UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2016
or
¨
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: _____________
to _____________
usell.com, Inc.
(Exact name of registrant as specified in
its charter)
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Delaware
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000-50494
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98-0412432
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(State or Other Jurisdiction
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(Commission
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(I.R.S. Employer
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of Incorporation or Organization)
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File Number)
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Identification No.)
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171 Madison Avenue, 17
th
Floor
New York, New York 10016
(Address of Principal Executive Office) (Zip
Code)
(212) 213-6805
(Registrant’s
telephone number, including area code)
Securities registered pursuant to Section
12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act: Common Stock, $0.0001 par value
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
¨
Yes
x
No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
¨
Yes
x
No
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
x
Yes
¨
No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files.)
x
Yes
¨
No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
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Large accelerated filer
¨
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Accelerated filer
¨
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Non-accelerated filer
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Smaller reporting company
x
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
¨
Yes No
x
The aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the closing price as of the last business day of the registrant’s most recently
completed second fiscal quarter was approximately $11.7 million ($0.899).
The number of shares outstanding of the registrant’s classes
of common stock as of March 30, 2017 was 20,138,999 shares.
INDEX
PART I
uSell.com, Inc. is a large market maker of used smartphones. uSell acquires products from both individual
consumers, on its website, uSell.com, and from major carriers, big box retailers, and manufacturers through its subsidiary, We
Sell Cellular, LLC (“We Sell Cellular”). The Company maximizes the value of these devices by reclassifying them, adding
value to them, and moving them throughout the world to those who want them most. In order to serve its global and highly diverse
customer base, uSell leverages both a traditional sales force and an online marketplace where professional buyers of used smartphones
can buy inventory on-demand. Through participation on uSell’s online platform and through interaction with uSell’s
salesforce, buyers can acquire high volumes of inventory in a cost effective manner, while minimizing risk.
Device Acquisition
uSell has two primary means of sourcing devices
to satisfy demand from its global base of customers. The first source is through its wholly-owned subsidiary, We Sell Cellular,
which was acquired in the fourth quarter of 2015. We Sell Cellular is among a handful of top tier wholesalers whose primary business
is to buy used smartphones that have been traded in with the major carriers and the big box retailers, fully inspect and grade
these devices, and then sell these devices wholesale and retail through its highly experienced sales force. We Sell Cellular is
one of a few wholesalers that has qualified for R2 certification, the industry standard for both data destruction and environmental
protection.
uSell’s second method of sourcing devices
is through its website, uSell.com, where individual consumers can find cash offers for their items based on the make, model, and
condition of each item. Upon accepting an offer, consumers can ship their devices for free using either a prepaid shipping kit
or shipping label, and then track the progress of their orders online from initiation to final payment of their devices. We have
historically utilized consumer oriented advertising efforts, such as direct response television commercials and various forms of
Internet advertising, to attract sellers to our website. However, during 2015, we decided to strategically reduce our marketing
spend in favor of seeking out wholesale supply.
Device Disposition
We sell devices through three primary means:
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Utilizing our proprietary marketplace bidding platforms where buyers can source devices on demand
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Employing our highly experienced sales force to sell devices to our global customer base
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Leveraging third party eCommerce platforms such as eBay and Amazon
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While a minority of our product is sold directly
to consumers via third party eCommerce platforms, the majority of our sales are to professional buyers. These buyers include brick
and mortar retailers, online retailers, large and small wholesalers, small repair shops, large refurbishing providers, and insurance
companies. Approximately two-thirds of our customer base is in the United States, with the balance abroad. We are able to provide
all of our buyers with a low risk, cost-efficient way to acquire inventory. Through participation on uSell’s online marketplace
or through interaction with our salesforce, our buyers gain access to the high volume of devices that we acquire through both
wholesale and retail means, without taking on the risk and investment involved in marketing directly to consumers or purchasing
directly from carriers, big box retailers, and manufacturers.
Revenue Model
We generate revenue by either taking possession
of devices and selling these devices for a premium (“Principal Device Revenue”) or by facilitating transactions between
buyers and sellers and collecting a commission (“Agent Commission Revenue”).
A part of our retail business utilizes an Agent
Commission Revenue model, whereby we do not take possession of the devices that are sold to us by consumers, but rather facilitate
transactions between these consumers and our network of professional buyers. Some of the devises we acquire through our retail
business, however, utilize our Managed by uSell service, whereby we partner with a third party logistics company to inspect and
process devices before passing them along to buyers offering the highest prices for each device. Through this approach, we take
possession of devices for a brief period of time before they are passed on to the ultimate buyer.
Devices sourced wholesale through our subsidiary, We Sell Cellular,
are all bought and sold using the Principal Device Revenue model. Given that our wholesale sourcing channel is substantially larger
than our retail sourcing channel, the vast majority of our business is characterized by the Principal Device Revenue approach.
Company Evolution
Our vision to build the premier online platform
to match supply and demand of used mobile devices was established in 2010, as the smartphone trade in market was just beginning
to take shape. From the beginning, we recognized the value of connecting a global marketplace of smaller wholesalers, distributors,
and retailers with supply that they could otherwise not access. In April, 2012, we acquired ecoSquid Inc., or Acquisition Corp,
which had developed the intellectual property that we licensed in order to implement the first iteration of our online platform.
Over the next two years, uSell acquired supply
by advertising the uSell.com website directly to consumers, primarily through direct response, television advertising. Over time,
an analysis of consumer price elasticity indicated that price, more so than any form of paid marketing, was what drove seller behavior.
It became apparent that the way to increase the price that our buyers would pay our sellers for their devices was to reduce risk
and eliminate friction in the transaction. These reductions in risk and friction came in many forms: automated shipping and logistics,
seamless payment processing, and finally, centralized grading of devices with the launch of our Managed by uSell offering in October,
2014.
By the end of 2014, the trade in market had
gone mainstream, as the carriers realized that trade-in was their means of eliminating the costly smartphone subsidies that they
had been funding. During the launch of the iPhone 6 and 6S, major carriers like AT&T and Verizon and big box retailers, like
Apple and Best Buy, became very aggressive in marketing their trade in programs. While this market shift created a challenge in
terms of marketing directly to consumers, it presented the much larger opportunity of leveraging our technology to connect supply
from major carriers, retailers, and manufacturers with demand from our large and growing global customer base
In 2015, we began seeking partnerships with
wholesalers and distributors with direct access to this supply. Our efforts culminated in the acquisition of a top tier wholesaler,
We Sell Cellular, in October, 2015. We Sell Cellular is among a handful of top tier wholesalers whose primary business is to buy
used smartphones that have been traded in with the major carriers and the big box retailers, fully test and grade these devices,
and then sell these devices wholesale and retail through its highly experienced sales force.
In 2016, we validated this synergy by successfully
integrating the two companies and moving a meaningful portion of We Sell Cellular’s business online. Furthermore, by empowering
We Sell Cellular’s sales force with better technology and actionable data, we were able to drive meaningful improvements
in efficiency. The Company intends to not only to continue building out its online platform but to also further reduce waste and
improve efficiency throughout the entire transaction lifecycle.
Market Opportunity
Six years ago, trade-in was merely an idea.
Less than 10% of consumers at the time reported selling their used mobile devices. The vast majority of these valuable devices
wasted away in potential sellers’ drawers. Numerous concepts arose to capture this untapped value, from websites that offered
to purchase devices directly, to marketplaces that enabled consumers to sell devices peer to peer, to ATM machines that offered
cash for smartphones on the spot, and finally to point of sale trade-in systems marketed through carriers and retailers.
At first it was unclear which of these concepts
was going to win, but these doubts have been erased over the last four years, as the wireless carriers realized that trade-in was
their means of eliminating the costly smartphone subsidies that they had been funding. The dominant model that has evolved has
two components: a leasing or financing component where the consumer is able to defer the cost of a device, and a trade-in component
at the end of the term whereby the carrier can capture the residual value of the device. This model has achieved such rapid adoption
that Apple offered its own solution in early September, 2015, with the launch of its iPhone Upgrade Program. For retailers like
Apple, this model offers a different opportunity: the chance to control the relationship with the consumer.
As programs like these continue to proliferate
throughout the world, the used smartphone market will expand dramatically. Deloitte Global estimates that the global used smartphone
market was worth $17 billion in 2016, representing 50% growth over 2015. Furthermore, it forecasts that the growth rate of the
used smartphone market is 4-5 times higher than the overall smartphone market and that it will likely accelerate through 2020
as both consumers and suppliers increasingly embrace the practice of selling or acquiring second-hand smartphones.
Despite this massive opportunity, there is
no dominant online platform for smartphones geared towards professional merchants looking to acquire inventory.
Competition
The trade-in market for used mobile devices
has gained significant momentum. Competitors include:
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Wireless carriers offering trade-in as a way for consumers to self-subsidize smartphones, either through a direct trade-in
program, an Equipment Installment Plan (EIP), or a handset lease. While these carriers compete directly with our uSell.com trade-in
platform, we also view them as an important channel to source wholesale inventory
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Retailers and big box stores such as Best Buy and Walmart that have implemented buyback programs. These retailers offer trade-in
programs that issue gift cards or store credit. As in the case of the wireless carriers, these retailers compete directly with
our uSell.com trade in platform, but they are also a channel to source wholesale inventory
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Large handset distributors and handset insurance providers that process and resell traded in devices for the carriers. As in
the above cases, these companies also act as a channel to source wholesale inventory
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Large wholesalers and distributors, similar to We Sell Cellular, that purchase traded in devices from major carriers, big box
retailers, manufacturers, and logistics providers. We estimate that, in the United States, there are fewer than five wholesalers
of similar size to We Sell Cellular with the required certifications and financial resources to service the major carriers and
retailers. We believe that, among these wholesalers, there is little to no technology enablement and a general lack of professional
management
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Direct-to-consumer buyers such as Gazelle.com and ecoATM (both owned by Outerwall, Inc.)
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Traditional online marketplaces such as eBay and online classified sites such as Craigslist. These sites continue to offer
an alternative to sellers but require a time intensive review of all available offers and less streamlined logistics. While we
compete with these platforms to source devices, we also utilize them to sell devices
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Government Regulation
Advertising and promotional information presented
to visitors on our websites and other marketing activities that we have undertaken are subject to federal and state consumer protection
laws that regulate unfair and deceptive practices. In the United States, Congress has begun to adopt legislation that regulates
certain aspects of the Internet, including online content, user privacy, taxation, liability for third-party activities and jurisdiction.
Such legislation includes the Communications Decency Act of 1996, which regulates content of material on the Internet and the Digital
Millennium Copyright Act of 1998, which provides recourse for owners of copyrighted material who believe that their rights under
U.S. copyright law have been infringed on the Internet. In the area of data protection, the U.S. Federal Trade Commission and certain
state agencies have investigated various Internet companies’ use of their customers’ personal information, and certain
federal and state statutes regulate specific aspects of privacy and data collection practices. We are also subject to a variety
of state and federal regulations and laws including state telemarketing laws, federal and state privacy laws, the CAN-SPAM Act,
and the Federal Trade Commission Act and its accompanying regulations and guidelines, including “little” unfair trade
practice laws. Because we have in the past and may in the future engage in marketing activities over the Internet and email, we
may be subject to some of these laws and regulations.
Federal, state, local and foreign governments
are also considering other legislative and regulatory proposals that would regulate the Internet in more and different ways than
exist today. It is impossible to predict whether new restrictions, fees, or taxes will be imposed on our services, and whether
and how we would be affected. Increased regulation of the Internet both in the United States and abroad may decrease its growth
and hinder technological development, which may negatively impact the cost of doing business via the Internet or otherwise materially
adversely affect our business, financial condition or operational results.
Employees
As of March 30, 2017, we had 86 full-time employees
and no part-time employees. None of our employees are subject to a collective bargaining agreement.
Intellectual Property
Our proprietary intellectual property consists
of trade secrets. We rely primarily on a combination of copyrights, trademarks, 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 buyers and control access to, and distribution of our software documentation and other proprietary information.
Our copyrights, trademarks and licenses expire at various dates, and we believe that none is individually significant.
Not applicable to smaller reporting companies. However, our principal
risk factors are described under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
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Item 1B.
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Unresolved Staff Comments.
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None.
We lease approximately 2,100 square feet for
our corporate headquarters, sales, marketing, development and customer support divisions located in New York, New York under a
lease expiring in August 2018.
We lease approximately 21,000 square feet for
our warehouse and office located in Edgewood, New York under a lease expiring in September 2021.
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.
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Item 3.
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Legal Proceedings.
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From time to time, the Company is 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, the Company is not aware
of any proceeding, threatened or pending, against the Company which, if determined adversely, would have a material effect on its
business, results of operations, cash flows or financial position.
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Item 4.
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Mine Safety Disclosures.
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Not applicable
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.
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Our common stock is quoted on the OTC Markets,
Inc. under the symbol “USEL.” As of March 28, 2017, the last reported sale price of our common stock as reported by
the OTC Markets was $0.85 per share. As of that date, there were approximately 129 shareholders of record. This number does not
include beneficial owners whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.
The following table provides the high and low
bid price information for our common stock for the periods indicated which reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
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Year
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Quarter Ended
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Stock Price
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High
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Low
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($)
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($)
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2016
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December 31
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0.98
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0.43
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September 30
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1.20
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0.60
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June 30
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1.15
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0.62
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March 31
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1.25
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0.80
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2015
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December 31
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2.00
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0.72
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September 30
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1.25
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0.67
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June 30
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1.73
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0.72
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March 31
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2.01
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1.00
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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.
The Company is unable to declare or pay any
dividends, without the prior consent of the purchaser’s agent under the Note Purchase Agreement dated January 13, 2017.
Recent Sales of Unregistered Securities
None
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Item 6.
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Selected Financial Data.
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Not required for smaller reporting companies.
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Item 7.
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Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
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The following discussion and analysis should
be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report on Form
10-K. 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.”
Company Overview
uSell.com, Inc. is a large market maker of
used smartphones. uSell acquires products from both individual consumers, on its website, uSell.com, and from major carriers, big
box retailers, and manufacturers through its subsidiary, We Sell Cellular. The Company maximizes the value of these devices by
reclassifying them, adding value to them, and moving them throughout the world to those who want them most.
2016 Financial Highlights
As a result of the We Sell Cellular acquisition
in October 2015, our business was fundamentally transformed and our financial situation substantially improved. Key financial metrics
were as follows:
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Revenues increased by $67,563,000, or 249%, to $94,657,000 for the year ended December 31, 2016, from $27,094,000 for the year
ended December 31, 2015
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Operating loss decreased by $2,992,000, or 62%, to $1,845,000 for the year ended December 31, 2016, from $4,837,000 for the
year ended December 31, 2015
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Adjusted EBITDA, a non-GAAP financial measure, improved to $592,000 for the year ended December 31, 2016,
from ($795,000) for the year ended December 31, 2015. See “Non-GAAP Financial Measure - Adjusted EBITDA” below.
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Overview of 2016 Events
Through the acquisition of We Sell Cellular
in October of 2015, we gained direct access to devices traded in with major carriers, retailers, and manufacturers, which dramatically
increased our volume. Immediately after the acquisition, the Company faced turbulent market conditions when the iPhone SE was
launched unexpectedly in March of 2016, lowering the value of older models. While first quarter results were impacted by this
supply shock, we implemented several countermeasures which improved both planning and execution in subsequent quarters.
These measures resulted in much better performance
through the spring and summer months, and also positioned us to take full advantage of the iPhone 7 cycle. Large volumes of trade-ins
from the iPhone 7 did not hit the second hand market until late November. At this point, we fully utilized our credit facility,
making substantial purchases throughout December and into the first quarter of 2017. In doing so, the Company incurred larger-than-usual
expenses within its warehouse as it processed these devices to get them ready for sale. The benefits of this activity will been
seen in the first quarter of 2017.
In addition to increasing short term operational
efficiency, we made meaningful progress towards our long term objectives in 2016. These objectives included migrating We Sell
Cellular’s sales to an online platform and diversifying our supplier base. In particular, we:
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Successfully launched an online auction platform for a subset of We Sell Cellular’s product.
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Launched an “Online Stock List,” where buyers can log into their accounts and view
our inventory on demand.
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Consolidated and streamlined our processes for lead capture, lead management, prospect management,
and customer relationship management, which has increased the effectiveness of our sales team while laying the foundation for seamless
online interactions with a much larger customer base.
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Added several new suppliers, substantially strengthening our ability to scale the business. Our
largest supplier’s share of our purchases dropped from 97% in the first quarter, to 85% in the second quarter, to 62% in
the third quarter, to 51% in the fourth quarter.
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On the finance side, 2016 was an important
year for the Company in ensuring available liquidity for our core business while also securing extra working capital to take advantage
of strategic opportunities. We began discussions with a financial partner during Q4 of 2016 and closed transactions in January
of 2017, through which we:
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Increased the size of our debt facility and extended the amortization period resulting in greater
flexibility of cash management and additional time to fully implement our business plan.
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Launched a new Special Purpose Entity (“SPE”). The SPE was funded with an initial $5.2 million in
funding, which provides us with additional capital to buy inventory and scale with our customer base. This funding can increase
upon agreement by both parties and provides us with the ability to increase our purchasing power without shareholder dilution or
excess leverage.
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In summary, 2016 was a critical year for the Company, and has put
us in a far stronger position to take market share from our competitors in 2017.
New Accounting Pronouncements
See Note 2 to the accompanying Consolidated
Financial Statements contained herein for a discussion of recent accounting pronouncements.
Critical Accounting Policies
In response to financial reporting release
FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, from the Securities and Exchange Commission (“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 Consolidated Financial Statements contained
herein for further discussion regarding our critical accounting policies and estimates.
Capitalized Technology Costs
In accordance with Accounting Standards Codification
(“ASC”) 350-40, Internal-Use Software, we capitalize certain external and internal computer software costs incurred
during the application development stage. The application development stage generally includes software design and configuration,
coding, testing and installation activities. Training and maintenance costs are expensed as incurred, while upgrades and enhancements
are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized technology costs
are amortized over the estimated useful lives of the software assets on a straight-line basis, generally not exceeding three years.
Business Combinations
ASC 805, Business Combinations (“ASC
805”), applies the acquisition method of accounting for business combinations to all acquisitions where the acquirer gains
a controlling interest, regardless of whether consideration was exchanged. ASC 805 establishes principles and requirements for
how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination
or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. Accounting for acquisitions requires us to recognize, separately
from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition
date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of the assets acquired
and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities
assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement
period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities
assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the
values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated
statements of comprehensive loss.
Goodwill and Intangible Assets
We account for goodwill and intangible assets
in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). ASC 350 requires that goodwill and
other intangibles with indefinite lives should be tested for impairment annually or on an interim basis if events or circumstances
indicate that the fair value of an asset has decreased below its carrying value.
We assess goodwill for impairment, as described
in Note 2, “Summary of Significant Accounting Policies – Goodwill and Intangible Assets,” in the Notes to Consolidated
Financial Statements, on an annual basis or more often if deemed necessary. At December 31, 2016, goodwill totaled $8,449,000.
To determine whether goodwill impairment indicators exist, we are required to assess the fair value of the reporting unit and compare
it to the carrying value. A reporting unit is a component of an operating segment for which discrete financial information is available
and management regularly reviews its operating performance. In evaluating goodwill for impairment, we have the option to first
assess qualitative factors to determine whether further impairment testing is necessary.
Our annual impairment test performed as of
December 31, 2016, did not result in any impairment of goodwill. We performed quantitative tests consistent with our policy of
periodically updating our reporting unit’s fair value. Based on our quantitative analyses, we determined there was no impairment.
Intangible assets represent customer relationships
and trade names/trademarks related to We Sell Cellular. Finite lived assets are amortized on a straight-line basis over the estimated
useful lives of the assets. Indefinite lived intangible assets are not amortized, but instead are subject to impairment evaluation.
We periodically review the carrying values
of our intangible assets and other 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 amount of the asset over its estimated fair value, is recognized. The cash flow estimates used in such calculations are
based on estimates and assumptions, using all available information that management believes is reasonable. Fair value, for purposes
of calculating impairment, is measured based on estimated future cash flows, discounted at a market rate of interest.
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.
Principal Device Revenue
Through our We Sell Cellular subsidiary, we
generate revenue from the sales of our cellular telephones and related equipment and recognize revenue “FOB shipping point”
on such sales. Delivery to the customer is deemed to have occurred when the customer takes title to the product. Generally, title
passes to the customer when the products leave our warehouse. Payment terms generally require payment once an order is placed.
We allow customers to return product within 30 days of shipment if the product is defective. Allowances for product returns are
recorded as a reduction of sales at the time revenue is recognized based on historical data.
Under our “Managed by uSell” service
on uSell.com, we partnered with a third party logistics company to inspect, wipe and process devices before passing them along
to buyers. Under this model, title to a device passes to uSell upon issuance of payment to the seller, which is generally within
one to two days from the receipt of the device at the third party warehouse. Title to a device is then transferred to the buyer
upon shipment to the buyer.
Agent Commission Revenue
In certain cases, sellers on our uSell.com
website are shown a larger list of offers directly from third party buyers interested in purchasing their devices. These offers
are shown instead of or in addition to the “Managed by uSell” offer. If a seller chooses one of these offers, the seller
will ship their device directly to the buyer, rather than to our third party warehouse. The buyer is then responsible for testing
the device, servicing the customer, and ultimately paying the seller for the device or returning it. We charge a commission to
our buyers only when the seller sends in a device and is successfully paid for it. As such, we recognize Agent Commission Revenue
upon payment to the seller.
Fulfillment Revenue
We offer fulfillment services on behalf of
our buyers for the items sold using the Agent Commission Revenue approach outlined above. We act as the agent in these fulfillment
services transactions, passing orders booked by our buyers to our third party fulfillment vendor, who then assembles the kits and
mails them directly to the sellers. We earn a standard fee from our buyers and recognize revenue upon shipment of the kits to the
sellers. We evaluated the presentation of revenue on a gross versus net basis and determined that since we perform as an agent
without assuming the risks and rewards of ownership of the goods, revenue should be reported on a net basis.
Advertising Revenue
Advertising revenues primarily come from payments
for text-based sponsored links and display advertisements. Generally, our advertisers pay us on a cost per click, or CPC basis,
which means advertisers pay us only when someone clicks on one of their advertisements, or on a cost per thousand impression basis,
or CPM. Paying on a CPM basis means that advertisers pay us based on the number of times their advertisements appear on our websites
or mobile applications. Advertising revenue is recognized as income when the advertising services are rendered.
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 general and administrative expense.
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.
Results of Operations
Comparison of the Year Ended December 31, 2016 to the Year
Ended December 31, 2015
The following tables set forth, for the periods
indicated, results of operations information from our unaudited interim condensed consolidated financial statements:
|
|
|
Year Ended
December 31,
|
|
|
Change
|
|
|
Change
|
|
|
|
|
2016
|
|
|
2015
|
|
|
(Dollars)
|
|
|
(Percentage)
|
|
|
Revenue
|
|
$
|
94,657,000
|
|
|
$
|
27,094,000
|
|
|
$
|
67,563,000
|
|
|
|
249
|
%
|
|
Cost of Revenue
|
|
|
88,835,000
|
|
|
|
23,549,000
|
|
|
|
65,286,000
|
|
|
|
277
|
%
|
|
Gross Profit
|
|
|
5,822,000
|
|
|
|
3,545,000
|
|
|
|
2,277,000
|
|
|
|
64
|
%
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
1,680,000
|
|
|
|
2,037,000
|
|
|
|
(357,000
|
)
|
|
|
(18
|
)%
|
|
General and Administrative
|
|
|
5,987,000
|
|
|
|
6,345,000
|
|
|
|
(358,000
|
)
|
|
|
(6
|
)%
|
|
Total Operating Expenses
|
|
|
7,667,000
|
|
|
|
8,382,000
|
|
|
|
(715,000
|
)
|
|
|
(9
|
)%
|
|
Operating Loss
|
|
|
(1,845,000
|
)
|
|
|
(4,837,000
|
)
|
|
|
2,992,000
|
|
|
|
(62
|
)%
|
|
Other Expense, Net
|
|
|
(1,867,000
|
)
|
|
|
(188,000
|
)
|
|
|
(1,679,000
|
)
|
|
|
893
|
%
|
|
Income Tax Benefit
|
|
|
-
|
|
|
|
2,393,000
|
|
|
|
(2,393,000
|
)
|
|
|
(100
|
)%
|
|
Net Loss
|
|
$
|
(3,712,000
|
)
|
|
$
|
(2,632,000
|
)
|
|
$
|
(1,080,000
|
)
|
|
|
41
|
%
|
Revenue by Type
The following table breaks down our revenue by type:
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Principal Device Revenue
|
|
$
|
94,190,000
|
|
|
|
100
|
%
|
|
$
|
26,238,000
|
|
|
|
97
|
%
|
|
Agent Commission Revenue
|
|
|
378,000
|
|
|
|
0
|
%
|
|
|
516,000
|
|
|
|
2
|
%
|
|
Other
|
|
|
89,000
|
|
|
|
0
|
%
|
|
|
340,000
|
|
|
|
1
|
%
|
|
|
|
$
|
94,657,000
|
|
|
|
100
|
%
|
|
$
|
27,094,000
|
|
|
|
100
|
%
|
Principal Device Revenue increased by $67,952,000,
or 259%, from $26,238,000 for year ended December 31, 2015 to $94,190,000 for the year ended December 31, 2016. Agent Commission
Revenue decreased by $138,000, or 27%, from $516,000 for the year ended December 31, 2015 to $378,000 for the year ended December
31, 2016. Principal Device Revenue related to We Sell Cellular amounted to $90,324,000 for the year ended December 31, 2016, compared
to $17,646,000 for the period from October 27, 2015 (acquisition date of We Sell Cellular) through December 31, 2015.
Due to the fact that devices sourced through
We Sell Cellular are bought and sold using the Principal Device Revenue model, we anticipate that the percentage of the Agent
Commission Revenue will remain minimal for the foreseeable future, as we continue to increase the volume that we purchase through
wholesale channels.
Cost of Revenue
Cost of revenue increased by $65,286,000 or
277% from $23,549,000 for the year ended December 31, 2015 to $88,835,000 for the year ended December 31, 2016. Cost of revenue
related to We Sell Cellular amounted to $85,011,000 for the year ended December 31, 2016, compared to $16,207,000 for the period
from October 27, 2015 through December 31, 2015. Cost of revenue pertaining to the sale of devices through our Managed by uSell
service includes the cost of acquiring the device, as well as any other direct costs and expenses required to inspect and process
the devices internally before shipping them to the buyers. Furthermore, with the acquisition of We Sell Cellular in 2015, we saw
a substantial increase in Principal Device Revenue associated with the wholesale acquisition and sale of devices. Accordingly,
our cost of revenue has increased substantially. Cost of revenues for the year ended December 31, 2016 includes a $52,000 recovery
for slow-moving and obsolete inventory, respectively.
Any gross profit comparison prior to the We
Sell Cellular acquisition in October 2015 would not be meaningful.
Sales and Marketing Expenses
Sales and marketing expense decreased $357,000,
or 18%, from $2,037,000 during the year ended December 31, 2015 to $1,680,000 during the year ended December 31, 2016. While the
decrease in spend between 2015 and 2016 is not material between periods, the nature of the spend is substantially different, and
is much smaller as a percentage of overall sales. With the We Sell Cellular acquisition and our newfound ability to source devices
directly from the carriers, retailers, and manufacturers, our primary sales and marketing expenses have shifted from consumer marketing
to paying out sales commissions. We believe this shifting profile will enable us to scale volume significantly while maintaining
sales and marketing expense as a much lower percentage of sales than in prior years.
General and Administrative Expenses
General and administrative expenses include
professional fees for technology, legal and accounting services as well as consulting and internal personnel costs for our back
office support functions. General and administrative expenses are impacted by non-cash compensation expense pertaining to stock
grants and option grants for services. Non-cash compensation expense amounted to $525,000 and $2,954,000 for the years ended December
31, 2016 and 2015, respectively.
Excluding non-cash compensation expense, general
and administrative expenses for the year ended December 31, 2016 increased by $2,071,000, or 61%, compared to the year ended December
31, 2015. The increase is mainly attributable to the acquisition of We Sell Cellular in October 2015. General and administrative
expenses include $3,394,000 of expenses (inclusive of $1,362,000 of depreciation and amortization expense) related to the acquisition
of We Sell Cellular during the year ended December 31, 2016, compared to $805,000 of expenses (inclusive of $248,000 of depreciation
and amortization expense) during the period from October 27, 2015 through December 31, 2015. The increase in depreciation and amortization
expense is mainly the result of the amortization of the intangible assets acquired in connection with the We Sell Cellular acquisition.
Not included in this amount is $548,000 and $567,000 of amortization expense for the years ended December 31, 2016 and 2015, respectively,
related to our capitalized technology, which is included in cost of revenues. Offsetting the increase in general and administrative
expenses is a decrease in salary and salary-related expenses of $364,000 resulting from the reduction in our marketing headcount
during 2015 and a decrease in professional fees of $143,000 incurred during the year ended December 31, 2015 related to the We
Sell Cellular acquisition that are not included in the three months ended December 31, 2016.
Other Income (Expense)
Other expense during the year ended December
31, 2016 is comprised of ($1,497,000) of interest expense primarily attributable to the BAM Note Purchase Agreement entered into
in October 2015 (“BAM NPA”) in connection with the We Sell Cellular acquisition and $370,000 related to the change
in the fair value of the Placement Rights derivative liability. See Note 3 to our consolidated financial statements for a description
of the rights. On July 27, 2016, we entered into an agreement with the Tepfers pursuant to which, effective July 1, 2016, the
Tepfers agreed to waive the Placement Rights granted to them in connection with the We Sell Cellular acquisition. Accordingly,
the derivative liability pertaining to the Placement Rights was eliminated with a corresponding credit to additional paid in capital.
Other expense during the year ended December
31, 2015 is primarily comprised of interest expense attributable to the BAM NPA.
Income Tax Benefit
The benefit for income taxes for the year ended December 31, 2015 relates to the release of the valuation
allowance resulting from the deferred tax liability on the intangible assets acquired from We Sell Cellular.
Non-GAAP Financial Measure - Adjusted EBITDA
We make reference to “Adjusted EBITDA,”
a measure of financial performance not calculated in accordance with accounting principles generally accepted in the United States
(“GAAP”). Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial
position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly
comparable measure calculated and presented in accordance with GAAP.
Reconciliations of this non-GAAP financial
measure to the most directly comparable GAAP financial measure, net loss, to the extent available without unreasonable effort,
are set forth below. The Company defines Adjusted EBITDA as earnings or (loss) from continuing operations before the items noted
in the table below.
Management believes Adjusted EBITDA provides
a meaningful representation of our operating performance that provides useful information to investors regarding our financial
condition and results of operations. Adjusted EBITDA is commonly used by financial analysts and others to measure operating performance.
Furthermore, management believes that this non-GAAP financial measure may provide investors with additional meaningful comparisons
between current results and results of prior periods as they are expected to be reflective of our core ongoing business. However,
while we consider Adjusted EBITDA to be an important measure of operating performance, Adjusted EBITDA and other non-GAAP financial
measures have limitations, and investors should not consider them in isolation or as a substitute for analysis of our results as
reported under GAAP. Further, Adjusted EBITDA, as we define it, may not be comparable to EBITDA, or similarly titled measures,
as defined by other companies.
The following table presents Adjusted EBITDA,
a non-GAAP financial measure, and provides a reconciliation of Adjusted EBITDA to the directly comparable GAAP measure reported
in the Company’s consolidated financial statements:
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Net loss
|
|
$
|
(3,712,000
|
)
|
|
$
|
(2,632,000
|
)
|
|
Income tax benefit
|
|
|
-
|
|
|
|
(2,393,000
|
)
|
|
Stock-based compensation expense
|
|
|
525,000
|
|
|
|
2,954,000
|
|
|
Depreciation and amortization
|
|
|
1,912,000
|
|
|
|
820,000
|
|
|
Acquisition related costs
|
|
|
-
|
|
|
|
268,000
|
|
|
Interest expense
|
|
|
1,497,000
|
|
|
|
189,000
|
|
|
Interest and other income
|
|
|
-
|
|
|
|
(1,000
|
)
|
|
Change in fair value of derivative liability
|
|
|
370,000
|
|
|
|
-
|
|
|
Adjusted EBITDA
|
|
$
|
592,000
|
|
|
$
|
(795,000
|
)
|
Liquidity and Capital Resources
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. More recently since our acquisition
of We Sell Cellular, we have relied on institutional loans. We believe that the continued increase in revenues and current institutional
financing provide us with sufficient funds to meet our anticipated cash needs through March 2018.
There can be no assurance that the plans and
actions proposed by management will be successful and that we will generate profitability and positive cash flows in the future.
Our cash flow has been significantly impacted
by the We Sell Cellular acquisition. In connection with the acquisition, we entered into an $8 million financing facility, of
which we had borrowed the full $8 million as of December 31, 2016. On January 13, 2017, we entered into a Note Purchase Agreement
with a new lender pursuant to which we issued the lender a secured term note in the principal amount of $8,660,000 at an original
issue discount of 1%, for gross proceeds of $8,572,400 (the “2017 Note”). We applied the proceeds received upon the
issuance of the 2017 Note to repay all amounts outstanding under the BAM NPA. The BAM NPA required repayments of principal in
1/48
th
increments beginning September 1, 2017 until the maturity date of October 23, 2018. The 2017 Note requires repayment
of principal in January 2020 and bears interest at an annual rate of 13.25%, which interest is due and payable monthly in arrears.
In addition, the lender from whom the Company borrowed the funds under the 2017 Note, established an SPE with the Company. Under
the SPE, the lender provided $5 million of equity capital to purchase smartphones and similar inventory. The Company entered into
a Services Agreement with the SPE and will provide all necessary services including inventory management. The Company will receive
a percentage of the SPE’s profits, if any.
Cash Flows from Operating Activities
Operating activities used $409,000 of cash
during the year ended December 31, 2016, a decrease from $3,343,000 of cash used in operating activities during the year ended
December 31, 2015. Our net loss during the year ended December 31, 2016 of $3,712,000 was offset by $1,912,000 of depreciation
and amortization, $370,000 due to the change in the fair value of the Placement Rights derivative liability, $524,000 of stock-based
compensation, $479,000 of amortization of debt issue costs related to our BAM NPA and $112,000 from the loss on the disposal of
property and equipment. Changes in operating assets and liabilities used $94,000 of cash during the year ended December 30, 2016.
Our net loss during the year ended December 31, 2015 of $2,632,000 was primarily affected by an income tax benefit of $2,393,000,
offset by $2,954,000 of stock-based compensation and $820,000 of depreciation and amortization. Changes in working capital used
$2,148,000 of cash during the year ended December 31, 2015.
Cash Flows from Investing Activities
During the year ended December 31, 2016, we
capitalized $596,000 of website development costs, we purchased $94,000 of property and equipment in connection with our move to
our new warehouse location, and our restricted cash account increased by $181,000 as a result of our requirement under the BAM
NPA to maintain a dedicated bank account controlled by BAM, the agent of our lender.
During the year ended December 31, 2015, we
paid $2,366,000 in connection with our acquisition of We Sell Cellular on October 26, 2015, we capitalized $601,000 of website
development costs and purchased $17,000 of property and equipment. Our restricted cash account changed by $801,000 as a result
of our requirement under the NPA to maintain a dedicated bank account controlled by BAM.
Cash Flows from Financing Activities
During the year ended December 31, 2016, we
received $2,000,000 in proceeds under our BAM NPA and paid $100,000 in costs associated with the BAM NPA. During the year ended
December 31, 2015, we received $6,000,000 in proceeds under our BAM NPA and paid $239,000 in costs associated with the BAM NPA.
Related Party Transactions
None.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Cautionary Note Regarding Forward Looking Statements
This report includes forward-looking statements
including statements regarding liquidity, anticipated revenues, capital expenditures, first quarter 2017 results, position to
obtain market shares and anticipated results from increasing buyers on our site.
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, uncertainties and risks that may cause actual results to differ
materially from these forward-looking statements are contained in the Risk Factors that follow. 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.
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 purchase or sell securities
of 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
If our working relationship with or new
lender is not successful, we will lack the capital to sustain and grow our business and our future results of operations and financial
condition will be adversely affected.
In January 2017, we entered into a series of
agreements with a new lender to whom we issued the 2017 Note and who acts as the Manager of the SPE. As long as our working relationship
with this entity is positive, we believe that we have sufficient capital to operate our business as we did in 2016 and grow it
through the SPE. However, if we encounter issues working with this new lender, it could adversely affect our results of operations
and future financial condition. In that event, we would have to refinance our loan and possible issue equity and/or debt securities.
If we fail to meet the covenants under
our loan agreement, we may sustain material adverse consequences including the possibility of the lender declaring a default.
As is customary with institutional loan agreements,
our loan agreement requires us to meet future a number of financial covenants. If we fail to comply with any of these covenants,
we may sustain a number of material adverse consequences including:
|
|
·
|
we may incur interest penalties; and
|
|
|
·
|
the lender may declare a default and accelerate the repayment of the loan.
|
If any of these events were to occur, your
investment may be lost.
If we pay too much or do not offer a sufficient
amount to our suppliers for phones, our revenues will be adversely affected.
In 2015, we acquired We Sell Cellular which
primarily engages in the wholesale acquisition and resale of smartphones and related devices from carriers and big box stores.
The We Sell Cellular business is reliant on its ability to purchase phones at low prices which result in profitability on liquidation.
Conversely, if the prices that We Sell Cellular offers suppliers for the phones are too low, than we will be unsuccessful at obtaining
the phones and our revenues will be adversely affected.
Because we acquired 72% of our phones in
2016 from one supplier, if this supplier reduces its sales to us, it may adversely affect our results of operations.
We Sell Cellular’s business has been
characterized by a high degree of supplier concentration. In 2016 and 2015, We Sell Cellular purchased approximately 72% and 94%,
respectively, of its inventory from one supplier. Unless we were to find new large suppliers, the relationship with this supplier
is vital to the continued success of We Sell Cellular. Although this supplier continues to sell We Sell Cellular phones in large
quantities, we cannot assure you that the supplier will continue to provide us with phones at a cost effective rate for any reason.
In the event that our relationship with this supplier was terminated or the number of phones supplied to We Sell Cellular from
this supplier were reduced, our revenues and profitability would be adversely affected.
If we cannot manage our growth effectively,
we may not become profitable.
Businesses which grow rapidly often have difficulty
managing their growth. If we continue to 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.
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 including Nikhil Raman, uSell’s
Chief Executive Officer, Brian Tepfer, an Executive Vice President of uSell and We Sell Cellular’s Chief Executive Officer
and Scott Tepfer, an Executive Vice President of uSell and We Sell Cellular’s President, each of whom may be difficult to
replace. 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.
Because we rely on the continuing rapid
pace of technological development in the smartphone and tablet industries, if innovation in these industries were to decrease or
providers were to extend the upgrade cycles on phones, our future results of operation will be adversely affected.
We believe that one of the driving factors
for the potential success of our business is the continued improvements and developments in the smartphone industry as well as
the continued reduction in the amount of time consumers have to wait to upgrade their phones with no penalties. Because consumers
have in the past expressed a continual need to have the latest generation phones and iPads or other tablets, the opportunity for
liquidating these huge quantities of depreciating assets in a profitable yet efficient manner is very promising. If innovation
in smartphone or tablet device technology were to level off, the upgrade cycles were to be extended or there were fewer new phone
launches, the purchase of new phones and tablets could be diminished, reducing the demand for used electronics and consequently
the wholesale market for them. In such an 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, 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 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.
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.
If we experience system interruptions, it
may cause us to lose customers and may 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 the buyers and/or customers on our website, 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 customers attempt to access it or access
is slower than a customer expects, customers 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.
Because our networks and IT systems may
be vulnerable to unauthorized persons hacking our systems, it 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 provided by participants
on our website, or cause interruptions or malfunctions in our operations. Hacking of websites is a growing problem. If we grow
and obtain more visibility, we may be more vulnerable to hacking. 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.
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 our business. The cost to comply with
such laws or regulations could be significant and would increase our operating expenses.
If there is new tax treatment of companies
engaged in Internet commerce, it could adversely affect the commercial use of our 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. New York State, for example, taxes online sales. Recently there has been movement toward Congress
permitting states and localities to impose sale taxes on online purchases. Recently, the United States Senate passed legislation
to permit taxation of Internet sales but it stalled in the House of Representatives. 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 the cost of doing business 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
on 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:
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·
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Divert management’s attention;
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·
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Result in prohibitive costs;
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Require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all.
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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.
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 OTCQB, 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 there may be a substantial decrease in the price of our common stock.
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:
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Our failure to increase revenue in each succeeding quarter;
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Our failure to achieve and maintain profitability;
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Our failure to meet our revenue and earnings guidance or our failure to meet financial analysts’ performance expectations;
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The loss of a number of suppliers (see risk factor on page 13) or our failure to attract more suppliers;
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The loss of a number of buyers or our failure to attract more buyers;
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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;
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An adverse court ruling or regulatory action;
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Changes in market valuations of similar companies;
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Short selling activities;
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Our announcement of any financing which is dilutive to our shareholders;
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Our announcement of a change in the direction of our business; or
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Announcements by us, or our competitors, of significant contracts, acquisitions, commercial relationships, joint ventures or
capital commitments.
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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 there is little incentive to brokerage firms to
recommend the purchase of our common stock. 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.
If we become subject to a regulatory investigation,
it 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. Responding to or defending other such actions 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.
Because our executive officers and directors
beneficially own a significant amount of our common stock, it is likely that they will continue to be able to exert significant
control over matters which require shareholder approval including election of directors and the future sale of our business.
As of March 30, 2017, our executive officers
and directors beneficially owned approximately 49% of our outstanding common stock. Therefore, these shareholders will have the
ability to influence us through this ownership position. These shareholders may be able to determine all matters requiring shareholder
approval and, acting together, may be able to control elections of directors, amendments of our organizational documents, or approval
of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals
or offers for our common stock you may believe are in your best interest as one of our shareholders.
We do not expect to pay dividends in the
future, which means that investors may not be able to realize the value of their shares except through a sale.
We have never, and do not anticipate that we
will, declare or pay a cash dividend. Without the lenders agent’s consent, we are precluded from declaring or paying out
dividends under our outstanding January 2017 loan. We expect to retain future earnings, if any, for our business and do not anticipate
paying dividends on common stock at any time in the foreseeable future. Because we do not anticipate paying dividends in the future,
the only opportunity for our shareholders to realize the creation of value in our common stock will likely be through a sale of
those shares.
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Item 7A.
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Quantitative and Qualitative Disclosures About Market
Risk.
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Not required for smaller reporting companies.
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Item 8.
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Financial Statements and Supplementary Data.
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The requirements of this Item can be found beginning on page F-1
found elsewhere herein.
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Item 9.
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Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
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None.
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Item 9A.
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Controls and Procedures.
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Evaluation of Disclosure Controls and Procedures
Our management carried out an evaluation, with
the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls
and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based
on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls
and procedures were effective as of December 31, 2016.
Management’s Annual Report on Internal
Control over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management,
under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated
the effectiveness of our internal control over financial reporting as of the end of the period covered by this report. In making
this assessment, our management used the criteria set forth by the Committee of Sponsor Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework as issued in 2013. Based on that evaluation, our management concluded that our
internal control over financial reporting was effective based on that criteria.
Our internal control over financial reporting
is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting
purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our
assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management
and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with policies or procedures may deteriorate.
Changes in Internal Control over Financial
Reporting
There were no changes in our internal control
over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially
affect our internal control over financial reporting.
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Item 9B.
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Other Information.
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None.
PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance.
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The following is a list of our directors and
executive officers (including executive officers of We Sell Cellular). All directors serve one-year terms or until each
of their successors are duly qualified and elected. The officers are elected by the Board of Directors, which we refer
to as our “Board.”
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Name
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Age
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Position
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Nik Raman
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33
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Chief Executive Officer and Director
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Daniel Brauser
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36
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Executive Chairman
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Jennifer Calabrese
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46
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Executive Vice President of Finance and Chief Financial Officer
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Brian Tepfer
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38
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Executive Vice President and Director of uSell and Chief Executive Officer of We Sell Cellular
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Scott Tepfer
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34
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Executive Vice President of uSell and President of We Sell Cellular
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Peter Benz
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57
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Director
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Grant Fitzwilliam
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49
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Director
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Amitabh Jhawar
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35
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Director
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Nik Raman
was appointed as the
Chief Executive Officer on November 6, 2014 and as a director on April 24, 2012. From January 27, 2012 until November 6, 2014,
Mr. Raman served as our Chief Operating Officer. After graduating from Harvard Business School, Mr. Raman founded and served as
Manager of Ft. Knox Recycling, LLC doing business as EcoSquid. Mr. Raman also served as Chief Executive Officer of EcoSquid from
its founding through its acquisition by the Company in April 2012. From 2008 until 2010, Mr. Raman attended Harvard Business School.
Mr. Raman was appointed a director in connection with the acquisition of EcoSquid.
Daniel Brauser
has served as a director since July 23, 2008 and as Executive Chairman since November 6, 2014. From October 16, 2013 to
November 6, 2014, Mr. Brauser served as our Chief Executive Officer. Additionally, Mr. Brauser served as our Chief Executive Officer
from July 10, 2012 until October 10, 2012. Prior to being appointed Chief Executive Officer, Mr. Brauser served as our 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 September 2014 through October 2016, Mr. Brauser also served as Chairman of Cousins Logistics,
Inc. and from October 2016 through the present he has served as its Chief Executive Officer.
From March 2015 until December
2015, Mr. Brauser served as a director of Cogint, Inc. (Nasdaq: COGT), a data and analytics company. 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 an in-depth understanding of the challenges and risks and
characteristics unique to our business model and the reverse logistics market.
Jennifer Calabrese
was appointed
Executive Vice President of Finance on March 28, 2013 and Chief Financial Officer on April 11, 2014 initially on an interim basis
and more recently on a permanent basis. Ms. Calabrese had been acting as our principal financial and accounting officer since October
2012 when our then Chief Financial Officer began providing a high level direction on a very limited basis due to health reasons.
Since August 2012, Ms. Calabrese has been the Managing Member of Calabrese Consulting, LLC, a company she founded, which provides
SEC financial reporting compliance and consulting services. From March 2010 through August 2012, Ms. Calabrese served as the Director
of Accounting and SEC Reporting 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 July 2007 through March 2010, Ms. Calabrese
was the Managing Director of SEC Solutions Group, LLC, a company specializing in SEC financial reporting compliance and consulting
services. She is a Certified Public Accountant in New York.
Brian Tepfer
was appointed a
director in October 2015 in connection with the acquisition of We Sell Cellular and has served as an Executive Vice President
since November 2015. Mr. Tepfer was the Chief Executive Officer of BST for over five years prior to the We Sell Cellular acquisition.
Mr. Tepfer was appointed as a director in connection with the We Sell Cellular acquisition and for his expertise and extensive
knowledge of the smartphone wholesale business.
Scott Tepfer
was appointed as
an Executive Vice President on November 2015 and
is the President of We Sell Cellular and has been for over five
years prior to the We Sell Cellular acquisition.
Peter Benz
was appointed a director
on May 15, 2014. Mr. Benz is the Chief Executive Officer of Viking Asset Management, LLC, an asset and investment management company
which he founded in 2001. Since June 2016, Mr. Benz has served as a director of Lilis Energy, Inc. (Nasdaq: LLEX), an oil and
gas company. Since June 2015, Mr. Benz has served as a director of Cogint, Inc. (Nasdaq: COGT), a data and analytics company.
Mr. Benz was appointed a director as a result of his knowledge and experience in developing companies and capital markets that
strengthen our Board's collective qualifications, skills, and experience.
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.
Amitabh Jhawar
was appointed
a director on May 15, 2014. Since January 2012, Mr. Jhawar has been Chief Operating Officer and Chief Financial Officer of Braintree,
a mobile app payments company. In December 2013, PayPal, which is an eBay (NASDAQ: EBAY) company, purchased Braintree for $800
million in cash. As COO and CFO at Braintree, Mr. Jhawar is responsible for the management and direction of that company's finance
and accounting functions and new business development initiatives, including expanding Braintree's partnerships and continued international
growth. Prior to Braintree, Mr. Jhawar was an Associate at KKR Capstone & Co. L.P. from July 2010 to December 2011. Previous
to this, Mr. Jhawar was a student at Harvard Business School where he graduated with high honors in 2010. Mr. Jhawar was appointed
a director due to his expertise in online marketplaces and accounting and finance.
Family Relationships
Except for Messrs. Scott and Brian Tepfer who
are brothers, there are no family relationships among our directors and executive officers.
Corporate Governance
Board Responsibilities and Structure
The Board oversees, counsels, and directs management
in the long-term interest of uSell and its shareholders. The Board’s responsibilities include:
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Establishing broad corporate policies,
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Reviewing the overall performance of uSell and
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The Board is not, however, involved in the
operating details on a day-to-day basis.
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 appointed members to its: Audit, Compensation and
Nominating and Corporate Governance Committees. Committees are expected to regularly report on their activities and actions to
the Board. Each of the Audit Committee and the Compensation Committee each have a written charter approved by the Board. Each
of our committee charters, as well as our Code of Ethics and Insider Trading Policy are available through the “Investors”
section on our website, which can be found at
www.uSell.com
. The information on, or that can be accessed through, our website
is not incorporated herein. In addition, we will provide a copy of any of the foregoing documents, without charge, to anyone that
requests one in writing to uSell.com, Inc., 171 Madison Avenue, 17
th
Floor, New
York, New York 10016, Attention: Corporate Secretary.
The following table identifies the independent
and non-independent current Board and Committee members:
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Name
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Independent
|
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Audit
|
|
Compensation
|
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Nominating
& Corporate
Governance
|
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Peter Benz
|
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√
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√
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√
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√
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Daniel Brauser
|
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Grant Fitzwilliam
|
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√
|
|
Chairman
|
|
|
|
√
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|
Amitabh Jhawar
|
|
√
|
|
√
|
|
√
|
|
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Nik Raman
|
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Brian Tepfer
|
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Independence
Our Board has determined that Messrs. Benz,
Fitzwilliam and Jhawar are independent under the NASDAQ Stock Market listing rules and are independent in accordance with the NASDAQ
independence standards for audit committees and compensation 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
and Amitabh Jhawar are qualified as Audit Committee Financial Experts, 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
our 2008 Equity Incentive Plan (the “Plan”) and the 2016 Management Incentive Compensation Plan (“Incentive Plan”).
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee
assists the Board with developing and maintaining the Company's corporate governance policies, determining the qualifications,
qualities, skills, and other expertise required to be a director and identifying individuals meeting those criteria. In considering
prospective Board nominees, the Committee will consider, among other factors, the candidate’s demonstrated leadership ability,
business experience, and personal and professional ethics, as well as a candidate’s independence under the NASDAQ standards.
The Committee may also consider whether a prospective Board member will contribute a diversity of viewpoints, background, experience
and demographics as compared to the current members of the Board.
The Committee will consider any nominations
of director candidates validly made by stockholders in accordance with applicable laws, rules and regulations and the provisions
of the Company's charter documents. Director candidates submitted by our stockholders will be evaluated by the Nominating and Corporate
Governance Committee on the same basis as any other director candidates.
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 having sufficient liquidity to expand the business, continued integration of the We Sell and uSell business, and maintaining
our relationships with our largest suppliers and obtaining additional suppliers. The Board 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:
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·
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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.
|
|
|
·
|
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
|
|
|
·
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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.
|
Code of Ethics
Our Board has adopted a Code of Ethics that
applies to all of our employees, including our Chief Executive Officer and Chief Financial Officer. Although not required, the
Code of Ethics also applies to our directors. The Code of Ethics provides written standards that we believe are reasonably designed
to deter wrongdoing and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest
between personal and professional relationships, full, fair, accurate, timely and understandable disclosure and compliance with
laws, rules and regulations, including insider trading, corporate opportunities and whistle-blowing or the prompt reporting of
illegal or unethical behavior. See “Board Committees and Charters,” above, for information on accessing or requesting
a copy, free of charge, of our Code of Ethics and other corporate governance documents.
Shareholder Communications
Although we do not have a formal policy regarding
communications with our Board, shareholders may communicate with the Board by writing to us at uSell.com, Inc., 171 Madison Avenue,
17
th
Floor, New York, New York 10016, Attention: Corporate Secretary, or by facsimile
(888) 748-1120. Shareholders who would like their submission directed to a member of the Board may so specify, and the communication
will be forwarded, as appropriate.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires
our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file with the
SEC initial reports of ownership and reports of changes in ownership of common stock and the other equity securities. Officers,
directors and greater than ten percent shareholders are required by SEC rules to furnish us with copies of all Section 16(a) reports
they file.
Based solely on a review of the reports furnished
to us, or written representations from reporting persons that all reportable transactions were reported and that no Form 5s were
required, we believe that during 2016 our officers, directors and greater than 10% owners timely filed all reports they were required
to file under Section 16(a).
|
Item 11.
|
Executive Compensation.
|
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 $100,000
in 2016. We refer to these persons as the “Named Executive Officers.”
2016 Summary Compensation Table
Name and
Principal Position
(a)
|
|
Year
(b)(1)
|
|
Salary
($)(c)
|
|
|
Stock
Awards
($)(e)(2)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)(g)(3)
|
|
|
Total
($)(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nik Raman
|
|
2016
|
|
|
157,500
|
|
|
|
-
|
|
|
|
16,669
|
|
|
|
174,169
|
|
|
Chief Executive Officer of uSell
|
|
2015
|
|
|
147,920
|
|
|
|
385,000
|
|
|
|
-
|
|
|
|
532,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian Tepfer
|
|
2016
|
|
|
455,962
|
|
|
|
-
|
|
|
|
31,255
|
|
|
|
487,217
|
|
|
Executive Vice President of uSell and Chief Executive Officer of We Sell Cellular
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Tepfer
|
|
2016
|
|
|
455,962
|
|
|
|
-
|
|
|
|
31,255
|
|
|
|
487,217
|
|
|
Executive Vice President of uSell and President of We Sell Cellular
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Brian and Scott Tepfer were not Named Executive Officers in 2015.
|
|
|
(2)
|
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 equity awards and do not reflect the actual amounts that may be
realized by the Named Executive Officer. Our assumptions with respect to the calculation of these values are set forth in Note
2 of our consolidated financial statements contained herein.
|
|
|
(3)
|
Represents cash compensation earned under the Company’s 2016 Management Incentive Compensation Plan (“Incentive
Plan”). See below for a description the eligibility of quarterly bonus payments under the Incentive Plan. As of the date
of this report, the Named Executive Officers have been paid 50% of the amount that they have earned under the Incentive Plan.
|
Named Executive Officer Employment Arrangements
Nik Raman
.
Prior to April 1,
2015, Nik Raman received a base salary of $175,000 per year under an oral contract. Effective April 1, 2015, Mr. Raman’s
base salary was reduced to $140,000 and later increased to $175,000 per year effective July 1, 2016.
Brian Tepfer.
Effective October
23, 2015, the Company and Brian Tepfer entered into an Employment Agreement providing for the following: (i) an initial term ending
December 31, 2018 with automatic one-year renewals unless notice of termination is given, (ii) a base salary of $500,000 per year
which is subject to downward adjustments based on the failure to meet future EBITDA targets, provided that no adjustment(s) may
be made to cause the annual base salary below $360,000, and (iii) a semi-annual target bonus of $250,000, subject to upward and
downward adjustment based on the attainment of EBITDA targets. In July 2016, Mr. Tepfer waived his right to the semi-annual target
bonus in consideration, in part, for the right to receive a quarterly bonus equal to 4.5% of quarterly gross EBITDA under the
Company’s Incentive Plan (described below).
Scott Tepfer.
Effective October
23, 2015, the Company and Scott Tepfer entered into an Employment Agreement providing for the following: (i) an initial term ending
December 31, 2018 with automatic one-year renewals unless notice of termination is given, (ii) a base salary of $500,000 per year
which is subject to downward adjustments based on the failure to meet future EBITDA targets, provided that no adjustment(s) may
be made to cause the annual base salary below $360,000, and (iii) a semi-annual target bonus of $250,000, subject to upward and
downward adjustment based on the attainment of EBITDA targets. In July 2016, Mr. Tepfer waived his right to the semi-annual target
bonus in consideration, in part, for the right to receive a quarterly bonus equal to 4.5% of quarterly gross EBITDA under the Company’s
Incentive Plan (described below).
Termination Provisions
Both Scott and Brian Tepfer have severance
provisions which provide that in the event their Employment Agreement is terminated for Good Reason or without Cause (both as described
below). In the event the executive terminates their Employment Agreement for Good Reason, the Company terminates the Executive’s
employment without cause or the Company elects not to renew the Employment Agreement upon the termination of the initial term or
any extension thereof, the executive shall be entitled to the following:
|
|
(i)
|
any accrued but unpaid base salary through the termination date,
|
|
|
(ii)
|
an amount equal to the executive’s base salary for the remainder of the term, but no less than twelve months’ base
salary;
|
|
|
(iii)
|
any earned but unpaid bonus for any six month measuring period ended prior to the date of termination; and
|
|
|
(iv)
|
any earned but unpaid bonus for the six month measuring period in which termination occurs (to the extent it can be calculated).
|
The term “Good Reason” is generally
defined as the material diminution of the executive officers’ duties due to no fault of the executive or any other action
or inaction that constitutes a material breach by the Company under the Employment Agreements including reduction in compensation
or relocation of employment.
Outstanding Equity Awards at 2016 Fiscal
Year-End
Listed below is information with respect to
unexercised options and shares of common stock that have not vested for each Named Executive Officer outstanding as of December
31, 2016:
|
Outstanding Equity Awards At Fiscal Year-End
|
|
|
Name
(a)
|
|
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
(g)(1)
|
|
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(h)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nik Raman
|
|
|
233,333
|
|
|
|
119,000
|
|
|
|
(1)
|
Represents unvested restricted stock units. Market value is based on $0.51 closing price on December 31, 2016.
|
Management Incentive Compensation Plan
On July 27, 2016, the Company adopted the Incentive
Plan. The Incentive Plan provides that each quarter that the Company meets certain gross EBITDA thresholds, participants will be
eligible to receive quarterly bonuses. The Incentive Plan is effective through September 2018. The Incentive Plan provides for
minimum bonus eligibility thresholds set at quarterly gross EBITDA levels that ensure that the Company will remain cash-flow positive
and in compliance with all debt covenants over the term after payment of bonuses. If the Company does not meet the minimum EBITDA
threshold in a given quarter, no bonus is payable under the Incentive Plan for that quarter. Bonuses will be subject to adjustment
in the event the Company’s year-end audit results in restatement of a prior quarter’s EBITDA.
As of the date of this report, the Company
has granted Nik Raman, Brian Tepfer and Scott Tepfer eligibility under the Incentive Plan to receive a quarterly bonus representing
2.4%, 4.5% and 4.5%, respectively, of quarterly gross EBITDA. As of December 31, 2016 and the date of this report, a total of $79,179
was earned, of which total of $39,590 has been paid under the Incentive Plan. Of this amount, Mr. Raman earned $16,669 and was
paid $8,334, and Brian Tepfer and Scott Tepfer each earned $31,255 and were paid $15,628.
Director Compensation
We do not pay cash compensation to our directors
for service on our Board. Directors are reimbursed for reasonable expenses incurred in attending meetings and carrying out duties
as Board and committee members. Executive officers serving on the Board are not compensated for their service as directors.
Name
(a)
|
|
Stock
Awards
($)(c)(1)(2)
|
|
|
Total
($)(j)
|
|
|
|
|
|
|
|
|
|
|
Peter Benz
|
|
|
123,000
|
|
|
|
123,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel Brauser
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Fitzwilliam
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Amitabh Jhawar
|
|
|
70,000
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Nik Raman
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian Tepfer
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts reported represent the aggregate grant date fair value
of awards granted without regards to forfeitures granted to the independent members of our board of directors during 2016, computed
in accordance with ASC 718. This amount does not reflect the actual economic value realized by the director.
(2) On January 6, 2016, the Company granted 100,000 restricted stock
units to Peter Benz, including 10,000 restricted stock units for service as an Audit Committee member, 70,000 restricted stock
units to Amitabh Jhawar, including 10,000 restricted stock units for service as an Audit Committee member, and 20,000 restricted
stock units to Grant Fitzwilliam for service as Audit Committee Chairman. Each of the awards vest in two equal annual increments,
subject to continued service on each vesting date, with the first vesting date being one year from the grant date, and fully vesting
upon a change in control.
Equity Compensation Plan Information
The following chart reflects the number of
awards granted under equity compensation plans approved and not approved by shareholders and the weighted average exercise price
for such plans as of December 31, 2016.
|
Name Of Plan
|
|
Number of shares
of common stock to
be issued upon exercise
of outstanding
options, warrants and rights(1)
(a)
|
|
|
Weighted-average
exercise price of
outstanding
options warrants and rights
(b)($)
|
|
|
Number of shares remaining
available for future issuance
under equity compensation
plans (excluding the
shares reflected
in column (a))(2)
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Equity Incentive Plan
(2)
|
|
|
263,000
|
|
|
|
1.61
|
|
|
|
365,188
|
|
|
Non-Plan Equity Compensation
(3)
|
|
|
315,018
|
|
|
|
3.04
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
(4)
|
|
|
350,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
928,018
|
|
|
|
2.59
|
|
|
|
365,188
|
|
|
|
(1)
|
Consists of stock options and restricted stock units.
|
|
|
(2)
|
This represents securities issued under the Plan. As of December 31, 2016, we had 365,188 shares remaining under the Plan.
Because we have issued 953,835 shares of restricted stock, the number of securities available for future issuance has been reduced.
|
|
|
(3)
|
This represents securities issued outside our Plan. Includes
53,332 of fully vested options granted to executive officers and directors with a weighted average exercise price of $3.00 per
share.
|
|
|
(4)
|
Represents 350,000 unvested restricted stock units granted
to Mr. Nikhil Raman.
|
In April 2016, uSell amended the Plan to increase
the number of authorized shares under the Plan by 200,000 shares (to a total of 1,582,023 authorized shares).
|
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
|
The following table sets forth the number of
shares of our common stock beneficially owned as of March 30, 2017 by (i) those persons known by us to be owners of more than 5%
of our common stock, (ii) each director, (iii) our Named Executive Officers and (iv) all of our executive officers and directors
of as a group. Unless otherwise specified in the notes to this table, the address for each person is: c/o uSell.com, Inc., 171
Madison Avenue, 17
th
Floor, New York, New York 10016.
|
Title of Class
|
|
Beneficial Owner
|
|
Amount and
Nature of Beneficial
Owner
(1)
|
|
|
Percent of
Class
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Nik Raman (2)
|
|
|
9,670,403
|
|
|
|
48.0
|
%
|
|
Common Stock
|
|
Brian Tepfer (3)
|
|
|
9,643,737
|
|
|
|
47.9
|
%
|
|
Common Stock
|
|
Scott Tepfer (3)
|
|
|
9,643,737
|
|
|
|
47.9
|
%
|
|
Common Stock
|
|
Daniel Brauser (4)
|
|
|
10,031,512
|
|
|
|
49.8
|
%
|
|
Common Stock
|
|
Peter Benz (5)
|
|
|
80,500
|
|
|
|
*
|
|
|
Common Stock
|
|
Grant Fitzwilliam (6)
|
|
|
51,702
|
|
|
|
*
|
|
|
Common Stock
|
|
Amitabh Jhawar (7)
|
|
|
38,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
All directors and executive officers as a group (8 persons) (8)
|
|
|
9,877,757
|
|
|
|
48.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Todd Oretsky (9)
|
|
|
1,032,342
|
|
|
|
5.1
|
%
|
|
Common Stock
|
|
Hakan Koyuncu (10)
|
|
|
1,032,342
|
|
|
|
5.1
|
%
|
|
Common Stock
|
|
Douglas Feirstein (11)
|
|
|
1,045,675
|
|
|
|
5.2
|
%
|
|
Common Stock
|
|
Kokino LLC (12)
|
|
|
3,399,000
|
|
|
|
15.8
|
%
|
* Less than 1%.
|
|
(1)
|
Applicable percentages are based on 20,138,199 shares of common stock outstanding as of March 30,
2017. 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. The table does
not include: (i) restricted stock units that do not have the right to vote until they vest and the shares are delivered or (ii)
unvested options that do not vest within 60 days of the date listed above in this Note (1).
|
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 127 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 25 shares. The shares of common stock individually owned by them are:
|
Mr. Brauser
|
|
657,900 shares
|
|
Mr. Feirstein
|
|
357,195 shares
|
|
Mr. Koyuncu
|
|
6,096 shares
|
|
Mr. Oretsky
|
|
11,151 shares
|
The shares of common stock beneficially
owned by each of Messrs. Brauser, Raman, and Brian and Scott Tepfer include all shares of common stock subject to a Shareholders
Agreement. Under the Shareholders Agreement, each person agreed that, in connection with any annual meeting, special meeting or
written consent of uSell shareholders, such person would vote together with the other three parties on each matter. However, the
parties further agreed that if they cannot reach an agreement, then the affirmative vote of at least 75% of the voting power of
all shares of outstanding voting stock of uSell is required to take action. As a result, for so long as the Shareholders Agreement
remains in effect, future action by uSell shareholders will effectively require either the unanimous consent of Raman, Brauser,
and the Tepfers, or a 75% supermajority vote of outstanding shares. This voting agreement terminates if certain covenants under
the Securities Purchase Agreement are not met. The shares of common stock individually owned by them are:
|
Mr. Brauser
|
|
657,900 shares
|
|
Mr. Raman
|
|
621,000 shares
|
|
Mr. Brian Tepfer
|
|
4,182,419 shares
|
|
Mr. Scott Tepfer
|
|
4,182,418 shares
|
|
|
(2)
|
Mr. Raman is a director and executive
officer. Includes 26,666 vested options.
|
|
|
(3)
|
Mr. Brian Tepfer is a director and both Brian and Scott Tepfer are Named Executive Officers.
|
|
|
(4)
|
Mr. Daniel Brauser is a director and executive officer.
Includes 13,333 vested options. See Note 1 above regarding two Shareholders Agreements that Mr. Brauser is subject to.
|
|
|
(5)
|
Mr. Benz is a director.
|
|
|
(6)
|
Mr. Fitzwilliam is a director. Includes 13,333 vested options.
|
|
|
(7)
|
Mr. Jhawar is a director.
|
|
|
(8)
|
Includes executive officers of uSell and We Sell Cellular who are not Named Executive Officers. Excludes shares
subject to shareholders agreements that are owned by non-executive officers and directors.
|
|
|
(9)
|
Mr. Oretsky is a former executive officer and director. 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. See Note (1) above.
|
|
|
(10)
|
Mr. Koyuncu is a former executive officer and director. Address is 750 SW 3rd Street, Boca Raton, Florida 33486. See Note (1)
above.
|
|
|
(11)
|
Mr. Feirstein is a former executive officer and director. Represents: (i) 393,198 shares of common stock (of which 3,176 are
held by the Feirstein Family Holdings, LLLP, an entity controlled by Mr. Feirstein), and (ii) 13,333 vested options. See Note (1)
above.
|
|
|
(12)
|
Includes: (i) 550,000 shares and 275,000 warrants held in the Trust Agreement dated December 23, 1989 FBO the issue of Jonathan
D. Sackler (the “Trust”) for which Leslie J. Schreyer serves as sole trustee, (ii) 300,000 shares and 150,000 warrants
held by M3C Holdings LLC (“M3C”), which is wholly-owned by Mary Corson and Richard S. Sackler, M.D., as trustees of
the Mary Corson Trust dated January 15, 2004 and (iii) 124,000 shares held jointly by Robert and Mickel Averick. Mary Corson is
the sole beneficiary of the Mary Corson Trust and the wife of Jonathan D. Sackler. Piton Capital Partners, LLC (“Piton”)
is managed by Piton Capital Management LLC, which is managed by Kokino, LLC (“Kokino”), which is a family office and
provides non-discretionary investment advice to family clients, including the Trust, Piton and M3C.
As
a Portfolio Manager at Kokino, Mr. Averick shares the power to vote and dispose (or direct the disposition of) 3,399,000 shares
of Common Stock, which is the sum of the common stock beneficially owned by the following reporting persons: (i) 825,000 shares
of common stock beneficially owned by the Trust; (ii) 450,000 shares of common stock beneficially owned by M3C; (iii) 2,000,000
shares of common stock beneficially owned by Piton (including 1,000,000 shares underlying an option to buy stock); and (iv) 124,000
shares of common stock beneficially owned by Mr. Averick and his wife.
This information is based on the Schedule 13D filed
on December 30, 2016. The address is: 201 Tresser Boulevard, 3rd Floor Stamford, Connecticut 06901.
|
|
|
Item 13.
|
Certain Relationships and Related Transactions, and
Director Independence.
|
Jennifer Calabrese, our Executive Vice President
of Finance and Chief Financial Officer, provides her services through Calabrese Consulting, LLC, a company she controls. Beginning
in April 2014, we began paying this company $50,000 per year. As of April 2015 and through September 2016, Ms. Calabrese received
shares of common stock in lieu of $2,083 of monthly cash compensation. Beginning in October 2016, we began paying this company
on an hourly basis.
On April 14, 2016, the Company approved an
equity arrangement to compensate Jennifer Calabrese for her expanded role within the Company related to the acquisition and management
of We Sell Cellular, LLC. Under the arrangement, effective January 1, 2016 and through June 30, 2016, Ms. Calabrese was being issued
1,000 shares of the Company’s common stock monthly in addition to her existing salary and equity arrangements with the Company
until such time as the Company’s hires a full time Chief Financial Officer.
In November 2014, uSell entered into a Consulting
Agreement with Sunder Raman, the father of Nik Raman, our Chief Executive Officer. In connection with this agreement, Mr. Raman
was issued 35,000 restricted stock units which vested upon the acquisition of We Sell Cellular.
In connection with the acquisition of We Sell
Cellular, the Company issued the Brian and Scott Tepfer (collectively, the “Tepfers”) 9,358,837 shares of uSell common
stock (or approximately 49% of uSell on a fully-diluted basis). In accordance with the We Sell Securities Purchase Agreement (the
“SPA”), if the Tepfers elected to sell shares of common stock, uSell would use its best efforts to assist the Tepfers
in selling their shares of uSell stock acquired under the SPA for up to $6,000,000 in gross proceeds (together and not each) through
private placements or public offerings (the “Placement Rights”), with target sales of $1,500,000 quarterly, commencing
the quarter ending December 31, 2015. If the price per share received by the Tepfers was less than the greater of $1.20 or the
product of an EBITDA-based formula, uSell will issue the Tepfers additional shares of uSell stock. In addition, pursuant to the
SPA, uSell granted the Tepfers certain piggyback registration rights and a right of first refusal to participate in future uSell
financings. On July 27, 2016, the Company entered into an agreement with the Tepfers whereby the Tepfers agreed to waive the Placement
Rights granted to them under the SPA. The Tepfers also agreed to waive the bonus rights under their respective employment agreements
with the Company dated October 23, 2015 which provided for potential annual bonuses in a combined amount exceeding $1,000,000.
In exchange for agreeing to waive the Placement Rights and bonus rights, each of the Tepfers was granted the right to receive a
quarterly bonus equal to 4.5% of quarterly gross EBITDA under the Incentive Plan.
On December 22, 2016, the Tepfers each sold
500,000 shares of Company’s common stock at $1.00 per share to an investment fund (the “Purchaser”) and each
issued to the Purchaser a five-year option to purchase an additional 500,000 shares of common stock of the Company at a $1.00 per
share. The securities were sold in a private transaction which was initiated by an investment fund that has investment power on
behalf of the Purchaser. As an inducement to the Purchaser, the Company granted demand and piggy back registration rights to the
Purchaser and another shareholder of the Company over which the Purchaser exercises investment power. If the registration rights
are exercised, the two investment funds will pay the legal and other expenses of the Company and only exercise such demand rights
at a time when the Company is obligated to file its Form 10-K or a Form 10-Q.
See page 19 for a discussion of director independence.
|
|
Item 14.
|
Principal Accounting Fees and Services.
|
Our Audit Committee pre-approves audit and
permissible non-audit services performed by its independent registered public accounting firm, as well as the fees charged for
such services. All of the services related to audit fees and audit-related fees charged by Marcum, LLP, if any, were
pre-approved by the Audit Committee. The following table shows the fees for the years ended December 31, 2016 and 2015.
|
|
|
2016
|
|
|
2015
|
|
|
Audit Fees
|
|
$
|
138,983
|
|
|
$
|
93,076
|
|
|
Audit Related Fees
|
|
|
-
|
|
|
|
-
|
|
|
Tax Fees
|
|
|
-
|
|
|
|
-
|
|
|
All Other Fees
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
138,983
|
|
|
$
|
93,076
|
|
(1) Audit fees – these fees relate to the audit of our
annual financial statements and the review of our interim quarterly financial statements.
PART IV
|
|
Item 15.
|
Exhibits, Financial Statement Schedules.
|
|
|
(a)
|
Documents filed as part of the report.
|
|
|
(1)
|
Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The
financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this
Item.
|
|
|
(2)
|
Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required
information is contained in the consolidated financial statements or notes included in this report.
|
|
|
(3)
|
Exhibits. The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
|
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on March 30, 2017.
|
|
uSell.com, Inc.
|
|
|
|
|
|
|
By:
|
/s/
Nikhil Raman
|
|
|
|
Nikhil Raman
|
|
|
|
Chief Executive Officer
(Principal Executive Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Nikhil Raman
|
|
Principal Executive Officer and Director
|
|
March 30, 2017
|
|
Nikhil Raman
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Jennifer Calabrese
|
|
Chief Financial Officer
|
|
March 30, 2017
|
|
Jennifer Calabrese
|
|
(Principal Financial Officer) and
Chief Accounting Officer
(Principal Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Daniel Brauser
|
|
Director and Executive Chairman
|
|
March 30, 2017
|
|
Daniel Brauser
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Peter Benz
|
|
Director
|
|
March 30, 2017
|
|
Peter Benz
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Grant Fitzwilliam
|
|
Director
|
|
March 30, 2017
|
|
Grant Fitzwilliam
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Amitabh Jhawar
|
|
Director
|
|
March 30, 2017
|
|
Amitabh Jhawar
|
|
|
|
|
|
/s/ Brian Tepfer
|
|
Director
|
|
March 30, 2017
|
|
Brian Tepfer
|
|
|
|
|
EXHIBIT INDEX
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed or
Furnished
|
|
No.
|
|
Exhibit Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Certificate of Incorporation, as amended
|
|
10-K
|
|
3/31/15
|
|
3.1
|
|
|
|
3.2
|
|
Bylaws, as amended
|
|
|
|
|
|
|
|
Filed
|
|
10.1
|
|
Shareholders Agreement – Brauser, Feirstein, Oretsky and Koyuncu
|
|
10-Q
|
|
8/19/09
|
|
10.3
|
|
|
|
10.2
|
|
Form of Restricted Stock Unit Agreement
|
|
10-K
|
|
3/31/15
|
|
10.5
|
|
|
|
10.3
|
|
2008 Equity Incentive Plan, as amended*
|
|
|
|
|
|
|
|
Filed
|
|
10.4
|
|
Sunder Raman Consulting Agreement
|
|
10-K
|
|
3/31/15
|
|
10.12
|
|
|
|
10.5
|
|
Stock Purchase Agreement – We Sell Cellular^^
|
|
8-K
|
|
10/27/15
|
|
10.1
|
|
|
|
10.6
|
|
Registration Rights Agreement – Brian and Scott Tepfer
|
|
8-K
|
|
10/27/15
|
|
10.2
|
|
|
|
10.7
|
|
Shareholders Agreement – Raman, Brauser and Tepfers
|
|
8-K
|
|
10/27/15
|
|
10.3
|
|
|
|
10.8
|
|
Management Agreement – Raman, Brauser and Tepfers
|
|
8-K
|
|
10/27/15
|
|
10.4
|
|
|
|
10.9
|
|
Form of Amendment to Management Agreement - Raman, Brauser and Tepfers
|
|
8-K
|
|
1/19/17
|
|
10.11
|
|
|
|
10.10
|
|
Brian Tepfer Employment Agreement*
|
|
8-K
|
|
10/27/15
|
|
10.5
|
|
|
|
10.11
|
|
Scott Tepfer Employment Agreement*
|
|
8-K
|
|
10/27/15
|
|
10.6
|
|
|
|
10.12
|
|
Form of Amendment to Tepfers Employment Agreement*
|
|
8-K
|
|
11/10/16
|
|
10.1
|
|
|
|
10.13
|
|
Form of Non-Compete and Confidentiality Agreement - Tepfers
|
|
8-K
|
|
1/19/17
|
|
10.3
|
|
|
|
10.14
|
|
Form of Non-Compete and Confidentiality Agreement - Raman
|
|
8-K
|
|
1/19/17
|
|
10.4
|
|
|
|
10.15
|
|
Note Purchase Agreement - BAM Administrative Services, LLC^^
|
|
8-K
|
|
10/27/15
|
|
10.7
|
|
|
|
10.16
|
|
Form of Secured Term Note dated October 23, 2015
|
|
8-K
|
|
10/27/15
|
|
10.8
|
|
|
|
10.17
|
|
Security Agreement - BAM Administrative Services, LLC^^
|
|
8-K
|
|
10/27/15
|
|
10.9
|
|
|
|
10.18
|
|
Subsidiary Guaranty - BAM Administrative Services, LLC
|
|
8-K
|
|
10/27/15
|
|
10.10
|
|
|
|
10.19
|
|
Pledge Agreement – BAM Administrative Services, LLC
|
|
8-K
|
|
10/27/15
|
|
10.11
|
|
|
|
10.20
|
|
Collateral Assignment Agreement – BAM Administrative Services, LLC
|
|
8-K
|
|
10/27/15
|
|
10.12
|
|
|
|
10.21
|
|
Form of Amendment No. 1 to Note Purchase Agreement - BAM Administrative Services, LLC
|
|
8-K
|
|
4/1/16
|
|
10.1
|
|
|
|
10.22
|
|
Form of Amended and Restated Secured Term Note, originally issued October 23, 2015
|
|
8-K
|
|
4/1/16
|
|
10.2
|
|
|
|
10.23
|
|
Form of Amended and Restated Secured Term Note, originally issued December 1, 2015
|
|
8-K
|
|
4/1/16
|
|
10.3
|
|
|
|
10.24
|
|
Form of Secured Term Note issued March 30, 2016
|
|
8-K
|
|
4/1/16
|
|
10.4
|
|
|
|
10.25
|
|
Form of Services Agreement dated January 13, 2017
|
|
8-K
|
|
1/19/17
|
|
10.1
|
|
|
|
10.26
|
|
Form of Contribution Agreement dated January 13, 2017
|
|
8-K
|
|
1/19/17
|
|
10.2
|
|
|
|
10.27
|
|
Form of Note Purchase Agreement dated January 13, 2017 ^^
|
|
8-K
|
|
1/19/17
|
|
10.5
|
|
|
|
10.28
|
|
Form of Secured Term Note issued January 13, 2017
|
|
8-K
|
|
1/19/17
|
|
10.6
|
|
|
|
10.29
|
|
Form of Security Agreement dated January 13, 2017 ^^
|
|
8-K
|
|
1/19/17
|
|
10.7
|
|
|
|
10.30
|
|
Form of Subsidiary Guaranty dated January 13, 2017 ^^
|
|
8-K
|
|
1/19/17
|
|
10.8
|
|
|
|
10.31
|
|
Form of Trademark Security Agreement dated January 13, 2017 ^^
|
|
8-K
|
|
1/19/17
|
|
10.9
|
|
|
|
10.32
|
|
Form of Pledge Agreement dated January 13, 2017 ^^
|
|
8-K
|
|
1/19/17
|
|
10.10
|
|
|
|
21.1
|
|
Subsidiaries
|
|
|
|
|
|
|
|
Filed
|
|
31.1
|
|
Certification of Principal Executive Officer (302)
|
|
|
|
|
|
|
|
Filed
|
|
31.2
|
|
Certification of Principal Financial Officer (302)
|
|
|
|
|
|
|
|
Filed
|
|
32.1
|
|
Certification of Principal Executive and Principal Financial Officer (906)
|
|
|
|
|
|
|
|
Furnished**
|
|
101.INS
|
|
XBRL Instance Document
|
|
|
|
|
|
|
|
Filed
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
|
|
|
|
Filed
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
|
|
|
|
Filed
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
|
|
|
|
Filed
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
|
|
|
|
Filed
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
|
|
|
|
|
Filed
|
* Management contract or compensatory plan or arrangement.
** This exhibit is being furnished rather than filed and shall not
be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
^^ Certain schedules, appendices and exhibits to this agreement
have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished
supplementally to the Securities and Exchange Commission staff upon request.
Copies of this report (including the financial statements) and any
of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to our Corporate
Secretary at 171 Madison Avenue, 17
th
Floor, New York, New York 10016.
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Stockholders
of uSell.com, Inc. and Subsidiaries
We have audited the accompanying consolidated
balance sheets of uSell.com, Inc. and Subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related
consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated 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 consolidated 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 audit 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 also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of uSell.com, Inc. and
Subsidiaries, as of December 31, 2016 and 2015, and the consolidated 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.
/s/ Marcum LLP
West Palm Beach, FL
March 30, 2017
uSell.com, Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,657,422
|
|
|
$
|
1,047,786
|
|
|
Restricted cash
|
|
|
982,064
|
|
|
|
801,230
|
|
|
Accounts receivable, net
|
|
|
430,171
|
|
|
|
463,187
|
|
|
Inventory
|
|
|
8,874,099
|
|
|
|
7,099,970
|
|
|
Prepaid expenses and other current assets
|
|
|
130,141
|
|
|
|
297,023
|
|
|
Total Current Assets
|
|
|
12,073,897
|
|
|
|
9,709,196
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
191,957
|
|
|
|
193,243
|
|
|
Goodwill
|
|
|
8,448,759
|
|
|
|
8,406,561
|
|
|
Intangible assets, net
|
|
|
3,724,466
|
|
|
|
5,043,972
|
|
|
Capitalized technology, net
|
|
|
934,193
|
|
|
|
886,543
|
|
|
Other assets
|
|
|
124,358
|
|
|
|
79,145
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
25,497,630
|
|
|
$
|
24,318,660
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,328,422
|
|
|
$
|
2,563,598
|
|
|
Accrued expenses
|
|
|
916,961
|
|
|
|
729,160
|
|
|
Deferred revenue
|
|
|
374,098
|
|
|
|
814,295
|
|
|
Promissory note payable
|
|
|
673,332
|
|
|
|
-
|
|
|
Capital lease obligation
|
|
|
10,664
|
|
|
|
-
|
|
|
Lease termination payable
|
|
|
-
|
|
|
|
5,000
|
|
|
Total Current Liabilities
|
|
|
6,303,477
|
|
|
|
4,112,053
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note payable, net of current portion
|
|
|
6,441,000
|
|
|
|
5,087,043
|
|
|
Capital lease obligation, net of current portion
|
|
|
47,986
|
|
|
|
-
|
|
|
Placement rights derivative liability
|
|
|
-
|
|
|
|
1,130,000
|
|
|
Total Liabilities
|
|
|
12,792,463
|
|
|
|
10,329,096
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
Convertible Series A preferred stock; $0.0001 par value; 325,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Convertible Series B preferred stock; $0.0001 value per share; 4,000,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Convertible Series C preferred stock; $0.0001 value per share; 146,667 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Convertible Series E preferred stock; $0.0001 value per share; 103,232 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common stock; $0.0001 par value; 43,333,333 shares authorized; 20,134,999 shares and 19,751,999 shares issued and outstanding, respectively
|
|
|
2,013
|
|
|
|
1,976
|
|
|
Additional paid in capital
|
|
|
71,089,882
|
|
|
|
68,662,578
|
|
|
Accumulated deficit
|
|
|
(58,386,728
|
)
|
|
|
(54,674,990
|
)
|
|
Total Stockholders' Equity
|
|
|
12,705,167
|
|
|
|
13,989,564
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
25,497,630
|
|
|
$
|
24,318,660
|
|
See accompanying notes to consolidated financial
statements.
uSell.com, Inc. and Subsidiaries
Consolidated Statements of Operations
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenue
|
|
$
|
94,656,735
|
|
|
$
|
27,093,928
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue
|
|
|
88,834,912
|
|
|
|
23,549,098
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
5,821,823
|
|
|
|
3,544,830
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,680,364
|
|
|
|
2,037,371
|
|
|
General and administrative
|
|
|
5,986,273
|
|
|
|
6,344,539
|
|
|
Total operating expenses
|
|
|
7,666,637
|
|
|
|
8,381,910
|
|
|
Loss from Operations
|
|
|
(1,844,814
|
)
|
|
|
(4,837,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
429
|
|
|
|
956
|
|
|
Interest expense
|
|
|
(1,497,353
|
)
|
|
|
(189,245
|
)
|
|
Change in fair value of placement rights derivative liability
|
|
|
(370,000
|
)
|
|
|
-
|
|
|
Total Other Expense, Net
|
|
|
(1,866,924
|
)
|
|
|
(188,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss before Income Tax Benefit
|
|
|
(3,711,738
|
)
|
|
|
(5,025,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit
|
|
|
-
|
|
|
|
2,392,994
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(3,711,738
|
)
|
|
$
|
(2,632,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the period - basic and diluted
|
|
|
20,029,701
|
|
|
|
9,687,951
|
|
See accompanying notes to consolidated financial
statements.
uSell.com, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders'
Equity
Years Ended December 31, 2016 and 2015
|
|
|
Series A Preferred
Stock,
$0.0001 Par Value
|
|
|
Series B Preferred
Stock,
$0.0001 Par Value
|
|
|
Series C Preferred
Stock,
$0.0001 Par Value
|
|
|
Series E Preferred
Stock,
$0.0001 Par Value
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance, January 1, 2015
|
|
|
100,000
|
|
|
$
|
10
|
|
|
|
951,250
|
|
|
$
|
95
|
|
|
|
146,667
|
|
|
$
|
15
|
|
|
|
103,232
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series A Preferred Stock to Common Stock
|
|
|
(100,000
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B Preferred Stock to Common Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(951,250
|
)
|
|
|
(95
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series C Preferred Stock to Common Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(146,667
|
)
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series E Preferred Stock to Common Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(103,232
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock in connection with We Sell Cellular acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock in connection with Note Purchase Agreement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with Note Purchase Agreement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Derivative Liability upon Elimination of Placement Rights
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
See accompanying notes to consolidated financial
statements.
uSell.com, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders'
Equity
Years Ended December 31, 2016 and 2015
(Continued)
|
|
|
Common Stock,
$0.0001 Par Value
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Total
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid in Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance, January 1, 2015
|
|
|
7,533,817
|
|
|
$
|
753
|
|
|
$
|
54,610,843
|
|
|
$
|
(52,042,615
|
)
|
|
$
|
2,569,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series A Preferred Stock to Common Stock
|
|
|
100,000
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B Preferred Stock to Common Stock
|
|
|
60,411
|
|
|
|
6
|
|
|
|
89
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series C Preferred Stock to Common Stock
|
|
|
146,667
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series E Preferred Stock to Common Stock
|
|
|
103,232
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock in connection with We Sell Cellular acquisition
|
|
|
9,358,837
|
|
|
|
936
|
|
|
|
10,387,373
|
|
|
|
-
|
|
|
|
10,388,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock in connection with Note Purchase Agreement
|
|
|
860,000
|
|
|
|
86
|
|
|
|
725,714
|
|
|
|
-
|
|
|
|
725,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
1,589,035
|
|
|
|
160
|
|
|
|
2,938,559
|
|
|
|
-
|
|
|
|
2,938,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,632,375
|
)
|
|
|
(2,632,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
19,751,999
|
|
|
$
|
1,976
|
|
|
$
|
68,662,578
|
|
|
$
|
(54,674,990
|
)
|
|
$
|
13,989,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with Note Purchase Agreement
|
|
|
350,000
|
|
|
|
35
|
|
|
|
402,465
|
|
|
|
-
|
|
|
|
402,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Derivative Liability upon Elimination of Placement Rights
|
|
|
-
|
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
33,000
|
|
|
|
2
|
|
|
|
524,839
|
|
|
|
-
|
|
|
|
524,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,711,738
|
)
|
|
|
(3,711,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
20,134,999
|
|
|
$
|
2,013
|
|
|
$
|
71,089,882
|
|
|
$
|
(58,386,728
|
)
|
|
$
|
12,705,167
|
|
See accompanying notes to consolidated financial
statements.
uSell.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,711,738
|
)
|
|
$
|
(2,632,375
|
)
|
|
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,912,077
|
|
|
|
819,604
|
|
|
(Recovery of) Provision for bad debt expense
|
|
|
(1,876
|
)
|
|
|
5,432
|
|
|
Stock based compensation expense
|
|
|
524,841
|
|
|
|
2,953,969
|
|
|
Deferred tax benefit
|
|
|
-
|
|
|
|
(2,392,994
|
)
|
|
Amortization of debt issue costs into interest expense
|
|
|
479,340
|
|
|
|
51,564
|
|
|
Loss on disposal of property and equipment
|
|
|
112,284
|
|
|
|
-
|
|
|
Change in fair value of placement rights derivative liability
|
|
|
370,000
|
|
|
|
-
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
34,892
|
|
|
|
(76,205
|
)
|
|
Inventory
|
|
|
(1,816,327
|
)
|
|
|
(3,718,347
|
)
|
|
Prepaid and other current assets
|
|
|
166,882
|
|
|
|
669,565
|
|
|
Other assets
|
|
|
13,222
|
|
|
|
(26,750
|
)
|
|
Accounts payable
|
|
|
1,764,824
|
|
|
|
727,466
|
|
|
Accrued expenses
|
|
|
187,801
|
|
|
|
(173,297
|
)
|
|
Lease termination payable
|
|
|
(5,000
|
)
|
|
|
(10,000
|
)
|
|
Deferred revenues
|
|
|
(440,197
|
)
|
|
|
459,400
|
|
|
Net Cash and Cash Equivalents Used In Operating Activities
|
|
|
(408,975
|
)
|
|
|
(3,342,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Website development costs
|
|
|
(595,528
|
)
|
|
|
(601,404
|
)
|
|
Cash paid for acquisition, net of cash acquired
|
|
|
-
|
|
|
|
(2,365,859
|
)
|
|
Restricted cash
|
|
|
(180,834
|
)
|
|
|
(801,230
|
)
|
|
Cash paid to purchase property and equipment
|
|
|
(93,686
|
)
|
|
|
(16,789
|
)
|
|
Security deposits
|
|
|
(8,435
|
)
|
|
|
-
|
|
|
Net Cash and Cash Equivalents Used In Investing Activities
|
|
|
(878,483
|
)
|
|
|
(3,785,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
|
2,000,000
|
|
|
|
6,000,000
|
|
|
Payment of capital lease obligations
|
|
|
(3,355
|
)
|
|
|
-
|
|
|
Cash paid for debt issue costs
|
|
|
(99,551
|
)
|
|
|
(238,721
|
)
|
|
Net Cash and Cash Equivalents Provided By Financing Activities
|
|
|
1,897,094
|
|
|
|
5,761,279
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
609,636
|
|
|
|
(1,366,971
|
)
|
|
Cash and Cash Equivalents - Beginning of Period
|
|
|
1,047,786
|
|
|
|
2,414,757
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - End of Period
|
|
$
|
1,657,422
|
|
|
$
|
1,047,786
|
|
uSell.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Continued)
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
SUPPLEMENTARY CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash Paid During the Period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,018,529
|
|
|
$
|
136,858
|
|
|
Taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to goodwill for inventory valuation
|
|
$
|
42,198
|
|
|
$
|
-
|
|
|
Elimination of Placement Rights Derivative Liability
|
|
$
|
1,500,000
|
|
|
$
|
-
|
|
|
Purchases of property and equipment through capital leases
|
|
$
|
62,005
|
|
|
$
|
-
|
|
|
Common stock issued in connection with note payable
|
|
$
|
402,500
|
|
|
$
|
725,800
|
|
|
Common stock issued in connection with We Sell Cellular Acquisition
|
|
$
|
-
|
|
|
$
|
10,388,309
|
|
|
Fair value of Placement Rights in connection with We Sell Cellular acquisition
|
|
$
|
-
|
|
|
$
|
1,130,000
|
|
|
Common stock issued for services
|
|
$
|
-
|
|
|
$
|
4,450
|
|
|
Conversion of Series A preferred stock into common stock
|
|
$
|
-
|
|
|
$
|
10
|
|
|
Conversion of Series B preferred stock into common stock
|
|
$
|
-
|
|
|
$
|
95
|
|
|
Conversion of Series C preferred stock into common stock
|
|
$
|
-
|
|
|
$
|
15
|
|
|
Conversion of Series E preferred stock into common stock
|
|
$
|
-
|
|
|
$
|
10
|
|
See accompanying notes to consolidated financial
statements.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1 - Organization and Business
uSell.com, Inc., through
its wholly-owned subsidiaries (collectively, “uSell,” or the “Company”), is a technology driven company
focused on extracting the maximum value from used mobile devices, at large scale. uSell acquires products from both individual
consumers, on its website, uSell.com, and from major carriers, big box retailers, and manufacturers through its subsidiary, We
Sell Cellular, LLC (“We Sell Cellular”). These devices are then distributed globally, leveraging both a traditional
sales force and an online marketplace where professional buyers of used smartphones compete to buy inventory in an on-demand fashion.
Through participation on uSell’s marketplace platforms and through interaction with uSell’s salesforce, buyers can
acquire high volumes of inventory in a cost effective manner, while minimizing risk.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”).
Principals of Consolidation
The accompanying consolidated
financial statements include the accounts of uSell and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The operating results for We Sell Cellular are included in the consolidated
financial statements from the effective date of acquisition of October 26, 2015.
Segment Information
Operating segments are
identified as components of an enterprise about which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance.
The Company’s chief operating decision maker is its Chief Executive Officer. The Company and its Chief Executive Officer
view the Company’s operations and manage its business as one operating segment.
Use of Estimates
The preparation of consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
Making estimates requires
management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition,
situation or set of circumstances that existed at the date of the 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 these estimates.
Cash and Cash Equivalents
All highly liquid investments
with an original maturity of 90 days or less when purchased are considered to be cash equivalents. Cash equivalents are stated
at cost, which approximates market value. Cash equivalents generally consist of money market accounts.
Accounts Receivable
Accounts receivable represent
obligations from the Company’s customers and are recorded net of allowances for cash discounts, doubtful accounts, and sales
returns. The Company’s policy is to reserve for uncollectible accounts based on its best estimate of the amount of probable
credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether
an allowance for doubtful accounts is necessary based on an analysis of past due accounts and other factors that may indicate that
the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all
means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts
was $1,600 and $14,300 at December 31, 2016 and 2015 respectively.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Inventory, net
Inventory, comprised of
all finished goods, is stated at the lower of cost (average cost method) or market. Inventory is recorded net of allowances.
Allowances for slow-moving
or obsolete inventory are provided based on historical experience of a variety of factors, including sales volume, product life
and levels of inventory at the end of the period. The allowance for slow-moving or obsolete inventory amounted to $115,000 and
$0 at December 31, 2016 and 2015, respectively.
Substantially all of the
Company’s inventory purchases are paid for before inventory is received in the Company’s warehouse. Prepaid inventory
amounted to approximately $221,000 and $133,000 at December 31, 2016 and 2015, respectively, and is included in inventory, net
in the accompanying consolidated balance sheets.
Property and Equipment
Property and equipment
represent costs associated with leasehold improvements, software, and computer and office equipment. Property and equipment is
stated at cost less accumulated depreciation and amortization. Depreciation on property and equipment is calculated on the straight-line
basis over the estimated useful lives of the related assets, which typically range from three to five years. Leasehold improvements
are amortized over the shorter of the estimated useful lives or the remaining lease term. Maintenance and repairs are expensed
as incurred; expenditures that enhance the value of property or extend their useful lives are capitalized. When assets are sold
or returned, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included
in income.
Capitalized Technology Costs
In accordance with Accounting
Standards Codification (“ASC”) 350-40, Internal-Use Software, the Company capitalizes certain external and internal
computer software costs incurred during the application development stage. The application development stage generally includes
software design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed as
incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality.
Capitalized technology costs are amortized over the estimated useful lives of the software assets on a straight-line basis, generally
not exceeding three years.
Business Combinations
ASC 805, Business Combinations
(“ASC 805”), applies the acquisition method of accounting for business combinations to all acquisitions where the acquirer
gains a controlling interest, regardless of whether consideration was exchanged. ASC 805 establishes principles and requirements
for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination
or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. Accounting for acquisitions requires the Company to recognize,
separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of
the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of
the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately value
assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.
As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments
to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement
period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments
are recorded to the consolidated statements of comprehensive loss.
Goodwill and Intangible
Assets
The Company accounts for
goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). ASC
350 requires that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim
basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Goodwill is tested for
impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (December
31 for the Company) 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. In evaluating goodwill for impairment, the Company has the option
to first assess qualitative factors to determine whether further impairment testing is necessary. Among other relevant events and
circumstances that affect the fair value of reporting units, the Company considers individual factors such as macroeconomic conditions,
changes in the Company’s industry and the markets in which the Company operates, as well as the Company’s historical
and expected future financial performance. If the Company concludes that it is more likely than not that a reporting unit's fair
value is less than its carrying value, recoverability of goodwill is evaluated using a two-step process. The first step involves
a comparison of the fair value of each of reporting unit with its carrying amount. If a reporting unit’s carrying amount
exceeds its fair value, the second step is performed. The second step involves a comparison of the implied fair value and carrying
value of that reporting unit’s goodwill. To the extent that a reporting unit’s carrying amount exceeds the implied
fair value of its goodwill, an impairment loss is recognized.
The valuation of fair value
for reporting units is determined based on a discounted future cash flow model that uses six years of projected cash flows and
a terminal value based on growth assumptions. Rates used to discount cash flows are dependent upon interest rates and the cost
of capital based on the Company’s industry and capital structure, adjusted for equity and size risk premiums based on market
capitalization. Estimates of future cash flows are dependent on the Company’s knowledge and experience about past and current
events and assumptions about conditions expected to exist, including long-term growth rates, capital requirements and useful lives.
The Company’s estimates of cash flows are also based on historical and future operating performance, economic conditions
and actions the Company expects to take.
In making its assessments
of fair value, the Company relies on its knowledge and experience about past and current events and assumptions about conditions
expected to exist in the future. These assumptions are based on a number of factors, including future operating performance, economic
conditions, actions the Company expects to take and present value techniques. There are inherent uncertainties related to these
factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions
underlying the impairment analysis will change in such a manner that impairment in value may occur in the future. There was no
impairment of goodwill as of December 31, 2016 and 2015.
Intangible assets represent
customer relationships and trade names/trademarks related to We Sell Cellular. Finite lived assets are amortized on a straight-line
basis over the estimated useful lives of the assets. Indefinite lived intangible assets are not amortized, but instead are subject
to annual impairment evaluation.
The Company periodically
reviews the carrying values of its intangible assets and other 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 records an impairment charge when
considered necessary. When circumstances indicate that an impairment of value may have occurred, the Company tests 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 amount of the asset over its estimated fair value, is recognized.
The cash flow estimates used in such calculations are based on estimates and assumptions, using all available information that
management believes is reasonable. Fair value, for purposes of calculating impairment, is measured based on estimated future cash
flows, discounted at a market rate of interest. During the years ended December 31, 2016 and 2015, the Company noted no indicators
of impairment.
Debt Issue Costs
Debt issuance costs incurred in connection with
the Company’s debt are capitalized and amortized as interest expense over the term of the related debt. In accordance with
Accounting Standards Update (“ASU”) No. 2015-03, “Interest—Imputation of Interest,” the Company presents
debt issuance costs as a reduction from the carrying amount of debt.
Convertible Instruments
The Company reviews all
of its 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, the Company may be required to classify certain stock equivalents issued in connection with the underlying debt instrument
as derivative liabilities.
For convertible instruments
that the Company has determined should not be bifurcated from their host instruments, the Company records 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, the Company records deemed dividends for the intrinsic value of conversion options embedded in preferred shares
based upon the differences between the fair value of the underlying common stock at the commitment date of the financing transaction
and the effective conversion price embedded in the preferred shares.
Finally, if necessary,
the Company 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.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Common Stock Purchase Warrants and Derivative
Financial Instruments
The Company reviews any
common stock purchase warrants and other freestanding derivative financial instruments at each balance sheet date and classifies
them on the consolidated balance sheet as:
|
|
a)
|
Equity if they (i) require physical settlement or net-share settlement, or (ii) gives the Company
a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement), or
|
|
|
b)
|
Assets or liabilities if they (i) require net-cash settlement (including a requirement to net cash
settle the contract if an event occurs and if that event is outside the Company’s control), or (ii) give the counterparty
a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
|
The Company assesses classification
of its 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. The Company determined that its outstanding common stock purchase warrants
satisfied the criteria for classification as equity instruments at December 31, 2016 and 2015. The Company also determined that
the Placement Rights satisfied the criteria for classification as derivative financial instruments at December 31, 2015 (see Note
3).
Contingent Consideration
The Company recognizes
the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree
or assets of the acquiree in a business combination. The contingent consideration is classified as either a liability or equity
in accordance with ASC 480-10, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity.” If classified as a liability, the liability is remeasured to fair value at each subsequent reporting date until
the contingency is resolved. Increases in fair value are recorded as losses, while decreases are recorded as gains. If classified
as equity, contingent consideration is not remeasured and subsequent settlement is accounted for within equity.
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.
Principal Device Revenue
The Company, through We
Sell Cellular, generates revenue from the sales of its cellular telephones and related equipment. The Company recognizes revenue
“FOB shipping point” on such sales. Delivery to the customer is deemed to have occurred when the customer takes title
to the product. Generally, title passes to the customer when the products leave the Company’s warehouse. Payment terms generally
require payment once an order is placed. The Company allows customers to return product within 30 days of shipment if the product
is defective. Allowances for product returns are recorded as a reduction of sales at the time revenue is recognized based on historical
data. The estimate of the allowance for product returns amounted to approximately $130,000 and $197,000 at December 31, 2016 and
2015, respectively, and is recorded in accrued expenses in the accompanying consolidated balance sheets.
Under the Company’s
“Managed by uSell” service on uSell.com, the Company partnered with a third party logistics company to inspect, wipe
and process devices before passing them along to buyers. Under this model, title to a device passes to uSell upon issuance of payment
to the seller, which is generally within one to two days from the receipt of the device at the third party warehouse. Title to
a device is then transferred to the buyer upon shipment to the buyer.
Agent Commission Revenue
In certain cases, sellers
on the Company’s uSell.com website are shown a larger list of offers directly from third party buyers interested in purchasing
their devices. These offers are shown instead of or in addition to the “Managed by uSell” offer. If a seller chooses
one of these offers, the seller will ship their device directly to the buyer, rather than to the Company’s third party warehouse.
The buyer is then responsible for testing the device, servicing the customer, and ultimately paying the seller for the device or
returning it. The Company charges a commission to the buyers only when the seller sends in a device and is successfully paid for
it. As such, the Company recognizes Agent Commission Revenue upon payment to the seller.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Fulfillment Revenue
The Company offers fulfillment
services on behalf of its buyers for the items sold using the Agent Commission Revenue approach outlined above. The Company acts
as the agent in these fulfillment services transactions, passing orders booked by its buyers to its third party fulfillment vendor,
who then assembles the kits and mails them directly to the sellers. The Company earns a standard fee from its buyers and recognizes
revenue upon shipment of the kits to the sellers. The Company evaluated the presentation of revenue on a gross versus net basis
and determined that since the Company performs as an agent without assuming the risks and rewards of ownership of the goods, revenue
should be reported on a net basis.
Advertising Revenue
Advertising revenues primarily
come from payments for text-based sponsored links and display advertisements. Generally, the Company’s advertisers pay the
Company on a cost per click, or CPC basis, which means advertisers pay only when someone clicks on one of their advertisements,
or on a cost per thousand impression basis, or CPM. Paying on a CPM basis means that advertisers pay the Company based on the number
of times their advertisements appear on the Company’s websites or mobile applications. Advertising revenue is recognized
as income when the advertising services are rendered.
Deferred revenue represents
amounts billed to customers or payments received from customers prior to providing services and for which the related revenue recognition
criteria have not been met.
Shipping and Handling
Costs
The Company follows the
provisions of ASC Topic 605-45 regarding shipping and handling costs. Shipping and handling costs included in cost of revenue were
approximately $519,000 and $116,000 for the years ended December 31, 2016 and 2015, respectively.
Advertising
Advertising costs are expensed as they are incurred
and are included in sales and marketing expenses. Advertising expense amounted to approximately $50,000 and $1,324,000 for the
years ended December 31, 2016 and 2015, respectively.
Share-Based Payment Arrangements
The Company accounts for
stock options in accordance with 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 is 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 the Company’s 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 general and administrative expense in the accompanying consolidated
statements of operations.
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
The Company complies with
the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach
to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts,
based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
ASC Topic 740 prescribes
a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken
or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be
sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of December 31, 2016. The Company
is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from
its position.
The Company may be subject
to potential income tax examinations by federal or state authorities. These potential examinations may include questioning the
timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and state tax
laws. Management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve
months.
The Company’s policy
for recording interest and penalties associated with audits is to record such expense as a component of income tax expense. There
were no amounts accrued for penalties or interest as of December 31, 2016.
Concentration of Credit
Risk
Financial instruments that
potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable.
The Company minimizes credit
risk associated with cash by periodically evaluating the credit quality of its primary financial institutions. At times, the Company’s
cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance
limit. At December 31, 2016 and 2015, the Company had not experienced losses on these accounts and management believes the Company
is not exposed to significant risks on such accounts.
Concentrations of credit
risk with respect to accounts receivables is minimal due to the large number of customers comprising the Company’s customer
base and generally short payment terms.
Fair Value of Financial
Instruments
Financial instruments,
including cash, accounts receivable, accounts payable and accrued expenses are carried at cost, which management believes approximates
fair value due to the short-term nature of these instruments. The fair value of debt approximates its carrying amounts as a market
rate of interest is attached to the repayment.
Net Loss per Share
Basic loss per share (“EPS”)
is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during
the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of
shares of common stock outstanding during the period, including stock options and warrants, using the treasury stock method, and
convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of
shares of common stock if their effect is anti-dilutive.
The computation of diluted
EPS excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Unvested Restricted Stock
|
|
|
226,666
|
|
|
|
356,662
|
|
|
Unvested Restricted Stock Units
|
|
|
743,020
|
|
|
|
475,000
|
|
|
Stock Warrants
|
|
|
801,250
|
|
|
|
802,520
|
|
|
Stock Options
|
|
|
434,998
|
|
|
|
575,685
|
|
|
|
|
|
2,205,934
|
|
|
|
2,209,867
|
|
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Recent
Accounting Pronouncements
In May 2014, the Financial
Accounting Standard Board (the “FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers”
(“ASU 2014-09”). ASU 2014-09 provides guidance for revenue recognition and affects any entity that either enters into
contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes
the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. The
core principle of ASU 2014-09 is the recognition of revenue when a company transfers promised goods or services to customers in
an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services.
ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, companies will need to use more judgment
and make more estimates than under the current guidance. These may include identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each
separate performance obligation. ASU 2014-09 was initially effective for fiscal years beginning after December 15, 2016 and interim
periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application
of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach
with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote
disclosures). Early adoption is not permitted. The Company will adopt the standard on January 1, 2018, using the full retrospective
transition method, which may result in a cumulative-effect adjustment for deferred revenue to the opening balance sheet for 2016
and the restatement of the financial statements for all prior periods presented. The Company continues to evaluate the impact of
adoption of this standard on its consolidated financial statements and disclosures.
In July 2015, the FASB
issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” simplifying the measurement of inventory
.
The guidance requires an entity to measure inventory at the lower of cost or net realizable value, which consists of estimated
selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation.
The new guidance eliminates unnecessary complexity that exists under current “lower of cost or market” guidance. For
public entities, ASU No. 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years. The guidance is to be applied prospectively as of the beginning of an interim or annual reporting period, with
early adoption permitted. The Company does not believe the implementation of this standard will have a material impact on its consolidated
financial statements and disclosures.
In September 2015, the
FASB issued ASU 2015-16, “Business Combinations – Simplifying the Accounting for Measurement-Period Adjustments”
(“ASU 2015-16”), which eliminates the current guidance that requires an acquirer in a business combination to account
for measurement-period adjustments retrospectively as if the accounting for the business combination had been completed at the
acquisition date. Instead, under the new guidance, an acquirer recognizes measurement-period adjustments in the period in which
it determines the amount of the adjustment, including the effect on earnings of any amounts that would have been recorded in previous
periods if the accounting had been completed at the acquisition date. ASU 2015-16 does not change the criteria for determining
whether an adjustment qualifies as a measurement-period adjustment or change the length of the measurement period, which cannot
exceed one year from the date of the acquisition. The guidance is effective for annual and interim periods beginning after December
15, 2015, and the guidance is applied prospectively to adjustments to provisional amounts that occur after the adoption date. The
Company adopted ASU 2015-16 as of January 1, 2016. The adoption of this guidance impacted the Company’s accounting for its
measurement-period adjustment in connection with the Well Sell Cellular acquisition during the year ended December 31, 2016, as
described in Note 3.
In February 2016, the FASB
issued ASU No. 2016-02, “Leases” (“ASU 2016-02”)
.
Under the new guidance, at the commencement date,
lessees will be required to recognize a lease liability, which is a lessee‘s obligation to make lease payments arising from
a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to
use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term of
12 months or less. Lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted
upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases)
must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. The modified retrospective approach would not require any transition
accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective
transition approach. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In March 2016, the FASB
issued ASU No. 2016-08, “Revenue from contracts with customers (Topic 606): Principal versus Agent Considerations Reporting
Revenue Gross versus Net” (“ASU 2014-09”). The amendments are intended to improve the operability and understandability
of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and
adding additional illustrative examples to assist in the application of the guidance. The effective date and transition of these
amendments is the same as the effective date and transition of ASU 2014-09. Public entities should apply the amendments in ASU
2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. The Company
is currently evaluating the impact of the new guidance on its consolidated financial statements.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
In March 2016, the FASB
issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
(“ASU 2016-09”). ASU 2016-09 was issued as part of the FASB’s simplification initiative and affects all entities
that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of
excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting
policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification
and the classification of those taxes paid on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods
beginning after December 15, 2016. This guidance can be applied either prospectively, retrospectively or using a modified retrospective
transition method, depending on the area covered in this update. Early adoption is permitted. The Company is currently evaluating
the impact of the new guidance on its consolidated financial statements.
In April 2016, the FASB
issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”
(“ASU 2016-10”). ASU 2016-10 clarifies two aspects of Topic 606: (a) identifying performance obligations; and (b) the
licensing implementation guidance. The update is effective for annual periods beginning after December 15, 2017 including interim
reporting periods therein. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In May 2016, the FASB issued
ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients”
(“ASU 2016-12”), which further amended ASU 2016-09 by providing additional clarity in recognizing revenue from contracts
that have been modified prior to the transition period to the new standard, as well as providing additional disclosure requirements
for businesses and other organizations that make the transition to the new standard by adjusting amounts from prior reporting periods
via retrospective application. The Company is continuing to evaluate the expected impact of this standard on its consolidated financial
statements.
In August 2016, the FASB
issued ASU No. 2016-15, “Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments” (“ASU
2016-15”), which eliminates the diversity in practice related to the classification of certain cash receipts and payments
in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues: debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination;
proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including
bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization
transactions; and separately identifiable cash flows and application of the predominance principle. ASU 206-15 is effective for
annual and interim periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-15 provides for retrospective
application for all periods presented. The Company is currently evaluating the impact of the new guidance on its consolidated financial
statements.
In October 2016, the
FASB issued ASU No. 2016-16, “Income Taxes (Topic 740)” (“ASU 2016-16”), which reduces the complexity in
the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other
than inventory, when the transfer occurs. This guidance is effective for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years, with early adoption permitted using a modified retrospective transition approach. The Company
is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.
In
November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”),
providing specific guidance on the cash flow classification and presentation of changes in restricted cash and restricted cash
equivalents. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and is to be applied retrospectively.
Upon the adoption of the new guidance, the Company will change the presentation of restricted cash in its consolidated statements
of cash flows to conform to the new requirements.
In January 2017, the FASB issued ASU 2017-01,
“Business Combinations (Topic 805) Clarifying the Definition of a Business” (“ASU 2017-01”). The amendments
in ASU 2017-01 is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business
affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for
annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating
the impact of adopting this guidance.
In January 2017, the FASB
issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU
2017-04”). ASU 2017-04 eliminates Step 2 along with amending other parts of the goodwill impairment test. Under ASU 2017-04,
an entity should perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with
its carrying amount, and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04
is effective for annual periods beginning after December 15, 2019, and interim periods therein with early adoption permitted for
interim or annual goodwill impairment tests performed after January 1, 2017. At adoption, this update will require a prospective
approach. The Company is currently evaluating the impact of adopting this guidance.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 3 – Acquisition
On October 26, 2015 (the
“Closing Date”), the Company acquired BST Distribution, Inc., a New York corporation (“BST”), which owns
We Sell Cellular, and is engaged primarily in the wholesale acquisition and resale of smartphones and related devices from carriers
and big box stores. In connection with the We Sell Cellular acquisition, the Company, BST and We Sell Cellular entered into a financing
transaction on October 26, 2015 with BAM Administrative Services, LLC, a Delaware limited liability company (“BAM”),
as agent, and an institutional investor (the “Purchaser”), pursuant to which the Company issued and sold the Purchaser
a note in the principal amount of $4,040,000.
The Company, BST, and Brian
Tepfer and Scott Tepfer (together, the “Tepfers”) entered into a Stock Purchase Agreement (the “SPA”) as
a result of which BST became a wholly-owned subsidiary of the Company. The SPA and the related transactions, other than the financing
transaction, were effective as of October 1, 2015. Prior to closing of the SPA, the Tepfers owned 100% of the outstanding stock
of BST, which owns 100% of the membership interests of We Sell Cellular. In exchange for acquiring 100% of the outstanding stock
of BST, the Company issued the Tepfers 9,358,837 shares of the Company’s common stock, subject to adjustment as described
below.
In accordance with the
SPA, if the Tepfers elected to sell shares of the Company’s common stock, the Company would use its best efforts to assist
the Tepfers in selling their shares of common stock acquired under the SPA for up to $6,000,000 in gross proceeds (together and
not each) through private placements or public offerings, with target sales of $1,500,000 quarterly, commencing with the quarter
ending December 31, 2015 (the “Placement Rights”). If the price per share received by the Tepfers was less than the
greater of $1.20 or the product of an EBITDA-based formula, the Company would have been required to issue the Tepfers additional
shares of common stock. The Tepfers did not elect to sell shares of common stock during the quarter ending December 31, 2015 and
the year ended December 31, 2016.
The fair value of the Placement
Rights was determined assuming the Tepfers sold their shares of common stock evenly over four quarters, as permitted under the
SPA. Accordingly, the Placement Rights were valued as if they expired on the dates the shares of common stock were sold (see Note
10). In accordance with ASC 480-10, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities
and Equity,” the Placement Rights were treated as a derivative liability in the accompanying consolidated balance sheet because
the Company was unable to determine if it would have sufficient authorized and unissued shares to deliver to the Tepfers.
On July 27, 2016, the Company
entered into an agreement with the Tepfers pursuant to which, effective July 1, 2016, the Tepfers agreed to waive the Placement
Rights granted to them under the SPA. Accordingly, the derivative liability pertaining to the Placement Rights was eliminated with
a corresponding credit to additional paid in capital (see Note 10).
In addition, pursuant to
the SPA, the Company granted the Tepfers certain piggyback registration rights and a right of first refusal to participate in future
Company financings. The Company also created a pool of 300,000 restricted stock units which can be granted to employees of We Sell
Cellular designated by the Tepfers.
The We Sell Cellular acquisition
was accounted for under the acquisition method of accounting. Accordingly, the acquired assets and assumed liabilities were recorded
at their estimated fair values, and operating results for We Sell Cellular are included in the consolidated financial statements
from the effective date of acquisition of October 26, 2015. Total revenues and income from operations since the date of the We
Sell Cellular acquisition, included in the consolidated statement of operations for the year ended December 31, 2015, were approximately
$17,646,000 and $55,000, respectively.
During the year ended December
31, 2016, the Company recorded an adjustment to the value of the inventory acquired that existed prior to the acquisition. As a
result of the adjustment, the Company recorded an increase in goodwill of $42,198 during the year ended December 31, 2016.
The following unaudited
consolidated pro forma information gives effect to the We Sell Cellular acquisition as if the transaction had occurred on January
1, 2015. The following pro forma information is presented for illustration purposes only and is not necessarily indicative of the
results that would have been attained had the acquisition been completed on January 1, 2015, nor are they indicative of results
that may occur in any future periods.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
|
|
|
Year Ended
December 31, 2015
|
|
|
Revenues
|
|
$
|
78,563,161
|
|
|
Loss from operations
|
|
$
|
(2,516,609
|
)
|
|
Net loss
|
|
$
|
(3,867,598
|
)
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
19,277,511
|
|
Note 4 - Property and Equipment
Property and equipment
consists of the following at December 31, 2016 and 2015:
|
|
|
2016
|
|
|
2015
|
|
|
Machinery and Equipment
|
|
$
|
89,690
|
|
|
$
|
73,256
|
|
|
Leasehold Improvements
|
|
|
139,254
|
|
|
|
120,333
|
|
|
Computer Software
|
|
|
21,564
|
|
|
|
21,564
|
|
|
Furniture and Fixtures
|
|
|
5,645
|
|
|
|
5,645
|
|
|
|
|
|
256,153
|
|
|
|
220,798
|
|
|
Less: Accumulated Depreciation
|
|
|
(64,196
|
)
|
|
|
(27,555
|
)
|
|
Property and Equipment, Net
|
|
$
|
191,957
|
|
|
$
|
193,243
|
|
Depreciation expense on
property and equipment amounted to $45,000 and $15,000 for the years ended December 31, 2016 and 2015, respectively.
Note 5 – Intangible Assets, Net
Intangible assets, net is as follows:
|
December 31, 2016
|
|
Useful Lives
(Years)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Trade Name
|
|
7
|
|
$
|
2,622,000
|
|
|
$
|
(436,996
|
)
|
|
$
|
2,185,004
|
|
|
Customer Relationships
|
|
5
|
|
|
2,008,000
|
|
|
|
(468,538
|
)
|
|
|
1,539,462
|
|
|
eBay Reputation Relationship
|
|
1
|
|
|
369,000
|
|
|
|
(369,000
|
)
|
|
|
-
|
|
|
Non-Compete Agreement
|
|
1
|
|
|
283,000
|
|
|
|
(283,000
|
)
|
|
|
-
|
|
|
Intangible assets, net
|
|
|
|
$
|
5,282,000
|
|
|
$
|
(1,557,534
|
)
|
|
$
|
3,724,466
|
|
|
December 31, 2015
|
|
Useful Lives
(Years)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Trade Name
|
|
7
|
|
$
|
2,622,000
|
|
|
$
|
(62,428
|
)
|
|
$
|
2,559,572
|
|
|
Customer Relationships
|
|
5
|
|
|
2,008,000
|
|
|
|
(66,934
|
)
|
|
|
1,941,066
|
|
|
eBay Reputation Relationship
|
|
1
|
|
|
369,000
|
|
|
|
(61,500
|
)
|
|
|
307,500
|
|
|
Non-Compete Agreement
|
|
1
|
|
|
283,000
|
|
|
|
(47,166
|
)
|
|
|
235,834
|
|
|
Intangible assets, net
|
|
|
|
$
|
5,282,000
|
|
|
$
|
(238,028
|
)
|
|
$
|
5,043,972
|
|
Intangible assets are amortized on a straight-line
basis over their estimated useful lives. Amortization expense amounted to $1,319,000 and $238,000 for the years ended December
31, 2016 and 2015, respectively.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Future annual estimated amortization expense
is summarized as follows:
|
Years ending December 31,
|
|
|
|
|
2017
|
|
$
|
776,171
|
|
|
2018
|
|
|
776,171
|
|
|
2019
|
|
|
776,171
|
|
|
2020
|
|
|
709,233
|
|
|
2021
|
|
|
374,571
|
|
|
Thereafter
|
|
|
312,149
|
|
|
|
|
$
|
3,724,466
|
|
Note 6 – Capitalized Technology, Net
Capitalized technology consists of the following
at December 31, 2016 and 2015:
|
|
|
2016
|
|
|
2015
|
|
|
Gross value
|
|
$
|
3,171,414
|
|
|
$
|
2,575,886
|
|
|
Accumulated amortization
|
|
|
(2,237,221
|
)
|
|
|
(1,689,343
|
)
|
|
Net value
|
|
$
|
934,193
|
|
|
$
|
886,543
|
|
Capitalized technology
is amortized on a straight-line basis over their estimated useful lives of three years. Amortization expense amounted to $548,000
and $567,000 for the years ended December 31, 2016 and 2015, respectively, and is included in cost of revenue.
Future annual estimated amortization expense
is summarized as follows:
|
Years ending December 31,
|
|
|
|
|
2017
|
|
$
|
519,680
|
|
|
2018
|
|
|
302,618
|
|
|
2019
|
|
|
111,895
|
|
|
|
|
$
|
934,193
|
|
Note 7 - Promissory Notes
At December 31, 2016, the
Company’s Notes (as defined below) is comprised of the following:
|
Total Notes
|
|
$
|
8,080,000
|
|
|
Less: Unamortized discount and debt issue costs
|
|
|
(965,668
|
)
|
|
Total Notes, net of unamortized discount and debt issue costs
|
|
|
7,114,332
|
|
|
Less: Current portion of Notes
|
|
|
673,332
|
|
|
Long-term Notes
|
|
$
|
6,441,000
|
|
On October 23, 2015 (the
“Note Closing Date”), in connection with the closing of the SPA and related transactions, the Company, BST, We Sell
Cellular, BAM, as agent, and the Purchaser, an institutional investor, entered into a Note Purchase Agreement (the “BAM NPA”)
pursuant to which the Company issued and sold the Purchaser a 1% original issue discount Secured Term Note in the aggregate principal
amount of $4,040,000 (the “Initial Note”) in exchange for gross proceeds of $4,000,000.
Within six months of the
Note Closing Date, the Company was permitted to receive up to two additional draws of funds in connection with the issuance of
additional 1% original issue discount Secured Term Note (the “Deferred Draw Notes,” and with the “Initial Note,”
the “Notes”). The BAM NPA provided that the Company could elect to receive a total of another $4,000,000 under the
Deferred Draw Notes in compliance with the covenants under the BAM NPA. The proceeds of the Notes could be used for working capital
and other general corporate purposes.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
The Notes was to mature
three years from the Note Closing Date and accrued interest at 13.25% annually, which was payable monthly in arrears, beginning
November 1, 2015. Repayment of principal originally commenced seven months from the Note Closing Date in monthly installments
of 1/48
th
of the aggregate principal amount of the Notes (see below). The Notes were prepayable at 103%, beginning
one year from the Note Closing Date, in increments of $500,000.
In connection with the
issuance of the Initial Note, the Company issued the Purchaser 740,000 shares of its common stock. On December 1, 2015, the Company
elected to borrow an additional $2,000,000 and issued the Purchaser a Deferred Draw Note in the principal amount of $2,020,000
and issued the Purchaser an additional 120,000 shares of common stock.
The Company maintained
a dedicated bank account with a third party custodian pursuant to which all accounts receivable and Collateral proceeds (as defined
in the BAM NPA) were deposited to this account. The Company could only access funds in this account in accordance with the terms
of the BAM NPA. This account was controlled by BAM and is presented as restricted cash in the accompanying consolidated balance
sheets.
On March 30, 2016, the
Company received $2,000,000 in connection with the issuance of a Secured Term Note in the original principal amount of $2,020,000
(the “Second Deferred Draw Note”) under the terms of the Company’s original BAM NPA. In connection with the closing
of the Second Deferred Draw Note, the Purchaser was issued an additional 350,000 shares of restricted common stock, consisting
of the 120,000 shares required by the original BAM NPA for the issuance of the Second Deferred Draw Note, and an additional 230,000
shares as consideration for the covenant modifications referenced below. The Company paid an additional $31,000 of costs in connection
with the closing of the Second Deferred Draw Note.
On March 31, 2016, the
Company amended the terms of its BAM NPA with BAM, and the Purchaser, pursuant to which the Company received the following modifications
of covenants applicable to the credit facility:
|
|
·
|
The EBITDA covenants would not apply until September 2017;
|
|
|
·
|
The amortization period of the principal would not commence until September 1, 2017;
|
|
|
·
|
The interest rate was increased by one-quarter of one percent (25 basis points) from 13.0% to 13.25%;
|
|
|
·
|
The Company would get 75% credit for new purchase orders towards the borrowing base of the facility instead of the previous
50%; and
|
|
|
·
|
The Company would get a 90% credit for inventory in transit towards the borrowing base instead of the previous 75%.
|
The Company analyzed the
modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows of the modified debt
was less than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments
were not substantially different. Accordingly, the Company did not treat the original BAM NPA as having been extinguished and exchanged
for a new BAM NPA.
The Company determined
the value of the 1,210,000 shares of common stock issued to the Purchaser to be $1,128,300, based upon the quoted closing trading
price of the Company’s common stock on the date of grant. The issuance of the 1,210,000 shares of common stock has been treated
as a debt issue cost and, accordingly, has been recorded as a direct deduction from the carrying amount of Notes and was being
amortized to interest expense over the contractual term of the Notes. During the years ended December 31, 2016 and 2015, accretion
of the costs amounted to $360,000 and 36,000, respectively.
The Company recorded a
discount on the Notes of $80,000 which was being accreted to non-cash interest expense over the contractual term of the Notes.
During the years ended December 31, 2016 and 2015, accretion of the discount amounted to $26,000 and $3,000, respectively. Contractual
interest expense on the Notes amounted to $1,019,000 and $172,000 for the years ended December 31, 2016 and 2015, respectively.
The Company incurred fees
associated with the closing of the Notes of $288,000. These amounts were treated as a debt issue cost and, accordingly, have been
recorded as a direct deduction from the carrying amount of Notes and were being amortized to interest expense over the contractual
term of the Notes. During the years ended December 31, 2016 and 2015, accretion of the fees amounted to $93,000 and $13,000, respectively.
On January 13, 2017, the
Company entered into a Note Purchase Agreement (the “NPA”) with an institutional investor (the “Investor,”
the “Lender” or the “Manager”) pursuant to which the Company issued the Lender a secured term note in the
principal amount of $8,660,000 at an original issue discount of 1%, for gross proceeds of $8,572,400 (the “2017 Note”).
The Company applied the proceeds received upon the issuance of the 2017 Note to repay all amounts outstanding under the BAM NPA.
At the time of repayment, amounts of principal outstanding under the BAM NPA were $8,080,000, with accrued interest and fees bringing
the total payoff amount to $8,140,296 (see Note 16).
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 8 – Capital Lease Obligations
We are obligated under
a capital lease under which the aggregate present value of the minimum lease payments amounted to $55,000. The present value of
the minimum lease payments was calculated using a discount rate of 8.64%. The future minimum lease payments under the capital lease
at December 31, 2016 is as follows:
|
Years ending December 31,
|
|
|
|
|
2017
|
|
$
|
15,316
|
|
|
2018
|
|
|
15,316
|
|
|
2019
|
|
|
15,316
|
|
|
2020
|
|
|
15,316
|
|
|
2021
|
|
|
10,211
|
|
|
|
|
|
71,475
|
|
|
Less: Amounts representing interest
|
|
|
12,825
|
|
|
Principal portion
|
|
|
58,650
|
|
|
Less: Current portion
|
|
|
10,664
|
|
|
Capital lease obligations, net of current portion
|
|
$
|
47,986
|
|
The capital lease obligations are collateralized
by underlying property and equipment. As of December 31, 2016, the gross amount of property and equipment under non-cancelable
capital leases was $62,000 and the amount of accumulated amortization was $3,100.
Note 9 - Commitments and Contingencies
Management Incentive Compensation Plan
On July 27, 2016, the Company
adopted its Management Incentive Compensation Plan (the “Incentive Plan”). The Incentive Plan provides that each quarter
that the Company meets certain gross EBITDA thresholds, participants will be eligible to receive quarterly bonuses. The Incentive
Plan is effective through September 2018. The Incentive Plan provides for minimum bonus eligibility thresholds set at quarterly
gross EBITDA levels that ensure that the Company will remain cash-flow positive and in compliance with all debt covenants over
the term after payment of bonuses. If the Company does not meet the minimum EBITDA threshold in a given quarter, no bonus is payable
under the Incentive Plan for that quarter. Bonuses will be subject to adjustment in the event the Company’s year-end audit
results in restatement of a prior quarter’s EBITDA. As of December 31, 2016, a total of $104,183 was earned under the Incentive
Plan, of which $52,092 has been paid and $52,091 is included in accrued expenses.
Private Sale of Common Stock
On December 22, 2016, Brian
Tepfer and Scott Tepfer each sold 500,000 shares of the Company’s common stock at $1.00 per share to an investment fund (the
“Purchaser”) and each issued to the Purchaser a five-year option to purchase an additional 500,000 shares of the Company’s
common stock at $1.00 per share. The securities were sold in a private transaction which was initiated by an investment fund that
has investment power on behalf of the Purchaser. As an inducement to the Purchaser, the Company granted demand and piggy back registration
rights to the Purchaser and another shareholder of the Company over which the investment fund exercises investment power. If the
registration rights are exercised, the two investment funds will pay the legal and other expenses of the Company.
Legal Proceedings
From time to time, the
Company is 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, the Company is not aware of any proceeding, threatened or pending, against the Company which, if determined
adversely, would have a material effect on its business, results of operations, cash flows or financial position.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Operating
Leases
The Company leases space
for operations, sales, customer support and corporate purposes under a lease agreement that expires in August 2018. The Company
also leases space for its warehouse and office under a lease that expires in September 2021. The leases contain provisions requiring
the Company to pay maintenance, property taxes and insurance and require scheduled rent increases. Rent expense is recognized on
a straight-line basis over the terms of the leases.
Rent expense, amounting
to $235,000 and $100,000 for the years ended December 31, 2016 and 2015, respectively, is included in general and administrative
expense in the consolidated statements of operations.
Future annual minimum payments
due under the leases are summarized as follows:
|
Year ended December 31,
|
|
|
|
|
2017
|
|
$
|
323,000
|
|
|
2018
|
|
|
304,000
|
|
|
2019
|
|
|
225,000
|
|
|
2020
|
|
|
232,000
|
|
|
2021
|
|
|
177,000
|
|
|
|
|
$
|
1,261,000
|
|
Note 10 – Stockholders’ Equity
Convertible Series A Preferred Stock
In October 2015, in connection
with the We Sell Cellular acquisition, holders of 100,000 shares of the Company’s Convertible Series A Preferred Stock agreed
to convert their preferred stock into 100,000 shares of common stock. As a result, there are no shares of Convertible Series A
Preferred Stock outstanding as of December 31, 2016 and 2015.
Convertible Series B Preferred Stock
In October 2015, in connection
with the We Sell Cellular acquisition, holders of 951,250 shares of the Company’s Convertible Series B Preferred agreed to
convert their preferred stock converted into 60,411 shares of common stock. As a result, there are no shares of Convertible Series
B Preferred Stock outstanding as of December 31, 2016 and 2015.
Convertible Series C Preferred Stock
In October 2015, in connection with the We Sell
Cellular acquisition, holders of 146,667 shares of the Company’s Convertible Series C Preferred Stock agreed to convert their
preferred stock into 146,667 shares of common stock. As a result, there are no shares of Convertible Series C Preferred Stock outstanding
as of December 31, 2016 and 2015.
Series E Preferred Stock
In October 2015, in connection
with the We Sell Cellular acquisition, holders of 103,232 shares of the Company’s Convertible Series E Preferred Stock agreed
to convert their preferred stock into 103,232 shares of common stock. As a result, there are no shares of Convertible Series E
Preferred Stock outstanding as of December 31, 2016 and 2015.
Common Stock
On March 16, 2015, the
Company filed a Certificate of Correction pursuant to which the number of authorized shares of the Company’s common stock
was decreased from 650,000,000 shares to 43,333,333 shares to properly reflect the Company’s 1-for-15 reverse stock split
on January 21, 2014. The par value remained the same. All share and per share amounts have been retroactively restated to reflect
the reverse stock split.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 12 - Stock-Based Compensation
Stock Option Grants
On January 6, 2016 and
April 14, 2016, the Company amended its 2008 Equity Incentive Plan (the “Plan”) to increase the number of authorized
shares of common stock under the Plan by 290,000 shares and 200,000 shares, respectively. The Company is now authorized to issue
1,582,023 shares under the Plan. The Plan is administered by the board of directors. Under the Plan, the board of directors is
authorized to grant awards to employees, consultants and any other persons to whom the Plan is applicable and to determine the
number and types of such awards and the terms, conditions, vesting and other limitations applicable to each such award. The Plan
provides for the issuance of both incentive stock options (“ISO’s”) and non-qualified stock options (“NQO’s”).
ISO’s can only be granted to employees and NQO’s can be granted to directors, officers, employees, consultants, independent
contractors and advisors. As of December 31, 2016, there were 365,188 shares of common stock available for issuance under the Plan.
The fair value of options
is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined by the Black-Scholes pricing
model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual
and projected employee stock option exercise behaviors. The risk free rate is based on the U.S. Treasury rate for the expected
life at the time of grant, volatility is based on the average of the Company’s long-term implied volatility, the expected
life is based on the estimated average of the life of options using the simplified method, and forfeitures are estimated on the
date of grant based on certain historical data. The Company utilizes the simplified method to determine the expected life of its
options due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The
expected dividend assumption is based on the Company’s history and expectation of dividend payouts.
Forfeitures are required to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
During the year ended
December 31, 2015, the Company granted 121,000 stock options to employees for future services. These options had a fair value of
$79,000, using the Black-Scholes option pricing model with the following assumptions:
|
Risk-free interest rate
|
|
|
1.12% – 1.47
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
61.89% - 99.21
|
%
|
|
Expected term
|
|
|
3.75 years
|
|
The options are exercisable
over a five-year term and vest over four years. The Company recorded $16,000 and $26,000 during the years ended December 31, 2016
and 2015, respectively, as compensation expense pertaining to these grants.
In connection with the We Sell Cellular acquisition,
on October 26, 2015, the Company determined to accelerate the vesting of stock options previously granted to employees and, therefore,
recognized the remaining value of the stock options in the amount of $330,000.
During the year ended December
31, 2016, the Company granted 10,000 stock options to an employee for future services. These options had a fair value of $8,800,
using the Black-Scholes option pricing model with the following assumptions:
|
Risk-free interest rate
|
|
|
0.94
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
166.35
|
%
|
|
Expected term
|
|
|
3.5 years
|
|
The options are exercisable
over a five-year term and vest over three years. The Company recorded $2,000 during the year end December 31, 2016, as compensation
expense pertaining to these grants.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
The following table summarizes
the Company’s stock option activity for the year ended December 31, 2016:
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding - December 31, 2015
|
|
|
575,685
|
|
|
$
|
2.75
|
|
|
|
3.0
|
|
|
$
|
1,509
|
|
|
Granted
|
|
|
10,000
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Canceled
|
|
|
(150,687
|
)
|
|
|
3.10
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2016
|
|
|
434,998
|
|
|
$
|
2.59
|
|
|
|
1.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – December 31, 2016
|
|
|
389,997
|
|
|
$
|
2.74
|
|
|
|
1.4
|
|
|
$
|
-
|
|
The Company recorded non-cash
compensation expense of $18,000 and $543,000 for the year ended December 31, 2016 and 2015, respectively, pertaining to stock option
grants.
The weighted-average grant
date fair value of options granted during the years ended December 31, 2016 and 2015 was $0.88 and $0.65, respectively. Total unrecognized
compensation expense related to unvested stock options at December 31, 2016 amounts to $37,000 and is expected to be recognized
over a weighted average period of 2.0 years.
The following table summarizes
the Company’s stock option activity for non-vested options for the year ended December 31, 2016:
|
|
|
Number of
Options
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Balance at December 31, 2015
|
|
|
55,000
|
|
|
$
|
0.86
|
|
|
Granted
|
|
|
10,000
|
|
|
|
0.88
|
|
|
Vested
|
|
|
(19,999
|
)
|
|
|
(0.86
|
)
|
|
Forfeited or Canceled
|
|
|
-
|
|
|
|
-
|
|
|
Balance at December 31, 2016
|
|
|
45,001
|
|
|
$
|
0.86
|
|
Warrants
As of December 31, 2016
and 2015, there were 801,250 warrants and 802,520 warrants outstanding and exercisable, respectively, with a weighted average exercise
price of $3.19 and $3.21 per share, respectively. The weighted average remaining contractual life of the warrants outstanding and
exercisable at December 31, 2016 and 2015 was 2.8 and 3.6 years, respectively, and the aggregate intrinsic value was $0.
The Company did not grant
any warrants to purchase shares of common stock during the years ended December 31, 2016 and 2015.
There was no expense pertaining
to warrants recorded during the year ended December 31, 2016 and 2015.
Restricted Stock Awards
On April 1, 2015, the
Company granted 5,200 RSUs to its Chief Financial Officer. The RSUs vested monthly over a three-month period through June 30, 2015,
subject to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value of the
common stock on the date of grant was $1.03 per share, based upon the closing market price on the grant date. In connection with
the We Sell Cellular acquisition, the Company agreed to accelerate the delivery of the RSUs and the Company issued 5,200 shares
of common stock. The aggregate grant date fair value of the award amounted to $5,000, which was recorded as compensation expense
during the year ended December 31, 2015.
On July 1, 2015, the Company
granted 5,384 RSUs to its Chief Financial Officer. The RSUs vested monthly over a three-month period through September 30, 2015,
subject to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value of the
common stock on the date of grant was $1.25 per share, based upon the closing market price on the grant date. In connection with
the We Sell Cellular acquisition, the Company agreed to accelerate the delivery of the RSUs and the Company issued 5,384 shares
of common stock.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
The aggregate grant date
fair value of the award amounted to $7,000, which was recorded as compensation expense during the year ended December 31, 2015.
On October 1, 2015, the
Company granted 8,235 RSUs to its Chief Financial Officer. The RSUs vested monthly over a three-month period through December 31,
2015, subject to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value
of the common stock on the date of grant was $0.76 per share, based upon the closing market price on the grant date. In connection
with the We Sell Cellular acquisition, the Company agreed to accelerate the delivery of the RSUs and the Company issued 8,235 shares
of common stock. The aggregate grant date fair value of the award amounted to $6,000, which was recorded as compensation expense
during the year ended December 31, 2015.
As a result of the We
Sell Cellular acquisition, on October 26, 2015, the Company granted 150,000 shares of fully vested restricted common stock to each
of its Executive Chairman and Chief Executive Officer for services previously provided. The fair value of the common stock on the
date of grant was $0.77 per share, based upon the quoted closing trading price of the Company’s common stock on the grant
date. The aggregate grant date fair value of the award amounted to $231,000, which was recorded as compensation expense during
the year ended December 31, 2015.
As a result of the We Sell
Cellular acquisition, on October 26, 2015, the Company granted 350,000 RSUs to its Chief Executive Officer. The RSUs vest annually
over three years, subject to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The
fair value of the common stock on the date of grant was $0.77 per share, based upon the quoted closing trading price of the Company’s
common stock on the grant date. The aggregate grant date fair value of the award amounts to $269,500, which is being recognized
as compensation expense over the vesting period. The Company recorded $90,000 and $15,000 of compensation expense during the years
ended December 31, 2016 and 2015, respectively, with respect to this award.
On December 10, 2015, the
Company granted 125,000 RSUs to certain of employees. The RSUs vest quarterly over a three years, subject to continued service
on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value of the common stock on the date of
grant was $1.28 per share, based upon the quoted closing trading price of the Company’s common stock on the grant date. The
aggregate grant date fair value of the award amounts to $160,000, which is being recognized as compensation expense over the vesting
period. The Company recorded $53,000 and $4,000 of compensation expense during the years ended December 31, 2016 and 2015, respectively,
with respect to this award.
On December 10, 2015, the
Company granted 475,000 shares of restricted common stock to certain employees, of which 135,000 shares were fully vested on the
date of grant. The remaining 340,000 shares of common stock vest quarterly over three years, subject to continued service on each
applicable vesting date. The fair value of the common stock on the date of grant was $1.28 per share, based upon the quoted closing
trading price of the Company’s common stock on the grant date. The aggregate grant date fair value of the award amounts to
$608,000, which is being recognized as compensation expense over the vesting period. The Company recorded $145,000 and $185,000
of compensation expense during the years ended December 31, 2016 and 2015, respectively, with respect to this award.
On January 1, 2016, the
Company granted 5,208 restricted stock units (“RSUs”) to its Chief Financial Officer. The RSUs vested monthly over
a three-month period through March 31, 2016, subject to continued service on each applicable vesting date. The RSUs have no voting
or dividend rights. The fair value of the common stock on the date of grant was $1.23 per share, based upon the closing market
price on the grant date. The aggregate grant date fair value of the award amounted to $6,000, which was recorded as compensation
expense during the year ended December 31, 2016.
On January 6, 2016, the
Company granted 250,000 RSUs to the directors of the Company’s Board of Directors. The RSUs vest in two equal annual increments,
subject to continued service on each vesting date, with the first vesting date being one year from the grant date, and full vesting
upon a change in control. The RSUs will be delivered three years from the date of grant. The RSUs have no voting or dividend rights.
The fair value of the common stock on the date of grant was $1.23 per share, based upon the closing market price on the grant date.
The aggregate grant date fair value of the awards amounted to $308,000. The Company recorded $154,000 of compensation expense during
the year ended December 31, 2016 related to this award.
On April 1, 2016, the Company
granted 6,433 RSUs to its Chief Financial Officer. The RSUs vested monthly over a three-month period through June 30, 2016, subject
to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value of the common
stock on the date of grant was $1.15 per share, based upon the closing market price on the grant date. The aggregate grant date
fair value of the award amounted to $7,000, which was recorded as compensation expense during the year ended December 31, 2016.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
On April 18, 2016, the
Company granted 7,000 fully vested shares of common stock to an advisor for services provided. The fair value of the common stock
on the date of grant was $0.80 per share, based upon the closing market price on the grant date. The aggregate grant date fair
value of the award amounted to $5,600, which was recorded as compensation expense during the year ended December 31, 2016.
During the quarter ended
June 30, 2016, the Company granted an aggregate of 6,000 fully vested shares of common stock to its Chief Financial Officer. The
fair value of the common stock on the dates of grant ranged from $0.90 to $1.00 per share, based upon the closing market price
on the respective grant dates. The aggregate grant date fair value of the awards amounted to $6,000, which was recorded as compensation
expense during the year ended December 31, 2016.
During the year ended December
31, 2016, the Company granted 18,000 fully vested shares of common stock to an advisor for services provided. The fair value of
the common stock on the dates of grant ranged from $0.51 to $1.00 per share. The aggregate grant date fair value of the award amounted
to $16,000, which was recorded as compensation expense during the year ended December 31, 2016.
On July 1, 2016, the Company
granted 6,379 RSUs to its Chief Financial Officer. The RSUs vested monthly over a three-month period through September 30, 2016,
subject to continued service on each applicable vesting date. The RSUs have no voting or dividend rights. The fair value of the
common stock on the date of grant was $0.90 per share, based upon the closing market price on the grant date. The aggregate grant
date fair value of the award amounted to $6,000, which was recorded as compensation expense during the year ended December 31,
2016.
A summary of the restricted
stock award activity for the year ended December 31, 2016 is as follows:
|
|
|
Number of
Shares
|
|
|
Unvested Outstanding at December 31, 2015
|
|
|
831,662
|
|
|
Granted
|
|
|
301,020
|
|
|
Forfeited
|
|
|
-
|
|
|
Vested
|
|
|
(339,349
|
)
|
|
Unvested Outstanding at December 31, 2016
|
|
|
793,333
|
|
The Company recorded non-cash
compensation expense of $507,000 and $2,411,000 for the years December 31, 2016 and 2015, respectively.
Total unrecognized compensation
expense related to unvested stock awards and unvested restricted stock units at December 31, 2016 amounts to $699,000 and is expected
to be recognized over a weighted average period of 1.6 years.
Note 13 - Income Taxes
The Company recognizes
deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis
of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards.
The Company established a valuation allowance to reflect the likelihood of realization of deferred tax assets.
The valuation allowance
at December 31, 2016 was approximately $8,730,000. The net change in the valuation allowance during the year ended December 31,
2016 was an increase of approximately $404,000. In assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization
of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined
that enough uncertainty exists relative to the realization of the deferred tax asset to warrant the application of a full valuation
allowance as of December 31, 2016 and 2015.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
The Company has
a net operating loss carryforward totaling approximately $15,688,000 at December 31, 2016, expiring through 2036. Pursuant to
Code Sec. 382 of the Internal Revenue Code, the utilization of net operating loss carryforwards may be limited as a result of
a cumulative change in stock ownership of more than 50% over a three year period. The Company underwent such a change and consequently,
the utilization of a portion of the net operating loss carryforwards is subject to certain limitations. Temporary differences
are approximately as follows:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Accrued expenses
|
|
$
|
238,000
|
|
|
$
|
259,000
|
|
|
Inventory reserve
|
|
|
42,000
|
|
|
|
-
|
|
|
Allowance for doubtful accounts
|
|
|
1,000
|
|
|
|
6,000
|
|
|
Intangible Assets
|
|
|
(1,092,000
|
)
|
|
|
(2,187,000
|
)
|
|
Fixed Assets
|
|
|
(415,000
|
)
|
|
|
(238,000
|
)
|
|
Charitable Contributions
|
|
|
2,000
|
|
|
|
2,000
|
|
|
Stock Options
|
|
|
2,811,000
|
|
|
|
3,466,000
|
|
|
Net operating loss carryover
|
|
|
7,143,000
|
|
|
|
7,018,000
|
|
|
Deferred tax assets
|
|
|
8,730,000
|
|
|
|
8,326,000
|
|
|
Less: valuation allowance
|
|
|
(8,730,000
|
)
|
|
|
(8,326,000
|
)
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The actual tax benefit differs from the expected
tax benefit for the years ended December 31, 2016 and 2015 (computed by applying the U.S. Federal Corporate income tax rate of
34%) as follows:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Expected tax benefit
|
|
$
|
1,262,000
|
|
|
$
|
1,709,000
|
|
|
State income taxes, net of federal benefit
|
|
|
66,000
|
|
|
|
353,000
|
|
|
Net operating loss adjustment due to Section 382 limitation
|
|
|
-
|
|
|
|
(5,346,000
|
)
|
|
Permanent items
|
|
|
(416,000
|
)
|
|
|
(650,000
|
)
|
|
Change in tax rate
|
|
|
(200,000
|
)
|
|
|
537,000
|
|
|
True-up
|
|
|
(308,000
|
)
|
|
|
887,000
|
|
|
Change in valuation allowance
|
|
|
(404,000
|
)
|
|
|
4,903,000
|
|
|
Actual tax benefit
|
|
$
|
-
|
|
|
$
|
2,393,000
|
|
Note 14 – Customer and Vendor Concentrations
Customer Concentration
During the year ended December
31, 2016 and 2015, there were no customers that represented at least 10% of revenues. During the year ended December 31, 2016 and
2015, 64% and 58% of the Company’s revenues, respectively, were originated in the United States, 22% and 24% of the Company’s
revenues, respectively, were originated in Europe and 12% and 18% of the Company’s revenues were originated in Hong Kong.
At December 31, 2016, two
customers represented at least 10% of accounts receivable, accounting for 22% and 15% of the Company’s accounts receivable.
At December 31, 2015, there were no customers that represented at least 10% of accounts receivable.
Vendor Concentration
During the year ended December
31, 2016 and 2015, one vendor represented at least 10% of purchases, accounting for 72% and 94% of the Company’s purchases,
respectively.
At December 31, 2016, one
vendor represented at least 10% of accounts payable, accounting for 52% of accounts payable. At December 31, 2015, one vendor represented
at least 10% of accounts payable, accounting for 40%, of the Company’s accounts payable.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note
15 - Fair Value Measurements
The fair value of the Company’s
financial assets and liabilities reflects management’s estimate of amounts that the Company 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 the Company’s assets and liabilities,
the Company seeks 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 the Company’s assessment
of the assumptions that market participants would use in pricing the asset or liability.
|
The following table presents
information about the Company’s liabilities that are measured at fair value on a recurring basis at December 31, 2016 and
2015, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
|
|
|
|
|
|
December 31,
|
|
|
Description
|
|
Level
|
|
|
2016
|
|
|
2015
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Placement Right Derivative Liability
|
|
|
3
|
|
|
$
|
-
|
|
|
$
|
1,130,000
|
|
Level 3 liabilities are
valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the
derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s
Chief Financial Officer, who reports to the Chief Executive Officer, determines its valuation policies and procedures. The development
and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility
of the Company’s Chief Financial Officer and is approved by the Chief Executive Officer.
The Company has 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 the Company 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. The Company has based these fair value estimates
on pertinent information available as of the respective balance sheet dates and has determined that, as of such dates, the carrying
value of all financial instruments approximates fair value.
Level 3 Valuation Techniques:
Level 3 financial liabilities
consist of placement right liabilities for which there is no current market for these securities such that the determination of
fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair
value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
The Company uses the Black-Scholes
option pricing model to value Level 3 financial liabilities at inception and on subsequent valuation dates. This model incorporates
transaction details such as the Company’s stock price, contractual terms, maturity, and risk free rates, as well as volatility.
A significant increase
in the volatility or a significant increase in the Company’s stock price, in isolation, would result in a significantly higher
fair value measurement. Changes in the values of the derivative liabilities are recorded in “change in fair value of placement
right derivative liability” in the Company’s condensed consolidated statements of operations.
As of December 31, 2016
and 2015, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
The placement right liability
was valued using the Black-Scholes option pricing model and the following assumptions on the following dates:
|
|
|
July 1,
2016
|
|
|
December 31,
2015
|
|
|
Exercise price
|
|
$
|
1.20
|
|
|
$
|
1.20
|
|
|
Stock price
|
|
$
|
0.90
|
|
|
$
|
1.11
|
|
|
Expected life
|
|
|
0 years
|
|
|
|
0.18-0.93 years
|
|
|
Risk-free interest rate
|
|
|
0.26
|
%
|
|
|
0.02%-0.25
|
%
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Volatility
|
|
|
1
|
%
|
|
|
59
|
%
|
The following table reflects
the change in fair value of the Company’s derivative liability for the year ended December 31, 2016:
|
Balance – January 1, 2015
|
|
$
|
1,130,000
|
|
|
Change in fair value of placement right liability
|
|
|
370,000
|
|
|
Elimination of placement right liability
|
|
|
(1,500,000
|
)
|
|
Balance – December 31, 2016
|
|
$
|
-
|
|
As discussed in Note 3,
on July 27, 2016, the Company entered into an agreement with the Tepfers pursuant to which, effective July 1, 2016, the Tepfers
agreed to waive the Placement Rights granted to them under the SPA. Accordingly, the Company recorded an expense of $370,000 during
the year ended December 31, 2016, representing the change in the fair value of the derivative liability pertaining to the Placement
Rights through July 1, 2016 and, as the derivative liability was eliminated on July 1, 2016, recorded $1,500,000 as additional
paid in capital.
Note 16 – Subsequent Events
The Company evaluates subsequent
events and transactions that occur after the balance sheet date up to the date that the financial statements were issued for potential
recognition or disclosure. Other than as described below, the Company did not identify any subsequent events that would have required
adjustment or disclosure in the financial statements.
Special Purpose Entity
On the January 13, 2017
(the “Closing Date”), the Company and the Manager formed a special purpose entity as a Delaware limited liability company
(the “SPE”), for the purpose of purchasing, refurbishing, repairing and reselling cell phones, smart phones, tablets
and related accessories. The Manager is the sole manager of the SPE. The Manager invested $5,200,000 in equity in exchange for
a membership interest. Of this sum, $5,000,000 will be used by the SPE for the purchase of approved inventory.
As further detailed in
the Services Agreement entered into between the Company and the SPE on the Closing Date, the Company will provide all administrative
and inventory management services necessary to the SPE’s daily operations. uSell and its personnel will not be compensated
for providing services to the SPE, and uSell will generally be responsible for the costs of providing services to the SPE. However,
the SPE will be responsible for costs directly related to acquiring and refurbishing the SPE’s inventory, shipping, certain
tax accounting fees approved by the Manager, and other costs. The Services Agreement allows uSell to purchase inventory for its
account and not for the SPE’s account until uSell has no available capital to purchase inventory. In exchange for its future
services, uSell received its membership interest in the SPE. Profits from the SPE will be distributed to the Manager and to uSell
based on certain return thresholds.
Note Purchase Agreement
and Secured Term Note
On the Closing Date, the
Company entered into an NPA with the Lender (in Lender’s capacity as a purchaser and as the agent (the “Agent”)
for all purchasers from time to time party to the NPA), pursuant to which the Company issued the Lender a secured term note in
the principal amount of $8,660,000 at an original issue discount of 1%, for gross proceeds of $8,572,400 (the “2017 Note”).
The 2017 Note matures three years from issuance and bears interest at an annual rate of 13.25%, which interest is due and payable
monthly in arrears. In addition, the Company paid the Lender a fee equal to 2% of the aggregate original principal amount of the
2017 Note and will pay the Lender a monthly maintenance fee based on an annual rate of 0.75% of the aggregate original principal
amount of the 2017 Note. The 2017 Note is prepayable after 18 months with a 3% prepayment penalty. The 2017 Note contains customary
financial covenants. In connection with the issuance of the 2017 Note, the Company granted the Lender a right of first refusal
to participate in future financings (with certain exceptions) for as long as the principal balance of the 2017 Note remains outstanding.
uSell.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
The Company applied the
proceeds received upon the issuance of the 2017 Note to repay all amounts outstanding under the BAM NPA.
Security Agreements,
Subsidiary Guaranty and Pledge Agreement
In connection with the
execution of the NPA and issuance of the 2017 Note, the Company entered into a Security Agreement for the benefit of the Lender
and Agent. Pursuant to the Security Agreement, the Company granted the Agent (for the benefit of the Lender) a lien on all of the
Company’s respective assets, including, but not limited to, equipment, inventory, accounts, and intellectual property. The
wholly-owned subsidiaries which are parties to the Security Agreement also jointly and severally guaranteed payment and performance
of all obligations under the 2017 Note and related debt transaction documents. The Company also entered into a Trademark Security
Agreement with the Lender incorporating the terms of the Security Agreement with respect to the Company’s trademark-related
collateral.
As additional collateral
to guarantee the 2017 Note and related obligations, the Company also entered into a Pledge Agreement for the benefit of the Agent
pursuant to which the Company pledged the equity interests of certain of its wholly-owned subsidiaries and the Company pledged
its equity interest in the SPE.
In connection with the
above, the Management Agreement effective as of October 1, 2015 by and among the Company, Nik Raman, Brian Tepfer, Scott Tepfer,
and Daniel Brauser, uSell’s Executive Chairman, was amended to clarify that nothing in the Management Agreement precludes
the Agent’s ability to exercise its remedies as a secured creditor party under the 2017 Note and related agreements.
Exhibit 10.3
usell.com,
Inc
2008
Equity Incentive Plan, as amended
1.
Scope of Plan; Definitions
.
(a) This
2008 Equity Incentive Plan (the “Plan”) is intended to advance the interests of Money4Gold Holdings, Inc. (the “Company”)
by enhancing the ability of the Company to attract and retain qualified employees, consultants, Officers, directors, by creating
incentives and rewards for their contributions to the success of the Company. This Plan will provide to (a) Officers and other
employees of the Company opportunities to purchase common stock (“Common Stock”) of the Company pursuant to Options
granted hereunder which qualify as incentive stock options (“ISOs”) under Section 422(b) of the Internal Revenue Code
of 1986 (the “Code”), (b) directors, Officers, employees and consultants of the Company opportunities to purchase Common
Stock in the Company pursuant to options granted hereunder which do not qualify as ISOs (“Non-Qualified Options”);
(c) directors, Officers, employees and consultants of the Company opportunities to receive shares of Common Stock of the Company
which normally are subject to restrictions on sale (“Restricted Stock”); (d) directors, Officers, employees and consultants
of the Company opportunities to receive grants of stock appreciation rights (“SARs”); and (e) directors, Officers,
employees and consultants of the Company opportunities to receive grants of restricted stock units (“RSUs”). ISOs,
Non-Discretionary Options and Non-Qualified Options are referred to hereafter as “Options.” Options, Restricted Stock,
RSUs and SARs are sometimes referred to hereafter collectively as “Stock Rights.” Any of the Options and/or Stock Rights
may in the Compensation Committee’s discretion be issued in tandem to one or more other Options and/or Stock Rights to the
extent permitted by law.
This Plan is intended to
comply in all respects with Rule 16b-3 (“Rule 16b-3”) and its successor rules as promulgated under Section 16(b) of
the Securities Exchange Act of 1934 (the “Exchange Act”) for participants who are subject to Section 16 of the Exchange
Act. To the extent any provision of the Plan or action by the Plan administrators fails to so comply, it shall be deemed null and
void to the extent permitted by law and deemed advisable by the Plan administrators.
Provided
,
however
, such exercise
of discretion by the Plan administrators shall not interfere with the contract rights of any grantee. In the event that any interpretation
or construction of the Plan is required, it shall be interpreted and construed in order to ensure, to the maximum extent permissible
by law, that such grantee does not violate the short-swing profit provisions of Section 16(b) of the Exchange Act and that any
exemption available under Rule 16b-3 or other rule is available.
(b) For
purposes of the Plan, capitalized words and terms shall have the following meaning:
“Board”
means the board of directors of the Company.
“Bulletin
Board” shall mean the Over-the-Counter Bulletin Board.
“Chairman”
means the chairman of the Board.
“Change of Control”
means the occurrence of any of the following events: (i) any “person” (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly
or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s
then outstanding voting securities; (ii) the consummation of the sale or disposition by the Company of all or substantially
all of the Company’s assets in a transaction which requires shareholder approval under applicable state law; or (iii) the
consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving entity or its parent) at least 50% of the total voting
power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after
such merger or consolidation.
“Code” shall
have the meaning given to it in Section 1(a).
“Common Stock”
shall have the meaning given to it in Section 1(a).
“Company” shall
have the meaning given to it in Section 1(a) and also includes a corporation which is a subsidiary corporation with respect to
the Company within the meaning of Section 425(f) of the Code.
“Compensation Committee”
means the stock option committee of the Board, if any, which shall consist of two or more members of the Board, each of whom shall
be both an “outside director” within the meaning of Section 162(m) of the Code and a “non-employee director”
within the meaning of Rule 16b-3. All references in this Plan to the Compensation Committee shall mean the Board when (i) there
is no Compensation Committee or (ii) the Board has retained the power to administer this Plan.
“Disability”
means “permanent and total disability” as defined in Section 22(e)(3) of the Code or successor statute.
“Disqualifying Disposition”
means any disposition (including any sale) of Common Stock underlying an ISO before the later of (i) two years after the date of
employee was granted the ISO or (ii) one year after the date the employee acquired Common Stock by exercising the ISO.
“Exchange Act”
shall have the meaning given to it in Section 1(a).
“Fair Market Value”
shall be determined as of the Trading Day on or the last Trading Day before the date a Stock Right is granted and shall mean:
(1) the
closing price on the principal market if the Common Stock is listed on a national securities exchange or the Bulletin Board.
(2) if
the Company’s shares are not listed on a national securities exchange or the Bulletin Board, then the closing price if reported
or the average bid and asked price for the Company’s shares as published by Pink Sheets LLC;
(3) if
there are no prices available under clauses (1) or (2), then Fair Market Value shall be based upon the average closing bid and
asked price as determined following a polling of all dealers making a market in the Company’s Common Stock; or
(4) if
there is no regularly established trading market for the Company’s Common Stock, the Fair Market Value shall be established
by the Board or the Compensation Committee taking into consideration all relevant factors including the most recent price at which
the Company’s Common Stock was sold.
“ISO” shall have
the meaning given to it in Section 1(a).
“Non-Discretionary
Options” shall have the meaning given to it in Section 1(a).
“Non-Qualified Options”
shall have the meaning given to it in Section 1(a).
“Officers” means
a person who is an executive officer of the Company and is required to file ownership reports under Section 16(a) of the Exchange
Act.
“Options” shall
have the meaning given to it in Section 1(a).
“Plan” shall
have the meaning given to it in Section 1(a).
“Restricted Stock”
shall have the meaning contained in Section 1(a).
“RSU” shall have
the meaning given to it in Section 1(a).
“Rule 16b-3”
shall have the meaning given to it in Section 1(a).
“SAR” shall have
the meaning given to it in Section 1(a).
“Securities Act”
means the Securities Act of 1933.
“Stock Rights”
shall have the meaning given to it in Section 1(a).
“Trading Day”
shall mean a day on which the New York Stock Exchange is open for business.
“Transaction”
has the meaning defined by Section 14(c).
2.
Administration of the Plan
.
(a) The
Plan may be administered by the entire Board or by the Compensation Committee. Once appointed, the Compensation Committee shall
continue to serve until otherwise directed by the Board. A majority of the members of the Compensation Committee shall constitute
a quorum, and all determinations of the Compensation Committee shall be made by the majority of its members present at a meeting.
Any determination of the Compensation Committee under the Plan may be made without notice or meeting of the Compensation Committee
by a writing signed by all of the Compensation Committee members. Subject to ratification of the grant of each Stock Right by the
Board (but only if so required by applicable state law), and subject to the terms of the Plan, the Compensation Committee shall
have the authority to (i) determine the employees of the Company (from among the class of employees eligible under Section 3 to
receive ISOs) to whom ISOs may be granted, and to determine (from among the class of individuals and entities eligible under Section
3 to receive Non-Qualified Options, Restricted Stock, RSUs and SARs) to whom Non-Qualified Options, Restricted Stock, RSUs and
SARs may be granted; (ii) determine when Stock Rights may be granted; (iii) determine the exercise prices of Stock Rights other
than Restricted Stock and RSUs, which shall not be less than the Fair Market Value; (iv) determine whether each Option granted
shall be an ISO or a Non-Qualified Option; (v) determine when Stock Rights shall become exercisable, the duration of the exercise
period and when each Stock Right shall vest; (vi) determine whether restrictions such as repurchase options are to be imposed on
shares subject to or issued in connection with Stock Rights, and the nature of such restrictions, if any, and (vii) interpret the
Plan and promulgate and rescind rules and regulations relating to it. The interpretation and construction by the Compensation Committee
of any provisions of the Plan or of any Stock Right granted under it shall be final, binding and conclusive unless otherwise determined
by the Board. The Compensation Committee may from time to time adopt such rules and regulations for carrying out the Plan as it
may deem best.
No members of the Compensation
Committee or the Board shall be liable for any action or determination made in good faith with respect to the Plan or any Stock
Right granted under it. No member of the Compensation Committee or the Board shall be liable for any act or omission of any other
member of the Compensation Committee or the Board or for any act or omission on his own part, including but not limited to the
exercise of any power and discretion given to him under the Plan, except those resulting from his own gross negligence or willful
misconduct.
(b) The
Compensation Committee may select one of its members as its chairman and shall hold meetings at such time and places as it may
determine. All references in this Plan to the Compensation Committee shall mean the Board if no Compensation Committee has been
appointed. From time to time the Board may increase the size of the Compensation Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused or remove
all members of the Compensation Committee and thereafter directly administer the Plan.
(c) Stock
Rights may be granted to members of the Board, whether such grants are in their capacity as directors, Officers or consultants.
All grants of Stock Rights to members of the Board shall in all other respects be made in accordance with the provisions of this
Plan applicable to other eligible persons. Members of the Board who are either (i) eligible for Stock Rights pursuant to the Plan
or (ii) have been granted Stock Rights may vote on any matters affecting the administration of the Plan or the grant of any Stock
Rights pursuant to the Plan.
(d) In
addition to such other rights of indemnification as he may have as a member of the Board, and with respect to administration of
the Plan and the granting of Stock Rights under it, each member of the Board and of the Compensation Committee shall be entitled
without further act on his part to indemnification from the Company for all expenses (including advances of litigation expenses,
the amount of judgment and the amount of approved settlements made with a view to the curtailment of costs of litigation) reasonably
incurred by him in connection with or arising out of any action, suit or proceeding, including any appeal thereof, with respect
to the administration of the Plan or the granting of Stock Rights under it in which he may be involved by reason of his being or
having been a member of the Board or the Compensation Committee, whether or not he continues to be such member of the Board or
the Compensation Committee at the time of the incurring of such expenses;
provided
,
however
, that such indemnity
shall be subject to the limitations contained in any Indemnification Agreement between the Company and the Board member or Officer.
The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member
of the Board or the Compensation Committee and shall be in addition to all other rights to which such member of the Board or the
Compensation Committee would be entitled to as a matter of law, contract or otherwise.
(e) The
Board may delegate the powers to grant Stock Rights to Officers to the extent permitted by the laws of the Company’s state
of incorporation.
3.
Eligible
Employees and Others
.
(a) (i) ISOs
may be granted to any employee of the Company or any Related Corporation. Those Officers and directors of the Company who are not
employees may not be granted ISOs under the Plan. ISOs may not be granted unless this Plan has been approved by the Company’s
shareholders within one year after it has been adopted by the Board.
(ii) Subject
to compliance with Rule 16b-3 and other applicable securities laws, Non-Qualified Options, Restricted Stock, RSUs and SARs may
be granted to any director (whether or not an employee), Officers, employees or consultants of the Company or any Related Corporation.
(iii) The
Compensation Committee may take into consideration a recipient’s individual circumstances in determining whether to grant
an ISO, a Non-Qualified Option, Restricted Stock, RSUs or a SAR. Granting of any Stock Right to any individual or entity shall
neither entitle that individual or entity to, nor disqualify him from participation in, any other grant of Stock Rights.
(b) All
directors of the Company who are not employees or beneficial owners of 10% or more of the Common Stock of the Company shall automatically
receive the following grant of Non-Qualified Options as appropriate:
(i) Initial
Grants. On the date on which this Plan is approved by the Board or a person is first elected or appointed, whether elected by the
shareholders of the Company or appointed by the Board to fill a Board vacancy, each non-employee director, except Neil McDermott,
shall receive an automatic grant of Non-Qualified Options and Restricted Stock (or RSUs if selected by the director with such delivery
deferral as the director may select) based upon Fair Market Value. In lieu of Restricted Stock or RSUs, the director may elect
to receive Non-Qualified Options for the entire grant.
|
Qualifying Event
|
|
Stock Options
|
|
|
Restricted Stock
|
|
|
Initial appointment as Chairman of the Board
|
|
$
|
62,500
|
|
|
$
|
62,500
|
|
|
Initial election or appointment of non-employee director
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
Initial appointment as Chairman of a Committee
|
|
$
|
7,500
|
|
|
$
|
7,500
|
|
|
Initial appointment as Committee Member
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
(ii) Annual
Grants. On July 1
st
of each year, each non-employee director shall receive an automatic grant of Non-Qualified Options
and Restricted Stock (or RSUs if selected by the director with such delivery deferral as the director may select) based upon Fair
Market Value. In lieu of Restricted Stock or RSUs, the director may elect to receive Non-Qualified Options for the entire grant.
|
Qualifying Event
|
|
Stock Options
|
|
|
Restricted Stock
|
|
|
Annual grant to Chairman of the Board
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
Annual grant to non-employee director
|
|
$
|
37,500
|
|
|
$
|
37,500
|
|
|
Annual grant to a Chairman of a Committee
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
|
Annual grant to Committee Member
|
|
$
|
3,750
|
|
|
$
|
3,750
|
|
(iii) Vesting.
All initial grants under this Section 3(b) shall vest annually in equal increments over a three-year period following the date
of the automatic grant, subject to service in the capacity in which the grant is received on the applicable vesting dates. Any
fractional vesting shall be rounded up one or two times, as applicable. All annual grants shall vest 12 months following the date
of grant, subject to service with the Company in the capacity in which the grant is received on the applicable vesting dates.
(iv) All
grants of Non-Qualified Options under this Section 3(b) shall be exercisable for a period of five years unless otherwise provided
by the Board.
(v)
All grants of Non-Qualified Options under this Section 3(b) are subject to adjustment under Section 14.
(c) The
exercise price of the Options or SARs under Section 3 shall be Fair Market Value or such higher price as may be established by
the Compensation Committee, the Board or by the Code.
4.
Common
Stock
. The Common Stock subject to Stock Rights shall be authorized but unissued shares of Common Stock, par value $0.0001,
or shares of Common Stock reacquired by the Company in any manner, including purchase, forfeiture or otherwise. The aggregate number
of shares of Common Stock which may be issued pursuant to the Plan is 8,000,000 subject to adjustment as provided in Section 14.
Any such shares may be issued under ISOs, Non-Qualified Options, Restricted Stock, RSUs or SARs, so long as the number of shares
so issued does not exceed the limitations in this Section. If any Stock Rights granted under the Plan shall expire or terminate
for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, or if
the Company shall reacquire any unvested shares, the unpurchased shares subject to such Stock Rights and any unvested shares so
reacquired by the Company shall again be available for grants under the Plan.
5.
Granting
of Stock Rights
.
(a) The
date of grant of a Stock Right under the Plan will be the date specified by the Board or Compensation Committee at the time it
grants the Stock Right;
provided
,
however
, that such date shall not be prior to the date on which the Board or Compensation
Committee acts to approve the grant. The Board or Compensation Committee shall have the right, with the consent of the optionee,
to convert an ISO granted under the Plan to a Non-Qualified Option pursuant to Section 17.
(b) Except
for automatic grants under Section 3(b), the Board or Compensation Committee shall grant Stock Rights to participants that it,
in its sole discretion, selects. Stock Rights shall be granted on such terms as the Board or Compensation Committee shall determine
except that ISOs shall be granted on terms that comply with the Code and regulations thereunder.
(c) A
SAR entitles the holder to receive, as designated by the Board or Compensation Committee, cash or shares of Common Stock, value
equal to (or otherwise based on) the excess of: (a) the Fair Market Value of a specified number of shares of Common Stock at the
time of exercise over (b) an exercise price established by the Board or Compensation Committee. The exercise price of each SAR
granted under this Plan shall be established by the Compensation Committee or shall be determined by a method established by the
Board or Compensation Committee at the time the SAR is granted, provided the exercise price shall not be less than 100% of the
Fair Market Value of a share of Common Stock on the date of the grant of the SAR, or such higher price as is established by the
Board or Compensation Committee. A SAR shall be exercisable in accordance with such terms and conditions and during such periods
as may be established by the Board or Compensation Committee. Shares of Common Stock delivered pursuant to the exercise of a SAR
shall be subject to such conditions, restrictions and contingencies as the Board or Compensation Committee may establish in the
applicable SAR agreement or document, if any. The Board or Compensation Committee, in its discretion, may impose such conditions,
restrictions and contingencies with respect to shares of Common Stock acquired pursuant to the exercise of each SAR as the Board
or Compensation Committee determines to be desirable. A SAR under the Plan shall be subject to such terms and conditions, not inconsistent
with the Plan, as the Board or Compensation Committee shall, in its discretion, prescribe. The terms and conditions of any SAR
to any grantee shall be reflected in such form of agreement as is determined by the Board or Compensation Committee. A copy of
such document, if any, shall be provided to the grantee, and the Board or Compensation Committee may condition the granting of
the SAR on the grantee executing such agreement.
(d) An
RSU gives the grantee the right to receive a number of shares of the Company’s Common Stock on applicable vesting or other
dates. Delivery of the RSUs may be deferred beyond vesting as determined by the Board or Compensation Committee. RSUs shall be
evidenced by an RSU agreement in the form determined by the Board or Compensation Committee. With respect to an RSU, which becomes
non-forfeitable due to the lapse of time, the Compensation Committee shall prescribe in the RSU agreement the vesting period. With
respect to the granting of the RSU, which becomes non-forfeitable due to the satisfaction of certain pre-established performance-based
objectives imposed by the Board or Compensation Committee, the measurement date of whether such performance-based objectives have
been satisfied shall be a date no earlier than the first anniversary of the date of the RSU. A recipient who is granted an RSU
shall possess no incidents of ownership with respect to such underlying Common Stock, although the RSU agreement may provide for
payments in lieu of dividends to such grantee.
(e) Notwithstanding
any provision of this Plan, the Board or Compensation Committee may impose conditions and restrictions on any grant of Stock Rights
including forfeiture of vested Options, cancellation of Common Stock acquired in connection with any Stock Right and forfeiture
of profits. Unless otherwise provided for in a grant by the Board, Compensation Committee or Officers, all grants of Stock Rights
shall be subject to the grantee executing the Company’s standard form of Stock Rights Agreement.
(f) The
Options and SARs shall not be exercisable for a period of more than 10 years from the date of grant.
6.
Sale
of Shares
. The shares underlying Stock Rights granted to any Officers, director or a beneficial owner of 10% or more of the
Company’s securities registered under Section 12 of the Exchange Act shall not be sold, assigned or transferred by the grantee
until at least six months elapse from the date of the grant thereof.
7.
ISO
Minimum Option Price and Other Limitations
.
(a) The
exercise price per share relating to all Options granted under the Plan shall not be less than the Fair Market Value per share
of Common Stock on the last trading day prior to the date of such grant. For purposes of determining the exercise price, the date
of the grant shall be the later of (i) the date of approval by the Board or Compensation Committee or the Board, or (ii) for ISOs,
the date the recipient becomes an employee of the Company. In the case of an ISO to be granted to an employee owning Common Stock
which represents more than 10 percent of the total combined voting power of all classes of stock of the Company or any Related
Corporation, the price per share shall not be less than 110% of the Fair Market Value per share of Common Stock on the date of
grant and such ISO shall not be exercisable after the expiration of five years from the date of grant.
(b) In
no event shall the aggregate Fair Market Value (determined at the time an ISO is granted) of Common Stock for which ISOs granted
to any employee are exercisable for the first time by such employee during any calendar year (under all stock option plans of the
Company) exceed $100,000. Any ISO or portion thereof which exceeds such limit (according to the order in which they are granted)
shall be treated as a Non-Qualified Option, notwithstanding any contrary provision of the applicable agreement covering the ISO.
8.
Duration
of Stock Rights
. Subject to earlier termination as provided in Sections 3, 5, 9, 10 and 11, each Option and SAR shall expire
on the date specified in the original instrument granting such Stock Right or this Plan (except with respect to any part of an
ISO that is converted into a Non-Qualified Option pursuant to Section 17),
provided
,
however
, that such instrument
must comply with Section 422 of the Code with regard to ISOs and Rule 16b-3 with regard to all Stock Rights granted pursuant to
the Plan to Officers, directors and 10% shareholders of the Company.
9.
Exercise
of Options and SARs; Vesting of Stock Rights
. Subject to the provisions of Sections 3 and 9 through 13, each Option and SAR
granted under the Plan shall be exercisable as follows:
(a) The
Options and SARs shall either be fully vested and exercisable from the date of grant or shall vest and become exercisable in such
installments as the Board or Compensation Committee may specify.
(b) Once
an installment becomes exercisable it shall remain exercisable until expiration or termination of the Option and SAR, unless otherwise
specified by the Board or Compensation Committee.
(c) Each
Option and SAR or installment, once it becomes exercisable, may be exercised at any time or from time to time, in whole or in part,
for up to the total number of shares with respect to which it is then exercisable.
(d) The
Board or Compensation Committee shall have the right to accelerate the vesting date of any installment of any Stock Right;
provided
that the Board or Compensation Committee shall not accelerate the exercise date of any installment of any Option granted to any
employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to Section 17) if such acceleration would
violate the annual exercisability limitation contained in Section 422(d) of the Code as described in Section 7(b).
10.
Termination
of Employment or Relationship
. Subject to any greater restrictions or limitations as may be imposed by the Board’s Compensation
Committee or Officer upon the granting of any Option or SAR, if an optionee or holder of an SAR ceases to be employed by the Company
or his other relationship with the Company terminates, other than by reason of death or Disability, no further installments of
his Options or SARs shall become exercisable, and his Options or SARs shall terminate as provided for in the grant or on the day
three months after the day of the termination of his employment, whichever is earlier, but in no event later than on their specified
expiration dates. Employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those
attributable to illness, military obligations or governmental service) provided that the period of such leave does not exceed 90
days or, if longer, any period during which such optionee’s right to re-employment is guaranteed by statute. A leave of absence
with the written approval of the Board shall not be considered an interruption of employment under the Plan, provided that such
written approval contractually obligates the Company or any Related Corporation to continue the employment of the optionee after
the approved period of absence. Options or SARs granted under the Plan shall not be affected by any change of employment within
or the Company so long as the optionee continues to be an employee of the Company or otherwise continues to perform services for
the Company.
11.
Death;
Disability
. Subject to any greater restrictions or limitations as may be imposed by the Board or Compensation Committee upon
the granting of any Option or SAR:
(a) If
the holder of an Option or SAR ceases to be employed by the Company by reason of his death, any Options or SARs of such employee
may be exercised to the extent of the number of shares with respect to which he could have exercised it on the date of his death,
by his estate, personal representative or beneficiary who has acquired the Options or SARs by will or by the laws of descent and
distribution, at any time prior to the earlier of the Options’ or SARs’ specified expiration date or one year from
the date of the grantee’s death.
(b) If
the holder of an Option or SAR ceases to be employed by the Company, or a director can no longer perform his duties, by reason
of his Disability, he shall have the right to exercise any Option or SARs held by him on the date of termination of employment
or ceasing to act as a director until the earlier of (i) the Options’ or SARs’ specified expiration date or (ii) one
year from the date of the termination of the person’s employment or ceasing to act as a director.
12.
Assignment,
Transfer or Sale
.
(a) No
ISO granted under this Plan shall be assignable or transferable by the grantee except by will or by the laws of descent and distribution,
and during the lifetime of the grantee, each ISO shall be exercisable only by him, his guardian or legal representative.
(b) Except
for ISOs, all Stock Rights are transferable subject to compliance with applicable securities laws and Section 6 of this Plan.
13.
Terms
and Conditions of Stock Rights
. Stock Rights shall be evidenced by instruments (which need not be identical) in such forms
as the Board or Compensation Committee may from time to time approve. Such instruments shall conform to the terms and conditions
set forth in Sections 5 through 12 hereof and may contain such other provisions as the Board or Compensation Committee deems advisable
which are not inconsistent with the Plan. In granting any Stock Rights, the Board or Compensation Committee may specify that Stock
Rights shall be subject to the restrictions set forth herein with respect to ISOs, or to such other termination and cancellation
provisions as the Board or Compensation Committee may determine. The Board or Compensation Committee may from time to time confer
authority and responsibility on one or more of its own members and/or one or more Officers of the Company to execute and deliver
such instruments. The proper Officers of the Company are authorized and directed to take any and all action necessary or advisable
from time to time to carry out the terms of such instruments.
14.
Adjustments
Upon Certain Events
.
(a) Subject
to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Stock
Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Stock
Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of a Stock Right, as well
as the price per share of Common Stock (or cash, as applicable) covered by each such outstanding Option or SAR, shall be proportionately
adjusted for any increases or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock
split, stock dividend, combination or reclassification of Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company;
provided
,
however
, that conversion
of any convertible securities of the Company or the voluntary cancellation whether by virtue of a cashless exercise of a derivative
security of the Company or otherwise shall not be deemed to have been “effected without receipt of consideration.”
Such adjustment shall be made by the Board or Compensation Committee, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to a Stock Right. No adjustments shall be made for dividends or other distributions
paid in cash or in property other than securities of the Company.
(b) In
the event of the proposed dissolution or liquidation of the Company, the Board or Compensation Committee shall notify each participant
as soon as practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised,
a Stock Right will terminate immediately prior to the consummation of such proposed action.
(c) In
the event of a merger or consolidation of the Company with or into another corporation or the sale of all or substantially all
of the Company’s assets in a transaction requiring shareholder approval (either, a “Transaction”), each outstanding
Stock Right shall be assumed (as defined below) or an equivalent option or right substituted by the successor corporation or a
parent or subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute
for the Stock Rights and in the event of a Change of Control or Transaction, the participants shall fully vest in and have the
right to exercise their Stock Rights as to which it would not otherwise be vested or exercisable. If a Stock Right becomes
fully vested and exercisable in lieu of assumption or substitution as the result of a Change of Control or Transaction, the Board
or Stock Option Committee shall notify the participant in writing or electronically that the Stock Right shall be fully vested
and exercisable for a period of at least 15 days from the date of such notice, and any Options or SARs shall terminate one minute
prior to the closing of the Transaction. For a Change in Control, the Stock Right shall remain exercisable as long as permitted
in the Stock Rights Agreement.
For the purposes of this
Section 14(c), the Stock Right shall be considered “assumed” if, following the merger, the option or right confers
the right to purchase or receive, for each share of Common Stock subject to the Stock Right immediately prior to the merger, the
consideration (whether stock, cash, or other securities or property) received in the merger by holders of Common Stock for each
share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares);
provided
,
however
, that if such consideration received
in the merger is not solely common stock of the successor corporation or its parent, the Board or Compensation Committee may, with
the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Stock Right, for
each share of Common Stock subject to the Stock Right, to be solely common stock of the successor corporation or its parent equal
in Fair Market Value to the per share consideration received by holders of Common Stock in the merger.
(d) Notwithstanding
the foregoing, any adjustments made pursuant to Section 14(a), (b) or (c) with respect to ISOs shall be made only after the Board
or Compensation Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute
a “modification” of such ISOs (as that term is defined in Section 425(h) of the Code) or would cause any adverse tax
consequences for the holders of such ISOs. If the Board or Compensation Committee determines that such adjustments made with respect
to ISOs would constitute a modification of such ISOs it may refrain from making such adjustments.
(e) No
fractional shares shall be issued under the Plan and the optionee shall receive from the Company cash in lieu of such fractional
shares.
15.
Means
of Exercising Stock Rights
.
(a) An
Option or SAR (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal
office address. Such notice shall identify the Stock Right being exercised and specify the number of shares as to which such Stock
Right is being exercised, accompanied by full payment of the exercise price therefor (to the extent it is exercisable in cash)
either (i) in United States dollars by check or wire transfer; or (ii) at the discretion of the Board or Compensation Committee,
through delivery of shares of Common Stock having a Fair Market Value equal as of the date of the exercise to the cash exercise
price of the Stock Right; or (iii) at the discretion of the Board or Compensation Committee, by any combination of (i) and (ii)
above. If the Board or Compensation Committee exercises its discretion to permit payment of the exercise price of an ISO by means
of the methods set forth in clauses (ii) or (iii) of the preceding sentence, such discretion need not be exercised in writing at
the time of the grant of the Stock Right in question. The holder of a Stock Right shall not have the rights of a shareholder with
respect to the shares covered by his Stock Right until the date of issuance of a stock certificate to him for such shares. Except
as expressly provided above in Section 14 with respect to changes in capitalization and stock dividends, no adjustment shall be
made for dividends or similar rights for which the record date is before the date such stock certificate is issued.
(b) Each
notice of exercise shall, unless the shares of Common Stock are covered by a then current registration statement under the Securities
Act, contain the holder’s acknowledgment in form and substance satisfactory to the Company that (i) such shares are being
purchased for investment and not for distribution or resale (other than a distribution or resale which, in the opinion of counsel
satisfactory to the Company, may be made without violating the registration provisions of the Securities Act), (ii) the holder
has been advised and understands that (1) the shares have not been registered under the Securities Act and are “restricted
securities” within the meaning of Rule 144 under the Securities Act and are subject to restrictions on transfer and (2) the
Company is under no obligation to register the shares under the Securities Act or to take any action which would make available
to the holder any exemption from such registration, and (iii) such shares may not be transferred without compliance with all applicable
federal and state securities laws. Notwithstanding the above, should the Company be advised by counsel that issuance of shares
should be delayed pending registration under federal or state securities laws or the receipt of an opinion that an appropriate
exemption therefrom is available, the Company may defer exercise of any Stock Right granted hereunder until either such event has
occurred.
16.
Term,
Termination and Amendment
.
(a) This
Plan was adopted by the Board. This Plan may be approved by the Company’s shareholders within one year from the date of Board
approval, which approval is required for ISOs, or on a later date.
(b) The
Board may terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on October 20, 2018. No Stock Rights
may be granted under the Plan once the Plan is terminated. Termination of the Plan shall not impair rights and obligations under
any Stock Right granted while the Plan is in effect, except with the written consent of the grantee.
(c) The
Board at any time, and from time to time, may amend the Plan.
Provided
,
however
, except as provided in Section 14
relating to adjustments in Common Stock, no amendment shall be effective unless approved by the shareholders of the Company to
the extent (i) shareholder approval is necessary to satisfy the requirements of Section 422 of the Code or (ii) required by the
rules of the principal national securities exchange or trading market upon which the Company’s Common Stock trades. Rights
under any Stock Rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan, except with the
written consent of the grantee.
(d) The
Board at any time, and from time to time, may amend the terms of any one or more Stock Rights;
provided
,
however
,
that the rights under the Stock Right shall not be impaired by any such amendment, except with the written consent of the grantee.
17.
Conversion
of ISOs into Non-Qualified Options; Termination of ISOs
. The Board or Compensation Committee, at the written request of any
optionee, may in its discretion take such actions as may be necessary to convert such optionee’s ISOs (or any installments
or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time
prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or a Related Corporation
at the time of such conversion.
Provided
,
however
, the Board or Compensation Committee shall not reprice the Options
or extend the exercise period or reduce the exercise price of the appropriate installments of such Options without the approval
of the Company’s shareholders. At the time of such conversion, the Board or Compensation Committee (with the consent of the
optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Board or Compensation Committee
in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall
be deemed to give any optionee the right to have such optionee’s ISOs converted into Non-Qualified Options, and no such conversion
shall occur until and unless the Board or Compensation Committee takes appropriate action. The Compensation Committee, with the
consent of the optionee, may also terminate any portion of any ISO that has not been exercised at the time of such termination.
18.
Application
of Funds
. The proceeds received by the Company from the sale of shares pursuant to Options or SARS (if cash settled) granted
under the Plan shall be used for general corporate purposes.
19.
Governmental
Regulations
. The Company’s obligation to sell and deliver shares of the Common Stock under this Plan is subject to the
approval of any governmental authority required in connection with the authorization, issuance or sale of such shares.
20.
Withholding
of Additional Income Taxes
. In connection with the granting, exercise or vesting of a Stock Right or the making of a Disqualifying
Disposition the Company, in accordance with Section 3402(a) of the Code, may require the optionee to pay additional withholding
taxes in respect of the amount that is considered compensation includable in such person’s gross income.
To the extent that the
Company is required to withhold taxes for federal income tax purposes as provided above, if any optionee may elect to satisfy such
withholding requirement by (i) paying the amount of the required withholding tax to the Company; (ii) delivering to the Company
shares of its Common Stock (including shares of Restricted Stock) previously owned by the optionee; or (iii) having the Company
retain a portion of the shares covered by an Option exercise. The number of shares to be delivered to or withheld by the Company
times the Fair Market Value of such shares shall equal the cash required to be withheld.
21.
Notice
to Company of Disqualifying Disposition
. Each employee who receives an ISO must agree to notify the Company in writing immediately
after the employee makes a Disqualifying Disposition of any Common Stock acquired pursuant to the exercise of an ISO. If the employee
has died before such stock is sold, the holding periods requirements of the Disqualifying Disposition do not apply and no Disqualifying
Disposition can occur thereafter.
22.
Continued
Employment
. The grant of a Stock Right pursuant to the Plan shall not be construed to imply or to constitute evidence of any
agreement, express or implied, on the part of the Company to retain the grantee in the employ of the Company, as a member of the
Company’s Board or in any other capacity, whichever the case may be.
23.
Governing
Law; Construction
. The validity and construction of the Plan and the instruments evidencing Stock Rights shall be governed
by the laws of Delaware. In construing this Plan, the singular shall include the plural and the masculine gender shall include
the feminine and neuter, unless the context otherwise requires.
24.
Compliance
with Section 409A of the Code
. To the extent that the Board or the Compensation Committee determines that any Stock Right granted
under this Plan is subject to Section 409A of the Code, the agreement evidencing such Stock Right shall incorporate the terms and
conditions required by Section 409A of the Code. To the extent applicable, this Plan and the Stock Right agreement shall be interpreted
in accordance with Section 409A of the Code. Notwithstanding any provision of this Plan to the contrary, in the event that, the
Board or the Compensation Committee determines that any Stock Right may be subject to Section 409A of the Code, the Board or the
Compensation Committee may adopt such amendments to this Plan and the applicable Stock Right agreement or adopt other policies
and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Board
or the Compensation Committee determines are necessary or appropriate to (i) exempt the Stock Right from Section 409A of the Code
and/or preserve the intended tax treatment of the benefits provided with respect to the Stock Right, or (ii) comply with the requirements
of Section 409A of the Code.
25.
Forfeiture
of Stock Rights
. Notwithstanding any other provision of this Plan, if provided for in a written agreement issuing Stock Rights
all vested Stock Rights shall be immediately forfeited at the option of the Board in the event of:
(a) Termination
for any reason including without cause and including, but not limited to, fraud, theft, employee dishonesty and violation of Company
policy;
(b) Purchasing
or selling securities of the Company without written authorization in accordance with the Company’s inside information guidelines
then in effect;
(c) Breaching
any duty of confidentiality including that required by the Company’s inside information guidelines then in effect;
(d) Competing
with the Company;
(e) Being
unavailable for consultation after leaving the Company’s employ if such availability is a condition of any agreement between
the Company and the Employee;
(f) Recruitment
of Company personnel after termination of employment, whether such termination is voluntary or for cause;
(g) Failure
to assign any invention or technology to the Company if such assignment is a condition of employment or any other agreements between
the Company and the Employee; or
(h) A
finding by the Company’s Board that the Employee has acted against the interests of the Company.
Removal of an Officer or
director by the Board or shareholders, as applicable, shall not constitute termination within the meaning of Section 25(a).
The Board or the Compensation
Committee may impose other forfeiture restrictions which are more or less restrictive and require a return of profits from the
sale of Common Stock as part of said forfeiture provisions if such forfeiture provisions and/or return of provisions are contained
in a Stock Rights or similar agreement.
Money4Gold Holdings, Inc.
Amendment to the 2008 Equity Incentive Plan
Money4Gold Holdings, Inc. amends its 2008 Equity
Incentive Plan (the “Plan”) as follows:
Section 4 of the Plan shall be deleted and
replaced by the following:
4.
Common
Stock
. The Common Stock subject to Stock Rights shall be authorized but unissued shares of Common Stock, par value $0.0001,
or shares of Common Stock reacquired by the Company in any manner, including purchase, forfeiture or otherwise. The aggregate number
of shares of Common Stock which may be issued pursuant to the Plan is 27,000,000 subject to adjustment as provided in Section 14.
Any such shares may be issued under ISOs, Non-Qualified Options, Restricted Stock, RSUs or SARs, so long as the number of shares
so issued does not exceed the limitations in this Section. If any Stock Rights granted under the Plan shall expire or terminate
for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, or if
the Company shall reacquire any unvested shares, the unpurchased shares subject to such Stock Rights and any unvested shares so
reacquired by the Company shall again be available for grants under the Plan.
Upstream Worldwide, Inc.
Second Amendment to the 2008 Equity Incentive
Plan
Upstream Worldwide, Inc. amends its 2008 Equity
Incentive Plan by deleting Section 3(b) and re-lettering Section 3(c) as Section 3(b).
usell.com, Inc.
Amendment to the 2008 Equity Incentive Plan
usell.com, Inc. amends its 2008 Equity Incentive
Plan (the “Plan”) as follows:
Section 4 of the Plan shall be deleted and
replaced by the following:
4.
Common
Stock
. The Common Stock subject to Stock Rights shall be authorized but unissued shares of Common Stock, par value $0.0001,
or shares of Common Stock reacquired by the Company in any manner, including purchase, forfeiture or otherwise. The aggregate number
of shares of Common Stock which may be issued pursuant to the Plan is 4,264,437 subject to adjustment as provided in Section 14.
Any such shares may be issued under ISOs, Non-Qualified Options, Restricted Stock, RSUs or SARs, so long as the number of shares
so issued does not exceed the limitations in this Section. If any Stock Rights granted under the Plan shall expire or terminate
for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, or if
the Company shall reacquire any unvested shares, the unpurchased shares subject to such Stock Rights and any unvested shares so
reacquired by the Company shall again be available for grants under the Plan.
usell.com, Inc.
Amendment to the 2008 Equity Incentive Plan
usell.com, Inc. amends its 2008 Equity Incentive
Plan (the “Plan”) as follows:
Section 4 of the Plan shall be deleted and
replaced by the following:
4.
Common
Stock
. The Common Stock subject to Stock Rights shall be authorized but unissued shares of Common Stock, par value $0.0001,
or shares of Common Stock reacquired by the Company in any manner, including purchase, forfeiture or otherwise. The aggregate number
of shares of Common Stock which may be issued pursuant to the Plan is 584,296 subject to adjustment as provided in Section 14.
Any such shares may be issued under ISOs, Non-Qualified Options, Restricted Stock, RSUs or SARs, so long as the number of shares
so issued does not exceed the limitations in this Section. If any Stock Rights granted under the Plan shall expire or terminate
for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, or if
the Company shall reacquire any unvested shares, the unpurchased shares subject to such Stock Rights and any unvested shares so
reacquired by the Company shall again be available for grants under the Plan.
uSell.com, Inc.
Amendment to the 2008 Equity Incentive Plan
uSell.com, Inc. amends its 2008 Equity Incentive
Plan (the “Plan”) as follows:
Section 4 of the Plan shall be deleted and
replaced by the following:
4. Common Stock. The Common Stock subject
to Stock Rights shall be authorized but unissued shares of Common Stock, par value $0.0001, or shares of Common Stock reacquired
by the Company in any manner, including purchase, forfeiture or otherwise. The aggregate number of shares of Common Stock which
may be issued pursuant to the Plan is 1,382,023 subject to adjustment as provided in Section 14. Any such shares may be issued
under ISOs, Non-Qualified Options, Restricted Stock, RSUs or SARs, so long as the number of shares so issued does not exceed the
limitations in this Section. If any Stock Rights granted under the Plan shall expire or terminate for any reason without having
been exercised in full or shall cease for any reason to be exercisable in whole or in part, or if the Company shall reacquire any
unvested shares, the unpurchased shares subject to such Stock Rights and any unvested shares so reacquired by the Company shall
again be available for grants under the Plan.
uSell.com, Inc.
Amendment to the 2008 Equity Incentive Plan
uSell.com, Inc. amends its 2008 Equity Incentive
Plan (the “Plan”) as follows:
Section 4 of the Plan shall be deleted and
replaced by the following:
4. Common Stock. The Common Stock subject
to Stock Rights shall be authorized but unissued shares of Common Stock, par value $0.0001, or shares of Common Stock reacquired
by the Company in any manner, including purchase, forfeiture or otherwise. The aggregate number of shares of Common Stock which
may be issued pursuant to the Plan is 1,582,023 subject to adjustment as provided in Section 14. Any such shares may be issued
under ISOs, Non Qualified Options, Restricted Stock, RSUs or SARs, so long as the number of shares so issued does not exceed the
limitations in this Section. If any Stock Rights granted under the Plan shall expire or terminate for any reason without having
been exercised in full or shall cease for any reason to be exercisable in whole or in part, or if the Company shall reacquire any
unvested shares, the unpurchased shares subject to such Stock Rights and any unvested shares so reacquired by the Company shall
again be available for grants under the Plan.
