality agreements with our employees, licensees, independent contractors and other advisors. These agreements may not effectively prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. To the extent that our employees, contractors or other third parties with which we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Laws regarding trade secret rights in certain markets in which we currently, or in the future, operate may afford little or no protection to our trade secrets. The loss of trade secret protection could make it easier for third parties to compete with our platform by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our business, revenue, reputation and competitive position.

 

Risks Related to Our Common Stock 

 

Because the market for our common stock is limited, persons who purchase our common stock may not be able to resell their shares at or above the purchase price paid for them.

 

Our common stock trades on the Bulletin Board which is not a liquid market. There is currently only a limited public market for our common stock.  We cannot assure you that an active public market for our common stock will develop or be sustained in the future.  If an active market for our common stock does not develop or is not sustained, the price may continue to decline.

 

Because we are subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock which adversely affects its liquidity and market price.

 

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions.  The market price of our common stock on the Bulletin Board has been substantially less than $5.00 per share and therefore we are currently considered a “penny stock” according to SEC rules.  This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.

 

Due to factors beyond our control, our stock price may be volatile.

 

Any of the following factors could affect the market price of our common stock:

 

  · Our failure to increase revenue in each succeeding quarter;

 

  · Our failure to achieve and maintain profitability;

 

  · Our failure to meet our revenue and earnings guidance;

 

  · The loss of partners;

 

  · The sale of a large amount of common stock by our shareholders;

 

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  · Our announcement of a pending or completed acquisition or our failure to complete a proposed acquisition;

 

  · Adverse court ruling or regulatory action;

 

  · Our failure to meet financial analysts’ performance expectations;

 

  · Changes in earnings estimates and recommendations by financial analysts;

 

  · Changes in market valuations of similar companies;

 

  · Short selling activities;

 

  · Our announcement of any financing which is dilutive to our shareholders;

 

  · Our announcement of a change in the direction of our business;

 

  · Announcements by us, or our competitors, of significant contracts, acquisitions, commercial relationships;

 

  · joint ventures or capital commitments; or

 

  · Our failure to increase revenue in each succeeding quarter.

   

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted.  A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.

 

Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our common stock.

 

It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since the firm itself cannot recommend the purchase of our common stock under the penny stock rules referenced in an earlier risk factor.  The absence of such coverage limits the likelihood that an active market will develop for our common stock.  It may also make it more difficult for us to attract new investors at times when we acquire additional capital.

 

Our management team will have immediate and broad discretion over the use of the net proceeds from this offering and we may use the net proceeds in ways with which you disagree.

 

The net proceeds from this offering will be immediately available to our management to use at their discretion. We currently intend to use the net proceeds from this offering for marketing and advertising, improving our platform technology, general corporate purposes and working capital. See “Use of Proceeds.” You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for us or our shareholders. The failure of our management to use such funds effectively could have a material adverse effect on our business, prospects, financial condition, and results of operation.

 

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We are subject to a regulatory investigation and we may be subject to such proceedings in the future, which could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business.

 

From time to time, we may receive inquiries from regulators regarding our compliance with laws and other matters. For example, in August 2011, the Florida Attorney General, which we refer to as 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 is due to consumer complaints primarily with our former gold business, although some complaints related to our initial cell phone business. Because we generally relied on third parties to handle the products we sold, we are uncertain as to whether we have any potential liability. Under Florida law, the remedies include actual damages, civil penalties, and attorneys’ fees. We cooperated fully and provided a comprehensive response to the AG demonstrating that we acted properly. However, we cannot assure you that the AG will agree.  In such event, defending this or any other action would cause us to incur substantial expenses and divert our management’s attention.  If we are unsuccessful, we may have to change our policies or practices.  Any such change or defense of a regulatory investigation or action could reduce our future revenues and increase our costs and adversely affect our future operating results.

 

Violation of existing or future regulatory orders or consent decrees could subject us to substantial monetary fines and other penalties that could negatively affect our financial condition and results of operations. In addition, it is possible that future orders issued by, or enforcement actions initiated by, regulatory authorities could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business.

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus includes forward-looking statements.  All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial position, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking statements.  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.  These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” elsewhere in this prospectus.

 

Other sections of this prospectus may include additional factors which could adversely affect our business and financial performance.  Moreover, our business is competitive and our business model is expected to change.  New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause actual results to differ materially from those contained in any forward-looking statements.

  

Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this prospectus, whether as a result of new information, future events, changed circumstances or any other reason after the date of this prospectus.

 

DILUTION

 

The net tangible book value of our common stock on June 30, 2012 was approximately $(875,055), or approximately $(0.024) per share, based on 36,233,608 shares of our common stock outstanding as of June 30, 2012. Net tangible book value per share represents the amount of our total tangible assets, less our total liabilities, divided by the total number of shares of our common stock outstanding. Dilution in net tangible book value per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately afterwards.

 

After giving effect to the sale of 35,000,000 shares of our common stock in this offering at the public offering price of $[_____] per share, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of June 30, 2012 would have been approximately $[___________], or $[______] per share. This represents an immediate increase in net tangible book value of $[_______] per share to existing shareholder and immediate dilution in net tangible book value of $[_____] per share to new investors purchasing our common stock in this offering at the public offering price.

 

The following table illustrates this per share dilution:

 

Public offering price per share           $    
Net tangible book value per share as of June 30, 2012   $ (0.024 )        
Increase in net tangible book value per share attributable to this offering   $            
Pro forma net tangible book value per share as of June 30, 2012, after giving effect to this offering           $    
Dilution per share to new investors in this offering           $    

 

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The foregoing illustration does not reflect potential dilution from the conversion of our outstanding convertible preferred stock or the exercise of outstanding stock options or warrants.

 

The following table provides, as of June 30, 2012, with respect to existing shareholders and new investors, a comparison of the number of shares acquired, their percentage ownership of such shares, the total consideration paid, the percentage of total consideration paid and the average price per share:

 

               Average 
   Shares Purchased   Total Consideration   Price 
                   Per 
   Number   Percent   Amount   Percent   Share 
Existing shareholders   36,233,608    %  28,247,284    %  0.78 
New investors                    
Total       100%      100%  $ 

 

The above table excludes:

 

    6,309,147 shares of common stock issuable upon the exercise of options as of June 30, 2012 with a weighted-average exercise price of approximately $0.95 per share;
    8,305,529 shares of common stock issuable upon the exercise of warrants with an average exercise price of $0.42 per share;
    2,671,133 shares of common stock issuable upon the conversion of Series B preferred stock as of June 30, 2012; and
    227,844 shares of our common stock reserved for future issuance under the Plan.

 

To the extent that any of these securities are exercised or converted, there will be further dilution to new investors.

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds of $______ from the sale of all 35,000,000 shares of common stock being offered at an assumed public offering price of $_____ per share after deducting estimated expenses of approximately $_____ , which includes legal, accounting, printing costs and various fees associated with the registration of our shares. We intend to use the net proceeds of the offering as follows:

 

   Application of
Net Proceeds
   Percentage of
Net Proceeds
 
Marketing         %
Improvement in platform technology         %
Working capital and general corporate purposes         %
Total  $     100.00%

 

The allocation of the net proceeds of this offering set forth above represents our best estimates based upon our current plans and assumptions regarding industry and general economic conditions and our future revenues and expenditures. If any of these factors change, it may be necessary or advisable for us to reallocate some of the proceeds within the above-described categories or to use portions for other purposes. If less than 35,000,000 shares are sold, we anticipate the percentages above will remain applicable to the lesser dollar amounts raised. However, our management team will have discretion on allocating the proceeds amongst the categories above.

 

Pending use of the proceeds of this offering, we will invest the net proceeds of this offering in short-term, investment grade, interest-bearing instruments. We currently anticipate that the net proceeds of this offering, together with our available funds, will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least 12 months following the closing of this offering.

 

The allocation of the net proceeds of this offering set forth above represents our best estimates based upon our current plans and assumptions regarding industry and general economic conditions and our future revenues and expenditures. If any of these factors change, it may be necessary or advisable for us to reallocate some of the proceeds within the above-described categories or to use portions for other purposes. Investors will be relying on the judgment of our management regarding application of the net proceeds of this offering.

 

CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2012 on an actual basis and on an as-adjusted basis after giving effect to the completion of this offering with a sale by us of all 35,000,000 shares of common stock and net proceeds of $[_____________].

 

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This table should be read in conjunction with our audited and unaudited financial statements.

 

   June 30, 2012 
   Actual   As
Adjusted
 
         
Cash  $3,156,459   $ 
           
Common stock, ($0.0001 par value, 650,000,000 shares authorized, 36,233,608 shares issued and outstanding)   3,624      
           
Convertible Series A preferred stock, ($0.0001 par value, 10,000,000 shares authorized, 1,650,000 shares issued and outstanding)   165      
           
Convertible Series B preferred stock, ($0.0001 value per share, 4,000,000 shares authorized, 2,626,250 shares issued and outstanding) Liquidation preference $2,626,250   263      
           
Convertible Series C preferred stock, ($0.0001 value per share, 1,000,000 shares authorized, 14,797 shares issued and outstanding)   1      
           
Series D preferred stock, ($0.0001 value per share, 350,000 shares authorized, issued and outstanding)   35      
           
Additional paid-in capital   37,603,428      
           
Accumulated deficit   (38,478,682)     
           
Total shareholders’ deficit   (871,166)     
           
Total capitalization  $(871,166)  $ 

 

MARKET FOR COMMON STOCK

 

Our common stock is quoted on the Bulletin Board under the symbol “USEL”.  As of the date prior to the date of this prospectus, the last reported sale price of our common stock as reported by the Bulletin Board was $0.20.  As of that date, there were approximately 125 shareholders of record. This number does not include beneficial owners whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. 

 

The following table provides the high and low bid price information for our common stock for the periods indicated which reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

  

Year  Quarter Ended   Stock Price 
         High    Low 
         ($)    ($) 
                
2012   June 30    2.62    0.24 
    March 31    1.47    0.26 
                
2011   March 31    2.73    0.94 
    June 30    1.57    0.58 
    September 30    1.20    0.525 
    December 31    0.89    0.157 
                
2010   March 31    20.99    8.99 
    June 30    10.49    3.67 

 

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Dividend Policy

 

We have not paid any cash dividends on our common stock and do not plan to pay any such dividends in the foreseeable future.  We currently intend to use all available funds to develop our business.  We can give no assurances that we will ever have excess funds available to pay dividends.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus. 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 this prospectus.

 

Company Overview

 

usell.com, Inc., formerly known as Upstream Worldwide, Inc., is a technology based company focused on creating an online marketplace where individuals, which we refer to as 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 top-rated buyers,
     
  · Review satisfaction ratings and customer reviews of each buyer,
     
  · Determine the offer they wish to accept, and
     
  · Immediately complete their transaction 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 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.

 

Our corporate headquarters are located at 245 North Ocean Blvd., Suite 306, Deerfield Beach, Florida 33441 and our phone number is (954) 915-1550. Our website can be found at www.usell.com. The information on our website is not incorporated in this prospectus.

 

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 are discussed below and involve certain assumptions that, if incorrect, could have a material adverse impact on our results of operations and financial condition. See Note 2 to our unaudited interim condensed consolidated financial statements and Note 2 to our Consolidated Financial Statements for the year ended December 31, 2011 found elsewhere herein for further discussion regarding our critical accounting policies and estimates.

 

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Recent Accounting Pronouncements

 

See Note 2 to our unaudited interim condensed consolidated financial statements regarding recent accounting pronouncements.

 

Results of Operations

 

We help individuals 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. By mid-2010, the market for precious metals had retracted and we diversified our business by introducing a service similar to our precious metals business, for cellular phones. During the fourth quarter of 2010, our cellular phone business began to gain traction and our revenue from the sale of cellular phones began to make up a substantial percentage of our business.  As a result of this trend, 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 we continued to service packs coming in from prior precious metals and cellular phone advertising campaigns.

 

In July 2011, we began to focus more intently on our core strength of cost-effective customer acquisition, by creating an online marketplace where individuals 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 allows us to quickly expand into new product categories beyond cellular phones, such as smartphones, digital cameras, MP3 players, handheld game consoles, etc.

 

Results for the Three and Six Months Ended June 30, 2012, Compared to the Three and Six Months Ended June 30, 2011

 

The following tables set forth, for the periods indicated, results of operations information from our unaudited interim condensed consolidated financial statements:

 

   For the Three Months Ended June 30,   Change   Change 
   2012   2011   (Dollars)   (Percentage) 
Revenue  $591,432   $1,789,048   $(1,197,616)   -67%
                     
Cost of Revenue   47,592    877,937    (830,345)   -95%
                     
Gross Profit   543,840    911,111    (367,271)   -40%
                     
Sales and Marketing   680,260    488,575    191,685    39%
                     
General and Administrative   1,376,290    1,435,824    (59,534)   -4%
                     
Operating Loss   (1,512,710)   (1,013,288)   (499,422)   49%
                     
Other (Expense) Income   (4,177,900)   56,573    (4,234,473)   -7,485%
                     
Net Loss  $(5,690,610)  $(956,715)  $(4,733,895)   495%

 

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   For the Six Months Ended June 30,   Change   Change 
   2012   2011   (Dollars)   (Percentage) 
Revenue  $836,039   $5,510,759   $(4,674,720)   -85%
                     
Cost of Revenue   78,916    2,754,751    (2,675,835)   -97%
                     
Gross Profit   757,123    2,756,008    (1,998,885)   -73%
                     
Sales and Marketing   1,008,030    2,606,397    (1,598,367)   -61%
                     
General and Administrative   2,042,793    2,971,372    (928,579)   -31%
                     
Operating Loss   (2,293,700)   (2,821,761)   528,061    -19%
                     
Other (Expense) Income   (4,511,710)   165,185    (4,676,895)   -2,831%
                     
Net Loss  $(6,805,410)  $(2,656,576)  $(4,148,834)   156%

 

Our revenue demonstrates a strong correlation to our level of spending on advertising and marketing. Comparison of revenue, cost of revenue and the resulting gross margins for the three and six month periods ended June 30, 2012 to the same periods in 2011 highlights the effects of the changes to our business over the last year, as discussed above. During 2012, our revenue was generated by earning fees for providing our partners with customers. During 2011, our revenue was generated by selling precious metals and cellular phones that we had purchased from the public. During the transition of our approach, we lowered our advertising expenses considerably while we tested our new message to Consumers and adjusted based on feedback and results. This resulted in lower revenue during 2012, as compared with 2011.

 

Our direct cost of revenue for generating leads for our partners consists primarily of costs to access and maintain our website, as well as depreciation expense on our technology platform software. During 2011, we paid individuals a percentage of the market value of the items we purchased from them. In addition, we had to maintain facilities and personnel to ship, secure, grade, log and process the items we purchased. In connection with the change in approach, we were able to eliminate these costs. As a result, we have a higher gross margin, on a percentage basis, during 2012, as compared to the same period in 2011.

 

Our sales and marketing expenditures represent one of our most significant costs, amounting to 115% and 27% of revenue for the three months ended June 30, 2012 and 2011, respectively, and 121% and 47% of revenue for the six months ended June 30, 2012 and 2011, 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 2012, as evidenced by the decline in total sales and marketing costs as a percentage of revenue from 134% during the first quarter of 2012 to 115% during the second quarter of 2012. In addition, this percentage declined each month within the second quarter of 2012, to the point where our revenue exceeded our total sales and marketing costs at the end of the second quarter. Factors such as the time of year and significant local or nationally televised events can influence the effectiveness of our advertising campaigns.  We expect the presidential election later this year to have an impact on viewership patterns and to increase the cost of advertising.  As such, we have adjusted our advertising plans in an attempt to reduce the potential negative impact that these events might have on the cost of our media campaigns, and maximize the returns on our advertising spending.

 

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. In general, our general and administrative expenses for 2012, as compared to 2011, decreased as we scaled back our investments in our technology infrastructure, reduced our headcount, relocated to less expensive facilities, and reduced other expenses, such as travel, wherever practical. Offsetting the decrease, in part, is an increase in non-cash compensation expense pertaining to share grants for services to our co-chairman of the board and an outside vendor. We are continuing to diligently seek out ways to reduce our overhead costs and to maintain them at minimal levels. 

 

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Other expense during the three and six months ended June 30, 2012 was attributable predominantly to a charge resulting from the change in the market value of the derivative liability pertaining to our 2011 Series A PS. During the six months ended June 30, 2012, we also incurred interest expense associated with our 2011 Convertible Notes (as defined below), partially offset by a gain on the settlement of certain accounts payable.

 

Other income during the three and six months ended June 30, 2011 was attributable primarily to gains on the changes in the market values of the derivative liabilities pertaining to our 2010 Series B preferred stock and our 2011 Convertible Notes, partially offset by derivative expense and interest expense associated with our 2011 Convertible Notes.

 

Results for the Year Ended December 31, 2011, Compared to the Year Ended December 31, 2010

 

The following table sets forth, for the periods indicated, consolidated statements of operations information:

 

   For the Year Ended December 31,   Change   Change 
   2011   2010   (Dollars)   (Percentage) 
Revenue  $5,876,660   $32,547,898   $(26,671,238)   -82%
                     
Cost of Revenue   2,955,932    11,526,214    (8,570,282)   -74%
                     
Impairment of prepaid expenses - related party   312,712    -    312,712    100%
                     
Gross Profit   2,608,016    21,021,684    (18,413,668)   -88%
                     
Sales and Marketing   3,007,443    20,821,100    (17,813,657)   -86%
                     
General and Administrative   5,201,263    7,004,056    (1,802,793)   -26%
                     
Impairment of property and equipment   57,871    114,018    (56,147)   -49%
                     
Impairment of goodwill and intangible assets   448,734    11,142,273    (10,693,539)   -96%
                     
Operating Loss   (6,107,295)   (18,059,763)   11,952,468    -66%
                     
Interest Expense, net   (421,626)   -    (421,626)   -100%
                     
Other Income   2,150,721    1,268,510    882,211    70%
                     
Net Loss  $(4,378,200)  $(16,791,253)  $12,413,053    -74%

 

The nature of our direct response advertising and marketing campaigns generally yields a strong correlation between our level of spending on sales and marketing and our revenue across all of our service offerings.  This is evident as the decline in revenue during 2011, as compared with 2010, is relatively consistent with the decline in our sales and marketing expenses across the same period. As we changed our advertising allocations from precious metals to cellular phones and then to a broad array of small consumer electronics, our revenues have changed accordingly.  During 2011, approximately 43%, 53%, and 3% of our revenue came from the sale of precious metals, the sale of cellular phones, and the provision of small consumer electronics customers to our partners, respectively, whereas approximately 97% of our revenue during 2010 came from precious metals.  We expect revenue generated by providing small consumer electronics customers to our partners to comprise the majority of our revenue in 2012.  

 

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Cost of revenue decreased during 2011, as compared to 2010, mainly as a result of a strong correlation to revenue. For items purchased directly, we generally paid Consumers a percentage of the market value of the items we purchased from them.  Therefore a portion of our cost of revenue is directly correlated to our revenue, both on a volume and per unit basis. Also contributing to the decrease, and causing the slower rate of decline as compared with revenue, is the sales mix: we generally earned a lower gross margin on cellular phones than we did on precious metals.  Slowing the rate of decline in cost of revenue, as compared with the decline in revenue, is the fact that certain components of our cost of revenue, such as rent and salaries, are fixed in nature and therefore did not decrease with the sharp decline in revenue. We have reduced or eliminated these costs wherever possible, as they are not required for us to provide an online marketplace for small consumer electronics. Consequently, we anticipate that our gross margin percentage will increase substantially in 2012, as our direct cost of revenue for generating leads for our partners is minimal.

 

In connection with the decline of our revenues from precious metals and the adaptations we made to our approach to the electronics recycling market, we periodically reviewed the recoverability of our assets pertaining to those portions of our business. During 2010, we recorded an impairment charge of $114,018 pertaining to property and equipment utilized in our foreign precious metals operations and a goodwill impairment charge of $11,142,273. During 2011 we recorded an impairment charge of $57,871 pertaining to property and equipment utilized in our domestic precious metals operations. In addition, during 2011 we determined that our prepaid refinery costs and certain intangible assets, including our non-compete agreement with the Refinery and software development costs pertaining to our website and back-end systems, had been impaired.  Accordingly, in 2011 we recorded an impairment charge of $312,712 related to our prepaid refining services and $448,734 related to our intangible assets.

 

Our sales and marketing expenditures, primarily comprised of advertising and marketing costs, represent one of our most significant costs, amounting to 51% and 64% of revenue for 2011 and 2010, respectively.  We manage our advertising and marketing campaigns, and make allocation decisions, by measuring their effectiveness primarily based on the media efficiency rate, which we refer to as “MER”.  There are a variety of factors that impact the MER including:

 

  1. The number of leads generated from an advertisement,

 

  2. The rate at which those leads convert into actual orders from Consumers, and

 

  3. The average revenue per order.

 

Each of these factors, and hence our MERs, vary by market and by the particular advertising method utilized within each market.  As our MER from precious metals campaigns declined over the course of 2010 and into 2011, we stopped actively advertising for 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.  This decline was partially offset by the advertising and marketing testing costs, including production costs to design and implement new campaigns, related to our cellular phone offering, conducted during the first quarter of 2011.  However, during the first quarter of 2011, we began to experience collection problems from ReCellular, Inc., our then electronics partner and had to significantly scale down our expenses.  During the second half of 2011, we incurred advertising and marketing costs, including production costs to design and implement new campaigns, describing how we show consumers the highest cash offers from our partners for a wide variety of small consumer electronics, although on a significantly smaller scale. We expect that advertising and marketing will continue to be our most important and significant expense in 2012. Our levels of revenue and profitability are contingent upon achieving successful advertising and marketing campaigns that drive large volumes of Consumers to our online marketplace in a cost efficient manner.

 

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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. General and administrative expenses for 2011, as compared to 2010, decreased as we scaled back our investments in our technology infrastructure, reduced our headcount, and reduced other expenses, such as travel, wherever practical. We are continuing to diligently seek out ways to reduce our overhead costs to minimal levels.    

 

Interest expense, net during 2011 predominantly relates to the amortization of discounts on our Convertible Notes Payable. As discussed in greater detail below, during January 2012, these notes were all converted into 2011 Series A PS.

 

Other income was primarily due to gains recognized on the changes in the fair values of our derivative liabilities. During 2011, we recorded gains on the changes in the fair values of our derivative liabilities relating to both our Convertible Notes Payable and the embedded conversion feature of our Series B Preferred Stock, which we refer to as “Series B PS”. During 2010, we recorded a gain pertaining only to the derivative liability relating to the embedded conversion of our Series B PS. In both years, these gains were partially offset by derivative expenses and losses on foreign currency exchange. During 2011, we incurred derivative expenses relating to the issuance of both our Convertible Notes Payable, and the embedded conversion feature of our Series B PS. During 2010, we incurred derivative expenses relating only to the embedded conversion of our Series B PS.

 

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 customers, are generally received by us within seven to 10 days of the order being placed with the partner by the Consumer.

 

We incurred a loss from operations of $2,293,700 during the six months ended June 30, 2012 (including non-cash charges for stock based compensation of $843,926). We used $1,843,297 in cash from operations during the six months ended June 30, 2012. As of June 30, 2012 we had an accumulated deficit of $38,478,682, and a working capital deficit of $1,478,100 (including our derivative liability of $4,372,451).

 

Our investing activities used net cash of $111,154 to purchase property and equipment during the six months ended June 30, 2012. During the same period, our financing activities generated $3,319,287 in net proceeds, mainly comprised of proceeds from the sale of our preferred stock, partially offset by the repayment of an outstanding note payable to an investor in the amount of $35,000.  

 

We incurred a loss from operations of $6,107,295 for the year ended December 31, 2011 including non-cash charges for stock based compensation of $2,178,346, and asset impairment charges of $819,317 pertaining to certain prepaid expenses, property and equipment and intangible assets. We used $2,562,423 in cash from operations during 2011. As of December 31, 2011 we had an accumulated deficit of $31,450,276, and working capital deficit of $257,004.

 

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Our investing activities used net cash of $291,141, to purchase property and equipment and acquire intangible assets during 2011. During the same period, our financing activities generated $3,984,261 in net proceeds, mainly comprised of $1,081,406 in proceeds from the exercise of stock warrants, $800,000 in proceeds from convertible notes payable, and $2,110,000 in gross proceeds from the sale of our preferred stock.  

  

In general, we do not require significant capital to make purchases of property and equipment. We do however employ several people, and use outside contractors, to develop our website and technology platform. The costs incurred pertaining to this software development are capitalized as property and equipment.

 

During 2011, we received $800,000 pursuant to convertible notes payable, which we refer to as the “2011 Convertible Notes”, which we used for working capital purposes. Of this amount, $325,000 was received from a large shareholder, $325,000 was received from our now Co-Chairman of the Board, and $50,000 was received from our then Chief Executive Officer, and $100,000 was received from another shareholder.

 

In 2011, our Board authorized the sale of up to 10,000,000 shares 2011 Series A PS. From December 2011 through April 2012, we sold 5,406,000 shares of 2011 Series A PS for gross proceeds of $5,406,000 and converted the 2011 Convertible Notes into 1,600,000 shares of 2011 Series A PS.

 

In January 2012, we offered price protection to the purchasers of the 2011 Series A PS which are triggered if we sell securities with the purpose of raising capital from investors, at a price less than $0.20 per common share. All of the 2011 Series A PS, other than shares subject to 9.99% conversion blockers, automatically converted into common stock when on June 8, 2012, in connection with the Reverse Split (as defined below).

 

On June 8, 2012, our shareholders approved an amendment to our Certificate of Incorporation to effect a 1-for-52.4846 reverse stock split, which reduced our fully-diluted outstanding common share count to approximately 10,000,000 common shares, which we refer to as the “Reverse Split”. Certain securities that were outstanding at the time of the Reverse Split were not subject to the Reverse Split including our 2011 Series A PS; warrants to purchase our common stock that were issued in connection with our 2011 Series A PS; shares and warrants issued to shareholders in connection with the conversion of our 2011 Convertible Notes; and certain stock options.

 

On February 29, 2012, EcoSquid Acquisition, Inc, which we refer to as “Acquisition Corp”, an entity owned predominantly by affiliates of uSell, acquired Fort Knox Recycling, LLC, doing business as ecoSquid.  The purchase price was $500,000 in cash. EcoSquid owned the intellectual property that we licensed in order to implement our comparison technology platform. ecoSquid had revenue and losses during 2011 that were immaterial relative to ours for the same period. Aside from the $500,000 funded to acquire ecoSquid, Acquisition Corp. had no other assets, liabilities, revenues or expenses. On April 24, 2012, we acquired 100% of Acquisition Corp. by issuing 350,000 shares of Series D preferred stock to the Acquisition Corp shareholders. We valued the transaction at $500,000, based on the amount of cash paid by Acquisition Corp. for the acquisition of EcoSquid. We ascribed the full $500,000 to the comparison technology platform.

  

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 June 30, 2012. We anticipate that we will continue to generate significant losses from operations in the near future. We believe that our current available cash, along with anticipated revenues and proceeds from this offering, will be sufficient to meet our cash needs for the next twelve months.  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 through the issuance of debt and/or equity securities 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.

 

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BUSINESS

 

usell.com, Inc., which we refer to as “usell”, “we” or “us”, is a technology based company focused on creating an online marketplace 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 top-rated buyers,

 

·          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.

 

Our business model is similar to successful ecommerce websites, such as KAYAK (www.kayak.com) in the travel industry, Bankrate (www.bankrate.com) in the finance industry, and Insurance.com (www.insurance.com) in the insurance industry. Rather than offer the product or service directly to the consumer, these companies all serve consumers seeking to complete a transaction by providing them with an easy way to (i) find information to help them make an informed decision, (ii) compare offers from various companies that offer the respective product or service, and (iii) help them easily complete their transaction. Our services are free for consumers.

 

We utilize consumer oriented advertising efforts, such as direct response television commercials and various forms of Internet advertising, to attract consumers to our website. Effective consumer oriented advertising requires significant expertise and up-front capital to efficiently create, produce, edit and air the advertising campaigns.  Ineffective advertisements can result in significant costs that do not generate revenue sufficient to cover costs.

 

We partner with electronics buying companies and provide them with a low risk, cost-efficient customer acquisition model. Through participation in the uSell marketplace, our partners can benefit from the high volume response rates to our national television advertising and broad-based Internet advertising campaigns, while minimizing the investment and risk associated with creating and running their own branded advertising campaign.  When consumers enter the information about the device they intend to sell on our website, they are presented with offers from our partners that are interested in buying that item. A partner pays us only when a consumer accepts an offer on our website and provides us (and the partner) with the consumer’s name and address.  We believe that this model provides our partners with a competitive customer acquisition cost which, in turn, allows them to offer higher prices to consumers.

 

Our corporate headquarters are located at 245 North Ocean Blvd., Suite 306, Deerfield Beach, Florida 33441 and our phone number is (954) 915-1550. Our website can be found at www.usell.com. The information on our website is not incorporated in this prospectus.

 

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Company Evolution

 

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. On July 23, 2008, we acquired Money4Gold, Inc., an early stage precious metals company, and changed our name to Money4Gold Holdings, Inc. 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 MGE Enterprises Corporation, which we refer to as “MGE”.  MGE brought 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 their 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. 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. In July2011, 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 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. 

 

To date we have established several significant milestones toward our new strategy:

 

  · We have developed the core technology that enables consumers to fully research the value of the items they wish to sell and select a buyer based on attributes most important to the consumer. We solicit continuous feedback from our consumers and conduct regular, routine testing to ensure we provide the most valuable information to consumers, and in the most readily digestible format.

 

  · We have established strong relationships with approximately 20 partners to date, and are continuously working to bring more partners to the platform. We believe that a higher number of partners make our online marketplace more efficient, thereby ensuring that consumers receive the best available pricing and service. With each partner, we build a custom integration with their systems to ensure that the information exchanged is timely and accurate.

 

  · We have launched the initial stages of our advertising and marketing strategy and have seen very positive response. Each campaign is carefully monitored to ensure the highest returns, factoring in revenue and cost, as well as conversion rates at each phase of the process. By optimizing our advertising to focus on the most successful campaigns, we ensure the highest returns on our investments and can consistently deliver the most cost efficient customer lead costs to our partners. These benefits will be amplified even further as we increase the levels of our advertising investments going forward.
     
  · More recently, with enhancements to our technology platform, consumers now complete all transactions on our consumer website, www.usell.com, rather than being directed to the website of a partner.

 

Market Opportunity

 

We believe that the market for recycling small consumer electronics, though just emerging, is substantial and that our historical performance demonstrates the potential of the opportunity for helping consumers monetize items that they are no longer using. The leading product in this category is, by far, the smartphone.

 

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There are 150 million new smartphones sold every year and the number continues to grow. Traditionally, high costs have enabled cellular service providers, such as AT&T, Verizon and Sprint, to effectively control the distribution of smartphones by subsidizing their high initial purchase cost and requiring consumers to sign long-term contracts. This system however has created a bottleneck in the distribution channels as recent developments in operating system performance and available applications have driven consumer demand to record levels. This trend is evidenced by the recent introduction of advertising campaigns by the phone manufacturers, such as Apple, HTC, and Samsung, aimed directly to consumers. By establishing a direct line of communication with the consumers, device manufacturers can market new products and services directly, as they are developed. This will result in additional pressure on the biggest hurdle the carriers face with the consumers: the long-term contract, as consumers who prefer the latest and greatest technology seek to upgrade their device more frequently.

 

Most consumers do not know what to do with their old device after they upgrade their phone. Only 10% of the smartphones taken out of service are being sold or traded in by consumers. We believe that this is because consumers (i) do not realize that the devices have value, (ii) do not know that they can sell their devices, and/or (iii) do not know how to go about selling them. This, combined with the rapid pace of technological development, is resulting in an increasing level of supply of relatively new and still functioning, used devices.

 

There is also considerable demand for relatively new and still functioning used technology devices. As the initial cost of the latest generation devices continues to increase, a market for used smartphones is developing. Similar to the automobile industry, consumers are beginning to look for recent model smartphones that they can buy at prices that are lower than those for the brand new models. The growing demand for smartphones with faster processors and more functionality, the high initial cost of purchasing a new smartphone, and purchasing constraints have all contributed to increased values of used smartphones. For example, according to a consumer survey recently conducted by Consumer Intelligence Research Partners and cited in The Wall Street Journal, since the iPhone 4S launched in October 2011, used models of Apple’s earlier generation devices accounted for 11% of total iPhone activations at U.S. carriers. Apple is launching a new iPhone in September 2012, which we expect will motivate many people to sell earlier iPhone models.

 

There are a number of used consumer electronics buyers that have emerged to serve this opportunity, but none has gained significant traction. These companies tend to be small and undercapitalized, or are currently focusing on refurbishment infrastructure and distribution to wholesale and/or offshore markets. Some of the larger companies have introduced recycling programs, but with little, if any, financial incentive being offered to the consumer, they have not been largely embraced by consumers.

 

As a result, there is currently a huge opportunity for the introduction of a cost efficient way for buyers of used consumer electronics to find consumers that are interested in selling their devices. We believe that our online marketplace serves that opportunity.

 

Challenges

 

There are several challenges that exist today in the market for used consumer electronics, including:

 

  · Emerging Market: The used consumer electronics market is just emerging and it is not widely known that used consumer electronics have significant value. To date, several consumer electronics and retail companies have introduced recycling programs designed to encourage consumers to “donate” their items to be recycled. These programs are successful for the retailers, but provide little, if any, economic value to the consumer.

 

  · Fragmented Market: There are a number of used consumer electronics buyers that have emerged to serve this opportunity, but none has emerged as the market leader. These companies have focused mainly on the disposition of products and do not have the capital or marketing expertise to drive acquisition volume efficiently.

 

  · Lack of Information about Value: After a consumer becomes aware that they can sell their used device, it is still challenging for them to determine the fair market value of the device. Values found on other websites, such as eBay.com or craigslist.com can fluctuate widely depending on the condition of the item, the seller’s ability to resell the item, and/or the rating of the buyer. Researching a single item is generally very time consuming and can yield inconsistent results.

 

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Competition

 

We face significant competition in our efforts to attract and retain consumers to our website. Consumers often face countless advertisements each day and standing out amongst them is often challenging. Further, we believe that most consumers are not aware that the used electronics that they are no longer using still may possess significant value and are therefore not actively looking for our service. When consumers are searching for ways to dispose of their electronics, we face competition from a variety of other outlets vying for their attention including:

 

  · Online auctions websites such as eBay.com,
     
  · Companies such as Gazelle, an online purchaser of used electronics which advertises heavily, and our partners which promote their own websites which can be visited directly,
     
  · Online classifieds such as craigslist.com,
     
  · Electronics retailer recycling programs such as BestBuy, Inc.
     
  · Wireless provider trade-in programs,
     
  · Garage sales, and
     
  · Pawn shops.

 

 Our Approach

 

Marketing and Advertising

 

We utilize direct response advertising and marketing campaigns, including television, print and Internet to attract visitors to our website. The methods of advertising used and the level of advertising investment vary based on a variety of factors that influence the effectiveness of direct response advertising. The nature of our direct response advertising and marketing campaigns generally yields a strong correlation between our level of spending on sales and marketing and our revenue. Hence, as we increase our advertising and marketing budgets, we anticipate that our revenue will grow accordingly. Our advertising methods include the following:

 

  · Television advertisements can be targeted toward specific demographics based on the type of show and time of day.  Factors such as the time of year and significant local or nationally televised events can influence the effectiveness of campaigns.  

 

  · Internet and affiliate marketing targets various demographics by advertising on publisher websites and on search engines, most commonly with keyword-based text ads, as well as with banners and contextual banners, focused on generating potential customers by driving traffic to our websites.  Internet marketing also reaches customers who are using the web on their smart phones.

 

  · Mobile phone marketing targets mobile phone users, and provides the ability to specifically target owners of smart phones in general and certain specific models.

 

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  · Remarketing efforts focus on users who have visited the usell site, but did not sell their phone. This incremental online advertising effort maximizes the dollars spent to initially bring the customer to the site by increasing overall conversions.

 

  · Referral marketing encourages users to refer friends and family to usell by offering cash incentives, thus allowing usell to acquire multiple new customers at a low incremental cost.

 

Process

 

Consumers 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. In addition to the offered purchase price, consumers can review the offer details from each partner, including:

 

  · Average customer ratings,
     
  · Whether the partner offers the opportunity to print a prepaid shipping label immediately, or to receive a shipping kit,
     
  · Average payment time,
     
  · Payment options offered,
     
  · Return options,
     
  · Data removal, and
     
  · Complete the sale on our website.

 

Our website provides a checkout process that enables consumers to complete the entire transaction on our website without being re-directed to our partners’ websites. In addition, we are working on implementing the ability to sell multiple devices to multiple buyers simultaneously, thereby ensuring that they receive the highest offer for each individual device. We believe that this will encourage consumers to sell multiple devices.

 

Strengths

 

We believe that we have certain key strengths that will enable us to be successful:

 

  · A Better Way to Sell: We have created a better way for consumers to sell small consumer electronics that people are no longer using. We use proprietary software and algorithms to quickly find, consolidate and present offers from top-rated, reputable buyers. We display the results in an intuitive interface, providing a single place for consumers to educate themselves about market values of their items and then select the party with which they would like to do business based on the factors most important to them.

 

  · First in Our Industry: We believe that we are the first online marketplace of our kind in the small electronics industry. We have taken the same successful concepts used in other industries, such as travel, insurance, and banking/finance, and applied them to a burgeoning industry.

 

  · Technology Driven: We believe we have one of the strongest technology teams in the electronics recycling industry. We focus on developing high performance technology to power our website by rapidly searching for items based on variables selected by the consumer and presenting it in a clear and intuitive manner. We strive to innovate quickly and are continuously developing and releasing new functionality on our website to enhance the consumers’ experience. We invest in complex application program interface technology, and coordinate with our partners to update data in real time. These investments strengthen our relationship with our partners and ensure that consumers are receiving timely, reliable information.

 

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  · Scalable and Cost Efficient: We designed our business model and technology platform to be highly scalable and cost efficient. Our software and systems have been designed to handle significant growth in users and queries, without requiring significant re-engineering or major capital expenditures. In addition, we use a combination of proprietary software and public domain technologies that will allow us to leverage our technology investments as our traffic volume continue to grow. We do not incur meaningful costs or overhead associated with fulfillment or customer service, and we maintain relatively low fixed operating costs.

 

  · Flexible Discretionary Advertising: Our largest expenditures pertain to our advertising and marketing campaigns. Our consumer oriented advertising efforts include television and various forms of Internet advertising, as well as both affiliate and personal referral programs. Each approach is highly flexible and engineered in such a way as to minimize any significant up-front investments. We can dynamically tailor our campaigns to specific audiences and timeframes and adjust our spending levels to maximize our returns on each particular campaign and minimize the cost per visitor to our website.

 

  · Strong Management Team: Our management team is comprised of experienced marketing, technology and business entrepreneurs, each with a track record of success. Our varied industry backgrounds are united by the application of technological innovation to new or existing industries. We feel that our collective experience puts us in a unique position to focus on leveraging technology in an innovative way, while minimizing capital expenditures and overhead costs, to create an online marketplace that provides consumers a better way to sell small consumer electronics that they are no longer using.

 

Growth Strategy

 

We intend to quickly and efficiently scale our advertising and marketing campaigns to reach the owners of the 150 million smartphones currently going unsold in the marketplace today. We will continue to develop our website to expand the information available to provide consumers the forum to educate themselves regarding market values and buyer ratings and we will continue to seek out reputable consumer electronics buying partners to ensure that the offers we present to consumers are the best available.

 

Government Regulation

 

Because of the nature of our business, we are subject to the Federal Trade Commission’s unfair trade practice rules and various state laws designed to protect consumers including “little” unfair trade practice laws, as well as similar laws and regulations in the other markets in which we operate.  As we continue to expand globally, we will be subject to the laws of each country where we operate. See the Risk Factors on pages 9 and 13 for further description of Government Regulation.

 

Employees

 

As of the date of this prospectus, we had 12 employees, all of which are full-time employees.  None of our employees are subject to a collective bargaining agreement.

 

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Intellectual Property

 

We currently rely on a combination of trade secret laws and restrictions on disclosure to protect our intellectual property rights.  We enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of our software documentation and other proprietary information.

 

Property

 

We lease approximately 1,800 square feet for our corporate headquarters located at 245 North Ocean Blvd., Suite 306, Deerfield Beach, Florida 33441.

 

We believe that our existing facilities are suitable and adequate and that we have sufficient capacity to meet our current anticipated needs.  None of these facilities are critical to our operations because suitable alternatives are available in substantially all of the locations where we conduct business.  We continuously review our anticipated requirements for facilities and, on the basis of that review, may from time to time acquire or lease additional facilities and/or dispose of existing facilities.

 

Legal Proceedings

 

From time to time, we are periodically a party to or otherwise involved in legal proceedings arising in the normal and ordinary course of business.  As of the date of this prospectus, 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.

 

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MANAGEMENT

 

The following is a list of our executive officers and directors.  All directors serve one-year terms or until each of their successors are duly qualified and elected.  There is one vacancy on our Board of Directors, which we refer to as our “Board”. The officers are elected by the Board.

 

Name   Age   Position
         
Daniel Brauser   31   Chief Executive Officer, President, and Director
         
Michael Brachfeld   41   Chief Financial Officer and Chief Accounting Officer
         
Nik Raman   28   Chief Operating Officer and Director
         
Sergio Zyman   67   Executive Chairman
         
Michael Brauser   56   Co-Chairman
         
Douglas Feirstein   42   Director
         
Scott Frohman   44   Director
         
Grant Fitzwilliam   44   Director

 

Biographies

 

Daniel Brauser has served as our Chief Executive Officer since July 10, 2012 and as a director since July 23, 2008. Mr. Brauser has also served as our President since January 27, 2012. Prior to being appointed Chief Executive Officer, Mr. Brauser served as the Company’s Chief Financial Officer from July 23, 2008 through July 10, 2012. From July 23, 2008 through May 7, 2009, Mr. Brauser also served as our President and Chief Operating Officer. From November 2005 until September 2007, Mr. Brauser served as the Senior Vice President of Health Benefits Direct Corporation. Mr. Brauser was selected as a director for his extensive experience managing the growth of young companies from start-up through to maturity. In addition, as a founder of our reverse logistics business, Mr. Brauser possesses a detailed understanding of the characteristics unique to our business model.

 

Michael Brachfeld has served as our Chief Financial Officer since July 10, 2012 and as our Chief Accounting Officer since March 30, 2010. From September 21, 2009 until July 10, 2012, Mr. Brachfeld served as our Vice President of Finance. From April 2007 to September 2009, Mr. Brachfeld served as Vice President of Finance at eLandia Group, Inc., a provider of information technology products and services to small, medium-sized and large businesses as well as government entities, primarily in Latin America. From October 2003 until April 2007, Mr. Brachfeld served as the Corporate Controller of Affinity Internet, Inc., a web hosting and on-line services company. He is a Certified Public Accountant in Florida.

 

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Nik Raman was appointed as our Chief Operating Officer on January 27, 2012 and a director on April 24, 2012. After graduating from Harvard Business School, Mr. Raman founded and served as Manager of Ft. Knox Recycling, LLC doing business as EcoSquid. From 2008 until 2010, Mr. Raman attended Harvard Business School during which time he interned at FPL Energy’s Corporate Development Group. From 2005 to 2008, Mr. Raman was a Client Manager at IBM where he was responsible for product and services portfolio sales to financial services institutions. Mr. Raman was appointed a director in connection with the acquisition of Acquisition Corp. in April 2012.

 

Sergio Zyman was appointed as Executive Chairman and as a director on January 27, 2012. In 1999, Mr. Zyman founded Zyman Group, an international marketing consulting firm. In 2005 and 2008 respectively, Mr. Zyman sold a majority and then sole ownership of the company to MDC Partners. Since 2008, he has been President of Sergio Zyman & Company consultancy. Mr. Zyman was selected as a director for his extensive marketing experience.

 

Michael Brauser has served as Chairman and Co-Chairman (upon the appointment of Mr. Zyman as Executive Chairman on January 27, 2012) since November 18, 2011. Mr. Brauser has been the manager of Marlin Capital Partners, LLC, a private investment company, since 2003. Mr. Brauser served as the Co-Chairman of interclick, inc. from August 2007 until it was acquired by Yahoo, Inc. in December 2011. Since October 2011, Mr. Brauser has served as a Co-Chairman on the Board of Directors of Chromadex Corp., a publicly-traded developer of phytochemical and botanical reference standards. Mr. Brauser also served as a Co-Chairman of the Board of Directors of Chromadex Corp between May 2010 and March 2011. Mr. Brauser was selected as a director due to his significant experience in the Internet industry, and his extensive business and management expertise. 

 

Douglas Feirstein has served as a director since May 7, 2009 when we acquired MGE Enterprises Corporation, which we refer to as “MGE”. Until July 10, 2012, Mr. Feirstein served as our Chief Executive Officer since May 7, 2009 when we acquired MGE. In 2005, Mr. Feirstein founded and served as a manager of Pink Package, LLC, d/b/a My Gold Envelope a predecessor to MGE and since the date of MGE’s acquisition of My Gold Envelope, he had been an executive officer of MGE. Mr. Feirstein was selected as a director for his extensive experience managing the growth of young companies from start-up through to maturity. In addition, as a founder of MGE, Mr. Feirstein possesses a detailed understanding of the characteristics unique to our business model.

 

Scott Frohman served as our Chairman of the Board from July 23, 2008 through November 18, 2011, and as a director since November 18, 2011. Since June 23, 2008, Mr. Frohman has been the Chief Executive Officer and a director of Options Media Group Holdings, Inc. Mr. Frohman was selected as a director for his general business management with specific experience in marketing driven companies.

 

Grant Fitzwilliam has served as a director since September 30, 2009. Mr. Fitzwilliam is currently the President of 3c InSight, a software and consulting firm that he co-founded in 2008, which is focused on providing operational excellence solutions for companies throughout the United States. From August 2005 until August 2007, Mr. Fitzwilliam served as Executive Vice President of Finance and Chief Financial Officer of The Hackett Group a leading business and technology consulting firm and also served as a Managing Director leading Hackett’s national Oracle and Sarbanes Oxley business units. Mr. Fitzwilliam was formerly an auditor with KPMG LLP and is a licensed CPA in Georgia. Mr. Fitzwilliam was selected as a director for his accounting, financial and professional management experience.

 

Family Relationships

 

With the exception of Michael and Daniel Brauser, who are father and son, there are no family relationships among our directors and executive officers.

 

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Board Committees and Charters

 

The Board and its Committees meet and act by written consent from time to time as appropriate. The Board has formed and appoints members to its: Audit and Compensation Committees. Committees regularly report on their activities and actions to the Board. The Audit Committee and the Compensation Committee each have a written charter approved by the Board.

 

The following table identifies the independent and non-independent current Board and Committee members:

 

Name   Independent   Audit   Compensation
             
Michael Brauser            
Sergio Zyman            
Daniel Brauser            
Douglas Feirstein            
Grant Fitzwilliam     Chairman  
Scott Frohman      
Nik Raman            

 

Independence

 

Our Board has determined that Messrs. Fitzwilliam and Frohman are independent under the NASDAQ Stock Market listing rules and that Messrs. Frohman and Fitzwilliam are independent in accordance with the NASDAQ Stock Market independence standards for audit committees.

 

Audit Committee

 

The Audit Committee’s primary role is to review our accounting policies and any issues which may arise in the course of the audit of our financial statements. The Audit Committee selects our independent registered public accounting firm, approves all audit and non-audit services, and reviews the independence of our independent registered public accounting firm. The Audit Committee also reviews the audit and non-audit fees of the auditors. Our Audit Committee is also responsible for certain corporate governance and legal compliance matters including internal and disclosure controls and compliance with the Sarbanes-Oxley Act of 2002.

 

Our Board has determined that Grant Fitzwilliam is qualified as an Audit Committee Financial Expert, as that term is defined by the rules of the SEC and in compliance with the Sarbanes-Oxley Act of 2002.

 

Compensation Committee

 

The function of the Compensation Committee is to determine the compensation of our executive officers. The Compensation Committee has the power to set performance targets for determining periodic bonuses payable to executive officers and may review and make recommendations with respect to shareholder proposals related to compensation matters. Additionally, the Compensation Committee is responsible for administering the Plan.

 

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Board Assessment of Risk

 

The Board is actively involved in the oversight of risks that could affect usell. This oversight is conducted primarily through the Audit Committee, but the full Board has retained responsibility for general oversight of risks. The Audit Committee considers and reviews with our independent public accounting firm and management the adequacy of our internal controls, including the processes for identifying significant risks and exposures, and elicits recommendations for the improvements of such procedures where desirable. In addition to the Audit Committee’s role, the full Board is involved in oversight and administration of risk and risk management practices. Members of our senior management have day-to-day responsibility for risk management and establishing risk management practices, and members of management are expected to report matters relating specifically to the Audit Committee directly thereto, and to report all other matters directly to the Board as a whole. Members of our senior management have an open line of communication to the Board and have the discretion to raise issues from time-to-time in any manner they deem appropriate, and management’s reporting on issues relating to risk management typically occurs through direct communication with directors or committee members as matters requiring attention arise. Members of our senior management regularly attend portions of the Board’s meetings, and often discuss the risks related to our business.

 

Presently, the largest risk affecting usell is the inability to generate sufficient revenue so that we have positive cash flow from operations. The Board focuses on this key risk at each meeting and actively interfaces with management on seeking solutions.

 

Risk Assessment Regarding Compensation Policies and Practices

 

Our compensation program for employees does not create incentives for excessive risk taking by our employees or involve risks that are reasonably likely to have a material adverse effect on usell. Our compensation has the following risk-limiting characteristics:

 

·Our base pay programs consist of competitive salary rates that represent a reasonable portion of total compensation and provide a reliable level of income on a regular basis, which decreases incentive on the part of our executives to take unnecessary or imprudent risks;

 

·A portion of executive incentive compensation opportunity is tied to long-term incentive compensation that emphasizes sustained performance over time. This reduces any incentive to take risks that might increase short-term compensation at the expense of longer term Company results.

 

·Awards are not tied to formulas that could focus executives on specific short-term outcomes;

 

·Equity awards may be recovered by us should a restatement of earnings occur upon which incentive compensation awards were based, or in the event of other wrongdoing by the recipient; and

 

·Equity awards, generally, have multi-year vesting which aligns the long-term interests of our executives with those of our shareholders and, again, discourages the taking of short-term risk at the expense of long-term performance.

 

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EXECUTIVE COMPENSTION

 

The following information is related to the compensation paid, distributed or accrued by us to our Chief Executive Officer (principal executive officer) and the two other most highly compensated executive officers serving at the end of the last fiscal year whose total compensation exceeded $100,000 in 2011 and 2010.  We refer to these persons as the “Named Executive Officers.”

 

2011 Summary Compensation Table

 

Name and
Principal Position
(a)
  Year
(b)
  Salary
($)(c)
   Option
Awards
($)(f)
  (1)
   All
Other
Compensation
($)(i)
   Total
($)(j)
 
Douglas Feirstein  2011       1,300,000(2)        1,300,000 
Chief Executive Officer  2010   269,038(3)    506,181(4)        775,219 
Daniel Brauser  2011   63,462(5)    1,300,000(2)        1,363,462 
Chief Financial Officer  2010   184,615(5)    506,181(4)        690,796 
Chuck Wallace  2011   121,154(5)    181,483(6)    20,000 (7)    322,637 
Former President and Chief Operating Officer  2010   141,479(8)    518,534(9)        660,013 

 

(1)The amounts in this column represent the fair value of the award as of the grant date as computed in accordance with FASB ASC Topic 718 and the SEC disclosure rules. These amounts represent awards that are paid in options to purchase shares of our common stock and do not reflect the actual amounts that may be realized by the Named Executive Officers.

 

(2)In September 2011, Messrs. Feirstein and Brauser were each granted 1,905,321 five-year stock options exercisable at $0.68 per share which vested annually over a four-year period with first vesting date being September 13, 2012 (See below for further description of the grant). In January 2012, Messrs. Feirstein and Brauser agreed to forfeit these options. None of the options had vested.

 

(3)Of this amount, $149,038 was cash compensation. In November 2010, Mr. Feirstein was granted 114,319 five-year stock options in lieu of cash salary.  See below for further description of the grant. Mr. Feirstein began drawing a cash salary again starting on January 1, 2012.

 

(4)In September 2010, Messrs. Feirstein and Brauser were granted 246,988 five-year stock options exercisable at $1.78 per share which vest each calendar quarter over a four-year period with first vesting date being December 31, 2010. On September 13, 2011, the exercise price of these options was reduced to $0.68 per share.

 

(5)Represents cash compensation.

 

(6)Mr. Wallace was appointed President and Chief Operating Officer on September 10, 2010. He resigned from the Company effective December 31, 2011. In connection with his resignation, he was granted 500,000 fully vested stock options exercisable at $0.20 per share.

 

(7)This amount represents separation payments made in connection with Mr. Wallace’s resignation.

 

(8)Includes compensation received by Mr. Wallace for consulting services received prior to becoming an executive officer of usell.

 

(9)Mr. Wallace was granted 253,016 five-year stock options exercisable at $1.78 per share.  Of these options, 31,627 options vested immediately and the remaining options vested in 5,271 increments each month beginning September 22, 2010.

 

37
 

 

Named Executive Officer Employment Agreements

 

The following discussion is historical in nature.

 

Douglas Feirstein Employment Agreement

 

 Mr. Douglas Feirstein began drawing a salary of $125,000 per year effective January 1, 2012. With his resignation as Chief Executive Officer on July 10, 2012, his compensation terminated.

 

Effective May 5, 2009, we entered into an employment agreement with Douglas Feirstein, our then Chief Executive Officer.  The current term of the agreement expires on May 5, 2012.  On November 23, 2009, Mr. Feirstein’s employment agreement was amended to increase the annual salary from $225,000 to $275,000 effective December 1, 2009 and $300,000 beginning June 1, 2010.  On September 30, 2010, Mr. Feirstein agreed to relinquish all of his severance rights with respect to any termination of his employment with us. The December 1, 2009 increase occurred, but in April 2010, Mr. Feirstein’s salary was reduced to $175,000 and in May 2010, it was further reduced to $150,000. In October 2010, he agreed to no longer take a salary and on November 4, 2010, Mr. Feirstein was granted 114,319 five-year stock options in lieu of receiving cash compensation for a one-year period.  The options were to vest monthly over a one-year period unless Mr. Feirstein provided notice of his intent to receive cash compensation for that monthly period. Mr. Feirstein did not provide such notice and the options have fully vested.  Prior to being re-priced to $0.68, on September 13, 2011, the options were exercisable at $1.31 per share.

 

On September 13, 2011, we granted Mr. Feirstein 1,905,321 five-year stock options exercisable at $0.68 per share. The options were to have vested annually over a four-year period, subject to his continued employment. In January 2012, Mr. Feirstein agreed to forfeit these options. None of the options had vested at the time of forfeiture.

 

Daniel Brauser Employment Agreement

 

Mr. Daniel Brauser, who is now our Chief Executive Officer, began drawing a salary of $125,000 per year effective January 1, 2012.

 

Effective July 23, 2008, we entered into an employment agreement with Mr. Brauser, who was then our Chief Financial Officer. The current term of the agreement expires on May 5, 2012.   On November 23, 2009, Mr. Brauser’s employment agreement was amended to increase the annual salary from $225,000 to $275,000 effective December 1, 2009 and $300,000 beginning June 1, 2010. On September 30, 2010, Mr. Brauser agreed to relinquish all of his severance rights with respect to any termination of his employment with usell. The December 1, 2009 increase occurred, but in April 2010, Mr. Brauser’s salary was reduced to $175,000. In October 2010, he agreed to no longer take a salary.

 

On September 13, 2011, we granted Mr. Brauser 1,905,321 five-year stock options exercisable at $0.68 per share. The options were to have vested annually over a four-year period, subject to his continued employment. In January 2012, Mr. Brauser agreed to forfeit these options. None of the options had vested at the time of forfeiture.

 

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Charles Wallace Employment Arrangement

 

Mr. Wallace was receiving a cash salary of $150,000 under an oral agreement effective September 13, 2010 until May 2011, at which time it was reduced to $100,000. In connection with his resignation, Mr. Wallace received a $20,000 cash payment and was granted, subject to the proposed Reverse Split, 500,000 fully vested options exercisable at $0.20 per share.

 

Termination Provisions

 

As a result of the amendments to Messrs. Feirstein’s and Brauser’s Employment Agreement discussed above, no executive officer is entitled to any severance rights.

  

Outstanding Equity Awards At 2011 Fiscal Year-End

 

Listed below is information with respect to unexercised options for each Named Executive Officer as of December 31, 2011.

 

   Outstanding Equity Awards At 2011 Fiscal Year-End
Name
(a)
  Number of Securities
Underlying
Unexercised
Options (#)
Exercisable
(b)
   Number of Securities
Underlying
Unexercised Options
(#)
Unexercisable
(c)
   Option
Exercise Price
($)
(e)
   Option
Expiration Date
(f)
                
Douglas Feirstein   5,293    5,293(1)   0.68   12/21/2014
    77,184    169,804(2)   0.68   9/9/2015
    114,319    -    0.68   11/3/2015
    -    1,905,321(3)   0.68   9/10/2021
                   
Daniel Brauser   5,293    5,293(1)   0.68   12/21/2014
    71,450    71,450(1)   0.68   12/21/2014
    77,184    169,804(2)   0.68   9/9/2015
    -    1,905,321(3)   0.68   9/10/2021
                   
Chuck Wallace   110,694    142,321    1.78   9/9/2015

 

(1)These options vest each calendar quarter until December 31, 2013.

 

(2)These options vest each calendar quarter until December 31, 2014.

 

(3)These options were to have vested annually over a four-year period, subject to their continued employment. In January 2012, these options were forfeited. None of the options had vested at the time of forfeiture.

 

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Supplemental Information

 

In connection his appointment as Chief Financial Officer, Mr. Michael Brachfeld was granted 400,000 five-year stock options exercisable at $0.20 per share. These options vest each calendar quarter over a four year period, with the first vesting date being September 30, 2012, subject to continued employment on the applicable vesting date.

 

DIRECTOR COMPENSATION

 

We do not pay cash compensation to our directors for service on our Board. Directors are reimbursed for reasonable expenses incurred in attending meetings and carrying out duties as Board and committee members.  Previously, our non-employee directors received automatic grants of stock options and restricted stock as compensation for their services as directors under our Plan. On June 10, 2011, the Plan was amended to eliminate the automatic stock option grants to non-employee directors.  Consequently, the automatic stock option grants which were due to the non-employee directors serving on July 1, 2011 did not occur. Thus, there was no director compensation in 2011. On July 10, 2012, each of our directors, other than our Co-Chairmen, was granted 200,000 five-year stock options (exercisable at $0.20 per share) for service on the Board. The options vest one year from the date of grant, subject to continued service on the one year anniversary of the grant. In July 2012, we granted each of our Co-Chairmen (Messrs. Sergio Zyman and Michael Brauser) 1,000,000 shares of vested common stock; in addition, Mr. Zyman received a grant of 1,000,000 five-year fully vested stock options, exercisable at $0.20 per share. Additionally, we granted Mr. Zyman 2,500,000 shares of vested common stock.

 

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PRINCIPAL SHAREHOLDERS

 

The following table sets forth the number of shares of our common stock beneficially owned as of September 19, 2012 by (i) those persons known by us to be owners of more than 5% of our voting securities, (ii) each director, (iii) our Named Executive Officers and (iv) all executive officers and directors of usell as a group, pre-and post-offering (assuming all 35 million shares are sold).

 

Title of Class   Beneficial Owner 

Amount and

Nature of Beneficial

Owner (1)

   Percent of
Class Pre-
Offering
(1)
   Percent of
Class Post
Offering
(1)
 
                 
Directors and Executive Officers:               
                   
Common Stock   Douglas Feirstein (2)   2,336,893    5.2%   2.8%
                   
Common Stock   Daniel Brauser (3)   1,731,902    3.9%   2.1%
                   
Common Stock   Chuck Wallace (4)   500,000    1.1%   * 
                   
Common Stock   Sergio Zyman (5)   7,000,000    15.7%   8.5%
                   
Common Stock   Michael Brauser (6)   8,534,422    18.0%   10.0%
                   
Common Stock   Scott Frohman (7)   156,917    *    * 
                   
Common Stock   Grant Fitzwilliam (8)   36,088    *    * 
                   
Common Stock   Nik Raman (9)   0    0    0 
                   
Common Stock   All directors and executive officers
as a group (9 persons) (10)
   18,098,784    36.5%   20.8%
                   
5% Shareholders:               
                   
Common Stock   Barry Honig (11)   4,262,123    9.9%   8.8%
                   
Common Stock   Todd Oretsky (12)   1,496,536    3.4%   * 
                   
Common Stock   Hakan Koyuncu (13)   1,534,643    3.5%   * 
                   
Common Stock   Frost Gamma Investments Trust (14)   4,262,123    9.9%   7.7%

 

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* Less than 1%.

 

(1)          Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants, convertible notes and preferred stock currently exercisable or convertible or exercisable or convertible within 60 days are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. The table includes shares of common stock, options, warrants, and preferred stock exercisable or convertible into common stock and vested or vesting within 60 days. Unless otherwise indicated in the footnotes to this table, we believe that each of the shareholders named in the table has sole voting and investment power with respect to the shares of common stock indicated as beneficially owned by them.

 

Pre-Offering Percentages are based on the following securities outstanding (adjusted as required by rules of the SEC) and entitled to vote, as of September 19, 2012:

 

42,238,056 shares of common stock; and
1,977,961 shares of common stock underlying Series B PS.

 

Post-Offering Percentages are based on the following securities outstanding (adjusted as required by rules of the SEC) and entitled to vote, as of September 19, 2012:

 

77,568,056 shares of common stock, assuming all shares offered by this prospectus are sold; and
1,977,961 shares of common stock underlying Series B PS.

 

Holders of our outstanding preferred stock and/or certain warrants, excluding directors or officers, are precluded from converting or exercising their warrants if the conversion or exercise would cause them to be a beneficial owner of more than 9.99% of our common stock, which we refer to as the “Blocker”. Messrs. Barry Honig and Dr. Phillip Frost would be deemed to beneficially own more than 9.99% but for the Blocker. Consequently, their pre-offering ownership disclosure does not include certain shares of common stock underlying their shares of preferred stock and/or warrants. If all 35,000,000 shares are sold in this offering, the blockers will be eliminated.

 

The shares of common stock beneficially owned by each of Messrs. Daniel Brauser, Feirstein, Koyuncu and Oretsky include all shares of common stock subject to a Shareholders Agreement, which terminates when each member of the group beneficially owns less than 1,905 shares. Under the Shareholders Agreement, the group agreed to vote all of their shares of common stock together on any action as determined by a majority of the members of the group still owning 381 shares. The shares of common stock individually owned by them are:

 

Mr. Feirstein 1,052,705 shares
Mr. Brauser 185,108 shares
Mr. Koyuncu 91,455 shares
Mr. Oretsky 167,268 shares

 

(2)          Mr. Feirstein is a director. Includes: (i) 1,052,705 shares of common stock, (ii) 95,266 shares issuable upon conversion of preferred stock, (iii) 245,091 vested stock options and (iv) 500,000 shares issuable upon the exercise of warrants. The shares underlying the preferred stock and the warrants are held by the Feirstein Family Holdings, LLLP, an entity controlled by Mr. Feirstein.

 

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(3)          Mr. Daniel Brauser is a director and executive officer. Includes: (i) 185,108 shares of common stock, (ii) 229,014 vested stock options, (iii) 6,351 shares of common stock issuable upon the exercise of warrants.

 

(4)          Mr. Wallace is a former executive officer. Represents vested stock options.

 

(5)          Mr. Zyman is a director and executive officer. Represents (i) 6,000,000 shares of common stock and (ii) 1,000,000 fully-vested stock options.

 

(6)          Mr. Michael Brauser is a director. Includes shares of common stock jointly held with Mr. Brauser’s wife. Does not include shares held in a trust created by Mr. Brauser, of which one of his adult sons is the trustee and all of his four adult children including Daniel Brauser are the beneficiaries. Mr. Brauser disclaims beneficial ownership of these securities, and this disclosure shall not be deemed an admission of beneficial ownership of these securities for Section 16 of the Securities Exchange Act of 1934 or for any other purposes. Also includes (i) 428,697 additional shares of common stock issuable upon conversion of preferred stock and (ii) 3,250,000 shares issuable upon exercise of warrants.

 

(7)          Mr. Fitzwilliam is a director. Includes 30,544 vested stock options.

 

(8)          Mr. Frohman is a director. Includes 23,290 vested stock options.

 

(9)          Mr. Raman is a director.

 

(10)        This amount includes the ownership of executive officers which are not deemed named executive officers under SEC rules.

 

(11)        Includes (i) 75,209 shares of common stock held individually by Mr. Barry Honig, (ii) 272,868 shares of common stock held by GRQ Consultants, Inc. 401(K), of which the reporting person is the trustee, and (iii) 126,213 shares of common stock held by GRQ Consultants, Inc. Defined Benefit Pension Plan of which the reporting person is the trustee. The pre-offering column does not include additional shares of common stock issuable upon the exercise of warrants as a result of the Blocker. Address is 4400 Biscayne Blvd., Miami, Florida 33137.

 

(12)        Mr. Oretsky resigned as an executive officer and director in February 2010. Mr. Oretsky’s shares are held by Jack Oretsky Holdings, LLC, a limited liability company in which Mr. Oretsky, to our knowledge, is the managing member. Mr. Oretsky is a former director and executive officer. Address is 547 N.E. 59th Street, Miami, Florida 33137.

 

(13)        Mr. Koyuncu is a former executive officer and director who resigned in November 2010. Includes 38,106 vested stock options. Address is 750 SW 3rd Street, Boca Raton, Florida 33486.

 

(14)        Dr. Phillip Frost is the trustee of Frost Gamma Investments Trust. Includes shares of common stock issuable upon conversion of preferred stock. The pre-offering column does not include additional shares of common stock issuable upon the conversion of preferred stock as a result of the Blocker. Address is 4400 Biscayne Blvd., Miami, Florida 33137.

 

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RELATED PERSON TRANSACTIONS

 

As part of the acquisition of ecoSquid, Douglas Feirstein, our then Chief Executive Officer, Daniel Brauser, our then Chief Financial Officer and director, along with Nik Raman, and Christian Croft, the key managers of ecoSquid formed Acquisition Corp which was initially funded by $150,000 from certain investors including Michael Brauser, our Co-Chairman. On February 29, 2012, Acquisition Corp acquired ecoSquid for $500,000, which was distributed to the non-management ecoSquid members. As part of the $500,000 consideration, Acquisition Corp issued a $350,000 promissory note which was paid by Mr. Michael Brauser and by an entity controlled by Barry Honig, a 5% shareholder of usell. In April 2012, usell acquired Acquisition Corp. Acquisition Corp, owned the intellectual property that usell licensed in order to implement its comparison technology platform. As consideration for the acquisition, usell issued 350,000 shares of Series D preferred stock to the Acquisition Corp shareholders including 90,000 shares each to Messrs. Doug Feirstein, our then Chief Executive Officer and current director, Daniel Brauser, our then Chief Financial Officer and current Chief Executive Officer and director, and Nik Raman, our Chief Operating Officer and 25,000 shares each to Mr. Michael Brauser, our Co-Chairman and Barry Honig, a 5% shareholder. The Series D shares: (i) have a liquidation preference equal to $10.00 per share, (ii) do not have voting rights and (iii) were not convertible into our common stock. In connection with the acquisition of Acquisition Corp, usell appointed Nik Raman as a director. On August 28, 2012, our Board authorized the filing of an amendment to the Series D Certificate of Designation to provide for automatic conversion in the event of a change of control.

 

From April 2011 through November 2011, each of Messrs. Michael Brauser and Barry Honig lent usell $325,000. In June 2011, Mr. Feirstein lent $50,000 to usell. Messrs. Brauser, Honig and Feirstein converted the principal of the loans into the 2011 Series A PS offering and also received 650,000 five-year warrants exercisable at $0.20 per share.

 

In August 2010, our Board authorized the sale of up to $4,000,000 of Units, which we refer to as the “August 2010 PP”, whereby each Unit consisted of 100,000 shares of Series B PS and 47,633 three-year warrants exercisable at $3.15 per share. In connection with the August 2010 PP, on August 19, 2010, we sold 29.44 Units, or 2,943,750 shares of Series B and 1,402,197 warrants. In the August 2010 PP, the Feirstein entity invested $100,000. The Feirstein entity acquired 100,000 shares of Series B PS and 47,633 warrants. Michael Brauser and Barry Honig (through an entity he controls), then 5% shareholders, each invested $450,000 and were issued 450,000 shares of Series B PS and 214,349 warrants. In February 2011, the August 2010 PP was extended and 650,000shares of Series B PS and 30,961 warrants were sold, of which 40,000shares of Series B PS and 19,053 warrants were purchased by Scott Frohman, a director. In February 2011, we agreed to lower the exercise price of the warrants to $0.79 if the investors in the August 2010 PP exercised their warrants. The following individuals exercised their warrants:

 

·Michael Brauser paid $168,750 to exercise 214,349 warrants;

 

·Feirstein Entity paid $37,500 to exercise 47,633 warrants;

 

·Barry Honig paid $168,750 to exercise 214,349 warrants; and

 

·Frost Gamma Investments Trust paid $375,000 to exercise 476,330 warrants.

 

In March 2010, usell closed a private placement transaction and raised $1,151,667 from the sale of approximately 109,715 shares of our common stock at a price of $10.50 per share. Included in this private placement was an investment by Douglas Feirstein who invested $50,000 on the same terms and conditions as other investors in the offering. In addition, as part of this offering, Todd Oretsky, our former Chief Operating Officer, sold a number of shares equal to the number of shares sold by us at $5.25 per share.

 

44
 

 

On June 1, 2008, we entered into an agreement with the Refinery, whereby we agreed to sell all of our precious metals in the United States exclusively to the Refinery and the Refinery agreed to refrain from entering into a relationship with any third party that is similar to our relationship with them. The agreement is for an initial term of five years. As consideration for this agreement, the Refinery received 190,532 shares of our common stock valued at $1,230,000. Until January 30, 2012, Jason Rubin, an officer of the Refinery, was a member of our Board.

 

45
 

 

DESCRIPTION OF SECURITIES

 

Common Stock

 

We are authorized to issue 650,000,000 shares of common stock, par value $0.0001 per share. The holders of common stock are entitled to one vote per share on all matters submitted to a vote of shareholders, including the election of directors. There is no cumulative voting in the election of directors. The holders of common stock are entitled to any dividends that may be declared by the Board out of funds legally available for payment of dividends subject to the prior rights of holders of preferred stock and any contractual restrictions we have against the payment of dividends on common stock. In the event of our liquidation or dissolution, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive rights and have no right to convert their common stock into any other securities.

 

Preferred Stock

 

We are authorized to issue of 25,000,000 shares of $0.0001, par value preferred stock in any series.  The Board has the authority to establish and designate a series, and to fix the number of shares included in such series and the variations in the relative rights, preferences and limitations in the series.  The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of our company without further action by shareholders and could adversely affect the rights and powers, including voting rights, of the holders of common stock. In certain circumstances, the issuance of preferred stock could depress the market price of the common stock.

 

The following discussion of our common stock is qualified in its entirety by our Certificate of Incorporation, our Bylaws and by the full text of the agreements pursuant to which the securities were issued. We urge you to review these documents, copies of which have been filed with the SEC, as well as the applicable statutes of the State of Delaware for a more complete description of the rights and liabilities of holders of our securities.

 

Our charter documents include provisions that may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal that a shareholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by our shareholders. Certain of these provisions are summarized in the following paragraphs.

 

Effects of authorized but unissued common stock and blank check preferred stock. One of the effects of the existence of authorized but unissued common stock and undesignated preferred stock may be to enable our to make more difficult or to discourage an attempt to obtain control of usell by means of a merger, tender offer, proxy contest or otherwise, and thereby to protect the continuity of management. If, in the due exercise of its fiduciary obligations, our Board were to determine that a takeover proposal was not in our best interest, such shares could be issued by our Board without shareholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover transaction by diluting the voting or other rights of the proposed acquirer or insurgent shareholder group, by putting a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent Board, by effecting an acquisition that might complicate or preclude the takeover, or otherwise.

 

In addition, our Certificate of Incorporation grants our Board broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common stock. The issuance also may adversely affect the rights and powers, including voting rights, of those holders and may have the effect of delaying, deterring or preventing a change in control of usell.

 

46
 

 

Cumulative Voting. Our Certificate of Incorporation does not provide for cumulative voting in the election of directors which would allow holders of less than a majority of the stock to elect some directors.

 

Vacancies. Our bylaws provide that vacancies on the Board may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.

 

Special Meeting of Shareholders. A special meeting of shareholders may only be called the Board or by holders of at least 10% of all the votes entitled to vote at the special meeting.

 

Anti-takeover Effects of Delaware Law

 

We are subject to the “business combination” provisions of Section 203 of the Delaware General Corporation Law.  In general, such provisions prohibit a publicly-held Delaware corporation from engaging in various “business combination” transactions such as a merger with any interested shareholder which includes, a shareholder owning 15% of a corporation’s outstanding voting securities, for a period of three years after the date in which the person became an interested shareholder, unless:

 

·The transaction is approved by the corporation’s Board prior to the date the shareholder became an interested shareholder;

 

·Upon closing of the transaction which resulted in the shareholder becoming an interested shareholder, the shareholder owned at least 85% of the shares of stock entitled to vote generally in the election of directors of the corporation outstanding excluding those shares owned by persons who are both directors and officers and specified types of employee stock plans; or

 

·On or after such date, the business combination is approved by the Board and at least 66 2/3% of outstanding voting stock not owned by the interested shareholder.

 

A Delaware corporation may opt out of Section 203 with either an express provision in its original Certificate of Incorporation or an amendment to its Certificate of Incorporation or Bylaws approved by its shareholders.  We have not opted out of this Statute.  This Statute could prohibit, discourage or delay mergers or other takeover attempts to acquire us.

 

PLAN OF DISTRIBUTION

 

We are offering up to 35,000,000 shares of common stock at a price of $0._ per share on a “best efforts” basis. There is a _____ share minimum purchase of $________. The common stock is being offered by our officers and directors without the use of any underwriter or broker-dealer. Although they are associated persons of usell, as that term is defined under Rule 3a4-1 under the Securities and Exchange Act of 1934, which we refer to as the “Exchange Act”, they are deemed not to be a broker for the following reasons:

 

(1)          They are not subject to a statutory disqualification under the Exchange Act at the time of their participation in the sale of our securities.

 

47
 

 

(2)          They will not be compensated for their participation in the sale of our securities by the payment of commission or other remuneration based either directly or indirectly on transactions in securities.

 

(3)          They are not associated persons of a broker or dealer at the time of their participation in the sale of our securities.

 

(4)          They meet all of the following conditions:

 

a)Primarily perform and intend primarily to perform at the end of the offering substantial duties for our Company otherwise than in connection with this offering;
b)Not a broker-dealer, or an associated person of a broker-dealer, within the 12 preceding months; and
c)Have not participated in selling an offering of securities for any other issuer within the past 12 months nor will they participate in such an offering over the next 12 months.

 

There are no arrangements or agreements, verbal or written, with any underwriters to help underwrite this offering. No broker has been retained by us for the sale of securities being offered. In the event a broker is retained by us, an amendment to our registration statement will be filed.

 

This offering is intended to be made solely by the delivery of this prospectus. Our officers, employees and directors plan to distribute prospectuses related to this offering. They intend to distribute prospectuses to current shareholders, institutional investors and private investors. Except for oral communications, our officers and directors will not participate in the making of this offering other than by the delivery of this prospectus or by responding to inquiries by prospective purchasers. Their responses will be limited to the information contained in the registration statement, of which this prospectus is a part. They are not registered as broker-dealers, nor as associated persons of any other brokers or dealers.

 

Determination of Offering Price

 

In determining the offering price of the shares we considered several factors including:

 

·The current market price of our common stock; and
·Prevailing market conditions, including the history and prospects for the industry in which we compete.

 

There has been no valuation or appraisal prepared for our business or potential business expansion.  

 

Transfer Agent

 

We have appointed Island Stock Transfer, as our transfer agent.  Their contact information is: 100 Second Avenue South, Ste. 705S, St. Petersburg, Florida 33701, phone number (727) 289-0010, facsimile (727) 289-0069, www.islandstocktransfer.com.

 

LEGAL MATTERS

 

The validity of the securities offered hereby will be passed upon for us by Nason, Yeager, Gerson, White & Lioce, P.A., West Palm Beach, Florida.  

 

48
 

 

EXPERTS

 

The financial statements appearing in this prospectus and registration statement for the years ended December 31, 2011 and 2010 have been audited by Berman & Company, P.A., an independent registered public accounting firms, as set forth in their reports appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

 

ADDITIONAL INFORMATION

 

We have filed with the SEC a registration statement on Form S-1, including the exhibits, schedules, and amendments to this registration statement, under the Securities Act with respect to the shares of common stock to be sold in this offering.  This prospectus, which is part of the registration statement, does not contain all the information set forth in the registration statement.  For further information with respect to us and the shares of our common stock to be sold in this offering, we make reference to the registration statement.  Although this prospectus contains all material information regarding us, statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and in each instance we make reference to the copy of such contract, agreement, or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference.  We are an Exchange Act reporting company and are required to file periodic reports on Form 10-K and 10-Q and current reports on Form 8-K.  You may read and copy all or any portion of the registration statement or any other information, which we file at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549, on official business days during the hours of 10:00 AM to 3:00 PM.  We also file periodic reports and other information with the SEC.  You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC.  Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms.  Our SEC filings, including the registration statement, are also available to you on the SEC’s website, www.sec.gov and on our investor relations website at http://ir.stockpr.com/usell/.

 

49
 

 

Index to Consolidated Financial Statements

 

    Page
     
Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011   F-2
     
Condensed Consolidated Statements of Operations and Other Comprehensive Loss for the three and six months ended June 30, 2012 and 2011 (unaudited)   F-3
     
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)   F-4
     
Notes to Condensed Consolidated Financial Statements (unaudited)   F-6

 

F-1
 

 

usell.com, Inc. and Subsidiaries

Consolidated Balance Sheets

   

   June 30, 2012   December 31, 2011 
Assets  (Unaudited)     
Current Assets:          
Cash  $3,156,459   $1,791,623 
Accounts receivable   129,052    22,277 
Inventory   -    16,876 
Prepaid expenses and other current assets   713,211    24,456 
Debt issue costs   -    2,858 
Total Current Assets   3,998,722    1,858,090 
           
Property and Equipment - net   603,045    34,980 
           
Other Assets:          
Intangible assets - net   3,889    5,556 
Total Other Assets   3,889    5,556 
           
Total Assets  $4,605,656   $1,898,626 
           
Liabilities and Stockholders' Deficit          
Current Liabilities:          
Accounts payable  $520,108   $1,064,276 
Accrued expenses   584,263    581,451 
Note payable, net of discount   -    29,113 
Convertible notes payable, net of discount   -    410,417 
Derivative liability   4,372,451    29,837 
Total Current Liabilities   5,476,822    2,115,094 
           
Stockholders' Deficit:          
Convertible Series A preferred stock, ($0.0001 par value, 10,000,000 shares authorized, 1,650,000 and 4,045,000 issued and outstanding, respectively)   165    405 
           
Convertible Series B preferred stock, ($0.0001 value per share, 4,000,000 shares authorized, 2,626,250 shares issued and outstanding) Liquidation preference $2,626,250   263    263 
           
Convertible Series C preferred stock, ($0.0001 value per share, 1,000,000 shares authorized, 14,797 shares issued and outstanding)   1    1 
           
Convertible Series D preferred stock, ($0.0001 value per share, 350,000 and -0- shares authorized, issued and outstanding, respectively)   35    - 
           
Common stock, ($0.0001 par value, 650,000,000 shares authorized, 36,233,608 and 5,790,266 shares issued and outstanding)   3,624    579 
           
Subscriptions receivable - Convertible Series A preferred stock   -    (2,000,000)
Additional paid in capital   37,603,428    33,232,560 
Accumulated deficit   (38,478,682)   (31,450,276)
Total Stockholders' Deficit   (871,166)   (216,468)
           
Total Liabilities and Stockholders' Deficit  $4,605,656   $1,898,626 

  

See accompanying notes to unaudited interim condensed consolidated financial statements.  

 

F-2
 

 

usell.com, Inc. and Subsidiaries

Consolidated Statements of Operations and Other Comprehensive Loss

(Unaudited)

   

   For the Three Months
Ended June 30,
   For the Six Months
Ended June 30,
 
   2012   2011   2012   2011 
Revenue  $591,432   $1,789,048   $836,039   $5,510,759 
Cost of revenue   47,592    877,937    78,916    2,754,751 
Gross Profit   543,840    911,111    757,123    2,756,008 
Sales and marketing expenses   680,260    488,575    1,008,030    2,606,397 
General and administrative expenses   1,376,290    1,435,824    2,042,793    2,971,372 
Loss from Operations   (1,512,710)   (1,013,288)   (2,293,700)   (2,821,761)
                     
Other Income (Expense):                    
Interest income   4,055    9,911    4,055    9,911 
Interest expense   (1,942)   (75,411)   (398,725)   (75,411)
Gain on settlements of accounts payable   3,113    -    178,779    - 
Loss on foreign exchange   -    (653)   -    (1,751)
Derivative expense - embedded conversion feature of convertible Series B preferred stock issuance   -    -    -    (6,307)
Derivative expense - convertible notes payable   -    (418,970)   -    (418,970)
Change in fair value of derivative liability - embedded conversion feature of convertible Series A preferred stock   (4,183,126)   -    (4,310,148)   - 
Change in fair value of derivative liability - embedded conversion feature of convertible Series B preferred stock   -    504,324    -    620,341 
Change in fair value of derivative liability - convertible notes payable   -    37,372    14,329    37,372 
Total Other Income (Expense) - Net   (4,177,900)   56,573    (4,511,710)   165,185 
Net Loss  $(5,690,610)  $(956,715)  $(6,805,410)  $(2,656,576)
                     
Basic and Diluted Loss per Common Share:                    
Net loss  $(5,690,610)  $(956,715)  $(6,805,410)  $(2,656,576)
Preferred stock dividends - Series B   -    -    -    (65,000)
Net loss available to common stockholders   (5,690,610)   (956,715)   (6,805,410)   (2,721,576)
                     
Net loss per common share - basic and diluted  $(0.43)  $(0.23)  $(0.72)  $(0.66)
                     
Weighted average number of common shares outstanding during the period - basic and diluted   13,149,571    4,246,002    9,469,919    4,137,050 
                     
Comprehensive Loss:                    
Net loss  $(5,690,610)  $(956,715)  $(6,805,410)  $(2,656,576)
Foreign currency translation adjustment   -    (3,973)   -    (25,551)
Comprehensive Loss  $(5,690,610)  $(960,688)  $(6,805,410)  $(2,682,127)

 

See accompanying notes to unaudited interim condensed consolidated financial statements.  

 

F-3
 

  

usell.com, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the Six Months
Ended June 30,
 
   2012   2011 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(6,805,410)  $(2,656,576)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   44,756    65,512 
Stock based compensation expense   843,926    1,211,956 
Amortization of prepaid asset - related party   -    93,813 
Amortization of debt issue costs into interest expense   2,858    - 
Amortization of debt discount into interest expense   395,470    75,000 
(Gain) Loss on settlement of accounts payable   (178,779)   - 
Derivative expense pertaining to embedded conversion feature of convertible Series B preferred stock issuance   -    6,307 
Derivative expense pertaining to convertible note payable   -    418,970 
Change in fair value of derivative liability - embedded conversion feature of convertible Series A preferred stock issuance   4,310,148    - 
Change in fair value of derivative liability - embedded conversion feature of convertible Series B preferred stock issuance   -    (620,341)
Change in fair value of derivative liability - convertible notes payable   (14,329)   (37,372)
Changes in operating assets and liabilities:          
Decrease (increase) in:          
Accounts receivable   (106,775)   (374,920)
Accounts receivable - related party   -    17,999 
Inventory   16,876    129,585 
Prepaid and other current assets   (16,231)   63,786 
Increase (decrease) in:          
Accounts payable   (340,390)   (145,561)
Accounts payable - related party   -    (24,332)
Accrued expenses   4,583    233,876 
Deferred Revenues   -    (389,135)
Net Cash Used In Operating Activities   (1,843,297)   (1,931,433)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Cash paid to acquire intangible assets   -    (199,901)
Cash paid to purchase property and equipment   (111,154)   - 
Net Cash Used In Investing Activities   (111,154)   (199,901)

  

See accompanying notes to unaudited interim condensed consolidated financial statements.  

 

F-4
 

 

usell.com, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Continued)

(Unaudited)

 

   For the Six Months
Ended June 30,
 
   2012   2011 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Principal repayments toward note payable   (35,000)   - 
Proceeds from convertible notes payable   -    550,000 
Proceeds from sale of convertible Series A preferred stock   3,361,000    - 
Proceeds from sale of convertible Series B preferred stock   -    65,000 
Cash paid for direct offering costs of preferred stock   (6,713)   (16,676)
Proceeds from exercise of warrants   -    1,081,412 
Net Cash Provided By Financing Activities   3,319,287    1,679,736 
           
Net Increase (Decrease) in Cash   1,364,836    (451,598)
Effect of Exchange Rates on Cash   -    (15,047)
Cash - Beginning of Period   1,791,623    686,065 
           
Cash - End of Period  $3,156,459   $219,420 
           
SUPPLEMENTARY CASH FLOW INFORMATION:          
Cash Paid During the Period for:          
Interest  $-   $- 
Taxes  $-   $- 
           
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Common stock issued for services  $1,152,900   $- 
Property and equipment acquired through issuance of Series D Preferred Stock in connection with acquisition - related party  $500,000   $- 
Cash paid after period end to acquire intangible assets  $-   $107,539 
Sale of stock for subscriptions receivable  $50,000   $- 
Derivative liability arising from issuance of price protection on Series A preferred stock  $220,746   $- 
Derivative liability arising from issuance of convertible Series B preferred stock  $-   $65,000 
Accrued interest on Convertible Notes Payable contributed to Additional Paid in Capital  $1,770   $- 
Derivative liability reclassified to Additional Paid in Capital  $160,693    - 
Derivative liability transferred to Additional Paid in Capital upon conversion of Convertible Notes Payable  $15,508   $- 
Conversion of Series A preferred stock into common stock  $-   $40 

  

See accompanying notes to unaudited interim condensed consolidated financial statements.   

 

F-5
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

Note 1 – Organization and Business

 

usell.com, Inc., formerly known as Upstream Worldwide, Inc., through our wholly-owned subsidiaries (collectively, “uSell,” “Company,” “we,” “us,” and/or “our”), helps individuals 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 we continued to service packs coming in from prior precious metals and cellular phone advertising campaigns. In July 2011, we created an online marketplace where individuals interested in selling small consumer electronics that they are no longer using (“Consumers”) can educate themselves on current market values and sell their items to electronics buyers.

 

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 – 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, 2011 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, 2011 and 2010. The financial information as of December 31, 2011 is derived from the audited financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2011.  The interim results for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012 or for any future interim periods.

 

Principles of Consolidation

  

The accompanying unaudited interim condensed consolidated financial statements include the accounts of uSell and its wholly-owned subsidiaries. All significant intercompany 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 amounts reported in the unaudited interim condensed consolidated financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: the amount allocated to intangible assets; the estimated useful lives for amortizable intangible assets and property and equipment; accrued expenses; the fair value of warrants granted in connection with various financing transactions; share-based payment arrangements; and the fair value of derivative liabilities.

 

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.

 

F-6
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

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

 

We minimize credit risk associated with cash by periodically evaluating the credit quality of our primary financial institutions. At times, our cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. On June 30, 2012 and December 31, 2011, our deposits exceeded the FDIC limit by approximately $2.9 million and $1.6 million, respectively.

 

Accounts Receivable

 

Accounts receivable represent obligations from our customers. We periodically evaluate the collectability of our accounts receivable 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. We did not deem it necessary to record an allowance for doubtful accounts at June 30, 2012 or December 31, 2011.

 

Prepaid Expenses and Other Current Assets

 

Prepaid Expenses and Other Current Assets represent amounts paid, in cash or equity instruments, in advance of a service being provided. Amounts are amortized into expense over the contracted or expected service term.

 

As discussed in Note 6, during June 2012, we granted an aggregate 3,660,000 fully vested shares of common stock, having an aggregate fair value of $1,152,900 to our Co-Chairman of the Board and an outside vendor for services. We recorded the amount as a prepaid expense and are amortizing the expense over the expected remaining service term.

 

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.

 

In addition, we review all of our convertible instruments for the existence of a beneficial conversion feature. Upon the determination that a beneficial conversion feature exists, the relative fair value of the beneficial conversion feature would be recorded as a discount from the face amount of the respective debt instrument and the discount would be amortized to interest expense over the life of the debt.

 

F-7
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

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 as

 

  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: (a) persuasive evidence of an arrangement exists, (b) delivery has occurred, (c) the sales price is fixed or determinable, and (d) 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.

 

Cellular Phones

 

Cellular phones received in response to our advertisements to purchase them directly were appraised upon receipt from the public based on a variety of factors including the condition of the phone and its level of functionality. To maximize efficiencies, phones were received directly by our electronics partner, ReCellular, Inc. (“ReCellular”), who would perform the appraisal on our behalf.  The appraised value was used to determine the price at which we sold the phone to ReCellular.  On a daily basis, all of the cellular phones received and appraised were sold to ReCellular.  As a result, revenue was recognized the same day the phones were received from the public.

 

Phones were not returned to the public once they had been received.  In addition, no returns were accepted from ReCellular and upon delivery of the phones to ReCellular, we had no further obligations.

 

Precious Metals

 

We graded the quality of the precious metals purchased from the public and estimated the total quantity received. We then locked in the current spot rate of each metal sufficient to cover the total quantity received in the current batch with our precious metals partner, Republic Metals Corporation, Inc. (“Refinery”). After a holding period of at least 10 days the precious metals were delivered to the Refinery to be melted. Upon melting the precious metals, the Refinery validated the quality and quantity of the precious metals and would remit payment to us based on the quantity of the pure precious metals at the agreed upon spot rates, as described above. Revenue was recognized upon melting of the precious metals and the validation of the quality and quantity of each precious metal by the Refinery.

 

No returns were accepted from the Refinery and upon delivery of the precious metals to the Refinery, we had no further obligations.

 

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. Our cost of revenue pertaining to the sale of cellular phones and precious metals included our cost of acquiring the cellular phones and precious metals, as well as any other direct costs and expenses required to ship, secure, grade, log and process the items internally. In addition, fees and other costs incurred in connection with processing at the Refinery were charged to cost of revenue.

 

F-8
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

We recorded $46,907 and $93,813 for the three and six months ended June 30, 2011 as cost of revenue pertaining to prepaid refining services and $14,593 and $29,183 for the three and six months ended June 30, 2011 as amortization expense pertaining to a non-compete agreement, both of which pertain to our service agreement with the Refinery.

 

Advertising

 

Advertising costs are expensed as they are incurred and are included in sales and marketing expenses. Advertising expense amounted to $656,385 and $240,809 for the three months ended June 30, 2012 and 2011, respectively, and $941,555 and $1,706,586 for the six months ended June 30, 2012 and 2011, 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.

 

Net Loss per Share

 

Basic earnings 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. As discussed in Note 6, on June 8, 2012, our shareholders approved an amendment to our Certificate of Incorporation to effect a Reverse Split. All share and per share amounts have been retroactively restated to reflect the Reverse Split.

 

The computation of basic and diluted loss per share for the three and six month periods ended June 30, 2012 and 2011 excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:

 

   For the Three and Six Months Ended
June 30, 2012
   For the Three and Six Months Ended
June 30, 2011
 
Convertible Notes Payable   ---    5,500,000 
Convertible Series A Preferred Stock   8,250,000     
Convertible Series B Preferred Stock   2,501,924    2,671,022 
Convertible Series C Preferred Stock   28,193    307,540 
Stock Warrants   8,305,529    415,360 
Stock Options   2,043,647    1,754,091 
    21,129,293    10,648,012 

  

F-9
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

Commitments

 

In July 2012, we signed a lease to move our corporate office. Our obligations under this lease total approximately $3,000 per month, and continue through the end of December 2013.

 

Legal Proceedings

  

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 is due to consumer complaints.  We generally relied on third parties to handle the products we sold, the Refinery for precious metals and ReCellular for phones and smart phones.  Under Florida law, the remedies include actual damages, civil penalties, and attorneys’ fees.  To date, we have provided a comprehensive response to the AG demonstrating that we acted properly. Although we believe that we have not violated any laws, there can be no assurance that the Attorney General will agree. In April 2012, we met with the AG to discuss the matter and address their concerns. Though the AG’s investigation is ongoing, we believe that we will be able to reach a resolution that will not have a material impact on our financial statements.  We have not accrued a liability for this matter as we believe the likelihood of our incurring material damages or penalties is remote.

 

Customer and Vendor Concentrations

 

The following table shows significant concentrations in our revenues and accounts receivable for the periods indicated.

 

   Percentage of Revenue
During the Three Months
Ended June 30,
  Percentage of Revenue
During the Six Months
Ended June 30,
  Percentage of Accounts Receivable at
   2012  2011  2012  2011  June 30, 2012  December 31, 2011
Customer A  35%  ---  36%  ---  53%  28%
Customer B  18%  ---  18%  ---  13%  ---
Customer C  13%  ---  14%  ---  14%  16%
Customer D  14%  ---  14%  ---  ---  ---
Customer E  ---  64%  ---  57%  ---  ---
Customer F  ---  35%  ---  43%  ---  38%

 

 

  Recent Accounting Pronouncements

 

There are no recent accounting pronouncements that have had a material impact on our unaudited condensed consolidated financial statements.  

 

 

Note 3 – 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.

  

F-10
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

The following are the major categories of assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2012 and December 31, 2011, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

 

 

   At June 30, 2012   At December 31, 2011 
   Assets   Liabilities   Assets   Liabilities 
Level 1                    
None  $   $   $   $ 
Level 2                    
None                
Level 3                    
Derivative liability       4,372,451        29,837 
   $   $4,372,451   $   $29,837 

 

The following table reflects the change in fair value of our derivative liabilities for the six months ended June 30, 2012 and 2011:

 

   Six Months Ended
June 30, 2012
 
   Assets   Liabilities 
         
Balance at beginning of period  $   $29,837 
Derivative liability arising from issuance of convertible notes payable       --- 
Derivative liability arising from sale of Series B preferred stock       --- 
Change in value of derivative liability – convertible notes       (14,329)
Elimination of beneficial conversion feature – convertible notes (See Note 5)       (15,508)
Derivative liability arising from issuance of price protection on Series A preferred stock       222,996 
Change in value of derivative liability – Series A preferred stock       4,310,148 
Change in value of derivative liability – Series B preferred stock        
Elimination of beneficial conversion feature – Series A preferred stock       (160,693)
Balance at end of period  $   $4,372,451 

 

 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.

 

Note 4 – Acquisition

 

On February 29, 2012, EcoSquid Acquisition, Inc. (“Acquisition Corp”), an entity owned predominantly by affiliates of uSell, acquired Fort Knox Recycling, LLC, doing business as EcoSquid.  The purchase price was $500,000 in cash. EcoSquid owned the intellectual property that we licensed in order to implement our comparison technology platform. EcoSquid had revenue and losses during 2011 that were immaterial relative to ours for the same period.  Aside from this transaction, Acquisition Corp. had no other assets, liabilities, revenues or expenses.

 

On April 24, 2012, we acquired 100% of Acquisition Corp. by issuing 350,000 shares of Series D preferred stock to the Acquisition Corp shareholders including 90,000 shares each to our then Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer, and 25,000 shares each to our Co-Chairman and another uSell shareholder.

 

F-11
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

We valued the transaction at $500,000, based on the amount of cash paid by Acquisition Corp. for the acquisition of EcoSquid. We ascribed the full $500,000 to the comparison technology platform. This valuation is preliminary. We used the acquisition method of accounting in connection with the acquisition of Acquisition Corp. Accordingly, we recorded the comparison technology platform as software, valued at $500,000, in property and equipment on our unaudited interim condensed consolidated balance sheet.

 

We incurred $30,924 in legal expenses pertaining to this acquisition during the first quarter of 2012, which is included in our general and administrative expense for that period. 

  

As discussed above, Acquisition Corp had no revenue or expenses. Therefore the only difference between the actual results reported and any pro forma results, as if the transaction had occurred on January 1, 2011, would be the depreciation that would have been incurred on the comparison technology platform. The pro forma depreciation expense would not have a meaningful impact on the losses recognized in 2011 and 2012. We therefore did not present any pro forma information pertaining to this acquisition.

 

Note 5 – Debt

 

Notes Payable

 

In October 2011, we received $70,000 from an investor pursuant to a note payable which we used for working capital purposes.  The note was due the earlier of six-months from the date of the note, or the closing of a financing transaction in which we raise at least $3 million in gross proceeds.  In lieu of interest, the note-holder was issued 19,053 warrants to purchase our common stock.  The warrants are exercisable at $0.74 per share for a period of five years.  

 

We repaid $35,000 in principal on this note in December 2011 and the remaining $35,000 in January 2012.

 

During the first quarter of 2012, we recorded $5,887 as interest expense pertaining to the discount on the note payable and $2,858 as interest expense pertaining to debt issue costs associated with the note payable.

 

F-12
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

Convertible Notes Payable

 

During 2011, we received $800,000 pursuant to convertible notes payable (the “2011 Convertible Notes”) which we used for working capital purposes. Of this amount, $325,000 was received from a large stockholder, $325,000 was received from our now Co-Chairman of the Board, $50,000 was received from our then Chief Executive Officer, and $100,000 was received from another stockholder.

 

The 2011 Convertible Notes had a one-year term, an annual interest rate of approximately 0.5%, and, following a qualified financing transaction involving common stock or common stock equivalents in which we received gross proceeds in excess of $500,000 (“Future Financing”), became convertible into our common stock at 50% of the lower of (a) the price per share of common stock, or (ii) the exercise or conversion price of any common stock equivalents used in the financing transaction.  A Future Financing closed and on January 27, 2012, the 2011 Convertible Notes were converted into 1,600,000 shares of our Series A Preferred Stock (as defined in Note 6).

 

During the first quarter of 2012, we recorded $389,583 as interest expense pertaining to the discount on the 2011 Convertible Notes.

 

We evaluated the conversion feature embedded in the 2011 Convertible Notes and determined that since the exercise price of the convertible debt contained a variable conversion feature, such conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative.

 

At December 31, 2011, we determined that the fair value of the derivative liability pertaining to the 2011 Convertible Notes was $29,837 using the Black-Scholes pricing model.

 

On January 27, 2012, we determined that the fair value of the derivative liability pertaining to the 2011 Convertible Notes was $15,508 based on the following weighted average variables:

 

Expected dividends     0 %
Expected volatility     356.11 %
Expected term     5-months  
Risk free interest rate     0.07 %

 

We recorded a gain of $14,329 during January 2012, representing the net change in the fair value of the derivative liability pertaining to the 2011 Convertible Notes and, as the derivative liability is eliminated upon conversion, recorded the remaining $15,508 as additional paid in capital.

 

In addition, following the Future Financing, holders of the 2011 Convertible Notes received 8,000,000 warrants, which were not subject to the Reverse Split as defined in Note 6, to purchase our common stock at $0.20 per share. 

 

Note 6 – 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 have:

 

  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 Reverse Split (as defined below) at a rate of five common shares for each share of 2011 Series A PS. Shares of the 2011 Series A PS are not subject to the Reverse Split.

 

During December 2011, we sold 4,045,000 shares of 2011 Series A PS for gross proceeds of $4,045,000. Of this amount $2,000,000 was received in January 2012. During the first half of 2012, we sold an additional 1,361,000 shares of our 2011 Series A PS for gross proceeds of $1,361,000, and converted $800,000 of our convertible notes payable into 1,600,000 shares of 2011 Series A PS (Note 5). In connection with the sale of the 2011 Series A PS, we incurred direct offering costs totaling $6,713. After the Reverse Split (as defined below), and without giving effect to certain blocker provisions limiting conversions, the 7,006,000 outstanding shares of 2011 Series A PS would convert into 35,030,000 shares, or approximately 86%, of our then outstanding common stock.

 

F-13
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

In January 2012, we offered price protection to the purchasers of the 2011 Series A PS (“Purchasers”) whereby if we sell securities, including options, warrants, or convertible securities, with the purpose of raising capital from investors, at a price, or with an exercise or conversion price, of less than the 2011 Series A PS conversion price (as defined in the Amended and Restated Certificate of Designation filed with the Secretary of the State of Delaware on November 29, 2011), then:

 

  a) the conversion price of any outstanding 2011 Series A PS shall be automatically reduced to the sale price, or the exercise or conversion price, or

 

  b) if converted, we shall issue additional shares of our common stock to the Purchasers respecting the common shares still owned by the Purchasers as a result of their conversion of the 2011 Series A PS, such that the average per share purchase price of these common shares then owned by the Purchasers is equal to the lower price offered in the subsequent sale of securities.

 

At that time, we determined that the price protection feature constituted a derivative liability and estimated the fair value of such liability to be $220,746 using the Black-Scholes option pricing model using the following weighted average assumptions:

 

Risk-free interest rate     0.76 %
Expected dividend yield     0.0 %
Expected volatility     357.47 %
Expected life     5-Years  
Expected forfeitures     0 %

 

We recorded the $220,746 liability and a corresponding debit to accumulated deficit on January 27, 2012.

 

On March 31, 2012, we determined that the fair value of the derivative liability pertaining to the 2011 Series A PS was $347,768 using the Black-Scholes option pricing model based on the following weighted average variables:

 

Expected dividends     0 %
Expected volatility     379.08 %
Expected term     5-years  
Risk free interest rate     1.04 %

 

We recorded a loss of $127,022 during the first quarter of 2012, representing the net change in the fair value of the derivative liability pertaining to the 2011 Series A PS from January 27, 2012 through March 31, 2012.

 

We estimated the fair value of the derivative liability pertaining to the price protection feature for the Series A PS sold in April 2012 to be $2,250 using the Black-Scholes option pricing model using the following assumptions:

 

Risk-free interest rate     0.88 %
Expected dividend yield     0.0 %
Expected volatility     380.49 %
Expected life     5-Years  
Expected forfeitures     0 %

 

We recorded the $2,250 liability and a corresponding debit to accumulated deficit in April 2012.

 

On June 8, 2012, our Reverse Split (as defined below) became effective and, subject to certain blocker agreements limiting the common stock ownership percentages of certain investors to 9.99% of the outstanding common stock, the 2011 Series A PS automatically converted into common stock. As a result, 5,356,000 shares of 2011 Series A PS were converted into 26,780,000 shares of our common stock.

 

We determined that the fair value of the derivative liability pertaining to the 2011 Series A PS immediately prior to the conversion was $210,197 using the Black-Scholes option pricing model based on the following weighted average variables:

 

Expected dividends     0 %
Expected volatility     383.69 %
Expected term     4.57-years  
Risk free interest rate     0.72 %

 

F-14
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

We recorded a gain of $139,821 at that time, representing the net change in the fair value of the derivative liability pertaining to the 2011 Series A PS from March 31, 2012 through the date of conversion. We then wrote off $160,693 of the $210,197 derivative liability, representing the value of the 5,356,000 shares of 2011 Series A PS that converted as described above, to additional paid in capital.

 

On June 30, 2012, we determined that the fair value of the derivative liability pertaining to the outstanding 2011 Series A PS was $4,372,451 using the Black-Scholes option pricing model based on the following weighted average variables:

 

Expected dividends     0 %
Expected volatility     403.96 %
Expected term     4.5-years  
Risk free interest rate     0.72 %

 

We recorded a loss of $4,322,947 during the second quarter of 2012, representing the net change in the fair value of the derivative liability pertaining to the 2011 Series A PS from the date of conversion through June 30, 2012.

 

On July 31, 2012, 676,198 shares of 2011 Series A PS were converted into 3,380,990 shares of common stock.

 

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 (“2010 Series B PS”) and 47,633 warrants to purchase our common stock. The 2010 Series B PS have:

 

  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; and

 

  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.

 

During July 2012, a shareholder converted 100,000 shares of 2010 Series B PS into 95,266 shares of our common stock.

 

Convertible Series C Preferred Stock

 

On March 25, 2011, our Board authorized the sale of up to 1,000,000 shares of Convertible Series C Preferred Stock (“2011 Series C PS”), with a par value of $0.0001 per share.  The 2011 Series C PS have:

 

  a) Seniority to all classes of common stock and all preferred stock issued in the future with a liquidation preference senior to the common stock;

 

  b) Voting rights and powers equal to the voting rights and powers of our common stock. Each share of 2011 Series C 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 liquidation preference of the greater of the original issue price, or the amount that would be due if all 2011 Series C PS shares had been converted to common stock immediately prior to the liquidation event;

 

  d) No stated dividends; and

 

  e) Automatic conversion (subject to blocking provisions for certain significant shareholders) into common shares at a rate of 1.9053 shares of common for each share of 2011 Series C PS.

 

On July 31, 2012, the remaining 14,797 outstanding shares of 2011 Series C PS were converted into 28,192 shares of common stock; therefore, there are no longer any shares of 2011 Series C PS that are outstanding.

 

 

F-15
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

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 have:

 

  a) A liquidation preference equal to $10.00 per share;

 

  b) No voting rights; and

 

  c) No stated dividends; and

 

  d) Are not convertible into common stock.

 

On April 24, 2012, we acquired 100% of Acquisition Corp. by issuing 350,000 shares of Series D preferred stock to the Acquisition Corp shareholders including 90,000 shares each to our then Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer, and 25,000 shares each to our Co-Chairman and another uSell shareholder. The shares were sold without registration to accredited investors under the Securities Act of 1933 in reliance upon the exemption provided in Section 4(2) and Rule 506 thereunder

 

Common Stock

 

On June 8, 2012, our shareholders approved an amendment to our Certificate of Incorporation to effect a 1-for-52.4846 reverse stock split, which reduced our fully-diluted outstanding common share count to approximately 10,000,000 common shares (the “Reverse Split”). Certain securities that were outstanding at the time of the Reverse Split were not subject to the Reverse Split including our 2011 Series A PS; warrants to purchase our common stock that were issued in connection with our 2011 Series A PS; shares and warrants issued to shareholders in connection with the conversion of our 2011 Convertible Notes; and certain stock options. All share and per share amounts reported throughout this document have been retroactively restated to reflect the Reverse Split.

 

Shares Granted to Directors, Consultants and Employees

 

During June 2012, we granted 2,500,000 fully vested shares of common stock, having a fair value of $787,500 based on the quoted closing trading price of our common stock as of the grant date, to our Co-Chairman of the Board. The shares were issued as compensation for service on our board of directors for a one-year period. We recorded the amount as a prepaid expense and are amortizing the expense over the expected remaining service term. We recorded $328,125 during the second quarter of 2012 as expense pertaining to this grant.

 

During June 2012, we granted 1,160,000 fully vested shares of common stock, having a fair value of $365,400 based on the quoted closing trading price of our common stock as of the grant date, to a contractor for services to be provided over a one-year period. We recorded the amount as a prepaid expense and are amortizing the expense over the expected remaining service term. We recorded $152,250 during the second quarter of 2012 as expense pertaining to this grant.

 

Including the above grants, we recorded non-cash compensation expense of $478,083 and $71,853 for the three months ended June 30, 2012 and 2011, respectively, and $490,561 and $144,956 for the six months ended June 30, 2012 and 2011, respectively, pertaining to stock grants.

 

During July 2012, we granted a total of 2,000,000 fully vested shares of common stock, having a fair value of $700,000 based on the quoted closing trading price of our common stock as of the grant date, to our Co-Chairmen of the Board and 500,000 fully vested shares of common stock, having a fair value of $130,000 based on the quoted closing trading price of our common stock as of the grant date, to a consultant for future services.

 

Warrants

 

In connection with a settlement of an outstanding balance in our accounts payable, we issued 25,000 warrants to purchase our 2011 Series A PS. In connection with the Reverse Split, these warrants were converted into warrants to purchase 125,000 shares of our common stock. The warrants have an exercise price of $0.20 and are exercisable for five years. The estimated fair value of these stock warrants on their date of grant was $25,000, which we estimated using the Black-Scholes option pricing model using the following assumptions:

 

F-16
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

Risk-free interest rate     1.06 %
Expected dividend yield     0.0 %
Expected volatility     374.05 %
Expected life     5-Years  
Expected forfeitures     0 %

 

The $25,000 value of these warrants was included in the calculation of our gain on the settlement of accounts payable during the three months ended March 31, 2012.

 

In January 2012, we granted 8,000,000 warrants to purchase our common stock to the holders of our Convertible Notes Payable (these warrants were not subject to the Reverse Split). The warrants have an exercise price of $0.20 and are exercisable for five years. The estimated fair value of these stock warrants on their date of grant was $50,383, which we estimated using the Black-Scholes option pricing model using the following assumptions:

 

Risk-free interest rate     0.752 %
Expected dividend yield     0.0 %
Expected volatility     356.11 %
Expected life     5-Years  
Expected forfeitures     0 %

 

These warrants were to be issued to the note holders upon the completion of a Future Financing. As such, we considered these warrants to be a cost of the Future Financing, the recording of which had a net effect of zero on our additional paid in capital account.

 

There was no expense pertaining to warrants recorded during the six months ended June 30, 2011.

 

During the six months ended June 30, 2012, 101,458 warrants with a weighted average exercise price of $17.96 expired unexercised.

 

The aggregate intrinsic value of the warrants at June 30, 2012 and December 31, 2012 was $2,681,250 and $0, respectively.

 

The following summarizes our warrant activity for the six months ended June 30, 2012:

  

   Series A Preferred Stock   Common Stock 
   Number of Warrants   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life (in Years)   Number of Warrants   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life (in Years) 
Outstanding - December 31, 2011   -   $-    ---    281,988   $12.96    1.1 
Granted   25,000    0.200         8,125,000    0.20      
Exercised   -    -         -    -      
Cancelled/Forfeited   (25,000)   0.200         (101,458)   17.96      
Outstanding - June 30, 2012   -   $-    -    8,305,529   $0.42    4.5 
                               
Exercisable - June 30, 2012   -   $-    -    8,305,529   $0.42    4.5 

  

 

 Stock Option Grants

 

During the first quarter of 2012, we granted 500,000 stock options, which were not subject to the Reverse Split, to our former Chief Operating Officer in connection with his separation from the Company. These options had a fair value of $3,150 using the Black-Scholes option-pricing model using the following assumptions:

 

Risk-free interest rate     1.90 %
Expected dividend yield     0 %
Expected volatility     356.11 %
Expected life     10 years  
Expected forfeitures     0 %

 

F-17
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

The options have an exercise price of $0.20 per share over a ten-year term and were completely vested at the time of the grant. We recorded $3,150 during the three months ended March 31, 2012 as expense pertaining to this grant.

 

During the second quarter of 2012, we granted 100,000 stock options to employees for future services. These options had a fair value of $650 using the Black-Scholes option-pricing model using the following weighted average assumptions:

 

Risk-free interest rate     1.91 %
Expected dividend yield     0 %
Expected volatility     381.44 %
Expected life     10 years  
Expected forfeitures     0 %

 

The options are exercisable at a weighted average exercise price of $0.20 per share over a ten-year term and vest over 4-years. We recorded $28 during the second quarter of 2012 as expense pertaining to this grant.

 

During the second quarter of 2012, we granted 150,000 stock options to a vendor for future services. These options had a fair value of $1,050 using the Black-Scholes option-pricing model using the following weighted average assumptions:

 

Risk-free interest rate     1.67 %
Expected dividend yield     0 %
Expected volatility     384.10 %
Expected life     10 years  
Expected forfeitures     0 %

 

The options are exercisable at a weighted average exercise price of $0.20 per share over a ten-year term and vest over a six month period. We recorded $683 during the second quarter of 2012 as expense pertaining to this grant.

 

Including the above grants, we recorded non-cash compensation expense of $275,775 and $512,263 for the three months ended June 30, 2012 and 2011, respectively, and $353,361 and $1,067,000 for the six months ended June 30, 2012 and 2011, respectively, pertaining to stock option grants.

 

The following table summarizes our stock option activity for the period from December 31, 2011 through June 30, 2012:

 

   Number of
Options
   Weighted
Average
Exercise Price
   Weighted Average
Remaining
Contractual Life
(in Years)
   Aggregate
Intrinsic
Value
 
Outstanding - December 31, 2011   5,554,064   $1.00    8.0   $- 
Granted   750,000    0.20           
Forfeited or Canceled   (4,260,418)   0.88           
Outstanding – June 30, 2012   2,043,647   $0.95    6.0   $253,938 
                     
Exercisable – June 30, 2012   1,403,057   $1.02    6.8   $203,613 

 

F-18
 

 

usell.com, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2012

(Unaudited)

 

 The following table summarizes our stock option activity for non-vested options for the period from December 31, 2011 through June 30, 2012:

 

   Number of  Options   Weighted Average
Grant Date
Fair Value
 
Balance at December 31, 2011   4,693,738   $1.15 
Granted   750,000      
Vested   (740,535)     
Cancelled or Forfeited   (4,062,614)     
Balance at June 30, 2012   640,590   $2.87 

 

During July 2012, we granted 2,400,000 stock options to members of our board of directors and our executive officers for future services. These options had an aggregate fair value of $750,000 using the Black-Scholes option-pricing model using the following weighted average assumptions:

 

Risk-free interest rate     0.61 %
Expected dividend yield     0 %
Expected volatility     409.58 %
Expected life     5 years  
Expected forfeitures     0 %

 

The options are exercisable at a weighted average exercise price of $0.20 per share over a five-year term. Of the stock options granted, 1,000,000 vested immediately upon grant, 1,000,000 vest over a one-year period, and 400,000 vest over a four-year period.

 

F-19
 

 

Index to Consolidated Financial Statements

 

    Page
     
Report of Independent Registered Public Accounting Firm   F-21
     
Consolidated Balance Sheets at December 31, 2011 and 2010   F-22
     
Consolidated Statements of Operations for the years ended December 31, 2011 and 2010   F-23
     
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2011 and 2010   F-24
     
Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010   F-25
     
Notes to Consolidated Financial Statements   F-27

 

F-20
 

 

 

  

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of:

Upstream Worldwide, Inc. & Subsidiaries


We have audited the accompanying consolidated balance sheets of Upstream Worldwide, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Upstream Worldwide, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Berman & Company, P.A.

 

 

Boca Raton, Florida

March 29, 2012

 

551 NW 77th Street Suite 201 · Boca Raton, FL 33487

Phone: (561) 864-4444 · Fax: (561) 892-3715

www.bermancpas.com · info@bermancpas.com

Registered with the PCAOB· Member AICPA Center for Audit Quality

Member American Institute of Certified Public Accountants

Member Florida Institute of Certified Public Accountants

 

F-21
 

 

Upstream Worldwide, Inc. and Subsidiaries

Consolidated Balance Sheets

 

   December 31, 2011   December 31, 2010 
Assets          
Current Assets:          
Cash  $1,791,623   $686,065 
Accounts receivable   22,277    251,999 
Accounts receivable - related party   -    26,875 
Inventory   16,876    135,601 
Prepaid expenses and other current assets   24,456    156,300 
Prepaid asset - related party - current portion   -    187,627 
Debt issue costs   2,858    - 
Total Current Assets   1,858,090    1,444,467 
           
Property and Equipment - net   34,980    79,251 
           
Other Assets:          
Intangible assets - net   5,556    98,767 
Intangible asset - related party - net   -    141,082 
Prepaid asset - related party - net of current portion   -    265,805 
Other assets   -    89,260 
Total Other Assets   5,556    594,914 
           
Total Assets  $1,898,626   $2,118,632 
           
Liabilities and Stockholders' Deficit          
Current Liabilities:          
Accounts payable  $1,064,276   $1,078,329 
Accounts payable - related party   -    24,332 
Accrued expenses   581,451    382,243 
Deferred revenue   -    413,985 
Note payable, net of discount   29,113    - 
Convertible notes payable, net of discount   410,417    - 
Derivative liability   29,837    1,615,852 
Total Current Liabilities   2,115,094    3,514,741 
           
Stockholders' Deficit:          
Convertible Series A preferred stock, ($0.0001 par value, 10,000,000 and 25,000,000 shares authorized, respectively, 4,045,000 and 400,000 issued and outstanding, respectively) Liquidation preference $4,045,000   405    40 
           
Convertible Series B preferred stock, ($0.0001 value per share, 4,000,000 shares authorized, 2,626,250 and 2,943,750 shares issued and outstanding, respectively) Liquidation preference $2,626,250   263    294 
Convertible Series C preferred stock, ($0.0001 value per share, 1,000,000 and -0- shares authorized, respectively, 14,797 and -0- shares issued and outstanding, respectively)   1    - 
           
Common stock, ($0.0001 par value, 650,000,000 shares authorized, 303,904,284 and 210,251,816 shares issued and outstanding, respectively)   30,391    21,026 
Subscriptions receivable - Convertible Series A preferred stock   (2,000,000)   - 
Additional paid in capital   33,202,748    25,869,850 
Accumulated deficit   (31,450,276)   (27,007,076)
Accumulated other comprehensive loss   -    (280,243)
Total Stockholders' Deficit   (216,468)   (1,396,109)
           
Total Liabilities and Stockholders' Deficit  $1,898,626   $2,118,632 

 

See accompanying notes to Consolidated Financial Statements.

 

F-22
 

 

Upstream Worldwide, Inc. and Subsidiaries

Consolidated Statements of Operations

 

   For the Year Ended
December 31,
 
   2011   2010 
Revenue  $5,876,660   $32,547,898 
Cost of revenue   2,955,932    11,526,214 
Impairment of prepaid expenses - related party   312,712    - 
Gross Profit   2,608,016    21,021,684 
Sales and marketing expenses   3,007,443    20,821,100 
General and administrative expenses   5,331,708    6,995,651 
(Gain) loss on settlements of accounts payable   (130,445)   8,405 
Impairment of property and equipment   57,871    114,018 
Impairment of goodwill and intangible assets   448,734    11,142,273 
Loss from Operations   (6,107,295)   (18,059,763)
           
Other Income (Expense):          
Interest expense, net   (421,626)   - 
Loss on substantial liquidation of foreign subsidiaries and foreign exchange   (300,293)   (11,258)
Derivative expense - embedded conversion feature of convertible Series B preferred stock issuance   (6,307)   (512,291)
Derivative expense - convertible notes payable   (626,681)   - 
Change in fair value of derivative liability - embedded conversion feature of convertible Series B preferred stock   1,687,158    1,840,189 
Change in fair value of derivative liability - convertible notes payable   1,396,844    - 
Total Other Income - Net   1,729,095    1,316,640 
Net Loss Before Income Tax Expense   (4,378,200)   (16,743,123)
Income Tax Expense   -    (48,130)
Net Loss  $(4,378,200)  $(16,791,253)
           
Basic and Diluted Loss per Common Share:          
Net loss  $(4,378,200)  $(16,791,253)
Preferred stock dividends - Series B   (65,000)   (2,943,750)
Net loss available to common stockholders   (4,443,200)   (19,735,003)
           
Net loss per common share - basic and diluted  $(0.02)  $(0.10)
           
Weighted average number of common shares outstanding during the period - basic and diluted   254,406,668    197,689,472 
           
Comprehensive Loss:          
Net loss  $(4,378,200)  $(16,791,253)
Foreign currency translation adjustment   (20,050)   (244,612)
Comprehensive Loss  $(4,398,250)  $(17,035,865)

 

See accompanying notes to Consolidated Financial Statements.

 

F-23
 

 

Upstream Worldwide, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders' Equity (Deficit)

For the Years Ended December 31, 2011 and 2010

 

   Series A Preferred Stock,
$0.0001 Par Value
   Series B Preferred Stock,
$0.0001 Par Value
   Series C Preferred Stock,
$0.0001 Par Value
   Common Stock, $0.0001 Par
Value
   Subscriptions   Additional   Accumulated
Other
Comprehensive
   Accumulated   Total
Stockholders'
 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Receivable   Paid in Capital   Loss   Deficit   Equity (Deficit) 
Balance, December 31, 2009   3,400,000   $340    -   $-    -   $-    183,208,004   $18,322   $-   $19,080,568   $(35,631)  $(7,272,073)  $11,791,525 
                                                                  
Sale of Common Stock   -    -    -    -    -    -    5,758,337    576    -    1,151,091    -    -    1,151,667 
Sale of Series B Preferred Stock   -    -    2,943,750    294    -    -    -    -    -    2,943,456    -    -    2,943,750 
Conversion of Preferred Stock to Common Stock   (3,000,000)   (300)   -    -    -    -    3,000,000    300    -    -    -    -    - 
Stock compensation: stock grants, stock options and warrants   -    -    -    -    -    -    1,270,000    127    -    2,439,043    -    -    2,439,170 
Payment of offering costs   -    -    -    -    -    -    -    -    -    (68,795)   -    -    (68,795)
Settlement of accounts payable with common stock   -    -    -    -    -    -    3,240,475    324    -    325,864    -    -    326,188 
Common shares issued to investors in connection with Preferred B stock sale   -    -    -    -    -    -    13,775,000    1,378    -    (1,378)   -    -    - 
Dividend arising from Preferred B beneficial conversion feature   -    -    -    -    -    -    -    -    -    -    -    (2,943,750)   (2,943,750)
Foreign currency translation adjustment   -    -    -    -    -    -    -    -    -    -    (244,612)   -    (244,612)
Net loss   -    -    -    -    -    -    -    -    -    -    -    (16,791,253)   (16,791,253)
                                                                  
Balance, December 31, 2010   400,000    40    2,943,750    294    -    -    210,251,816    21,026    -    25,869,850    (280,243)   (27,007,076)   (1,396,109)
                                                                  
Sale of Series A Preferred Stock   4,045,000    405    -    -    -    -    -    -    (2,000,000)   4,044,595    -    -    2,045,000 
Sale of Series B Preferred Stock   -    -    65,000    7    -    -    -    -    -    64,993    -    -    65,000 
Payment of offering costs   -    -    -    -    -    -    -    -    -    (37,245)   -    -    (37,245)
Warrants issued in connection with Note Payable   -    -    -    -    -    -    -    -    -    10,091    -    -    10,091 
Dividend arising from Preferred B beneficial conversion feature   -    -    -    -    -    -    -    -    -    -    -    (65,000)   (65,000)
Common shares issued to investors in connection with Preferred B stock sale   -    -    -    -    -    -    500,000    50    -    (50)   -    -    - 
Issuance of Series C Preferred Stock in connection with Warrant exercise   -    -    -    -    720,938    72    -    -    -    1,081,334    -    -    1,081,406 
Conversion of Series A Preferred Stock to Common Stock   (400,000)   (40)   -    -    -    -    400,000    40    -    -    -    -    - 
Conversion of Series B Preferred Stock to Common Stock   -    -    (382,500)   (38)   -    -    19,125,000    1,913    -    (1,875)   -    -    - 
Conversion of Series C Preferred Stock to Common Stock   -    -    -    -    (706,141)   (71)   70,614,076    7,061    -    (6,991)   -    -    -
Stock based compensation   -    -    -    -    -    -    3,013,392    301    -    2,178,045    -    -    2,178,346 
Loss on substantial liquidation of foreign subsidiaries and foreign exchange   -    -    -    -    -    -    -    -    -    -    300,293    -    300,293 
Foreign currency translation adjustment   -    -    -    -    -    -    -    -    -    -    (20,050)   -    (20,050)
Net loss   -    -    -    -    -    -    -    -    -    -    -    (4,378,200)   (4,378,200)
                                                                  
Balance, December 31, 2011   4,045,000   $405    2,626,250   $263    14,797   $1    303,904,284   $30,391   $(2,000,000)  $33,202,748   $-  $(31,450,276)  $(216,468)

 

See accompanying notes to Consolidated Financial Statements.

 

F-24
 

 

Upstream Worldwide, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 

   For the Year Ended
December 31,
 
   2011   2010 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(4,378,200)  $(16,791,253)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   108,187    142,580 
Stock based compensation expense   2,178,346    2,436,790 
Amortization of prepaid asset - related party   140,720    187,627 
Amortization of debt issue costs   2,042    - 
Amortization of debt discount into interest expense   414,621    - 
Impairment of prepaid expenses   312,712    - 
Impairment of property and equipment   57,871    114,018 
Impairment of goodwill and intangible assets   448,734    11,142,273 
Loss on substantial liquidation of foreign subsidiaries and foreign exchange   300,293    - 
(Gain) Loss on settlement of accounts payable   (130,445)   8,405 
Derivative expense pertaining to embedded conversion feature of convertible Series B preferred stock issuance   6,307    512,291 
Derivative expense pertaining to convertible note payable   626,681    - 
Change in fair value of derivative liability - embedded conversion feature of convertible Series B preferred stock issuance   (1,687,158)   (1,840,189)
Change in fair value of derivative liability - convertible notes payable   (1,396,844)   - 
Changes in operating assets and liabilities:          
Decrease (increase) in:          
Accounts receivable   236,843    (251,999)
Accounts receivable - related party   26,875    1,056,612 
Inventory   120,587    713,070 
Prepaid and other current assets   151,825    543,329 
Increase (decrease) in:          
Accounts payable   98,335    (34,662)
Accounts payable - related party   (24,332)   (21,652)
Accrued expenses   244,763    90,609 
Deferred Revenues   (421,186)   (1,169,532)
Net Cash Used In Operating Activities   (2,562,423)   (3,161,683)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Cash paid to acquire intangible assets   (276,632)   (77,752)
Cash paid to purchase property and equipment   (14,509)   (191,942)
Net Cash Used In Investing Activities   (291,141)   (269,694)

 

See accompanying notes to Consolidated Financial Statements.

 

F-25
 

 

Upstream Worldwide, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Continued)

 

   For the Year Ended
December 31,
 
   2011   2010 
CASH FLOWS FROM FINANCING ACTIVITIES:          
           
Proceeds from note payable   70,000    - 
Principal repayments toward note payable   (35,000)   - 
Cash paid for debt issue costs   (4,900)   - 
Proceeds from convertible notes payable   800,000    - 
Proceeds from sale of convertible Series A preferred stock   2,045,000    - 
Proceeds from sale of convertible Series B preferred stock   65,000    2,943,750 
Cash paid for direct offering costs of preferred stock   (37,245)   (17,218)
Proceeds from sale of common stock   -    1,151,667 
Cash paid for direct offering costs of common stock   -    (51,579)
Proceeds from exercise of warrants   1,081,406    - 
Net Cash Provided By Financing Activities   3,984,261    4,026,620 
           
Net Increase (Decrease) in Cash   1,130,697    595,243 
           
Effect of Exchange Rates on Cash   (25,139)   (206,604)
           
Cash - Beginning of Period   686,065    297,426 
           
Cash - End of Period  $1,791,623   $686,065 
           
SUPPLEMENTARY CASH FLOW INFORMATION:          
Cash Paid During the Period for:          
Interest  $-   $- 
Taxes  $-   $- 
           
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
           
Derivative liability arising from convertible notes payable  $1,426,681   $- 
Derivative liability arising from convertible Series B preferred stock  $71,307   $2,943,750 
Conversion of Series A preferred stock into common stock  $40   $300 
Conversion of Series B preferred stock into common stock  $38    - 
Conversion of Series C preferred stock into common stock  $71    - 
Sale of stock for subscriptions receivable  $2,000,000   $- 
Settlement of accounts payable with common stock  $-   $328,570 
Accrual of covenant not to compete  $-   $50,000 
Shares vested to foreign subsidiary managers  $-   $25 
Shares issued in connection with convertible Series B preferred stock  $-   $1,378 

 

See accompanying notes to Consolidated Financial Statements.

 

F-26
 

 

 

Upstream Worldwide, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2011 and 2010

 

Note 1 – Organization and Business

 

Upstream Worldwide, Inc., through our wholly-owned subsidiaries (collectively, “Upstream,” “Company,” “we,” “us,” and/or “our”), helps 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 we continued to service packs coming in from prior precious metals and cellular phone advertising campaigns. In July 2011, we 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 electronics buyers.

 

We utilize consumer oriented advertising efforts, such as direct response television commercials and various forms of internet advertising, to attract consumers 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. The economies of scale that we generate allow us to pass savings on to our partners which, in turn, allows them to offer the highest possible prices to consumers.

 

Note 2 – Significant Accounting Policies

 

Basis of Presentation

 

The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: the amount allocated to goodwill and other intangible assets and related impairments, the estimated useful lives for amortizable intangible assets and property and equipment, accrued expenses, deferred revenue, the fair value of warrants granted in connection with various financing transactions, share-based payment arrangements, and the fair value of derivative liabilities.

 

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 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

 

We minimize credit risk associated with cash by periodically evaluating the credit quality of our primary financial institutions. At times, our cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. On December 31, 2011 and 2010, our deposits exceeded the FDIC limit by approximately $1.6 million and $0.4 million, respectively.

 

Accounts Receivable

 

Accounts receivable represent obligations from customers, including a related party customer, the Refinery (Note 9). We periodically evaluate the collectability of our accounts receivable 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. We did not deem it necessary to record an allowance for doubtful accounts at December 31, 2011 or 2010.

 

F-27
 

 

Upstream Worldwide, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2011 and 2010

 

Inventory

 

Inventory consists predominantly of gold and other precious metals and is carried at the lower of cost or net realizable value. Cost is the amount paid by us to third parties, which is generally lower than the current market value. As such, we do not deem it necessary to record a reserve for obsolete inventory.

 

Debt Issue Costs

 

Direct costs incurred in connection with issuing debt securities or obtaining debt or other credit arrangements are recorded as debt issue costs and are amortized as interest expense over the term of the related debt.

 

Property and Equipment

 

Property and equipment is stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets.

 

See Note 4 regarding impairment charges pertaining to our property and equipment. 

 

Intangible Assets

 

Our intangible assets pertain to software related to our website and customer management platform and to our non-compete agreements. 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 than the carrying amount of the asset, an impairment loss, measured as the excess of the carrying value 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.

 

See Note 5 regarding impairment charges pertaining to our intangible assets. 

 

Goodwill

 

We test Goodwill for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit. The goodwill impairment test is conducted using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term growth rate of our business, the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment charge.

 

We reported revenue of $4.1 million during the third quarter of 2010, a decrease of $2.7 million from the $6.8 million reported during the same period of 2009. This represented the first occurrence of a decline in revenue from the same period in a prior year in our history. In addition, the losses from operations for the third quarter and the nine month period ended September 30, were both higher in 2010 as compared with the same periods in 2009. We concluded that these operating performance indicators were sufficient to warrant a review of the carrying amount of our goodwill at September 30, 2010. We reviewed the carrying value of our goodwill, considering both quantitative factors, such as projected future cash flows, as well as qualitative factors, including our limited operating history, the significant fluctuations in our sales volume over the last several quarters and the uncertainty regarding our expansion into similar services for cellular phones. Based on this review, we determined that the value of our goodwill had been impaired. Accordingly, we recorded an impairment charge on our Consolidated Statement of Operations of $11,142,273 for the year ended December 31, 2010 which brought our goodwill value to zero.

 

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:

 

F-28
 

 

Upstream Worldwide, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2011 and 2010

 

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.

 

In addition, we review all of our convertible instruments for the existence of a beneficial conversion feature. Upon the determination that a beneficial conversion feature exists, the relative fair value of the beneficial conversion feature would be recorded as a discount from the face amount of the respective debt instrument and the discount would be amortized to interest expense over the life of the debt.

 

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 as

 

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

 

Consumers 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. Upon selection of a partner’s offer, the consumer is re-directed to that partner’s website to complete the checkout process. We earn a fee for providing our partners with customers and recognize revenue upon acceptance of the partner’s offer by the consumer.

 

F-29
 

 

Upstream Worldwide, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2011 and 2010

 

Cellular Phones

 

Cellular phones received in response to our advertisements to purchase them directly were appraised upon receipt from the public based on a variety of factors including the condition of the phone and its level of functionality. To maximize efficiencies, phones were received directly by our electronics partner, ReCellular, Inc. (“ReCellular”), who would perform the appraisal on our behalf.  The appraised value was used to determine the price at which we sold the phone to ReCellular.  On a daily basis, all of the cellular phones received and appraised were sold to ReCellular.  As a result, revenue was recognized the same day the phones were received from the public.

 

Phones were not returned to the public once they had been received.  In addition, no returns were accepted from ReCellular and upon delivery of the phones to ReCellular, we had no further obligations.

 

  Precious Metals

 

We graded the quality of the precious metals purchased from the public and estimated the total quantity received. We then locked in the current spot rate of each metal sufficient to cover the total quantity received in the current batch with the Refinery. After a holding period of at least 10 days the precious metals were delivered to the Refinery to be melted. Upon melting the precious metals, the Refinery validated the quality and quantity of the precious metals and would remit payment to us based on the quantity of the pure precious metals at the agreed upon spot rates, as described above. Revenue was recognized upon melting of the precious metals and the validation of the quality and quantity of each precious metal by the Refinery.

 

No returns were accepted from the Refinery and upon delivery of the precious metals to the Refinery, we had no further obligations.

 

Deferred Revenue

 

Upon our estimate of the total quantity of precious metals received and the locking in of the current spot rate for each precious metal, we were able to estimate the total value of the batch received. The Refinery advanced to us, up to 80% of the value of the precious metals we had received, but not yet delivered. This amount was recorded as deferred revenue until the specific batch was melted and processed as described above, at which time, it was recorded as revenue.

 

Cost of Revenue

 

Our cost of revenue pertaining to Consumer Electronics Referral revenue, consists primarily of costs to maintain our website. These costs are expensed as incurred. Our cost of revenue pertaining to the sale of cellular phones and precious metals included our cost of acquiring the cellular phones and precious metals, as well as any other direct costs and expenses required to ship, secure, grade, log and process the items internally. In addition, fees and other costs incurred in connection with processing at the Refinery were charged to cost of revenue.

 

We recorded $140,720 and $187,627 for the years ended December 31, 2011 and 2010, respectively, as cost of revenue pertaining to prepaid refining services and $43,780 and $58,373 for the years ended December 31, 2011 and 2010, respectively, as amortization expense pertaining to a non-compete agreement, both of which pertain to our service agreement with the Refinery.

 

Advertising

 

Advertising costs are expensed as they are incurred and are included in sales and marketing expenses. Advertising expense amounted to $1,962,268 and $15,223,698 for the years ended December 31, 2011 and 2010, respectively.

 

Foreign Currency Transactions

 

The Consolidated Financial Statements are presented in United States Dollars. The financial position and results of operations of our foreign subsidiaries were measured using the local currency as the functional currency. Assets and liabilities of our foreign subsidiaries were translated from their local currency (British pounds, Canadian dollars and Euros) into the reporting currency, U.S. dollars, using period end exchange rates. Equity transactions were translated using the historical exchange rate that was in effect when the transaction occurred. The resulting translation adjustments were recorded as a separate component of accumulated other comprehensive loss. Revenues and expenses were translated using weighted average exchange rates for the respective periods. Transaction gains and losses resulting from foreign currency transactions were recorded as foreign exchange gains or losses in the consolidated statement of operations. We did not enter into any financial instruments to offset the impact of foreign currency fluctuations.

 

F-30
 

 

Upstream Worldwide, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2011 and 2010

 

During 2010 and 2011, we slowed, and then stopped, our advertising and marketing in markets outside the United States. As discussed elsewhere in this Report, we wrote off assets that pertain to these operations in 2010 and 2011, as we determined that the assets were no longer expected to provide future economic benefit. At December 31, 2011, the operations outside the United States were substantially liquidated. As such, we removed the amounts attributable to these entities and the accumulated translation adjustments from our Accumulated Other Comprehensive Income and reported it as part of the Loss on substantial liquidation of foreign subsidiaries and foreign exchange on our Consolidated Income Statement for the year ended December 31, 2011. 

 

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 “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 for awards that vest over time, and in the period of grant for awards that vest immediately. 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 in the Consolidated Statement of Operations, 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.

 

Income Taxes

 

We account for income taxes in accordance with ASC Topic 740, “Income Taxes,” which requires that we recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.

 

ASC Topic 740-20, “Income Taxes – Intraperiod Tax Allocation,” clarifies the accounting for uncertainties in income taxes recognized in accordance with ASC Topic 740-20 by prescribing guidance for the recognition, de-recognition and measurement in financial statements of income tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns, including a decision whether to file or not to file in a particular jurisdiction. ASC Topic 740-20 requires that any liability created for unrecognized tax benefits is disclosed. The application of ASC Topic 740-20 may also affect the tax bases of assets and liabilities and therefore may change or create deferred tax liabilities or assets. We would recognize interest and penalties related to unrecognized tax benefits in income tax expense.

 

During 2011 and 2010, we recorded impairment expenses resulting from the write off of certain intangible assets, goodwill, and from the write off of property and equipment and certain prepaid expenses. These impairment expenses are not deductible for tax purposes.

 

Net Loss per Share

 

Basic earnings 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.

 

F-31
 

 

Upstream Worldwide, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2011 and 2010

 

The computation of basic and diluted loss per share for the years ended December 31, 2011 and 2010, excludes the following potentially dilutive securities because their inclusion would be anti-dilutive:

 

   For the Year Ended
December 31, 2011
   For the Year Ended
December 31, 2010
 
Convertible Notes Payable (See Note 6)   8,000,000     
Convertible Series A Preferred Stock   20,225,000    400,000 
Convertible Series B Preferred Stock   131,312,500    147,187,500 
Convertible Series C Preferred Stock   1,479,674     
Stock Warrants   14,800,003    92,268,753 
Stock Options   291,502,890    81,316,214 
    467,320,067    321,172,467 

  

Comprehensive Loss

 

Other comprehensive loss includes all changes in stockholders’ equity during a period from non-owner sources and is reported in the consolidated statement of stockholders’ equity. To date, other comprehensive loss consists of changes in accumulated foreign currency translation adjustments.

 

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 is due to consumer complaints.  Because we generally relied on third parties to handle the products we sold, the Refinery for precious metals and ReCellular for phones and smart phones.  Under Florida law, the remedies include actual damages, civil penalties, and attorneys’ fees.  To date, we have provided a comprehensive response to the AG demonstrating that we acted properly. The AG’s investigation is ongoing.  We expect that our management will meet with the AG in April 2012 to discuss this matter further. Although we believe that we have not violated any laws, there can be no assurance that the Attorney General will agree. We have not accrued a liability for this matter as we believe the likelihood of our incurring damages or penalties is remote.

 

Customer and Vendor Concentrations

 

During the year ended December 31, 2011 and 2010, the Refinery represented approximately 43% and 97%, respectively, of our revenue. During the year ended December 31, 2011, ReCellular represented approximately 53% of our revenue. At December 31, 2011, the amount due from the Refinery comprised approximately 38% of our accounts receivable, and two consumer electronics recycling partners comprised approximately 28% and 16% of our accounts receivable. At December 31, 2010, approximately 90% of our accounts receivable was due from ReCellular.

 

During the year ended December 31, 2011, one vendor represented approximately 25% of our total purchases, and during the year ended December 31, 2010, one vendor represented approximately 11% of our total purchases. At December 31, 2011, one vendor comprised approximately 27%, of our accounts payable, and at December 31, 2010, two vendors comprised approximately 16% and 12%, of our accounts payable.

 

Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The guidance in ASU 2011-05 applies to both annual and interim financial statements and eliminates the option for reporting entities to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. This ASU also requires consecutive presentation of the statement of net income and other comprehensive income. Finally, this ASU requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We have adopted this guidance in these Consolidated Financial Statements.

 

Note 3 – 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:

 

F-32
 

 

Upstream Worldwide, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2011 and 2010

 

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.

 

Our investment strategy is focused on capital preservation. We intend to invest in instruments that meet credit quality standards. The current expectation is to maintain cash and cash equivalents, once these resources are available.

 

The following are the major categories of liabilities measured at fair value on a nonrecurring basis at December 31, 2011 and 2010, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

 

   At December 31, 2011   At December 31, 2010 
   Assets   Liabilities   Assets   Liabilities 
Level 1                    
None  $   $   $   $ 
Level 2                    
None                
Level 3                    
Derivative liability       29,837        1,615,852 
   $   $29,837   $   $1,615,852 

 

The following table reflects the change in fair value of our goodwill and derivative liabilities for the years ended December 31, 2011 and 2010:

 

    For the Year Ended
December 31, 2011
    For the Year Ended
December 31, 2010
 
    Assets     Liabilities     Assets     Liabilities  
Balance at January 1   $     $ 1,615,852     $ 11,142,273     $  
Derivative liability arising from sale of Series B preferred stock           71,306             1,615,852  
Derivative liability arising from issuance of convertible notes payable           1,426,681              
Change in value of derivative liability – Series B preferred stock           (1,687,157 )            
Change in value of derivative liability – convertible notes           (1,396,844 )            
Impairment of goodwill                 (11,142,273      
Balance at December 31   $     $ 29,837     $     $ 1,615,852  

  

We have determined the estimated fair value amounts presented in these Consolidated Financial Statements 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 in the Consolidated Financial Statements 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.

 

F-33
 

 

Upstream Worldwide, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2011 and 2010

 

Note 4 – Property and Equipment

 

Property and equipment consist of the following at December 31, 2011 and 2010:

 

   Balance at
December 31,
2011
   Balance at
December 31,
2010
   Estimated
Useful Life
Leasehold Improvements  $50,852   $105,678   *
Security Equipment   29,795    68,459   7 years
Hardware and Software   40,819    22,393   3 years
Office Equipment   3,386    13,549   3 years
    124,852    210,079    
Impairment charges   (57,871)   (114,018)   
Less: Accumulated Depreciation   (32,001)   (16,810)   
Property and Equipment, Net  $34,980   $79,251    

 

* The shorter of three years or the life of the lease.

 

During the fourth quarter of 2010, we changed our business plan in the United Kingdom and European markets, whereby we no longer managed advertising, fulfillment, or grading, logging and storing of gold and other precious metals directly.  In connection with this change, we recorded an impairment of $114,018 pertaining to the assets used in these functions as they were not expected to provide future economic benefit. During the fourth quarter of 2011, we recorded a similar impairment charge of $57,871 pertaining to our assets used in these functions in the United States.

 

Depreciation expense on property and equipment amounted to $15,201 and $46,448 for the years ended December 31, 2011 and 2010, respectively.

 

Note 5 – Intangible Assets

 

Our intangible assets were comprised of a non-compete agreement with the Refinery (Note 9) and other intangibles including an additional non-compete agreement and website related costs. Our remaining intangible asset at December 31, 2011 pertains to the purchase of our website domain address. Intangible asset values and the related accumulated amortization are as follows:

 

   Intangible Asset –
Related Party
   Other
Intangible
Assets
 
Gross value at December 31, 2011  $291,865   $448,942 
Less: Impairment Charges   (97,288)   (351,446)
Accumulated amortization at December 31, 2011   (194,577)   (91,940)
Net value at December 31, 2011  $   $5,556 
           
Gross value at December 31, 2010  $291,865   $141,502 
Accumulated amortization at December 31, 2010   (150,783)   (42,735)
Net value at December 31, 2010  $141,082   $98,767 

 

Our intangible assets all have a definite life and are amortized on a straight-line basis over their estimated useful lives of between three and five years. Amortization expense amounted to $92,986 and $96,132 for the years ended December 31, 2011 and 2010, respectively.

 

Due to the decline of our revenues from precious metals and in connection with the adaptations we made to our approach to the electronics recycling market, we reviewed the recoverability of our assets pertaining to those portions of our business.  As a result of this review, we determined that our prepaid refinery costs and certain intangible assets, including our non-compete agreement with the Refinery and software development costs pertaining to our website and back-end systems, had been impaired.  Accordingly, on September 30, 2011 we recorded an impairment charge of $312,712 related to our prepaid refining services and $448,734 related to our intangible assets.  

 

F-34
 

 

Upstream Worldwide, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2011 and 2010

 

The following table outlines the estimated future amortization expense related to intangible assets as of December 31, 2011:

 

   Future
Amortization
Expense
 
2012  $3,333 
2013   2,223 
Total  $5,556 

 

Note 6 – Debt

 

Notes Payable

 

In October 2011, we received $70,000 from an investor pursuant to a note payable which we used for working capital purposes.  The note was due the earlier of six-months from the date of the note, or the closing of a financing transaction in which we raise at least $3 million in gross proceeds.  In lieu of interest, the note-holder was issued 1,000,000 warrants to purchase our common stock.  The warrants are exercisable at $0.014 per share for a period of five years.  The fair value of the warrants was determined to be $10,091 based upon management assumptions using the Black-Scholes pricing model using the following assumptions:

 

Expected dividends   0 %
Expected volatility   301.02 %
Expected term   5 years  
Risk free interest rate   0.88 %

 

This amount was recorded as a discount to the face value of the note and will be amortized into interest expense over the term of the note.  In addition, we incurred $4,900 in debt issue costs to obtain the note.  Accordingly, we recorded this amount as a debt issue cost, which will be amortized into interest expense over the term of the note.

 

We repaid $35,000 in principal on this note in December 2011 and the remaining $35,000 in January 2012.

 

Convertible Notes Payable