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USEL > SEC Filings for USEL > Form 10-Q/A on 15-Nov-2012All Recent SEC Filings

Show all filings for USELL.COM, INC.

Form 10-Q/A for USELL.COM, INC.


Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this report on Form 10-Q/A. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under "Risk Factors" in our Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or the SEC.

Company Overview, Inc., formerly known as Upstream Worldwide, Inc., is a technology based company focused on creating an online marketplace where individuals interested in selling small consumer electronics that they are no longer using ("Consumers") 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 The information on our websites is not incorporated in this report.

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 3 to our unaudited interim condensed consolidated financial statements found elsewhere in this report and Note 2 to our Consolidated Financial Statements for the year ended December 31, 2011 as filed with the SEC for further discussion regarding our critical accounting policies and estimates.

Our more significant accounting policies can be found in Note 3 of our unaudited interim condensed consolidated financial statements found elsewhere in this report, and in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC. There have been no material changes to our Critical Accounting Policies during the period covered by this report.

Results of Operations

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                  1,835,665                1,435,824          399,841                28 %
Operating Loss                             (1,972,085 )             (1,013,288 )       (958,797 )              95 %
Other (Expense) Income                     (4,177,900 )                 56,573       (4,234,473 )           -7485 %
Net Loss                           $       (6,149,985 )     $         (956,715 )   $ (5,193,270 )             543 %

                                       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                 2,502,168               2,971,372         (469,204 )             -16 %
Operating Loss                            (2,753,075 )            (2,821,761 )         68,686                -2 %
Other (Expense) Income                    (4,511,710 )               165,185       (4,676,895 )           -2831 %
Net Loss                           $      (7,264,785 )     $      (2,656,576 )   $ (4,608,209 )             173 %

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 Olympics in August and 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.

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 (as defined below). 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.

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 $2,753,075 during the six months ended June 30, 2012 (including non-cash charges for stock based compensation of $1,303,301). 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 $38,938,057, and a working capital deficit of $1,937,475 (including our derivative liability of $4,372,451).The significant components which affect our working capital are revenues derived from the leads to our partners, capital raised in private offerings, offset by marketing expenses, expenses spent on our technology infrastructure and public company expenses including audit and legal expenses.

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. Additionally, we currently do not have any capital obligations or commitments that will require a significant amount of capital.

Our investing activities used net cash of $111,154 to purchase property and equipment. 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.

Because we have continued to operate at a loss, we have relied on raising funds through the issuance of debt and equity securities in order to run our operations. During 2011, we received $800,000 ($550,000 during the first half of 2011 and $250,000 during the second half of 2011) 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 a director, and $50,000 was received from our then Chief Executive Officer, and $100,000 was received from another stockholder.

In 2011, our Board authorized the sale of up to 10,000,000 shares of Convertible Series A Preferred Stock ("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.

We determined based on our negotiations with investors that we would be unable to raise any additional capital without offering price protection to investors. 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. Investors who invested prior to January 2012 were given the same rights. 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). The issuance of the 2011 Series A PS was very dilutive to our shareholders but was necessary to raise capital in order to continue operating and implementing our new business.

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.

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. 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.

On September 14, 2012, our Board authorized the sale of 35,000,000 shares of our common stock in a primary offering. We intend to use the net proceeds of this offering for marketing, improving our platform technology, working capital and general corporate purposes.

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. If we are unable to raise any funds in the proposed public offering or any other type of financing, we believe that, with our current available cash along with anticipated revenues, we will have sufficient funds to meet our anticipated cash needs for the next twelve months. If necessary, we will reduce operating expenses other than marketing and advertising expenses. As we continue to invest in and improve our infrastructure, we believe it will improve our efficiency and expand the number of buyers on our site; which will allow us to increase our marketing spend and, accordingly, increase our revenues. 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.

Recent Accounting Pronouncements

See Note 3 to our unaudited interim condensed consolidated financial statements regarding recent accounting pronouncements.

Cautionary Note Regarding Forward-Looking Statements

This report includes forward-looking statements including statements regarding liquidity, anticipated revenues and cash flows.

The words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "could," "target," "potential," "is likely," "will," "expect" and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

The results anticipated by any or all of these forward-looking statements might not occur. Important factors that could cause actual results to differ from those in the forward-looking statements include providing consumers with a sufficient number of partners that furnish offers on our site, the effectiveness of our advertising campaigns and the willingness of people to use us to help them monetize and recycle their small consumer electronic items. Further information on our risk factors is contained in our filings with the SEC, including the Form S-1 filed on September 21, 2012. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors and our other filings with the SEC.

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