[April 01, 2013] USELL.COM, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations. Tweet (Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. 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". Business Overview usell.com, Inc. is a technology based company focused on creating an online marketplace where individuals, which we refer to as consumers, interested in selling small consumer electronics that they are no longer using can: 7 · Research the current market value for their items, based on the make, model and condition of each item, · Efficiently find and compare offers for those items from top-rated buyers, · Review satisfaction ratings and customer reviews of each buyer, · Determine the offer they wish to accept, and · Immediately complete their transaction directly with the buyer of their choice. We have a low cost, highly scalable and flexible business model that allows us to quickly and efficiently adapt to entry into new markets, changes in economic conditions, supply and demand levels and other similar factors. We utilize consumer oriented advertising efforts, such as direct response television commercials and various forms of internet advertising, to attract individuals to our website. Our services are free for consumers. We partner with reputable electronics buying companies that require a cost efficient customer acquisition model. The economies of scale that we generate by combining the buying power of multiple companies allow us to pass savings on to our partners which, in turn, allows them to offer the highest possible prices to consumers. When a consumer visits our website and accepts an offer from one of our partners, we receive a fee. We receive this fee regardless of whether the consumer ultimately sends in the device. 2012 Highlights · Fiscal 2012 represented our first full year of operations under our current business model; · For the first time under our new business model, our quarterly revenues exceeded our quarterly sales and marketing expenses in the fourth quarter of 2012; · Our revenues increased each quarter growing from approximately $245,000 in the first quarter of 2012 to approximately $818,000 in the fourth quarter of 2012; · We grew our partner base from 5 in the first quarter of 2012 to 20 as of the end of the fourth quarter of 2012. New Accounting Pronouncements See Note 3 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 3 to our Consolidated Financial Statements for further discussion regarding our critical accounting policies and estimates. Intangible Assets Our intangible assets pertain to the purchase of our website domain address. When circumstances indicate that an impairment of value may have occurred, we test such assets for recoverability. During the year ended December 31, 2011, we recorded an impairment charge of $448,734 pertaining to our long-lived intangible assets. Revenue Recognition Revenue is recognized when all of the following conditions exist: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Consumer Electronics Referrals Individuals responding to our advertising campaigns come to our website where they search our database for the item they wish to sell. They are prompted to answer a number of questions regarding the condition of the item and which associated accessories they have, if any. Upon completion of the appraisal questions, they are presented with a listing of offers to purchase their item from our partners. We earn a fee for providing our partners with consumers and recognize revenue upon acceptance of the partner's offer by the Consumer. All of our partners pay similar fees per referral, which is based on the model of the phone. In 2012, usell received a higher fee for premium phones, such as smartphones, and a lower fee for non-premium phones. We received this fee regardless of whether the consumer ultimately sends in the device. We recorded payments received from partners in advance of offer acceptance as deferred revenue at the time payment is received. In December 2012, we began to offer fulfillment services on behalf of our partners for the items sold by consumers. We act as the agent in these transactions, passing orders booked by our partners to our vendors, who then assemble the kits and mail them directly to the consumers. We earn a standard fee from our partners and recognize revenue upon shipment of the kits to the consumers. We evaluated the presentation of revenue on a gross versus net basis and determined that since we perform as an agent without assuming the risks and rewards of ownership of the goods, revenue should be reported on a net basis. We did not have significant net revenues from fulfillment services during the year ended December 31, 2012. 8 Beginning in January 2013, we changed our fee structure with our partners. Our partners now pay fees based on the individual item sold. Fees are no longer based on a tiered structure and are not based on the value of the item sold. All other terms of our agreements with our partners remained the same. Cellular Phones In 2011, cellular phones received in response to our advertisements to purchase them directly were appraised upon receipt from the public based on a variety of factors including the condition of the phone and its level of functionality. To maximize efficiencies, phones were received directly by our electronics partner, ReCellular, Inc. ("ReCellular"), who would perform the appraisal on our behalf. The appraised value was used to determine the price at which we sold the phone to ReCellular. On a daily basis, all of the cellular phones received and appraised were sold to ReCellular. As a result, revenue was recognized the same day the phones were received from the public. Phones were not returned to the public once they had been received. In addition, no returns were accepted from ReCellular and upon delivery of the phones to ReCellular, we had no further obligations. Precious Metals We graded the quality of the precious metals purchased from the public and estimated the total quantity received. We then locked in the current spot rate of each metal sufficient to cover the total quantity received in the current batch with the Refinery. After a holding period of at least 10 days the precious metals were delivered to the Refinery to be melted. Upon melting the precious metals, the Refinery validated the quality and quantity of the precious metals and would remit payment to us based on the quantity of the pure precious metals at the agreed upon spot rates, as described above. Revenue was recognized upon melting of the precious metals and the validation of the quality and quantity of each precious metal by the Refinery. No returns were accepted from the Refinery and upon delivery of the precious metals to the Refinery, we had no further obligations. Share-Based Payment Arrangements We account for stock options in accordance with Accounting Standards Codification ("ASC") 718: Compensation - Stock Compensation. ASC 718 requires generally that all equity awards be accounted for at "fair value." This fair value is measured on the grant date for stock-settled awards, and at subsequent exercise or settlement for cash-settled awards. Fair value is equal to the underlying value of the stock for "full-value" awards such as restricted stock and performance shares, and estimated using the Black-Scholes option-pricing model with traditional inputs for "appreciation" awards such as stock options and stock appreciation rights. Costs equal to these fair values are recognized ratably over the requisite service period based on the number of awards that are expected to vest for awards that vest over time, and in the period of grant for awards that vest immediately. For awards that vest over time, cumulative adjustments in later periods are recorded to the extent actual forfeitures differ from our initial estimates: previously recognized compensation cost is reversed if the service or performance conditions are not satisfied and the award is forfeited. The expense resulting from share-based payments is recorded in cost of goods sold or general and administrative expense in the Consolidated Statement of Operations, depending on the nature of the services provided. Subsequent modifications to outstanding awards result in incremental cost if the fair value is increased as a result of the modification. Thus, a value-for-value stock option repricing or exchange of awards in conjunction with an equity restructuring does not result in additional compensation cost. Results of Operations From the inception of our business in 2008 through 2010, substantially all of our revenue came from the procurement, aggregation and resale of precious metals. In mid-2010, we diversified our business by introducing a service similar to our precious metals business, for cellular phones. We stopped offering to purchase precious metals in the United Kingdom and European markets during the fourth quarter of 2010 and in Canada and the United States in early 2011. By mid-2011 we further adapted our business strategy and stopped offering to purchase cellular phones directly, although we continued to service packs coming in from prior precious metals and cellular phone advertising campaigns. In July 2011, we created an online marketplace where consumers interested in selling small consumer electronics that they are no longer using can educate themselves on current market values and sell their items to top-rated, reputable buyers. Although we are not paid directly by individuals that utilize our services to help them sell items they are no longer using, we view them asour consumers. Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011 The following table sets forth, for the periods indicated, consolidated statements of operations information: 9 For the Year Ended December 31, Change Change 2012 2011 (Dollars) (Percentage) Revenue $ 2,383,466 $ 5,876,660 $ (3,493,194 ) -59 % Cost of Revenue 222,036 2,955,932 (2,733,896 ) -92 % Gross Profit 2,161,430 2,920,728 (759,298 ) -26 % Sales and Marketing 2,601,655 3,007,443 (405,788 ) -13 % General and Administrative 6,145,060 5,331,708 813,352 15 % Impairments - 819,317 (819,317 ) -100 % Operating Loss (6,585,285 ) (6,237,740 ) (347,545 ) 6 % Other (Expense) Income (2,264,086 ) 1,859,540 (4,123,626 ) -222 % Net Loss $ (8,849,371 ) $ (4,378,200 ) $ (4,471,171 ) 102 % Revenue by Type The following table breaks down our revenue by type: For the Year Ended December 31, 2012 2011 Consumer Electronics Referrals $ 2,357,772 99 % 159,934 3 % Cellular Phones - 0 % 3,137,635 53 % Precious Metals 11,000 0 % 2,529,543 43 % Fulfillment Revenue 7,041 0 % - 0 % Other 7,653 0 % 49,549 1 % $ 2,383,466 100 % $ 5,876,660 100 % Comparison of Revenue and Sales and Marketing Spend The following table compares our revenue to the amount of sales and marketing expenses for the corresponding periods. Three Months Ended December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012 Revenue 818,130 729,297 591,432 244,607Sales and Marketing Expenses 813,944 779,681 680,260 327,770 Percentage of Revenue 99 % 107 % 115 % 134 % As we increase our sales and marketing expenses, our revenues increase which demonstrates a strong correlation between revenue and our spending on advertising and marketing. Comparison of revenue, cost of revenue and the resulting gross margins for the year ended December 31, 2012 to the same period in 2011 highlights the effects of the changes to our business over the last year. During 2012, our revenue was generated primarily by earning fees for providing our partners with consumers. During 2011, our revenue was generated by selling precious metals and cellular phones that we had purchased from the public. Because we are no longer selling cellular phones and receiving any kits containing precious metals, our revenue generated by providing small consumer electronics consumers to our partners comprised almost all of our revenue in 2012 and will continue to do so in the future. Our revenues during the latter half of 2011 were impacted by our focus on the transition from selling precious metals and cellular phones to earning fees for providing our partners with consumers. Additionally, during the transition of our approach, we lowered our advertising expenses considerably while we tested our new message to consumers and adjusted based on feedback and results. This resulted in lower revenue during the year ended December 31, 2012, as compared with 2011. Cost of Revenue Our cost of revenue pertaining to consumer electronics referral revenue consists primarily of costs to maintain our website, including amortization expense of capitalized software development costs and technology platform software. Our cost of revenue pertaining to the sale of cellular phones and precious metals included our cost of acquiring the cellular phones and precious metals, as well as any other direct costs and expenses required to ship, secure, grade, log and process the items internally. In addition, fees and other costs incurred in connection with processing at the refinery were charged to cost of revenue. Our cost of revenue for generating leads for our partners consists primarily of costs to access and maintain our website, as well as amortization expense on our technology platform software. As opposed to our current business model of receiving referral fees from partners, during 2011, we paid individuals a percentage of the market value of the items we purchased from them. In addition, we had to maintain facilities and personnel to ship, secure, grade, log and process the items we purchased. In connection with the change in approach, we were able to eliminate these costs. As a result, we have a higher gross margin, on a percentage basis, during 2012, as compared to the same period in 2011. 10 Sales and Marketing Expenses Our sales and marketing expenditures represent one of our most significant costs, amounting to 109% and 51% of revenue for the years ended December 31, 2012 and 2011, respectively. We utilize direct response advertising and marketing campaigns, including television, print and Internet to attract consumers to our website. Our sales and marketing costs include production costs to produce and edit advertisements as well as the costs to run them. We manage our advertising and marketing campaigns, and make allocation decisions, by measuring their effectiveness based on a variety of metrics, including response rates, conversion rates and average revenue statistics. During 2012, our advertising and marketing costs exceeded our revenue as we incurred significant production costs to generate advertisements promoting our new online marketplace and optimized the placement of those advertisements. We have seen improvement in the return on our advertising and marketing expenses through 2012, as evidenced by the quarter to quarter decline in total sales and marketing costs as a percentage of revenue as noted in the above table, "Comparison of Revenue and Sales and Marketing Spend." Factors such as the time of year and significant local or nationally televised events can influence the effectiveness of our advertising campaigns. For example, the Olympics in August and the presidential election impacted viewership patterns and also increased the cost of advertising during the year ended December 31, 2012. As such, we adjusted our advertising plans in an attempt to reduce the potential negative impact that these events had or might have on the cost of our media campaigns, and maximize the returns on our advertising spending. Our marketing spending will vary during 2013 as we add new partners and increase our conversion rates. As we continue to invest in and improve our infrastructure, we believe it will improve our efficiency and expand the buyers on our site; this will allow us to increase our marketing spend and, accordingly, increase our revenues. General and Administrative Expenses General and administrative expenses include professional fees for technology, legal and accounting services as well as consulting and internal personnel costs for our back office support functions. Our general and administrative expenses for the year ended December 31, 2012 were impacted by non-cash compensation expense pertaining to share grants and option grants for services. Excluding non-cash compensation expense, our general and administrative expenses for 2012, as compared to 2011, decreased as we scaled back our investments in our technology infrastructure, reduced our headcount, relocated to less expensive facilities, and reduced other expenses, such as travel, wherever practical. We are continuing to diligently seek out ways to reduce our overhead costs and to maintain them at minimal levels. Impairment In connection with the decline of our revenues from precious metals and the adaptations we made to our approach to the electronics recycling market, we reviewed the recoverability of our assets pertaining to those portions of our business as of December 31, 2011 and determined that our prepaid refinery costs and certain intangible assets, including our non-compete agreement with the Refinery and software development costs pertaining to our website and back-end systems, had been impaired. Accordingly, during 2011 we recorded an impairment charge of $312,712 related to our prepaid refining services and $448,734 related to our intangible assets. Additionally, during 2011 we recorded an impairment charge of $57,871 pertaining to property and equipment utilized in our domestic precious metals operations. Other Income (Expenses) Other income (expense) during the year ended December 31, 2012 was primarily attributable to the change in the market value of the derivative liability pertaining to our 2011 Series A (as defined below) as a result of the change in our stock price. The derivative liability relates to the price protection provided to investors in the Series A offering. As of December 31, 2012, there were 177,906 shares of 2011 Series A outstanding held by one investor. In March 2013, the investor converted all of its 2011 Series A into common stock. During the year ended December 31, 2012, we also incurred interest expense associated with our 2011 Convertible Notes (as defined below), partially offset by a gain on the settlement of certain accounts payable. The significant change in the fair value of the derivative liability is primarily attributable to the change in the fair value of the common stock, from $0.006 immediately prior to the conversion, to $0.53 on June 30, 2012. The change in the value of the common stock is mainly attributable to the effect of the 1-for-52.4846 reverse stock split on June 8, 2012. This caused a significant increase in the derivative liability utilizing the Black-Scholes option pricing model. The exercise price of the 2011 Series A did not change as a result of the reverse split given the preferences of such shares. Other income (expense) during the year ended December 31, 2011 was attributable primarily to gains on the changes in the market values of the derivative liabilities pertaining to our 2010 Series B preferred stock and our 2011 Convertible Notes, partially offset by derivative expense and interest expense associated with our 2011 Convertible Notes and losses on substantial liquidation of foreign subsidiaries and foreign exchange. Net Loss For the year ended December 31, 2012, we incurred a net loss of $8.8 million, which was an increase of a net loss of $4.5 million for the prior year. Our operating loss in 2012 was $6.6 million in contrast to $6.2 in 2011. 11 Liquidity and Capital Resources We utilize direct response advertising and marketing campaigns, including television, print and Internet to attract consumers to our website where we help them monetize household items, such as small consumer electronics that they are no longer using. These advertising and marketing campaigns are our most significant use of cash from operations. Payment policies for these campaigns vary by advertising medium and by vendor. Payment terms vary as well, but in general payment for our advertisements is due within two-weeks or less of when the advertisement airs. Other significant uses of cash include production costs to create our advertisements, salary expense for our employees, and professional fees. Cash receipts from our partners, for providing them with consumers, are generally received by us within seven to 10 days of the order being placed with the partner by the consumer. Cash Flows from Operating Activities We used $3.3 million in operating activities in 2012, an increase from $2.6 million used in operating activities in 2011. Our net loss of $8.8 million was offset by $3.6 million of stock-based compensation and a change in fair value of derivative liability related to our Series A of $2.1 million. In 2011 we had a substantially lower net loss, less stock-based compensation and incurred no change in derivative liability non-cash charge. The significant components which affect our working capital are revenues derived from the leads to our partners, capital raised in private offerings, offset by marketing expenses, expenses spent on our technology infrastructure and public company expenses including audit and legal expenses. Cash Flows from Investing Activities In 2012, we used approximately $250,000 of net cash to purchase property and equipment while in 2011 we used $291,000 in investing activities including $277,000 to acquire intangible assets and only a minimal amount to acquire property and equipment. We currently do not have any capital obligations or commitments that will require a significant amount of capital. Cash Flows from Financing Activities During the year ended December 31, 2012, our financing activities generated $3.3 million in net proceeds, mainly comprised of proceeds from the sale of our preferred stock, partially offset by the repayment of an outstanding note payable to an investor. In 2011 financing activities provided $4 million including $2 million from the sale of Series A Preferred Stock ("Series A"), $1.1 million from the exercise of warrants and $800,000 received from convertible notes. Historical Financings Because we have continued to operate at a loss, we have relied on raising funds through the issuance of debt and equity securities in order to run our operations. During 2011, we received $800,000 pursuant to convertible notes payable ("2011 Convertible Notes") which we used for working capital purposes. Of this amount, $425,000 was received from two stockholders, $325,000 was received from a director, and $50,000 was received from our then Chief Executive Officer. In 2011, our Board authorized the sale of up to 10,000,000 shares of Series A. From December 2011 through April 2012, we sold 5,406,000 shares of Series A for gross proceeds of $5,406,000 and converted the 2011 Convertible Notes into 1,600,000 shares of Series A. In January 2012, the Company had a number of discussions with a representative of a broker-dealer which had an institutional investor client which was interested in making a large investment in the Series A offering if the Company offered price protection. This institutional investor invests in many smaller reporting companies and we had been advised that it required price protection on all of its investments. Due to the Company's financial position, management determined that accepting this investor's requirement for price protection was a fair price to pay in order to raise the additional capital in order to continue implementing the Company's new business model. The Company believed that in the principle of fairness and in order to ensure continued interest by the December 2011 Series A investors in the Company, it should offer the price protection rights to the December 2011 Series A investors. After notifying the December 2011 and January 2012 Series A investors and informing potential investors of the price protection rights, the institutional investor decided not to invest in the offering. The price protection rights which are triggered if we sell securities with the purpose of raising capital from investors a price less than $0.20 per common share may hamper our ability to raise capital in the future. All of the Series A, other than shares subject to 9.99% conversion blockers, automatically converted into common stock on June 8, 2012 in connection with the Reverse Split (as defined below). The issuance of the Series A was very dilutive to our shareholders but was necessary to raise capital in order to continue operating and implementing our new business model. On June 8, 2012, our shareholders approved an amendment to our Certificate of Incorporation to effect a 1-for-52.4846 reverse stock split, which reduced our fully-diluted outstanding common share count to approximately 10,000,000 common shares, which we refer to as the "Reverse Split". Certain securities that were outstanding at the time of the Reverse Split were not subject to the Reverse Split including our Series A; warrants to purchase our common stock that were issued in connection with our Series A; shares and warrants issued to shareholders in connection with the conversion of our 2011 Convertible Notes; and certain stock options. 12 Liquidity and Capital Resource Considerations We do not yet have a sustained history of financial stability. Historically our principal source of liquidity has been the issuances of debt and equity securities (including to related parties), including preferred stock, common stock and various debt financing transactions. Losses from operations are continuing subsequent to December 31, 2012. We anticipate that we will continue to generate losses from operations in the near future. If we are unable to raise any capital, we believe that, with our current available cash along with anticipated revenues, we will have sufficient funds to meet our anticipated cash needs for the next twelve months. If necessary, we will reduce operating expenses other than marketing and advertising expenses. As we continue to invest in and improve our infrastructure, we believe it will improve our efficiency and expand the number of buyers on our site; which will allow us to increase our marketing spend and, accordingly, increase our revenues. There can be no assurance that the plans and actions proposed by management will be successful, that we will generate profitability and positive cash flows in the future, that our diversification and expansion plans will not require substantial amounts of capital beyond our current capabilities, or that unforeseen circumstances will not require us to seek additional funding sources in the future or effectuate plans to conserve liquidity. Future efforts to raise additional funds through the issuance of debt and/or equity securities may not be successful or, in the event additional sources of funds are needed to continue operations, they may not be available on acceptable terms, if at all. In September 2012, we filed a Registration Statement on Form S-1 seeking to register 35,000,000 shares. The Registration Statement has not gone effective and we have received comments from the SEC. We are currently revaluating whether we should go in a different direction than a public offering of equity securities. Thus, we have not responded to the SEC's comments as of the date of this report. Related Party Transactions Refinery On June 1, 2008, we entered into an agreement with the Refinery, whereby we agreed to sell all of our precious metals in the United States exclusively to the Refinery and the Refinery agreed to refrain from entering into a relationship with any third party that is similar to our relationship with them. The agreement is for an initial term of five years. As consideration for this agreement, the Refinery received 10,000,000 fully vested shares of our common stock valued at $1,230,000. Of this amount, we ascribed $938,135 to prepaid refining services, which was being amortized into cost of revenue on a straight line basis over the term of the agreement, and we ascribed $291,865 to an intangible asset, representing the value of the non-compete agreement, which was being amortized into cost of revenue on a straight line basis over the term of the agreement. Due to the decline of our revenues from precious metals, we reviewed the recoverability of our assets pertaining to our precious metals business as of September 30, 2011. As a result of this review, we determined that our prepaid refinery costs and our non-compete agreement with the Refinery had been impaired. Accordingly, during 2011 we recorded an impairment charge of $312,712 related to our prepaid refining services and $97,288 related to our non-compete agreement with the Refinery. In addition, we leased space for our United States processing center on a month-to-month basis from the Refinery, but moved out of the facility in the fourth quarter of 2011. In connection with this move, we recorded an impairment charge of $57,871 related to assets at this location. Until he resigned in January 2012, an officer of the Refinery was a member of our Board of Directors. 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 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. 13 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 invest in usell. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the Risk Factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline. Risks Relating to Our Business Our ability to continue as a going concern is in substantial doubt absent obtaining adequate new debt or equity financing and generating sufficient revenue from operations. We incurred net losses of approximately $8.8 million in 2012 and $4.4 million in 2011. We anticipate these losses will continue for the foreseeable future. Additionally, we have negative cash flows from operations. Our continued existence is dependent upon generating sufficient working capital and obtaining adequate new debt or equity financing. Because of our continuing losses, we may have to reduce our expenditures, without improvements in our cash flow from operations or new financing. Working capital limitations continue to impinge on our day-to-day operations, thus contributing to continued operating losses.Because we have a limited operating history to evaluate our company and are implementing a new business model, the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delay frequently encountered by a new company. In the third quarter in 2011, we began testing our platform which aggregates offers from our partners to customers who we attract to our website. While our results to date have been positive, we have not committed significant marketing resources and cannot predict the degree of our ultimate success. Since we have a limited operating history, we cannot assure you that our business will be profitable. Early stage companies often are unsuccessful and encounter unanticipated expenses and difficulties, investors should consider this risk in determining whether to purchase or sell our common stock. If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations. We believe that our cash on hand and cash flow from operations will be sufficient to meet our anticipated cash needs for at least the next twelve months. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities. Because of the ongoing financial issues in Europe, difficulties which microcap companies have in raising capital, the lack of available credit for companies like us and our stock price, we may be hampered in our ability to raise the necessary working capital. Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments will dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. For example, the Series A offering was extremely dilutive to common shareholders and any future financing may be equally or more dilutive. The investors in the Series A received certain price protection features as well. In the event that we sell securities in the future below a value of $0.20 per share, we will be required to issue additional shares of common stock to these investors, to the extent they are still holding the common stock derived from the shares purchased in the offering. In addition, new equity or debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us. If we require additional financing and such financing is not available on reasonable terms or at all, we may have to reduce our marketing efforts and we will have to modify our business plans accordingly. We may be unable to maintain or establish relationships with partners, which would adversely affect our results of operations. In July 2011, we focused our business on creating an online marketplace where consumers could sell their small electronics which was a new, unproven market for us. Our ability to attract sellers of small electronics to our website depends in large part on providing a sufficient number of partners (buyers) to make our online marketplace efficient and providing customers with the best available pricing and service. The loss of existing relationships with partners, or an inability to continue to add new ones, may cause our platform to provide limited pricing, availability and other information important to customer's visiting our website. This deficiency could reduce customer confidence in the offers provided by partners on our website, making customers less likely to sell to our partners and come back to our website, which would limit the revenues we are able to generate from our platform. In turn, this will adversely affectour business. 14 Because we operate a platform or marketplace, we do not purchase devices directly from consumers. We rely on our partners to provide offers to our consumers and to complete the transactions with the consumers. If our partners limit the number of devices on which they provide offers, consumers may not receive offers on the devices they are trying to sell. In addition, we rely on our partners' ability to service all of the consumers visiting our website. As we grow our marketing campaigns, we expect the volume of transactions to increase. If consumers do not receive offers to buy their devices, or if our partners are unable to service the increased volume, consumers may be forced to go elsewhere to sell their devices, or abandon the transaction altogether which would adversely affect our results of operations. If any of our partners provide poor customer service to our customers, it could hurt the usell brand and adversely affect our business. We believe the importance of customer service in order to generate business and repeat customers is paramount to our ability to be successful. If any of our partners provides poor customer service including delayed and/or reduced payments, or poor website performance, we may lose customers. In particular, customers may think their electronics are in better condition than they are or may not know the exact model, which could result in our partners paying customers less than the customer anticipated. Although we provide customers with the ability to rate our partners after they have completed their transaction, there is no assurance that this rating system provides an accurate depiction of the service provided by our partners. Because we cannot control key elements of our business, we may not be successful. Although we are responsible for creating effective marketing campaigns and for providing a robust, secure and easy to use website for consumers, we have no ability to control our partners which are a key part of our business model. If our partners do not provide excellent service and prices which consumers perceive to be fair, it would affect the reputation of our business, as well as possibly helping our competitors. If we cannot manage our growth effectively, we may not become profitable. Businesses which grow rapidly often have difficulty managing their growth. If we grow as rapidly as we anticipate, we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet these challenges could cause us to lose money, and your investment could be lost. Additionally, the majority of our partners are small electronic recycling companies which are not largely capitalized and do not have the infrastructure to adapt to our expected rapid growth. If our partners do not have the liquidity to pay all of the customers that come to our site, customers may not get paid in time which would hurt the usell brand. If any of our partners' websites were unable to handle all of the traffic that our platform referred to them, their website could crash which would also negatively affect the usell brand. All of these factors could adversely affect our ability to become profitable. If we do not have sufficient capital to market our service, our revenue will be insufficient to support our operations. We are currently spending approximately $200,000 a month on marketing which is not enough money to market our service in a manner which we expect will generate enough revenue to support our operations. Our marketing spending will vary during 2013 as we add new partners and increase our conversion rates. As we continue to invest in and improve our infrastructure, we believe it will improve our efficiency and increase the number of partners on our site; this will allow us to increase our marketing spend and, accordingly, increase our revenues. If these efforts do not generate the revenue level we anticipate, or if we lack sufficient capital, our revenue will be insufficient to support our operations. Our future growth and profitability will depend in large part upon the effectiveness of our marketing and advertising expenditures. Our future growth and profitability will depend in large part upon our media performance, including our ability to: • create greater awareness of our platform; • identify the most effective and efficient level of spending in each market and specific media vehicle; • determine the appropriate creative message and media mix for advertising, marketing and promotional expenditures; and • effectively manage marketing costs (including creative and media). Our planned marketing expenditures may not result in increased revenue. If our media performance is not effective, our future results of operations and financial condition will be adversely affected. 15 If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer. Our future depends, in part, on our ability to attract and retain key personnel and the continued contributions of our executive officers, each of whom may be difficult to replace. In particular, Sergio Zyman, our Chief Executive Officer, Daniel Brauser, our President, and Nik Raman, our Chief Operating Officer, are important to the management of our business and operations and the development of our strategic direction. The loss of the services of any of these officers and the process to replace any key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives. Our business could be negatively affected by changes in general search engine algorithms and dynamics or termination of traffic-generating arrangements. We use Internet search engines, principally through the purchase of branded and smart phone related keywords, to generate traffic to our websites. Search engines, such as Google, frequently update and change the logic which determines the placement and ordering of results of a user's search, which may reduce the effectiveness of the keywords we have purchased. If a major search engine, such as Google, changes its algorithms in a manner that negatively affects the search engine ranking of our website, or changes its pricing, operating or competitive dynamics to our disadvantage, our business, results of operations and financial condition could be adversely affected. Because we face intense competition for business, our future results of operations and our future financial condition may be adversely affected. We compete with eBay and other online auction companies, Gazelle, a leading platform for selling used small electronics, and with many small websites including our partners. In addition, cellular service providers, such as AT&T, Verizon and Sprint, and large retail companies, such as Best Buy and Radio Shack, have introduced trade-in programs for used smartphone devices. Our smaller size, lack of established brand name, shorter operating history and limited working capital may limit our advertising levels, our ability to expand successfully into new markets or effectively compete against these other companies. If we are not able to compete effectively, our future business will be adversely affected and our future results of operations and financial condition will be adversely affected. Because we rely on the continuing rapid pace of technological development in the cell phone and tablet industries, if innovation in these industries were to decrease, our future results of operation will be adversely affected. We believe that one of the driving factors for the potential success of our platform is the continued improvements in the smartphone industry and tablet market. Because many consumers have in the past expressed a continual need to have the latest generation phones and iPads or other tablets, the opportunity for providing these consumers with an outlet to sell their used electronics is promising. However, we cannot guarantee that consumers will visit our website to sell their used electronics. If innovation in cell phone or tablet device technology were to level off, the purchase of new phones and tablets could be diminished reducing the need for an online marketplace for selling used electronics. In such event, our results of operations would suffer and we may not be able to continue operations. Because we rely on information technology to operate our businesses and maintain our competitiveness, any failure to adapt to technological developments or industry trends could harm our business. We depend upon the use of sophisticated information technology, including software. As our operations grow in both size and scope, we must continuously improve and upgrade our systems including our hardware and infrastructure to offer our customers enhanced products, services, features and functionality, while maintaining the reliability and integrity of our systems and infrastructure. Our future success also depends on our ability to adapt our services and infrastructure to meet rapidly evolving industry standards while continuing to improve the performance, features and reliability of our service in response to competitive service and product offerings and the changing demands of the marketplace. In particular, expanding our systems and infrastructure to meet any potential increases in business volume will require us to commit additional financial, operational and technical resources before those increases materialize, with no assurance that they actually will. Furthermore, our use of this technology could be challenged by claims that we have infringed upon the patents, copyrights or other intellectual property rights of others. In addition, we may not be able to maintain our existing systems, obtain new technologies and systems, or replace or introduce new technologies and systems as quickly as our competitors or in a cost-effective manner. Also, we may fail to achieve the benefits anticipated or required from any new technology or system, or we may be unable to devote financial resources to new technologies and systems in the future. Additionally, our business is heavily reliant on application program interfaces with our partners. If we experience information technology problems with one or more of our partners, it could adversely affect our business. If we experience system interruptions, it may cause us to lose customers and harm our business. Our inability to maintain and improve our information technology systems and infrastructure may result in system interruptions. System interruptions and slow delivery times, unreliable service levels, prolonged or frequent service outages, or insufficient capacity may prevent us from efficiently providing services to our customers, which could result in our losing customers and revenue. 16 We lease space for our data center and rely on a co-location partner for power, security, connectivity and other services. We also rely on third party providers for bandwidth and content delivery. We do not control these vendors and it would take significant time and effort to replace them. We have experienced, and may in the future experience, website disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints. Our systems are vulnerable to damage or interruption from terrorist attacks, floods, fires, power loss, telecommunications failures, hurricanes, computer viruses, computer denial of service attacks or other attempts to harm our systems. If the site is unavailable when consumers attempt to access it or access is slower than a consumer expects, consumers may stop visiting our site and become less likely to return, if at all. We expect to continue to make significant investments in our technology infrastructure to maintain and improve all aspects of user experience and site performance. To the extent that our disaster recovery systems are not adequate, or we do not effectively address capacity constraints, upgrade our systems and continually develop our technology and network architecture to accommodate increasing traffic, our business and operating results may suffer. Our software is highly technical and undetected errors, if any, could adversely affect our business. Our service incorporates software that is highly technical and complex. Our software has contained, and may now or in the future contain, undetected errors, bugs, flaws, corrupted data or vulnerabilities. Some errors in our software code may only be discovered after the code has been released. Any errors, bugs, flaws or corrupted data could result in damage to our reputation, loss of users, or loss of revenue, any of which could adversely affect our business and financial results. Our networks and IT systems may be vulnerable to unauthorized persons hacking our systems, which could disrupt our operations and result in the theft ofour proprietary information. A party who is able to breach the security measures on our networks could misappropriate either our proprietary information or the personal information of our customers, or cause interruptions or malfunctions in our operations. We may be required to expend significant capital and other resources to protect against such threats or to alleviate problems caused by breaches in security, which could have a material adverse effect on our financial performance and operating results. Our business is subject to a variety of U.S. and other laws, rules and regulations that could subject us to claims or otherwise harm our business. Government regulation of the Internet and e-commerce is evolving and unfavorable changes could substantially harm our business and results of operations. We are subject to a variety of laws in the U.S. and elsewhere that affect advertising, that are costly with which to comply, can result in negative publicity and diversion of management time and effort, and can subject us to claims or other remedies. In addition, the laws relating to the liability of providers of online services are currently unsettled both within the U.S. and elsewhere. Claims can be brought under both U.S. and foreign law for defamation and other tort claims, unlawful activity, copyright and trademark infringement. The Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, our liability for listing or linking to third-party websites that include materials that infringe copyrights or other rights, so long as we comply with the statutory requirements of this act. The Child Online Protection Act and the Children's Online Privacy Protection Act restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors. In the area of data protection, the European Union and many states have passed laws requiring notification to users when there is a security breach for personal data, such as California's Information Practices Act. We must comply with the Federal Trade Commission's unfair trade practices rules and state consumer protection laws including "little" unfair trade practice rules. Any failure on our part to comply with these laws, rules and regulations may subject us to additional liabilities. As Internet commerce develops, federal, state and foreign governments may draft and propose new laws to regulate Internet commerce, which may negatively affect our business. As Internet commerce continues to evolve, increasing regulation by federal, state or foreign governments becomes more likely. Our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws applicable to email marketing. The cost to comply with such laws or regulations could be significant and would increase our operating expenses. If governments tax 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. Recently there has been movement toward Congress permitting States and localities to impose sale taxes on online purchases principally due to the poor economy in the U.S., the impact of lower prices on real estate or tax revenue and soaring state budget deficits. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet. New or revised taxes and especially sales taxes would likely increase the cost of doing business online, and increase advertising and marketing costs over the Internet. Any of these events will increase our costs and adversely affect our business and results of operations. If a third party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or require us to obtain expensive licenses, and our business may be adversely affected. The Internet industry is characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. A party may assert patent and other intellectual property infringement litigation against us claiming our platform infringes on its patents or otherwise violates its intellectual property rights. Any lawsuit, whether or not successful, could: 17 · Divert management's attention; · Result in prohibitive costs; · Require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all; or · Require us to redesign our platform to avoid infringement. As a result, any third-party intellectual property claims against us could increase our expenses and adversely affect our business. In addition, agreements with third parties require us to indemnify them for intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling on any such claim. Even if we have not infringed any intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management time. Finally, if a claimant successfully asserts a claim that our services infringe their proprietary rights, royalty or licensing agreements might not be available on terms we find acceptable, or at all. 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 Over-The-Counter Bulletin Board which is not a liquid market. There is currently only a limited public market for our common stock. We cannot assure you that an active public market for our common stock will develop or be sustained in the future. If an active market for our common stock does not develop or is not sustained, the price may continue to decline. Because we are subject to the "penny stock" rules, brokers cannot generally solicit the purchase of our common stock which adversely affects its liquidity and market price. The SEC has adopted regulations which generally define "penny stock" to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the Bulletin Board has been substantially less than $5.00 per share and therefore we are currently considered a "penny stock" according to SEC rules. This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. Due to factors beyond our control, our stock price may be volatile. Any of the following factors could affect the market price of our common stock: · Our failure to increase revenue in each succeeding quarter; · Our failure to achieve and maintain profitability; · Our failure to meet our revenue and earnings guidance; · The loss of partners; · The sale of a large amount of common stock by our shareholders; · Our announcement of a pending or completed acquisition or our failure to complete a proposed acquisition; · Adverse court ruling or regulatory action; · Our failure to meet financial analysts' performance expectations; · Changes in earnings estimates and recommendations by financial analysts; · Changes in market valuations of similar companies; 18 · Short selling activities; · Our announcement of any financing which is dilutive to our shareholders; · Our announcement of a change in the direction of our business; · Announcements by us, or our competitors, of significant contracts, acquisitions, commercial relationships; joint ventures or capital commitments; or · Our failure to increase revenue in each succeeding quarter. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management's time and attention, which would otherwise be used to benefit our business. Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our common stock. It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since the firm itself cannot recommend the purchase of our common stock under the penny stock rules referenced in an earlier risk factor. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It may also make it more difficult for us to attract new investors at times when we acquire additional capital. We have been subject to a regulatory investigation and we may be subject to such proceedings in the future, which could cause us to incur substantial costs or require us to change our business practices in a manner materially adverseto our business. From time to time, we may receive inquiries from regulators regarding our compliance with laws and other matters. For example, in August 2011, the Florida Attorney General, which we refer to as the "AG", initiated an official investigation into whether or not we engaged in unfair trade practices in violation of its "Little FTC Act." The investigation was due to consumer complaints primarily with our former gold business, although some complaints related to our initial cell phone business. In March 2013, we entered into a settlement with the AG in which we agreed to pay the AG $20,000. See Item 3. "Legal Proceedings." 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. [ Back To TMCnet.com's Homepage ]