Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
Note 1 – Organization and
Business
Upstream
Worldwide, Inc. (formerly, Money4Gold Holdings, Inc.) is based in Florida and,
through our wholly-owned subsidiaries (collectively, “Upstream,” “Company,”
“we,” “us,” and/or “our”), operates in the United States, Canada, and several
countries in Europe. Through direct response advertising and marketing
campaigns, we purchase, aggregate and resell precious metals, including gold,
silver and platinum, and diamonds and other precious stones from the public.
Recently, we introduced similar reverse logistics services for small consumer
electronics, such as cellular phones, however to date the revenue generated from
these additional services has not been material.
Note 2 – Basis of
Presentation
The
accompanying unaudited interim condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information and pursuant
to the instructions to Form 10-Q and Article 8 of Regulation S-X of the United
States Securities and Exchange Commission (“SEC”). Certain information or
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted, pursuant to the rules and regulations of
the SEC for interim financial reporting. Accordingly, they do not include all
the information and footnotes necessary for a comprehensive presentation of
financial position, results of operations, or cash flows. It is our opinion,
however, that the accompanying unaudited interim condensed consolidated
financial statements include all adjustments, consisting of a normal recurring
nature, which are necessary for a fair presentation of the financial position,
operating results and cash flows for the periods presented.
The
accompanying unaudited interim condensed consolidated financial statements
should be read in conjunction with our Annual Report on Form 10-K for the year
ended December 31, 2009 as filed with the SEC, which contains the audited
financial statements and notes thereto, together with Management’s Discussion
and Analysis, for the year ended December 31, 2009 and the period from February
14, 2008 (inception) to December 31, 2008. The financial information as of
December 31, 2009 is derived from the audited financial statements presented in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
The interim results for the three or nine month periods ended September 30, 2010
are not necessarily indicative of the results to be expected for the year ending
December 31, 2010 or for any future interim period.
Note 3 – Liquidity,
Management’s Plans and Going Concern
We
incurred a net loss of $16,914,876 for the nine months ended September 30, 2010
(including non-cash charges for goodwill impairment of $11,142,273, a derivative
expense pertaining to the conversion feature of our convertible Series B
Preferred Stock of $512,291, stock based compensation of $1,687,338, and an
impairment charge of $219,324 pertaining to our operations in the United Kingdom
and Europe) and used $1,684,727 in cash from operations. As of September 30,
2010, we had an accumulated deficit of $27,130,698, and working capital deficit
of $2,971,112.
The
accompanying unaudited consolidated interim financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. These
accompanying unaudited consolidated interim financial statements do not include
any adjustments relating to the recovery of the recorded assets or the
classification of the liabilities that might be necessary should we be unable to
continue as a going concern.
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 preferred stock, common stock and various debt financing transactions.
Our consolidated revenue for the third and fourth quarter of 2009 of $6.8
million and $19.6 million, respectively, increased dramatically over the
respective prior quarters and the fourth quarter of 2009 was profitable. Our
revenue however, declined to $17.3 million during the first quarter of 2010,
$7.8 million during the second quarter of 2010, and $4.1 million during the
third quarter of 2010. We believe that the higher level of revenue attained
during the third and fourth quarters of 2009 and the first quarter of 2010
demonstrate the viability of our business plan however, because of our limited
size in the fourth quarter of 2008 and our rapid growth during 2009, we do not
have sufficient comparable history to determine the level of seasonality of our
business. In addition, we believe that increased competition for the aggregation
and resale of precious metals; negative representation of the industry by
multiple media and certain governmental agencies in several of the markets in
which we operate; and aging media campaigns resulted in decreased performance
during the second and third quarters of 2010. These factors further support the
importance of the successful implementation of the next stages of our business
plan, specifically the introduction of similar reverse logistics services for
small consumer electronics, such as cellular phones. We believe that the market
for recycling small consumer electronics such as cellular phones, though just
emerging, is substantial and that if we can achieve significant returns on our
media investments and control our costs accordingly, continued implementation of
our business plans will generate steadily improving results and cash flows in
the future.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
On August
5, 2010, our Board of Directors approved the borrowing of up to $500,000 through
the issuance of one-year secured notes paying 25% interest to a relative of our
Chief Financial Officer and another shareholder and authorized the sale of up to
$4,000,000 of Units in a private placement. During August 2010, we sold
2,943,750 shares of Convertible Series B Preferred Stock and 73,593,750 warrants
to purchase our common stock for gross proceeds of $2,943,750.
It is
possible that our cash balance on November 5, 2010 of approximately $1.5 million
and anticipated cash that will be received from revenue generated from
advertisements that have already aired will not be sufficient to sustain
operations through at least September 30, 2011. There can be no assurance that
the plans and actions proposed by management will be successful, that we will
continue to generate revenue from advertisements that have already aired, or
that unforeseen circumstances will not require us to seek additional funding
sources in the future or effectuate plans to conserve liquidity. In addition,
there can be no assurance that future efforts to raise additional funds through
the issuance of debt and/or equity securities will be successful or, that in the
event additional sources of funds are needed to continue operations, that they
will be available on acceptable terms, if at all.
Note 4 – Significant
Accounting Policies
Principles
of Consolidation
The
accompanying unaudited interim condensed consolidated financial statements
include the accounts of Upstream and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Use
of Estimates
The
preparation of unaudited interim condensed consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the unaudited interim condensed consolidated
financial statements and accompanying notes. Such estimates and assumptions
impact, among others, the following: the amount allocated to goodwill and other
intangible assets and related impairments, the estimated useful lives for
amortizable intangible assets and property, plant and equipment, accrued
expenses, deferred revenue, the fair value of warrants granted in connection
with various financing transactions, share-based payment arrangements, and the
fair value of derivative liabilities.
Making
estimates requires management to exercise significant judgment. It is at least
reasonably possible that the estimate of the effect of a condition, situation or
set of circumstances that existed at the date of the unaudited interim condensed
consolidated financial statements, which management considered in formulating
its estimate could change in the near term due to one or more future confirming
events. Accordingly, the actual results could differ significantly from our
estimates.
Reclassification
We have
reclassified certain prior period amounts to conform to the current period
presentation. These reclassifications have no effect on the financial position
at December 31, 2009 or on the results of operations or cash flows for the
periods presented.
Cash
and Cash Equivalents
All
highly liquid investments with an original maturity of 90 days or less when
purchased are considered to be cash equivalents. At September 30, 2010 and
December 31, 2009, there were no cash equivalents.
We
minimize credit risk associated with cash and cash equivalents by periodically
evaluating the credit quality of our primary financial institutions. At times,
our cash and cash equivalents may be uninsured or in deposit accounts that
exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. On
September 30, 2010, our deposits exceeded the FDIC limit by approximately $1.8
million.
Goodwill
Goodwill
is tested for impairment on an annual basis and between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying value. These events or
circumstances could include a significant change in the business climate, legal
factors, operating performance indicators, competition or sale or disposition of
a significant portion of a reporting unit. The goodwill impairment test is
conducted using a discounted cash flow methodology. This requires significant
judgments including estimation of future cash flows, which is dependent on
internal forecasts, estimation of the long-term growth rate of our business, the
useful life over which cash flows will occur, and determination of our weighted
average cost of capital. Changes in these estimates and assumptions could
materially affect the determination of fair value and/or goodwill impairment
charge.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
As
discussed in more detail in Note 8, during the three and nine month periods
ended September 30, 2010, we recorded an impairment charge of $11,142,273
pertaining to our goodwill.
Revenue
Recognition
We
generate revenue predominantly from the sale of precious metals, including gold,
silver and platinum, and from the sale of diamonds and other precious stones.
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.
Precious
Metals
We grade
the quality of the precious metals purchased from the public and estimate the
total quantity of pure gold, silver and platinum received. We then lock in the
current spot rate of each metal sufficient to cover the total quantity received
in the current batch with the Refinery (as defined in Note 12). After a holding
period of at least 10 days to allow for returns, the precious metals are
delivered to the Refinery to be melted. Upon melting the precious metals, the
Refinery validates the quality of pure gold, silver, and platinum and remits
payment to us based on the quantity of each precious metal at the agreed upon
spot rates, as described above. Revenue is recognized upon melting of the
precious metals and the validation of the quality and quantity of each precious
metal by the Refinery.
No
returns are accepted from the Refinery and upon delivery of the precious metals
to the refiner, we have no further obligations.
Diamonds
and Other Precious Stones
Diamonds
and other precious stones are generally purchased from the public in connection
with the purchase of precious metals. We value diamonds and other precious
stones based on a variety of factors including size and quality and then resell
them. To date, all diamonds and other precious stones have been sold to an
affiliate of an officer of one of our wholly-owned subsidiaries. Revenue is
recognized upon the acceptance of the diamonds and other precious stones by the
purchaser.
Deferred
Revenue
Upon our
estimate of the total quantity of pure gold, silver, and platinum received and
the locking in of the current spot rate for each precious metal, we are able to
estimate the total value of the batch received. The Refinery advances to us, up
to 80% of the value of the precious metals we have received, but not yet
delivered. This amount is recorded as deferred revenue until the specific batch
is melted and processed as described above, at which time, it is recorded as
revenue.
Cost
of Revenue
Our cost
of revenue includes our cost of acquiring precious metals and stones as well as
other direct costs and expenses required to ship, secure, grade, log and process
the metals and stones internally. In addition, fees and other costs incurred in
connection with processing at the Refinery are charged to cost of
revenue.
Advertising
Advertising
costs are expensed as they are incurred and are included in sales and marketing
expenses on our unaudited interim consolidated statements of operations.
Advertising expense amounted to $13,695,130 and $5,210,095 for the nine months
ended September 30, 2010 and 2009, respectively.
Foreign
Currency Transactions
The
unaudited interim condensed consolidated financial statements are presented in
United States Dollars. The financial position and results of operations of our
foreign subsidiaries are measured using the local currency as the functional
currency. Assets and liabilities of our foreign subsidiaries have been
translated from their local currency (British pounds, Canadian dollars and
Euros) into the reporting currency, U.S. dollars, using period end exchange
rates. Equity transactions have been translated using the historical exchange
rate that was in effect when the transaction occurred. The resulting translation
adjustments are recorded as a separate component of accumulated other
comprehensive loss. Revenues and expenses have been translated using weighted
average exchange rates for the respective periods. Transaction gains and losses
resulting from foreign currency transactions are recorded as foreign exchange
gains or losses and are included in general and administrative expense in the
consolidated statement of operations. We have not entered into any financial
instruments to offset the impact of foreign currency
fluctuations.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
Share-Based
Payment Arrangements
Generally,
all forms of share-based payments, including stock option grants, restricted
stock grants and stock appreciation rights are measured at their fair value on
the awards’ grant date, based on the estimated number of awards that are
ultimately expected to vest. Share-based compensation awards issued to
non-employees for services rendered are recorded at either the fair value of the
services rendered or the fair value of the share-based payment, whichever is
more readily determinable. The expense resulting from share-based payments are
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. We have applied fair value accounting and the related provisions of
Accounting Standards Codification (“ASC”) 718 for all share based payment
awards. The fair value of share-based payments is recognized ratably over the
stated vesting period. In the event of termination, we will cease to recognize
compensation expense.
Income
Taxes
We
account for income taxes in accordance with ASC Topic 740, “ Income Taxes ,” which
requires that we recognize deferred tax liabilities and assets based on the
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities, using enacted tax rates in effect in the years the
differences are expected to reverse. Deferred income tax benefit (expense)
results from the change in net deferred tax assets or deferred tax liabilities.
A valuation allowance is recorded when it is more likely than not that some or
all deferred tax assets will not be realized.
ASC Topic
740-20, “Income Taxes – Intraperiod Tax Allocation,” clarifies the accounting
for uncertainties in income taxes recognized in accordance with ASC Topic 740-20
by prescribing guidance for the recognition, de-recognition and measurement in
financial statements of income tax positions taken in previously filed tax
returns or tax positions expected to be taken in tax returns, including a
decision whether to file or not to file in a particular jurisdiction. ASC Topic
740-20 requires that any liability created for unrecognized tax benefits is
disclosed. The application of ASC Topic 740-20 may also affect the tax bases of
assets and liabilities and therefore may change or create deferred tax
liabilities or assets. We would recognize interest and penalties related to
unrecognized tax benefits in income tax expense.
During
2010, we recorded impairment expenses resulting from the write off of our
goodwill in the amount of $11,142,273 and from the write off of fixed assets and
certain prepaid expenses in the United Kingdom amounting to $219,324. These
impairment expenses are not deductible for tax purposes.
Convertible
Instruments
We review
all of our convertible instruments for the existence of an embedded conversion
feature which may require bifurcation, if certain criteria are met. These
criteria include circumstances in which:
|
a)
|
The economic characteristics and
risks of the embedded derivative instrument are not clearly and closely
related to the economic characteristics and risks of the host
contract,
|
|
b)
|
The hybrid instrument that
embodies both the embedded derivative instrument and the host contract is
not remeasured at fair value under otherwise applicable GAAP with changes
in fair value reported in earnings as they occur,
and
|
|
c)
|
A separate instrument with the
same terms as the embedded derivative instrument would be considered a
derivative instrument subject to certain requirements (except for when the
host instrument is deemed to be
conventional).
|
A
bifurcated derivative financial instrument may be required to be recorded at
fair value and adjusted to market at each reporting period end date. In
addition, we may be required to classify certain stock equivalents issued in
connection with the underlying debt instrument as derivative
liabilities.
For
convertible instruments that we have determined should not be bifurcated from
their host instruments, we record discounts to convertible notes for the
intrinsic value of conversion options embedded in debt instruments based upon
the differences between the fair value of the underlying common stock at the
commitment date of the note transaction and the effective conversion price
embedded in the note. Debt discounts under these arrangements are amortized over
the term of the related debt to their earliest date of redemption. Also when
necessary, we record deemed dividends for the intrinsic value of conversion
options embedded in preferred shares based upon the differences between the fair
value of the underlying common stock at the commitment date of the financing
transaction and the effective conversion price embedded in the preferred
shares.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
In
addition, we review all of our convertible instruments for the existence of a
beneficial conversion feature. Upon the determination that a beneficial
conversion feature exists, the relative fair value of the beneficial conversion
feature would be recorded as a discount from the face amount of the respective
debt instrument and the discount would be amortized to interest expense over the
life of the debt.
Finally,
if necessary, we will determine the existence of liquidated damage provisions.
Liquidated damage provisions are not marked to market, but evaluated based upon
the probability that a related liability should be recorded.
Common
Stock Purchase Warrants and Derivative Financial Instruments
We review
any common stock purchase warrants and other freestanding derivative financial
instruments at each balance sheet date and classify them on our balance sheet
as:
|
a)
|
Equity if they (i) require
physical settlement or net-share settlement, or (ii) gives us a choice of
net-cash settlement or settlement in our own shares (physical settlement
or net-share settlement), or
as
|
|
b)
|
Assets or liabilities if they (i)
require net-cash settlement (including a requirement to net cash settle
the contract if an event occurs and if that event is outside our control),
or (ii) give the counterparty a choice of net-cash settlement or
settlement in shares (physical settlement or net-share
settlement).
|
We assess
classification of our common stock purchase warrants and other freestanding
derivatives at each reporting date to determine whether a change in
classification between assets and liabilities is required.
Net
Loss per Share
Basic
earnings per share (“EPS”) is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding during
the period, excluding the effects of any potentially dilutive securities.
Diluted EPS gives effect to all dilutive potential of shares of common stock
outstanding during the period including stock options or warrants, using the
treasury stock method (by using the average stock price for the period to
determine the number of shares assumed to be purchased from the exercise of
stock options or warrants), and convertible debt or convertible preferred stock,
using the if-converted method. Diluted EPS excludes all dilutive potential of
shares of common stock if their effect is anti-dilutive.
The
computation of basic and diluted loss per share for the three and nine months
ended September 30, 2010 and 2009 excludes potentially dilutive securities
because their inclusion would be anti-dilutive. The following table lists the
potentially dilutive securities that existed at September 30, 2010 and December
31, 2009:
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Convertible
Preferred Stock
|
|
|
147,587,500 |
|
|
|
3,400,000 |
|
Common
Stock Purchase Warrants
|
|
|
92,268,753 |
|
|
|
21,800,003 |
|
Stock
Options
|
|
|
74,081,233 |
|
|
|
13,215,834 |
|
|
|
|
313,937,486 |
|
|
|
38,415,837 |
|
Comprehensive
Loss
Other
comprehensive loss includes all changes in stockholders’ equity during a period
from non-owner sources and is reported in the consolidated statement of
stockholders’ equity. To date, other comprehensive loss consists of changes in
accumulated foreign currency translation adjustments.
Recent
Accounting Pronouncements
In
January 2010, the FASB issued updated guidance to amend the disclosure
requirements related to recurring and nonrecurring fair value measurements. This
update requires new disclosures on significant transfers of assets and
liabilities between Level 1 and Level 2 of the fair value hierarchy (including
the reasons for these transfers) and the reasons for any transfers in or out of
Level 3. This update also requires a reconciliation of recurring Level 3
measurements about purchases, sales, issuances and settlements on a gross basis.
In addition to these new disclosure requirements, this update clarifies certain
existing disclosure requirements. For example, this update clarifies that
reporting entities are required to provide fair value measurement disclosures
for each class of assets and liabilities rather than each major category of
assets and liabilities. This update also clarifies the requirement for entities
to disclose information about both the valuation techniques and inputs used in
estimating Level 2 and Level 3 fair value measurements. This update is effective
for the interim and annual reporting periods beginning January 1, 2010, except
for the requirement to provide the Level 3 activity of purchases, sales,
issuances, and settlements on a gross basis, which will become effective for the
interim and annual reporting period beginning January 1, 2011. We will not be
required to provide the amended disclosures for any previous periods presented
for comparative purposes. Other than requiring additional disclosures, adoption
of this update will not have a material effect on our unaudited interim
condensed consolidated financial statements.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
Note 5 – Fair
Value
The fair
value of our financial assets and liabilities reflects our estimate of amounts
that we would have received in connection with the sale of the assets or paid in
connection with the transfer of the liabilities in an orderly transaction
between market participants at the measurement date. In connection with
measuring the fair value of our assets and liabilities, we seek to maximize the
use of observable inputs (market data obtained from independent sources) and to
minimize the use of unobservable inputs (internal assumptions about how market
participants would price assets and liabilities). The following fair value
hierarchy is used to classify assets and liabilities based on the observable
inputs and unobservable inputs used in order to value the assets and
liabilities:
Level 1:
|
Quoted prices in active markets
for identical assets or liabilities. An active market for an asset or
liability is a market in which transactions for the asset or liability
occur with sufficient frequency and volume to provide pricing information
on an ongoing basis.
|
Level 2:
|
Observable inputs other than
Level 1 inputs. Examples of Level 2 inputs include quoted prices in active
markets for similar assets or liabilities and quoted prices for identical
assets or liabilities in markets that are not
active.
|
Level 3:
|
Unobservable inputs based on our
assessment of the assumptions that market participants would use in
pricing the asset or
liability.
|
Our
investment strategy is focused on capital preservation. We intend to invest in
instruments that meet credit quality standards. The current expectation is to
maintain cash and cash equivalents, once these resources are
available.
The
following are the major categories of liabilities measured at fair value on a
nonrecurring basis at September 30, 2010 and December 31, 2009, using quoted
prices in active markets for identical assets (Level 1); significant other
observable inputs (Level 2); and significant unobservable inputs (Level
3):
|
|
At September 30, 2010
|
|
|
At December 31, 2009
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
Level
1
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Level
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
— |
|
|
|
— |
|
|
|
11,142,273 |
|
|
|
— |
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
|
|
— |
|
|
|
3,456,041 |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
— |
|
|
$ |
3,456,041 |
|
|
$ |
11,142,273 |
|
|
$ |
— |
|
The
following table reflects the change in fair value of our derivative liabilities
for the three and nine months ended September 30, 2010:
|
|
Three Months Ended
September 30, 2010
|
|
|
Nine Months Ended
September 30, 2010
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
11,142,273 |
|
|
$ |
- |
|
Impairment
of goodwill
|
|
|
- |
|
|
|
- |
|
|
|
(11,142,273 |
) |
|
|
- |
|
Derivative
liability
|
|
|
- |
|
|
|
3,456,041 |
|
|
|
- |
|
|
|
- |
|
Balance
at September 30, 2010
|
|
$ |
- |
|
|
$ |
3,456,041 |
|
|
$ |
- |
|
|
$ |
- |
|
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
We have
determined the estimated fair value amounts presented in these unaudited interim
condensed consolidated financial statements using available market information
and appropriate methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value. The estimates
presented in the unaudited interim condensed consolidated financial statements
are not necessarily indicative of the amounts that we could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts. We
have based these fair value estimates on pertinent information available as of
the respective balance sheet dates and have determined that, as of such dates,
the carrying value of all financial instruments approximates fair
value.
Note 6 –
Acquisitions
On May 7,
2009, we acquired 100% of MGE Enterprises Corporation, a Wyoming corporation
(“MGE”). MGE operated in the United States under the names mygoldenvelope.com
and sobredeoro.com using a business model similar to ours. In addition, their
management has provided us with extensive experience in creating and growing
businesses that provide shareholder value in a broad array of industries,
including direct response, Internet marketing and national retail distribution
and sales. MGE’s ability to reach a broader number of consumers through their
experience in multi-language television advertising, direct response, and retail
distribution and sales greatly accelerated our growth and increased our depth of
management experience. In connection with this acquisition, we recorded goodwill
totaling $11,142,273.
We used
the acquisition method of accounting in connection with the acquisition of MGE
and accordingly, our unaudited interim condensed consolidated financial
statements include the results of operations of MGE for the three and nine
months ended September 30, 2010 and for the period from May 7, 2009 to September
30, 2009.
The
following unaudited condensed consolidated pro forma information gives effect to
the acquisition of MGE as if the transaction had occurred on January 1, 2009.
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, 2009, nor are they indicative
of results that may occur in any future periods:
|
|
Nine
|
|
|
|
Months Ended
|
|
|
|
September 30, 2009
|
|
Revenues
|
|
$ |
12,251,253 |
|
Net
Loss
|
|
|
(5,337,045
|
) |
|
|
|
|
|
Basic
and Diluted Loss from Continuing Operations per Common
Share
|
|
$ |
(0.03
|
) |
Basic
and Diluted Weighted Average Shares
Outstanding
|
|
|
158,540,060 |
|
Note 7 –Fixed
Assets
Fixed
assets consist of the following at September 30, 2010 and December 31,
2009:
|
|
September 30, 2010
|
|
|
December 31,
2009
|
|
|
Estimated
Useful Life
|
|
Leasehold
Improvements
|
|
$ |
50,852 |
|
|
$ |
39,694 |
|
|
*
|
|
Security
Equipment
|
|
|
29,795 |
|
|
|
26,005 |
|
|
7years
|
|
Computers
|
|
|
7,821 |
|
|
|
6,024 |
|
|
3years
|
|
Furniture
and Fixtures
|
|
|
-0- |
|
|
|
2,397 |
|
|
7years
|
|
Office
Equipment
|
|
|
3,386 |
|
|
|
3,386 |
|
|
3years
|
|
|
|
|
91,854 |
|
|
|
77,506 |
|
|
|
|
|
Less:
Accumulated Depreciation
|
|
|
(10,359
|
) |
|
|
(1,598
|
) |
|
|
|
|
Fixed
Assets, Net
|
|
$ |
81,495 |
|
|
$ |
75,908 |
|
|
|
|
|
* The
shorter of three years or the life of the lease.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
Depreciation
expense pertaining to fixed assets amounted to $17,931 and $327 for the three
months ended September 30, 2010 and 2009, respectively, and $42,304 and $653 for
the nine months ended September 30, 2010 and 2009, respectively.
During
the fourth quarter of 2010, we changed our business plan in the United Kingdom
and European markets, whereby we no longer manage advertising, fulfillment, or
grading, logging and storing of gold and other precious metals directly. At
September 30, 2010, we recorded an impairment of $142,200 (as reflected in the
table above) to write off the fixed assets used in these functions as they are
not expected to provide future economic benefit.
Note 8
–Goodwill
We
reported revenue of $4.1 million during the third quarter of 2010, a decrease of
$2.7 million from the $6.8 million reported during the same period of 2009. This
represents the first occurrence of a decline in revenue from the same period in
a prior year in our history. In addition, the losses from operations for the
third quarter and the nine month period ended September 30, were both higher in
2010 as compared with the same periods in 2009. In connection with the
preparation of the financial statements for the three and nine month periods
ended September 30, 2010, we concluded that these operating performance
indicators were sufficient to warrant a review of the carrying amount of our
goodwill at September 30, 2010. We reviewed the carrying value of our goodwill,
considering both quantitative factors, such as projected future cash flows, as
well as qualitative factors, including our limited operating history, the
significant fluctuations in our sales volume over the last several quarters and
the uncertainty regarding our expansion into similar services for cellular
phones. Based on this review, we determined that the value of our goodwill had
been impaired. Accordingly, we recorded an impairment charge on our unaudited
interim consolidated statements of operations of $11,142,273 for the three and
nine months ended September 30, 2010 which brought our goodwill value to
zero.
Note 9 –Debt and Other
Financing
Convertible
Note Payable
On March
4, 2009, we issued a $250,000 Convertible Note Payable (the “Convertible Note”)
to Whalehaven Capital Fund Limited (“Whalehaven”). The Convertible Note had a
three month term, bore interest at an annual rate of 15% compounded monthly
beginning on the date of issuance, and was secured by all of our assets. The due
date for all principal and accrued interest of June 1, 2009 was subsequently
extended to June 1, 2010. The Convertible Note was paid in full, along with all
accrued interest, on October 5, 2009. We used the $237,500 net proceeds received
from this Convertible Note to provide working capital. We recorded interest
expense of $47,798 and $60,500 for the three and nine months ended September 30,
2009, respectively, pertaining to the Convertible Note.
In
connection with the issuance of the Convertible Note, we paid costs of $27,591
which were capitalized as debt issuance costs. During the three and nine months
ended September 30, 2009, we amortized $3,482 and $12,930, respectively, of the
debt issue costs to interest expense.
The
relative fair value of the conversion feature, which amounted to $69,429, was
recorded as a discount to the Convertible Note and a corresponding derivative
liability – embedded conversion feature. During the three and nine months ended
September 30, 2009, we amortized $6,177 and $42,662, respectively, of the
discount to interest expense.
The fair
value of the derivative liability – embedded conversion feature was recalculated
at each subsequent quarterly balance sheet date and on the date that the
maturity date was extended. We recorded a gain of $31,787 and expense of $55,399
for the three and nine months ended September 30, 2009, respectively,
representing the net change in the fair value of the derivative liability –
embedded conversion feature.
Media
Line of Credit
We
obtained a line of credit of up to $300,000 in May 2009 to be used to finance
our media and advertising campaigns, as most of our vendors require payment in
advance. In July 2009, the total amount available under the line of credit was
increased to $500,000. This facility was due on demand, accrued interest based
on a percentage of revenue generated from the media purchased with this money
capped at 1.5% of the principal amount outstanding per week and was secured by
our accounts receivable and inventory. On September 30, 2009, we converted the
$500,000 outstanding principal balance into 5,834,306 shares of our common stock
resulting in a loss from conversion of $550,175 based upon the fair value of the
stock on the date of conversion of $1,050,175. For the three and nine months
ended September 30, 2009, we recorded interest expense of $96,857 and $109,500,
respectively, pertaining to this line of credit.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
Notes
Payable - Other
In
connection with the acquisition of MGE, we assumed certain notes payable
totaling $194,785 at the time of the acquisition. The notes bore interest at 12%
and were due on December 31, 2009. On October 19, 2009, we paid $153,322, which
represented the entire remaining principal balance and all accrued interest
pertaining to these notes on that date. For the three and nine months ended
September 30, 2009, we recorded interest expense of $5,479 and $9,634,
respectively, pertaining to these notes.
Note 10 – Commitments and
Contingencies
We lease
space for our corporate headquarters and for our aggregation facilities located
around the world under operating lease agreements that expire at various dates
through October 2014. Aggregate rent expense for all operating leases was
$76,457 and $44,897 for the three months ended September 30, 2010 and 2009,
respectively, and $275,748 and $117,563 for the nine months ended September 30,
2010 and 2009, respectively.
Economic
Risks and Uncertainties
The
global economic slowdown has caused a general tightening in the credit markets,
lower levels of liquidity, increases in the rates of default and bankruptcy, and
extreme volatility in credit, equity and fixed income markets. These conditions
not only limit our access to capital, but also make it difficult for our
customers, our vendors and us to accurately forecast and plan future business
activities. Furthermore, our operations are subject to fluctuating prices of
precious metals. A decrease in the value of gold, silver or platinum could have
an adverse effect on our business.
Foreign
Operations
Our
operations in various geographic regions expose us to risks inherent in doing
business in each of the countries in which we transact business. Operations in
countries other than the United States are subject to various risks particular
to each country. With respect to any particular country, these risks may
include, but are not limited to:
|
·
|
Currency fluctuations,
devaluations, conversion and expropriation
restrictions;
|
|
·
|
Confiscatory taxation or other
adverse tax policies;
|
|
·
|
Political and economic
instability;
|
|
·
|
Trade restrictions and economic
embargoes imposed by the United States and other
countries;
|
|
·
|
Expropriation and nationalization
of our assets or of our customers in that
country;
|
|
·
|
Governmental activities that
limit or disrupt markets, payments, or limit the movement of
funds;
|
|
·
|
Governmental activities that may
result in the deprivation of contract
rights;
|
|
·
|
Civil unrest, acts of terrorism,
force majeure, war or other armed conflict;
and
|
|
·
|
Natural disasters including those
related to earthquakes, hurricanes, tsunamis and
flooding.
|
Employment
Agreements
Feirstein
and Brauser Amendments
Douglas
Feirstein, our Chief Executive Officer and Daniel Brauser, our Chief Financial
Officer, both amended their employment agreements:
|
·
|
Each
agreed to a reduced salary of $150,000 per year,
and
|
|
·
|
Each
is now employed on a month-to-month basis, eliminating all severance
rights.
|
On
November 4, 2010, Mr. Feirstein was granted 6,000,000 five-year stock options in
lieu of receiving cash compensation for a one-year period. The options vest
monthly over a one-year period unless Mr. Feirstein provides notice of his
intent to receive cash compensation for that monthly period. The options are
exercisable at $0.025 per share
Former
Chief Operating Officer – Todd Oretsky
On
February 2, 2010, Mr. Oretsky resigned as our Chief Operating Officer and as a
member of our Board of Directors on mutually agreeable terms with the Company to
pursue other opportunities. We have suspended payments to Mr. Oretsky previously
agreed to under a Consulting and Release Agreement.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
Legal
Proceedings
From time
to time, we are periodically a party to or otherwise involved in legal
proceedings arising in the normal and ordinary course of business. As of the
date of this report, we are not aware of any proceeding, threatened or pending,
against us which, if determined adversely, would have a material effect on our
business, results of operations, cash flows or financial position.
Customer
and Vendor Concentrations
Our
revenues are predominantly generated from the sale of precious metals to a
related party. During the three and nine month periods ended September 30, 2010,
this related party customer accounted for approximately 98% and 99% of our
revenue, respectively. During the three and nine month periods ended September
30, 2009, this related party customer accounted for approximately 100% of our
revenue. At September 30, 2010 and December 31, 2009, the amount due from this
customer was approximately 55% and 93% of our accounts receivable,
respectively.
During
the nine months ended September 30, 2010, two vendors accounted for
approximately 13% and 10% of our total purchases, and for the nine months ended
September 30, 2009, a related party vendor accounted for approximately 11% of
our total purchases and two other vendors accounted for approximately 14% and
10% of our total purchases.
At
September 30, 2010, one vendor accounted for approximately 14% of our accounts
payable and at December 31, 2009, a related party vendor accounted for
approximately 68% of our total accounts payable.
Note 11 – Stockholders’
Equity (Deficit)
On August
3, 2010, our Board recommended that we increase our authorized capital to
650,000,000 shares of common stock from the current 300,000,000
shares.
Convertible
Series A Preferred Stock
Our
Convertible Series A Preferred Stock (“Series A PS”) has no voting rights, no
liquidation preference, and are not entitled to receive dividends. Each share of
the Series A PS is convertible into one share of our common stock at the
election of the holder. We have determined that no beneficial conversion feature
or derivative financial instruments exist in connection with the Series A PS as
the conversion rate was fixed at an amount equal to the market price of our
common stock.
On March
19, 2009, 2,200,000 shares of our Series A PS were converted into 2,200,000
shares of our common stock of which, 950,000 shares were converted by a family
member of our Chief Financial Officer and 1,250,000 shares were converted by
another shareholder.
On
January 25, 2010, 3,000,000 shares of our Series A PS were converted into
3,000,000 shares of our common stock by a family member of our Chief Financial
Officer.
Convertible
Redeemable Series B Preferred Stock
In 2009
we issued Convertible Redeemable Series B Preferred Stock (“2009 Series B PS”)
which was non-voting, had a liquidation preference equal to $250,000, was
entitled to a 7% annual dividend, payable in cash or stock, that accrued
quarterly and was redeemable, at the option of the holder, 90 days after the
date of issuance.
On April
30, 2009, a relative of our Chief Financial Officer invested $250,000 and
received 25,000 shares of our 2009 Series B PS (stated value of $10/share),
which were, along with all accrued dividends, subsequently converted into
1,695,754 shares of our common stock.
On August
3, 2010, our Board authorized the sale of up to $4,000,000 of Units in a private
placement (the “August 2010 PP”), whereby each Unit consisted of 100,000 shares
of Convertible Series B Preferred Stock (“2010 Series B PS”) and 2.5 million
warrants to purchase our common stock. In connection with the August 2010 PP, on
August 19, 2010, we sold 29.44 Units, or 2,943,750 shares of 2010 Series B PS
and 73,593,750 warrants to purchase our common stock for gross proceeds of
$2,943,750. All of the securities issued in this private placement are subject
to a lock-up agreement and cannot be sold for a period of 12 months. These
securities were sold without registration under Section 4(2) of the Securities
Act of 1933 and Rule 506 thereunder. In connection with this transaction, we
paid direct offering costs totaling $17,216.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
The 2010
Series B PS have:
|
·
|
Seniority
to all classes of common and preferred stock existing or issued in the
future;
|
|
·
|
Voting
rights and powers equal to the voting rights and powers of our common
stock. Each share of 2010 Series B PS is entitled to the number of votes
that the holder would be entitled to upon the conversion of the shares
into common stock;
|
|
·
|
A
stated liquidation value of $1 per share, and a liquidation preference of
the greater of $1 per share, or the amount that would be due if all 2010
Series PS shares had been converted to common stock immediately prior to
the liquidation event;
|
|
·
|
An
option by the holder to convert each share into common shares at a price
of $0.02 per share, effective upon the increase of our authorized capital
to 650,000,000 shares of common
stock;
|
|
·
|
Conversion
price protection whereby if in the twelve months following issuance, we
sell any stock for a price less than $0.02 per share, then the exercise
price will be adjusted to reflect the lowest price for which the shares
were sold;
|
In
addition, in the event that we do not amended our articles of incorporation to
increase our authorized shares to 650,000,000 shares within twelve months of
this issuance, then each holder of 2010 Series B PS shall be entitled to receive
15% of such holders’ liquidation preference. Further, for each month following
the initial twelve months whereby the articles of incorporation have not been
amended as indicted above, each holder of 2010 Series B PS shall be entitled to
receive an additional 1.25% of such holders’ liquidation
preference.
We granted 73,593,750 common stock
purchase warrants which are exercisable at $0.035 per share for a period of
three years. The fair value of the warrants was determined to be $1,161,358
based upon management assumptions using the Black-Scholes pricing model. This
amount was recorded as additional paid in capital.
As
discussed under Common Stock below, certain investors in the August 2010 PP,
that had also invested in the March 2010 PP, received a number of shares of
common stock such that, including the shares purchased in the March 2010 PP and
the shares purchased in the August 2010 PP, the average price paid per share was
$0.06.
The
exercise price of the convertible Series B preferred shares contains a ratchet
provision. As such, the conversion feature is considered a derivative liability
which, under ASC 815, must be assigned a fair value. The fair value of the
embedded conversion feature at the commitment date was $3,456,041, based on the
following variables:
Expected
dividends
|
|
|
0 |
% |
Expected
volatility
|
|
|
151.12 |
% |
Expected
term – embedded conversion option
|
|
|
1.0 years |
|
Risk
free interest rate
|
|
|
0.49 |
% |
Of this
amount, $2,943,750 was recorded as a preferred stock dividend and $512,291 was
recorded as derivative expense.
Douglas
Feirstein, our Chief Executive Officer, invested $100,000 in the August 2010 PP
through an entity which he controls. This entity acquired 100,000 shares of
Series B preferred stock and 2,500,000 warrants. In addition, a relative of our
Chief Financial Officer invested $450,000 in the August 2010 PP and acquired
450,000 shares of Series B preferred stock and 11,250,000 warrants to purchase
our common stock.
Common
Stock
In
connection with a private placement transaction that closed in February 2009
(“February 2009 PP”), we issued 3,050,000 shares of our common stock and
warrants granting the right to purchase up to 3,050,000 shares of our common
stock to various investors. The warrants are exercisable for three years and
have an exercise price of $0.40 per share. Gross proceeds from the sale amounted
to $610,000, and were used for working capital purposes. In connection with the
February 2009 PP, we incurred direct offering costs of $36,185.
In
connection with the February 2009 PP, we agreed that, under certain conditions,
if an investor in the February 2009 PP had also invested in the private
placement transaction that closed in September 2008 (the “September 2008 PP”),
we would re-price the shares purchased under the September 2008
PP.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
As a
result of this re-pricing, we issued an additional 2,250,000 shares of our
common stock. In addition, we agreed to cancel 4,500,000 common stock purchase
warrants from the September 2008 PP with an exercise price of $0.50 per share
and reissue 6,750,000 common stock purchase warrants with an exercise price of
$0.40 per share. The exchange of the common stock purchase warrants resulted in
an expense of $41,837, which was calculated as the excess of the fair value of
the replacement award over the fair value of the cancelled award at the
cancellation date.
On March
31, 2010, we closed on a private placement transaction (the “March 2010 PP”)
whereby we issued 5,758,337 shares of our common stock at $0.20 per share. Gross
proceeds from the sale amounted to $1,151,667, which was used for working
capital. Offering costs associated with this transaction amounted to
$51,579.
Included
in the March 2010 PP was an investment of $50,000 by Douglas Feirstein, our
Chief Executive Officer and an investment of $25,000 from Michael Moran, our
Vice President of Corporate Development.
In
connection with the August 2010 PP discussed above, we agreed that, under
certain conditions, if an investor in the August 2010 PP had also invested in
the March 2010 PP, we would re-price the shares purchased under the March 2010
PP. Each investor who invested in the March 2010 PP and also invested in the
August 2010 PP received a number of shares of common stock such that, including
the shares purchased in the March 2010 PP (including the shares privately
purchased from our former Chief Operating Officer) and the shares purchased in
the August 2010 PP, the average price paid per share was $0.06. As a result of
this re-pricing, we issued an additional 13,775,000 shares of our common stock.
These shares were accounted for as direct offering costs in connection with the
August 2010 PP and charged directly to Additional paid in capital.
Share
Grants
On
October 1, 2008, we granted 50,000 shares of restricted common stock to a
consultant for services rendered. The shares are fully vested and
non-forfeitable, and had a fair value of $44,500 based upon the quoted closing
price of the stock as of the issuance date. Furthermore, in accordance with a
consulting agreement, we were to grant an additional 50,000 shares of stock for
future services six months from the date of the original grant. As of June 30,
2009 the stock was valued at $18,000 based upon the quoted closing price of the
stock. The value of the stock was adjusted on a monthly basis over the six-month
term of the agreement so that the requisite portion of the expense corresponding
to the service period is being recognized. During 2008, we recognized $9,000 in
consulting expenses and during the nine months ended September 30, 2009, we
recognized the remaining $9,000 in consulting expenses.
On
October 20, 2008, we granted 300,000 shares of restricted common stock to a
director upon appointment to the Board. The grant had a fair value of $183,000
based upon the quoted closing trading price of the stock on the date of the
grant. The shares vest annually over a three-year period, subject to continued
service as a director on each applicable vesting date. In connection with his
resignation on March 9, 2010, 200,000 shares of common stock that had not yet
vested, were immediately vested. We recorded $110,030 for the nine months ended
September 30, 2010 as expense pertaining to this grant, including $94,780 as a
result of the accelerated vesting. We recorded $15,250 and $46,750 for the three
and nine month periods ended September 30, 2009, respectively as expense
pertaining to this grant.
On
December 22, 2008, we granted an aggregate of 2,000,000 shares of common stock
to two employees. The grant had a fair value of $600,000 based upon the quoted
closing trading price of the stock on the date of the grant. Of the 2,000,000
shares, 500,000 were fully vested and the remaining 1,500,000 shares vest over a
period of 30 months. We recorded $45,000 and $60,000 for the three months ended
September 30, 2010 and 2009, respectively, and $69,788 and $185,161 for the nine
months ended September 30, 2010 and 2009, respectively, as expense pertaining to
this grant.
During
March 2009, we granted 750,000 shares of common stock to two employees. The
grant had a fair value of $292,500 based upon the quoted closing trading price
of the stock on the date of the grant and will vest over a period of 36 months.
We recorded $24,375 for each of the three month periods ended September 30, 2010
and 2009, and $73,125 and $56,875 for the nine months ended September 30, 2010
and 2009, respectively, as expense pertaining to this grant.
During
April, 2009, we issued 3,223 shares of our common stock, with a fair value of
$1,000 based on the quoted closing price, to an employee for services rendered.
This amount was recorded as expense in the period the shares were
granted.
During
June 2009, we issued 265,000 shares of our common stock, with a fair value of
$71,700 based on the quoted closing price, to consultants for services rendered.
This amount was recorded as expense in the period the shares were
granted.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
During
June 2009, we issued 46,500 shares of our common stock, with a fair value of
$13,600 based upon the quoted closing price, to vendors as payment on
outstanding liabilities. We recognized a gain on settlement of accounts payable
of $12,426 as a result of these transactions.
During
the third quarter of 2009, we issued 101,525 shares of
our common stock, with a fair value of $24,900 based on the quoted closing
price, to consultants for services rendered. This amount was recorded as expense
in the period it was granted.
During
September 2009, we issued 593,006 shares of our common stock, with a fair value
of $115,338 based upon the quoted closing price, to vendors as payment on
outstanding liabilities. We recognized a loss on settlement of accounts payable
of $9,135 as a result of these transactions.
During
October 2009, we issued 870,666 shares of restricted common stock, having a fair
value of $190,197, based upon the quoted closing trading price of our common
stock as of the issuance dates, to directors. The shares vest annually over a
three-year period, subject to continued service as a director on each applicable
vesting date. We recorded $17,590 and $71,810 for the three and nine months
ended September 30, 2010, respectively, as expense pertaining to this grant.
Included in the total for the nine months ended September 30, 2010 is a charge
for $34,375 resulting from the accelerated vesting of shares granted to Neil
McDermott in connection with his resignation from the Board on March 9,
2010.
On
January 4, 2010, we issued 120,000 shares of common stock, having a fair value
of $36,000, based upon the quoted closing trading price of our common stock as
of the issuance dates, to a consultant for technology services. This amount was
recorded as expense in the period the shares were granted.
On May
26, 2010, we issued 3,240,475 shares of common stock, having a fair value of
$326,188, based upon the quoted closing trading price of our common stock as of
the issuance dates, to vendors as consideration for outstanding accounts payable
owed to them. We recorded a loss of $8,405 on the settlement of accounts payable
in connection with this transaction.
Common
Stock Purchase Warrant Grants
During
November 2009, we granted 5,000,000 warrants to a consultant for services to be
performed. The warrants have an exercise price of $0.23, are exercisable for
three years and vest ratably over a twelve month period. The estimated fair
value of these stock warrants on their date of grant was $798,119, which we
estimated using the Black-Scholes option pricing model.
The
agreement was terminated effective March 15, 2010. As a result, 3,125,000
warrants were cancelled and no further warrants vested after that date. We
recorded $166,275 for the nine months ended September 30, 2010 as expense
pertaining to this grant.
The
following summarizes our warrant activity for the period from December 31, 2009
through September 30, 2010:
|
|
Warrants
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
Outstanding
– December 31, 2009
|
|
|
21,800,003 |
|
|
$ |
0.35 |
|
|
|
2.3 |
|
Granted
|
|
|
73,593,750 |
|
|
|
0.035 |
|
|
|
|
|
Exercised
|
|
|
— |
|
|
|
|
|
|
|
|
|
Forfeited
or Cancelled
|
|
|
(3,125,000
|
) |
|
|
0.23 |
|
|
|
|
|
Outstanding
– September 30, 2010
|
|
|
92,268,753 |
|
|
$ |
0.109 |
|
|
|
2.6 |
|
Exercisable
– September 30, 2010
|
|
|
89,143,753 |
|
|
$ |
0.104 |
|
|
|
2.7 |
|
At
September 30, 2010, the total intrinsic value of all warrants outstanding and
exercisable was $-0-.
Stock
Option Grants
On
October 20, 2008, we adopted the 2008 Equity Incentive Plan (the “Plan”)
covering 8,000,000 stock rights including options, restricted stock and stock
appreciation rights. Under the Plan, non-employee directors receive initial and
annual grants of options and restricted stock for their service as a director
and committee member. The initial grants will vest over a three-year period and
the annual grants vest on June 30 of each year, subject to continued service on
the applicable vesting dates.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
On
October 20, 2008, we granted 250,000 stock options to two non–employee
contractors for future services. The options were exercisable over a five-year
term, vesting quarterly in equal installments over a three-year term. These
options were exercisable at $0.30 per share and had a fair value of $130,750
using the Black-Scholes option-pricing model. We recorded $8,717 and $28,329 for
the three and nine months ended September 30, 2009, respectively, as expense
pertaining to this grant. During 2009, all 250,000 options were cancelled,
therefore no expense was recorded in 2010.
On
October 20, 2008, we granted 573,134 stock options to contractors and
non-employee directors for services to be rendered. The options are exercisable
over a five-year term at $0.61 per share. Of the total options granted, 373,134
were issued to two non-employee directors under the terms of the Plan vesting
annually in equal increments over a three-year period. The remaining 200,000
options were fully vested upon issuance. These options had an aggregate fair
value of $275,964 using the Black-Scholes option-pricing model. We recorded
$14,972 for each of the three month periods ended September 30, 2010 and 2009,
and $44,916 for each of the nine month periods ended September 30, 2010 and
2009, as expense pertaining to the 373,134 option grant. The 200,000 fully
vested options, had a fair value of $96,300, and were expensed in full during
2008.
On
December 31, 2008, we granted 250,000 stock options to an employee for future
services. The options were exercisable over a five-year term, vesting quarterly
in equal increments over a three-year term. These options were exercisable at
$0.36 per share and had a fair value of $75,225 using the Black-Scholes
option-pricing model. On March 15, 2010, the remaining unvested options were
cancelled. We recorded $0 and $6,269 for the three months ended September 30,
2010 and 2009, respectively, and $6,269 and $18,806 for the nine months ended
September 30, 2010 and 2009, respectively, as expense pertaining to this
grant.
On April
1, 2009, we granted 250,000 stock options to an employee for future services.
The options are exercisable at $0.31 per share over a five-year term, vesting
quarterly in equal increments over a three-year term. We recorded $5,925 for
each of the three month periods ended September 30, 2010 and 2009, and $17,775
and $11,191 for the nine months ended September 30, 2010 and 2009, respectively,
as expense pertaining to this grant. As discussed further below, on August 3,
2010, the exercise price on these stock options was reduced to $0.035 per share.
During
the third quarter of 2009, we granted 1,164,709 stock options to the members of
our board of directors for future services. The options are exercisable at a
weighted average $0.23 per share over a five-year term, vesting quarterly in
equal increments over a three-year term. We recorded $17,590 and $85,597 for the
three and nine months ended September 30, 2010, respectively, as expense
pertaining to this grant. Included in the total for the nine months ended
September 30, 2010 is a charge for $32,145 resulting from the accelerated
vesting of options granted to Neil McDermott in connection with his resignation
from the Board on March 9, 2010.
During
December 2009, we granted 10,977,991 stock options to our employees for future
services. The options are exercisable at an exercise price of $0.27 per share
over a five-year term, vesting quarterly in equal increments over a four-year
term. We recorded $166,573 and $671,181 for the three and nine months ended
September 30, 2010, respectively, as expense pertaining to these grants.
Included in the total for the nine months ended September 30, 2010 is a charge
for $156,910 resulting from the accelerated vesting of options granted to our
former Chief Operating Officer in connection with his separation agreement. As
discussed further below, on August 3, 2010, the exercise price on some of these
stock options was reduced to $0.035 per share.
On March
10, 2010, we increased the aggregate number of shares of common stock which may
be issued pursuant to the 2008 Equity Incentive Plan from 8,000,000 to
27,000,000.
During
the second quarter of 2010, we granted 3,900,000 stock options to our employees
for future services, including 3,500,000 to our Chief Accounting Officer. These
options had a fair value of $554,241 using the Black-Scholes option-pricing
model using the following assumptions:
Risk-free
interest rate
|
|
|
0.17 - 2.46 |
% |
Expected
dividend yield
|
|
|
0 |
% |
Expected
volatility
|
|
|
197.39 - 207.65 |
% |
Expected
life
|
|
6
mos - 5 years
|
|
Expected
forfeitures
|
|
|
0 |
% |
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
The
options are exercisable at a weighted average exercise price of $0.15 per share
over five years, with 656,250 vesting immediately and the remainder vesting
quarterly in equal increments over a four-year term. We recorded $34,640 and
$152,124 for the three and nine months ended September 30, 2010, respectively,
as expense pertaining to these grants.
On August
3, 2010, to incentivize employees who were holding stock options with an
exercise price below the current market price, our Compensation Committee
reduced the exercise price on 13,430,954 existing stock options to the closing
stock price on August 18, 2010 of $0.035 per share. Included in the existing
stock options that were repriced were: 555,556 options held by Douglas
Feirstein, our Chief Executive Officer, 8,055,556 options held by Daniel
Brauser, our Chief Financial Officer, and 3,777,778 options held by Michael
Brachfeld, our Chief Accounting Officer. Pursuant to ASC 718 and fair value
accounting, we treated this as a modification of an award of equity instruments.
These new options will continue to vest according to the terms of the original
grants. The fair value of the replacement awards was less than the fair value of
the original awards. Accordingly, there is no incremental compensation cost and
we will continue to amortize the value of the original awards over the original
vesting periods. We used the Black-Scholes option-pricing model using following
weighted average assumptions to calculate the fair value of the replacement
awards:
Risk-free
interest rate
|
|
|
1.40 |
% |
Expected
dividend yield
|
|
|
0 |
% |
Expected
volatility
|
|
|
191.01 |
% |
Expected
life
|
|
4.34 years
|
|
Expected
forfeitures
|
|
|
0 |
% |
During
the third quarter of 2010, we granted 57,781,187 stock options:
|
·
|
4,535,715
to the members of our board of directors for future services. These
options vest one-year after the date of
grant.
|
|
·
|
52,710,472
to our employees for future services including 12,963,070 to Douglas
Feirstein, our Chief Executive Office, 12,963,070 to Dan Brauser, our
Chief Financial Officer, 13,279,434 to Chuck Wallace, our Chief Operating
Officer, and 6,714,949 to Michael Brachfeld, our Chief Accounting Officer.
Of these options, 734,930 vested immediately and the rest vest quarterly
in equal increments over a four-year
term.
|
|
·
|
535,000
to non–employee contractors for future services. Of these options, 83,750
vested immediately and the rest vest over a period of three to nine
months, as services are provided.
|
The
57,781,187 stock options are exercisable at a weighted average exercise price of
$0.037 per share over five years. We recorded $182,448 for the three
and nine months ended September 30, 2010 as expense pertaining to these
grants. These options had a fair value of $2,389,602 using the
Black-Scholes option-pricing model using the following assumptions:
Risk-free
interest rate
|
|
|
1.59-1.85% |
% |
Expected
dividend yield
|
|
|
0 |
% |
Expected
volatility
|
|
|
174.82-197.89 |
% |
Expected
life
|
|
5
years
|
|
Expected
forfeitures
|
|
|
0 |
% |
The
following table summarizes our stock option activity for the period from
December 31, 2009 through September 30, 2010:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance
at December 31, 2009
|
|
|
13,215,834 |
|
|
$ |
0.450 |
|
|
|
4.8 |
|
|
|
|
Granted
|
|
|
61,681,187 |
|
|
|
0.037 |
|
|
|
|
|
|
|
|
Forfeited
or Cancelled
|
|
|
(815,788
|
) |
|
|
0.270 |
|
|
|
|
|
|
|
|
Balance
at September 30, 2010
|
|
|
74,081,233 |
|
|
|
0.046 |
|
|
|
4.4 |
|
|
$ |
— |
|
Exercisable
at September 30, 2010
|
|
|
6,565,473 |
|
|
$ |
0.114 |
|
|
|
4.4 |
|
|
$ |
— |
|
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
The
following table summarizes our stock option activity for non-vested options for
the period from December 31, 2009 through September 30, 2010:
|
|
Number of Options
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Non-Vested
– December 31, 2009
|
|
|
12,595,364 |
|
|
$ |
0.270 |
|
Granted
|
|
|
61,681,187 |
|
|
|
0.063 |
|
Vested
|
|
|
(6,054,783
|
) |
|
|
0.177 |
|
Cancelled
or Forfeited
|
|
|
(706,008
|
) |
|
|
0.270 |
|
Non-Vested
– September 30, 2010
|
|
|
67,515,760 |
|
|
$ |
0.072 |
|
Total
unamortized compensation expense related to stock options at September 30, 2010
amounted to $4,979,223 and is expected to be recognized over a weighted average
period of 3.6 years.
Note 12 – Related Party
Transactions
Refinery
We
recorded $46,907 and $140,720 for each of the three and nine month periods ended
September 30, 2010 and 2009, respectively, as cost of revenue pertaining to
prepaid refining services and $14,593 and $43,779 for each of the three and nine
month periods ended September 30, 2010 and 2009, respectively, as amortization
expense pertaining to a non-compete agreement, both of which pertain to our
service agreement with Republic Metals Corporation (the
“Refinery”).
Marketing
Services
We
recorded $740,227 and $607,248 for the three months ended September 30, 2010 and
2009, respectively, and $2,758,599 and $1,085,946 for the nine months ended
September 30, 2010 and 2009, respectively, as marketing expense to an online
marketing and lead generation services company in which our President is a 50%
shareholder.
Note 13 – Geographic
Information
We
currently generate revenue predominantly from the sale of precious metals,
including gold, silver and platinum, to the Refinery. Our operations in each of
our markets exhibit similar financial performance metrics and have similar
economic characteristics. As such, we have aggregated our operations around the
world into a single operating segment.
Below is
a summary of our revenue and total assets by geographic region as of and for the
periods indicated. The revenue has been allocated to geographic regions based on
the geographic region from which the precious metals were
purchased.
|
|
United States
|
|
|
Canada
|
|
|
Europe
|
|
|
Consolidated
|
|
Revenue
for the nine months ended September 30, 2010
|
|
$ |
12,733,984 |
|
|
$ |
8,820,695 |
|
|
$ |
7,591,444 |
|
|
$ |
29,146,123 |
|
Total
Assets at September 30, 2010
|
|
$ |
3,353,859 |
|
|
$ |
261,593 |
|
|
$ |
77,900 |
|
|
$ |
3,693,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
for the nine months ended September 30, 2009
|
|
$ |
4,599,457 |
|
|
$ |
2,209,529 |
|
|
$ |
2,502,603 |
|
|
$ |
9,311,589 |
|
Total
Assets at December 31, 2009
|
|
$ |
13,143,253 |
|
|
$ |
558,884 |
|
|
$ |
1,385,300 |
|
|
$ |
15,087,437 |
|
Note 14 – Subsequent
Events
During
2010, we experienced several challenges in some of our operations abroad
including deteriorating returns on our advertising campaigns and difficulties
managing the business remotely. During the fourth quarter of 2010, we changed
our business plan in the United Kingdom and European markets, whereby we no
longer manage advertising, fulfillment, or grading, logging and storing of gold
and other precious metals directly. At September 30, 2010, we recorded an
impairment of $219,324 pertaining to the assets used in these functions as they
are not expected to provide future economic benefit. Subsequent to this
impairment, the remaining assets and liabilities relating to our United Kingdom
and European operations are not material. We retained responsibility for
coordination of the melt processes and delivering the gold and other precious
metals to the Refinery. We believe that these changes will allow us to continue
to participate in the United Kingdom and European markets, but will enable our
management to focus on diversification into recycling small consumer electronics
such as cellular phones in the United States.
Upstream
Worldwide, Inc. and Subsidiaries
Notes
to Unaudited Interim Condensed Consolidated Financial Statements
September
30, 2010
As discussed in Note 10 above, on
November 4, 2010, Mr. Feirstein was granted 6,000,000 five-year stock options in
lieu of receiving cash compensation for a one-year period.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion and analysis should be read in conjunction with our
unaudited interim condensed consolidated financial statements and related notes
appearing elsewhere in this report on Form 10-Q. In addition to historical
information, this discussion and analysis contains forward-looking statements
that involve risks, uncertainties, and assumptions. Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including but not limited to those set forth under
“Risk Factors” in our Prospectus dated July 15, 2010, as filed with the United
States Securities and Exchange Commission, or the SEC.
Management’s
discussion and analysis of financial condition and results of operations is
based upon our unaudited interim condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these unaudited
interim condensed consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates and assumptions,
including, but not limited to, those related to revenue recognition, allowance
for doubtful accounts, income taxes, goodwill and other intangible assets, and
contingencies. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates and
assumptions.
Company
Overview
Overview
Upstream
Worldwide, Inc. (“Upstream,” or the “Company,” formerly, Money4Gold Holdings,
Inc.) is an emerging leader in direct-from-consumer, reverse logistics,
currently specializing in the procurement and aggregation of precious metals to
be recycled. In addition, we recently introduced similar reverse logistics
services for small consumer electronics, such as cellular phones, however to
date the revenue generated from these additional services has not been material
to our overall operations. We utilize consumer oriented advertising efforts to
solicit individuals interested in liquidating unwanted items. Through our global
platform, we facilitate an end-to-end consumer solution, from acquisition
through liquidation. 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.
Our focus
has been on providing a fast, secure and convenient service that enables the
public to discretely sell their precious metals from the comfort and security of
their home or office. Our relationship with Republic Metals Corporation, or the
Refinery, allows us to secure current market prices for all of the precious
metals we purchase on a daily basis.
Our
corporate headquarters are located at 200 East Broward Blvd., Suite 1200 in Ft.
Lauderdale, Florida. Our phone number is (954) 915-1550 and our corporate
website can be found at www.money4gold.com.
Corporate
History and Acquisitions
We were
incorporated in Delaware on November 18, 2003. On July 23, 2008, we acquired
Money4Gold, Inc., an early stage precious metals company, and changed our name
to Money4Gold Holdings, Inc. On May 7, 2009, we acquired MGE Enterprises
Corporation, a Wyoming corporation, or MGE, operating in the United States under
the names mygoldenvelope.com and sobredeoro.com. MGE brought extensive
experience in creating and growing businesses that provide shareholder value in
a broad array of industries, including direct response, Internet marketing and
national retail distribution and sales. MGE’s ability to reach a broader number
of consumers through their experience in multi-language television advertising,
direct response, and retail distribution and sales greatly accelerated our
growth and increased our depth of management experience. On June 11, 2010, we
changed our name to Upstream Worldwide, Inc.
Diversification
Plans
We are
exploring several alternatives to diversify our business beyond precious metals
by evaluating reverse logistics services for small consumer electronics and
similar related components, such as cellular phones. Revenues were first
generated from these additional services in June 2010 and although they have
grown in each subsequent period, they are not yet material to our overall
operations.
Recent
Trends
Our
consolidated revenue for the third and fourth quarter of 2009 of $6.8 million
and $19.6 million, respectively, increased dramatically over the respective
prior quarters and the fourth quarter of 2009 was profitable. Our revenue
however, declined to $17.3 million during the first quarter of 2010, $7.8
million during the second quarter of 2010, and $4.1 million during the third
quarter of 2010. We believe that the higher level of revenue attained during the
third and fourth quarters of 2009 and the first quarter of 2010 demonstrate the
viability of our business plan however, because of our limited size in the
fourth quarter of 2008 and our rapid growth during 2009, we do not have
sufficient comparable history to determine the level of seasonality of our
business. In addition, we believe that increased competition for the aggregation
and resale of precious metals; negative representation of the industry by
multiple media and certain governmental agencies in several of the markets in
which we operate; and aging media campaigns resulted in decreased performance
during the second and third quarters of 2010. These factors further support the
importance of the successful implementation of the next stages of our business
plan, specifically the introduction of similar reverse logistics services for
small consumer electronics, such as cellular phones. We believe that the market
for recycling small consumer electronics such as cellular phones, though just
emerging, is substantial and that if we can achieve significant returns on our
media investments and control our costs accordingly, continued implementation of
our business plans will generate steadily improving results and cash flows in
the future.
During
2010, we experienced several challenges in some of our operations abroad
including deteriorating returns on our advertising campaigns and difficulties
managing the business remotely. During the fourth quarter of 2010, we changed
our business plan in the United Kingdom and European markets, whereby we no
longer manage advertising, fulfillment, or grading, logging and storing of gold
and other precious metals directly. At September 30, 2010, we recorded an
impairment of $219,324 pertaining to the assets used in these functions as they
are not expected to provide future economic benefit. Subsequent to this
impairment, the remaining assets and liabilities relating to our United Kingdom
and European operations are not material. We retained responsibility for
coordination of the melt processes and delivering the gold and other precious
metals to the Refinery. We believe that these changes will allow us to continue
to participate in the United Kingdom and European markets, but will enable our
management to focus on diversification into recycling small consumer electronics
such as cellular phones in the United States.
Critical
Accounting Policies
In
response to financial reporting release FR-60, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, from the SEC, we have selected
our more subjective accounting estimation processes for purposes of explaining
the methodology used in calculating the estimate, in addition to the inherent
uncertainties pertaining to the estimate and the possible effects on the our
financial condition. The accounting estimates are discussed below and involve
certain assumptions that, if incorrect, could have a material adverse impact on
our results of operations and financial condition. See Note 4 to our unaudited
interim condensed consolidated financial statements found elsewhere in this
report and Note 4 to our consolidated financial statements for the year ended
December 31, 2009 as filed with the SEC for further discussion regarding our
critical accounting policies and estimates.
Goodwill
Our
goodwill was created in connection with our acquisition of MGE on May 7, 2009.
Goodwill is tested for impairment on an annual basis and between annual tests if
an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying value. These events or
circumstances could include a significant change in the business climate, legal
factors, operating performance indicators, competition or sale or disposition of
a significant portion of a reporting unit. The goodwill impairment test is
conducted using a discounted cash flow methodology. This requires significant
judgments including estimation of future cash flows, which is dependent on
internal forecasts, estimation of the long-term growth rate of our business, the
useful life over which cash flows will occur, and determination of our weighted
average cost of capital. Changes in these estimates and assumptions could
materially affect the determination of fair value and/or goodwill impairment
charge.
We
reported revenue of $4.1 million during the third quarter of 2010, a decrease of
$2.7 million from the $6.8 million reported during the same period of 2009. This
represents the first occurrence of a decline in revenue from the same period in
a prior year in our history. In addition, the losses from operations for the
third quarter and the nine month period ended September 30, were both higher in
2010 as compared with the same periods in 2009. In connection with the
preparation of the financial statements for the three and nine month periods
ended September 30, 2010, we concluded that these operating performance
indicators were sufficient to warrant a review of the carrying amount of our
goodwill at September 30, 2010. We reviewed the carrying value of our goodwill,
considering both quantitative factors, such as projected future cash flows, as
well as qualitative factors, including our limited operating history, the
significant fluctuations in our sales volume over the last several quarters and
the uncertainty regarding our expansion into similar services for cellular
phones. Based on this review, we determined that the value of our goodwill had
been impaired. Accordingly, we recorded an impairment charge on our unaudited
interim consolidated statements of operations of $11,142,273 for the three and
nine months ended September 30, 2010 which brought our goodwill value to
zero.
Revenue
Recognition
We
generate revenue predominantly from the sale of precious metals, including gold,
silver and platinum, and from the sale of diamonds and other precious stones.
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.
Precious
Metals
We grade
the quality of the precious metals purchased from the public and estimate the
total quantity of pure gold, silver and platinum received. We then lock 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 to allow for returns, the precious metals are delivered to the Refinery to
be melted. Upon melting the precious metals, the Refinery validates the quality
of pure gold, silver, and platinum and remits payment to us based on the
quantity of each precious metal at the agreed upon spot rates, as described
above. Revenue is recognized upon melting of the precious metals and the
validation of the quality and quantity of each precious metal by the
Refinery.
No
returns are accepted from the Refinery and upon delivery of the precious metals
to the refiner, we have no further obligations.
Diamonds
and Other Precious Stones
Diamonds
and other precious stones are generally purchased from the public in connection
with the purchase of precious metals. We value diamonds and other precious
stones based on a variety of factors including size and quality and then resell
them. To date, all diamonds and other precious stones have been sold to an
affiliate of an officer of one of our wholly-owned subsidiaries. Revenue is
recognized upon the acceptance of the diamonds and other precious stones by the
purchaser.
Deferred
Revenue
Upon our
estimate of the total quantity of pure gold, silver, and platinum received and
the locking in of the current spot rate for each precious metal, we are able to
estimate the total value of the batch received. The Refinery advances to us, up
to 80% of the value of the precious metals we have received, but not yet
delivered. This amount is recorded as deferred revenue until the specific batch
is melted and processed as described above, at which time, it is recorded as
revenue.
Share-Based
Payment Arrangements
Generally,
all forms of share-based payments, including stock option grants, restricted
stock grants and stock appreciation rights are measured at their fair value on
the awards’ grant date, based on the estimated number of awards that are
ultimately expected to vest. Share-based compensation awards issued to
non-employees for services rendered are recorded at either the fair value of the
services rendered or the fair value of the share-based payment, whichever is
more readily determinable. The expense resulting from share-based payments are
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. We have applied fair value accounting and the related provisions of
ASC 718 for all share based payment awards. The fair value of share-based
payments is recognized ratably over the stated vesting period. In the event of
termination, we will cease to recognize compensation expense.
Results
of Operations
We
currently generate revenue predominantly from the sale of precious metals,
including gold, silver and platinum, and from the sale of diamonds. Our
operations in each of our markets exhibit similar financial performance metrics
and have similar economic characteristics. As such, we have aggregated our
operations around the world into a single operating segment.
We
acquired MGE on May 7, 2009 using the acquisition method of accounting. As such,
the results of operations for MGE are only included in our consolidated results
of operations from that date onward. The pro forma results of operations as if
the acquisition of MGE had occurred as of January 1, 2009 can be found in Note 6
to the unaudited interim condensed consolidated financial statements found
elsewhere in this report, however the comparison of the pro forma results are
not meaningfully different than the comparison of the actual results as
presented below.
Discussion
regarding our sequential quarterly results during the second half of 2009, when
we experienced rapid growth, and into 2010, when our revenue declined, can be
found in more detail under the Liquidity section below.
Results
for the Three Months Ended September 30, 2010 Compared to the Three Months Ended
September 30, 2009
The
following tables set forth, for the periods indicated, results of operations
information from our unaudited interim condensed consolidated financial
statements:
|
|
For the Three Months Ended June 30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
(Dollars)
|
|
|
(Percentage)
|
|
Revenue
|
|
$ |
4,117,668 |
|
|
$ |
6,862,012 |
|
|
$ |
(2,744,344 |
) |
|
|
-40 |
% |
Cost
of Revenue
|
|
|
1,626,391 |
|
|
|
1,777,555 |
|
|
|
(151,164 |
) |
|
|
-9 |
% |
Gross
Profit
|
|
|
2,491,277 |
|
|
|
5,084,457 |
|
|
|
(2,593,180 |
) |
|
|
-51 |
% |
Sales
and Marketing
|
|
|
3,454,216 |
|
|
|
3,910,549 |
|
|
|
(456,333 |
) |
|
|
-12 |
% |
General
and Administrative
|
|
|
1,273,009 |
|
|
|
2,176,055 |
|
|
|
(903,046 |
) |
|
|
-41 |
% |
Operating
Loss
|
|
|
(2,235,948 |
) |
|
|
(1,002,147 |
) |
|
|
(1,233,801 |
) |
|
|
123 |
% |
Interest
Income (Expense), net
|
|
|
- |
|
|
|
(159,793 |
) |
|
|
159,793 |
|
|
|
-100 |
% |
Other
Expense
|
|
|
(11,880,175 |
) |
|
|
(753,181 |
) |
|
|
(11,126,994 |
) |
|
|
1477 |
% |
Net
Loss
|
|
$ |
(14,116,123 |
) |
|
$ |
(1,915,121 |
) |
|
$ |
(12,201,002 |
) |
|
|
637 |
% |
Our
revenue is largely dependent on the frequency and effectiveness of our direct
response advertising and marketing campaigns. As such, advertising and marketing
expenditures represent our most significant costs, amounting to 84% and 57% of
revenue for the three months ended September 30, 2010 and 2009, respectively. We
manage our advertising and marketing campaigns, and make allocation decisions,
by measuring their effectiveness primarily based on projected revenue earned as
compared to the cost of the advertisement, referred to as a Media Efficiency
Rate, or MER. There are a variety of factors that impact the MER
including:
|
1.
|
The number of leads generated
from an advertisement,
|
|
2.
|
The rate at which those leads
convert into actual packs submitted by members of the public (the
“Sellers”), and
|
|
3.
|
The average revenue generated
from the packs received.
|
Each of
these factors, and hence our MERs, vary by market and by the particular
advertising method utilized within each market.
The
decline in revenue during the three months ended September 30, 2010, as compared
to the same period in 2009, reflects the lower MERs achieved in 2010 and is a
result of increased competition for the aggregation and resale of precious
metals; negative representation of the industry by multiple media and certain
governmental agencies in several of the markets in which we operate; and aging
media campaigns. In addition, as discussed in more detail in the Liquidity
section below, during 2010 we experienced several challenges in some of our
operations abroad and scaled back our levels of advertising
accordingly.
Direct
advertising and marketing costs are expensed as incurred, but generally result
in revenue being generated over a period of up to eight to twelve weeks
following the airing of the advertisement. As a result, advertising and
marketing investments made during the latter part of a financial period tend to
have a disproportionately negative impact on profitability within that period
and a disproportionately favorable impact on profitability in future periods.
This impact is generally difficult to measure as the future revenue is generated
over extended periods of time and is contingent upon a variety of factors,
including the receptiveness of our advertisements by the public and the age of
the current advertisement, as well as factors beyond our control such as time of
year, geography and significant television events that skew normal viewing
patterns. The lower advertising expense during the three months ended September
30, 2010, as compared with the same period in 2009, is a result of the scaled
back campaigns run in 2010, as well as the significantly smaller campaigns run
abroad. As discussed in more detail under the Liquidity section below, we are
re-evaluating our advertising and marketing campaigns in each of our markets and
scaling back our spending levels to focus on the markets and campaigns that
continue to generate MER levels above certain minimum targets.
Cost of
revenue decreased during the three months ended September 30, 2010, as compared
to the same period in 2009, mainly as a result of a strong correlation to
revenue. We generally pay the Sellers a percentage of the market value of the
gold we purchase from them. Therefore a portion of our cost of revenue is
directly correlated to our revenue, both on a volume and per unit basis. During
2010, we changed our payout calculation which, on an overall basis, resulted in
our paying out a lower percentage of revenue. The benefits of this cost
reduction were offset however by significant investments made in our operational
infrastructure during late 2009 and early 2010, including the direct costs and
expenses required to ship, secure, grade, log and process the metals and stones
internally, which are not directly correlated to the price of gold and other
precious metals. As a result of the increase in these costs and the decrease in
revenue generated for each period, our gross profit, on a percentage basis,
declined to 61% for the three months ended September 30, 2010, as compared with
74% for the same period in 2009.
General
and administrative expenses include professional fees for technology
development, legal and accounting services as well as consulting and internal
personnel costs for our back office support functions. General and
administrative expenses for the three months ended September 30, 2010, as
compared to the same period in 2009, decreased as we scaled back our investments
in our technology and personnel infrastructure and slowed our expansion into new
markets. As discussed below under the Liquidity section, based on recent trends
and developments, we are examining our expense structure in each of our markets
and have slowed and/or temporarily suspended some projects while we re-evaluate
our implementation strategy for our future plans.
Interest
expense, net of interest income, during the three months ended September 30,
2009 was primarily attributable to interest pertaining to our convertible note
payable, media line of credit and other notes payable, all of which were paid
off during 2009.
Other
expense during the three months ended September 30, 2010 was attributable
primarily to a goodwill impairment charge of $11,142,273 pertaining to the
write-off of our goodwill, a derivative expense pertaining to the conversion
feature of our convertible Series B Preferred Stock of $512,291, and an
impairment charge of $219,324 pertaining to our operations in the United Kingdom
and Europe. Other expense during the third quarter of 2009 was attributable
primarily to a loss on the settlement of debt in the amount of $550,175 and a
charge of $218,400 pertaining to penalty shares issued in connection with
certain registration rights offered to the investors under the September 2008
private placement.
Results
for the Nine Months Ended September 30, 2010 Compared to the Nine Months Ended
September 30, 2009
The
following tables set forth, for the periods indicated, results of operations
information from our unaudited interim condensed consolidated financial
statements:
|
|
For the Nine Months Ended September 30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
(Dollars)
|
|
|
(Percentage)
|
|
Revenue
|
|
$ |
29,146,123 |
|
|
$ |
9,311,589 |
|
|
$ |
19,834,534 |
|
|
|
213 |
% |
Cost
of Revenue
|
|
|
10,056,116 |
|
|
|
2,785,674 |
|
|
|
7,270,442 |
|
|
|
261 |
% |
Gross
Profit
|
|
|
19,090,007 |
|
|
|
6,525,915 |
|
|
|
12,564,092 |
|
|
|
193 |
% |
Sales
and Marketing
|
|
|
18,529,338 |
|
|
|
5,604,099 |
|
|
|
12,925,239 |
|
|
|
231 |
% |
General
and Administrative
|
|
|
5,588,802 |
|
|
|
4,714,556 |
|
|
|
874,246 |
|
|
|
19 |
% |
Operating
Loss
|
|
|
(5,028,133 |
) |
|
|
(3,792,740 |
) |
|
|
(1,235,393 |
) |
|
|
33 |
% |
Interest
Income (Expense), net
|
|
|
- |
|
|
|
(235,226 |
) |
|
|
235,226 |
|
|
|
-100 |
% |
Other
Expense
|
|
|
(11,886,743 |
) |
|
|
(930,704 |
) |
|
|
(10,956,039 |
) |
|
|
1177 |
% |
Net
Loss
|
|
$ |
(16,914,876 |
) |
|
$ |
(4,958,670 |
) |
|
$ |
(11,956,206 |
) |
|
|
241 |
% |
Our
revenue is largely dependent on the frequency and effectiveness of our direct
response advertising and marketing campaigns. As such, advertising and marketing
expenditures represent our most significant costs, amounting to 64% and 60% of
revenue for the nine months ended September 30, 2010 and 2009, respectively. We
manage our advertising and marketing campaigns, and make allocation decisions,
by measuring their effectiveness primarily based on projected revenue earned as
compared to the cost of the advertisement, referred to as a Media Efficiency
Rate, or MER. There are a variety of factors that impact the MER
including:
|
1.
|
The number of leads generated
from an advertisement,
|
|
2.
|
The rate at which those leads
convert into actual packs submitted by members of the public (the
“Sellers”), and
|
|
3.
|
The average revenue generated
from the packs received.
|
Each of
these factors, and hence our MERs, vary by market and by the particular
advertising method utilized within each market.
The
substantial increases in revenue during the nine months ended September 30,
2010, as compared to the same period in 2009 was driven by significantly higher
volume of advertising in 2010. However, as discussed in more detail below in the
Liquidity section, MERs increased during the second half of 2009 and into the
first quarter of 2010, before beginning to decline in the second quarter of
2010. Our revenue declined from $17.3 million during the first quarter of 2010
to $7.8 million during the second quarter of 2010, and $4.1 million during the
third quarter of 2010.
Direct
advertising and marketing costs are expensed as incurred, but generally result
in revenue being generated over a period of up to eight to twelve weeks
following the airing of the advertisement. As a result, advertising and
marketing investments made during the latter part of a financial period tend to
have a disproportionately negative impact on profitability within that period
and a disproportionately favorable impact on profitability in future periods.
This impact is generally difficult to measure as the future revenue is generated
over extended periods of time and is contingent upon a variety of factors,
including the receptiveness of our advertisements by the public and the age of
the current advertisement, as well as factors beyond our control such as time of
year, geography and significant television events that skew normal viewing
patterns. As discussed in more detail in the Liquidity section below, we made
significant investments in advertising and marketing during late 2009 and early
2010, but decreased our spending levels as our MERs began to decline. We are
re-evaluating our advertising and marketing campaigns in each of our markets and
scaling back our spending levels to focus on the markets and campaigns that
continue to generate MER levels above certain minimum targets.
Cost of
revenue increased during the nine months ended September 30, 2010, as compared
to the same period in 2009, mainly as a result of a strong correlation to
revenue. We generally pay the Sellers a percentage of the market value of the
gold we purchase from them. Therefore a portion of our cost of revenue is
directly correlated to our revenue, both on a volume and per unit basis. During
2010, we changed our payout calculation which, on an overall basis, resulted in
our paying out a lower percentage of revenue. The benefits of this cost
reduction were partially offset however by significant investments made in our
operational infrastructure during late 2009 and early 2010, including the direct
costs and expenses required to ship, secure, grade, log and process the metals
and stones internally, which are not directly correlated to the price of gold
and other precious metals. As a result of the increase in these costs, our gross
profit, on a percentage basis, declined to 65% for the nine months ended
September 30, 2010, as compared with 70% for the same period in
2009.
General
and administrative expenses include professional fees for technology
development, legal and accounting services as well as consulting and internal
personnel costs for our back office support functions. General and
administrative expenses for the nine months ended September 30, 2010 increased
over the same periods in 2009, primarily due to investments in our
infrastructure to support our expansion into new markets including initial
development of a new technology platform, the addition of several staff, and
multiple consulting projects aimed at properly managing the expansion into new
product offerings. As discussed below under the Liquidity section, based on
recent trends and developments, we are examining our expense structure in each
of our markets and have slowed and/or temporarily suspended some projects while
we re-evaluate our implementation strategy for our future plans. In addition, in
2010 we incurred depreciation expense on the assets acquired to support the
infrastructure investments.
Interest
expense, net of interest income, during the nine months ended September 30, 2009
was primarily attributable to interest pertaining to our convertible note
payable, media line of credit and other notes payable, all of which were paid
off during 2009.
Other
expense during the nine months ended September 30, 2010 was attributable
primarily to a goodwill impairment charge of $11,142,273 pertaining to the
write-off of our goodwill, a derivative expense pertaining to the conversion
feature of our convertible Series B Preferred Stock of $512,291, and an
impairment charge of $219,324 pertaining to our operations in the United Kingdom
and Europe. Other expense during the nine months ended September 30, 2009 was
attributable to a loss on the settlement of debt, a charge pertaining to penalty
shares issued in connection with certain registration rights offered to the
investors under the September 2008 private placement, expenses pertaining to the
repricing of investor warrants, the change in the fair value of a derivative
liability, and impairment of an intangible asset.
Liquidity
and Capital Resources
During
the nine months ended September 30, 2010, we incurred a net loss of $16,914,876
(including non-cash charges for goodwill impairment of $11,142,273, a derivative
expense pertaining to the conversion feature of our convertible Series B
preferred stock of $512,291, stock based compensation of $1,687,338, and an
impairment charge of $219,324 pertaining to our operations in the United Kingdom
and Europe) and used $1,684,727 in cash from operations. As of September 30,
2010, we had an accumulated deficit of $27,130,698, and working capital deficit
of $2,971,112.
During
the nine months ended September 30, 2010, our investing activities used net cash
of $191,919, to purchase fixed assets and our financing activities generated
$4,026,622 in net proceeds from the sale of our convertible Series B preferred
stock and our common stock.
As
discussed above, we utilize direct response advertising and marketing campaigns,
including television, radio, print and Internet to solicit precious metals
including gold, silver and platinum as well as diamonds from the public. These
advertising and marketing campaigns are our most significant use of cash from
operations. Payment policies for these campaigns vary by country and range from
standard 30 day payment terms to prepayments of up to one-month prior to the
advertisement running. Once the advertisements run, we receive requests for mail
order kits from potential Sellers, which they fill with the items they wish to
sell and send the kit to our processing facility. After payment to the Sellers
and holding the precious metals for a minimum period of time, we aggregate the
precious metals received at our local processing facilities and prepare them for
sale to the Refinery. The Refinery advances us 80% of the estimated value of the
precious metals received each week, at an interest rate of 8%. Upon physical
receipt of the precious metals, up to three weeks later, the Refinery evaluates
them to ascertain the final definitive value. At that point, we settle with the
Refinery and they send us the additional amounts due.
Mail
order kits are generally received back from the Sellers over a period of up to
eight to twelve weeks following the date of the advertisement. As such, we
generally realize the cash benefits resulting from our advertisements over a
similar time period.
Our
international operations were initiated by launching direct response advertising
and marketing campaigns in Canada in late 2008 and then in the United Kingdom in
early 2009. During 2009 we experienced rapid growth in these markets and, as a
result, increased our advertising and marketing levels in those countries and
continued expanding by commencing operations in several other European countries
during the second half of 2009 and the first quarter of 2010. Beginning during
the first quarter of 2010 however, we experienced several challenges in some of
our operations abroad including deteriorating returns on our advertising
campaigns and difficulties managing the business remotely. During the fourth
quarter of 2010, we changed our business plan in the United Kingdom and European
markets, whereby we no longer manage advertising, fulfillment, or grading,
logging and storing of gold and other precious metals directly. At September 30,
2010, we recorded an impairment of $219,324 pertaining to the assets used in
these functions as they are not expected to provide future economic benefit.
Subsequent to this impairment, the remaining assets and liabilities relating to
our United Kingdom and European operations are not material. We retained
responsibility for coordination of the melt processes and delivering the gold
and other precious metals to the Refinery. We believe that these changes will
allow us to continue to participate in the United Kingdom and European markets,
but will enable our management to focus on diversification into recycling small
consumer electronics such as cellular phones in the United States.
Our
consolidated revenue for the third and fourth quarter of 2009 of $6.8 million
and $19.6 million, respectively, increased dramatically over the respective
prior quarters and the fourth quarter of 2009 was profitable. Our revenue during
the first quarter of 2010 however, declined to $17.3 million, declined again to
$7.8 million during the second quarter of 2010 and again to $4.1 million during
the third quarter of 2010. We believe that the higher level of revenue attained
during the third and fourth quarters of 2009 and the first quarter of 2010
demonstrate the viability of our business plan however, because of our limited
size in the fourth quarter of 2008 and our rapid growth during 2009, we do not
have sufficient comparable history to determine the level of seasonality of our
business. In addition, we believe that increased competition for the aggregation
and resale of precious metals; negative representation of the industry by
multiple media and certain governmental agencies in several of the markets in
which we operate; and aging media campaigns resulted in decreased performance
during the second and third quarters of 2010.
To
address the challenges discussed above, we are attempting to compete more
effectively and overcome the negative representation of the industry by media
and governmental agencies by changing our business plan in the United Kingdom
and Europe, re-evaluating our advertising and marketing campaigns in each of our
markets, and scaling back our spending levels to focus on the markets and
campaigns that continue to generate MER levels above certain minimum targets. In
addition, to minimize the impact of lower revenue on profitability and cash
flows, we are adjusting our expense structure in each of our markets and have
slowed and/or temporarily suspended some projects while we re-evaluate our
implementation strategy for our future plans. Specifically, we have reduced the
salaries of all employees, assessed staffing levels based on current volume,
reviewed contracts with minimum thresholds pertaining to existing services to
ensure we are utilizing these services in an optimal fashion, and reassessed
timing of our expansion plans. In addition, Douglas Feirstein, our Chief
Executive Officer, and Daniel Brauser, our Chief Financial Officer , both
amended their employment contracts such that their salary was reduced to
$150,000 per year: a reduction of $125,000, and each is now employed on a
month-to-month basis, eliminating all severance rights. Further, on November 4,
2010, Mr. Feirstein was granted 6,000,000 five-year stock options in lieu of
receiving cash compensation for a one-year period. The options vest monthly over
a one-year period unless Mr. Feirstein provides notice of his intent to receive
cash compensation for that monthly period. The options are exercisable at $0.025
per share.
These
circumstances further support the importance of the successful implementation of
the next stages of our business plan, specifically the introduction of similar
reverse logistics services for small consumer electronics, such as cellular
phones. Recently, we placed advertisements combining precious metals and cell
phone recycling using the MyGoldEnvelope brand, as well as cell phone recycling
as a stand-alone offer through a new brand named uSell, and have seen positive
early results. We are still currently addressing the operational differences
between aggregation and sale of cellular phones, as compared with precious
metals, including aspects such as fulfillment, valuation, and most importantly,
cash flows. We believe that the market for recycling small consumer electronics
such as cellular phones, though just emerging, is substantial and that if we can
achieve significant returns on our media investments and control our costs
accordingly, continued implementation of our business plans will generate
steadily improving results and cash flows in the future. Based on the early
results of our combination offer, we have developed a separate advertising and
marketing campaign that will focus solely on cellular phones. This campaign will
launch during the fourth quarter of 2010.
On March
31, 2010, we closed on a private placement transaction whereby we sold 5,758,337
shares of our common stock at $0.20 per share. Gross proceeds from the sale
amounted to $1,151,667, which was used for working capital. Offering costs
associated with this transaction amounted to $51,579.
In
connection with our August 2010 Private Placement (“August 2010 PP”), on August
19, 2010, we sold 2,943,750 shares of our convertible Series B preferred stock
and 73,593,750 warrants to purchase our common stock for gross proceeds of
$2,943,750.
Douglas
Feirstein, our Chief Executive Officer, invested $100,000 in the August 2010 PP
through an entity which he controls. This entity acquired 100,000 shares of
Series B preferred stock and 2,500,000 warrants. In addition, a relative of our
Chief Financial Officer invested $450,000 in the August 2010 PP and acquired
450,000 shares of Series B preferred stock and 11,250,000 warrants to purchase
our common stock.
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 preferred stock, common stock and various debt financing transactions.
It is possible that our cash balance on November 5, 2010 of approximately $1.5
million and anticipated cash that will be received from revenue generated from
advertisements that have already aired will not be sufficient to sustain
operations through at least September 30, 2011.
There can
be no assurance that we can overcome any of the challenges discussed above
regarding competition, negative portrayal of the industry by media and
government agencies, improving our MERs, or that we will be successful with the
execution of the next stages of our business plan. In addition, there can be no
assurance that the plans and actions proposed by management will be successful,
that we will continue to generate revenue from advertisements that have already
aired, that we will generate profitability and positive cash flows in the
future, that our expansion plans into similar reverse logistics services for
products other than precious metals won’t 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.
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 is 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 is being amortized
into cost of revenue on a straight line basis over the term of the agreement. In
addition, we lease space for our United States processing center on a
month-to-month basis from the Refinery. An officer of the Refinery is a member
of our Board of Directors.
Marketing
Services
We
purchase online marketing and lead generation services from a company in which
our President is a 50% shareholder. Our pricing is calculated at a 10% markup to
their cost, capped at $1.50 per lead. This markup is exclusively for the
unrelated 50% shareholders. Our President does not share in any profits earned
by this vendor for services rendered to us.
New
Accounting Pronouncements
See Note
4 to our unaudited interim condensed consolidated financial statements included
in this report for a discussion of recent accounting
pronouncements.
Cautionary
Note Regarding Forward-Looking Statements
This
report contains forward-looking statements including the results of our cell
phone business, future expansion plans, profitability and liquidity, cash
expected to be received from advertisements that have already run, our
expectations regarding revenue, our belief regarding decreased revenues, our
belief regarding future cash flows and our belief regarding working capital.
Forward-looking statements can be identified by words such as “anticipates,”
“intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar
references to future periods.
Forward-looking
statements are based on our current expectations and assumptions regarding our
business, the economy and other future conditions. Because forward-looking
statements relate to the future, they are subject to inherent uncertainties,
risks and changes in circumstances that are difficult to predict. Our actual
results may differ materially from those contemplated by the forward-looking
statements. We caution you therefore against relying on any of these
forward-looking statements. They are neither statements of historical fact nor
guarantees or assurances of future performance. Important factors that could
cause actual results to differ materially from those in the forward-looking
statements include the future price of gold and precious metals which may cause
consumers to recycle their precious materials, the effectiveness of our
advertising campaigns, future economic conditions, the condition of the global
credit and capital markets and the willingness of people to use us to recycle
their cell phones.
Further
information on our risk factors is contained in our filings with the SEC,
including our Prospectus dated July 15, 2010. Any forward-looking statement made
by us in this report speaks only as of the date on which it is made. Factors or
events that could cause our actual results to differ may emerge from time to
time, and it is not possible for us to predict all of them. We undertake no
obligation to publicly update any forward-looking statement, whether as a result
of new information, future developments or otherwise, except as may be required
by law.
Item
3. Quantitative and Qualitative
Disclosures About Market Risk.
Not
applicable to smaller reporting companies.
Item
4. Controls and
Procedures.
Evaluation
of Disclosure Controls and Procedures
Our
management carried out an evaluation with the participation of our Chief
Executive Officer and Chief Financial Officer, required by Rule 13a-15 of
the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of
our disclosure controls and procedures as defined in Rule 13a-15(e) under the
Exchange Act.
Based on
their evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report to ensure that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in our reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
Changes
in Internal Controls Over Financial Reporting
There
were no changes in our internal control over financial reporting as defined in
Rule 13a-15(f) under the Exchange Act that occurred during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
PART
II – OTHER INFORMATION
Item 1.
|
Legal
Proceedings.
|
From time
to time, we are periodically a party to, or otherwise involved in, legal
proceedings arising in the normal and ordinary course of business. As of the
date of this report, we are not aware of any proceeding, threatened or pending,
against us which, if determined adversely, would have a material effect on our
business, results of operations, cash flows or financial position.
Not
applicable to smaller reporting companies.
Item 2.
|
Unregistered Sales of Equity
Securities and Use of
Proceeds.
|
In
addition to those unregistered securities previously disclosed in filings
with the SEC, we have sold securities which are not registered under
the Securities Act of 1933 (the “Act”), as described below.
Name or Class of
Investor
|
|
Date Sold
|
|
No. of Securities
|
|
Consideration
|
Consultant(1)
|
|
7/26/10
|
|
335,000
five-year stock options exercisable at $0.065 per share
|
|
Consulting
services
|
|
|
|
|
|
|
|
March
2010 Private Placement Investors(1)
|
|
8/9/10 through
9/8/10
|
|
13,775,000
shares of common stock
|
|
In
order to give the investors an effective price per share of $0.06 per
share from March investment for investing in August 2010 Private
Placement
|
|
|
|
|
|
|
|
Consultant(1)
|
|
9/10/10
|
|
200,000
five-year stock options exercisable at $0.034 per share
|
|
Consulting
services
|
(1) Exempt under Section 4(2) of the Act
and Regulation 506 thereunder.
Item 3.
|
Defaults Upon Senior
Securities.
|
None.
Item 4.
|
(Removed and
Reserved).
|
Item 5.
|
Other
Information.
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed or
Furnished
|
No.
|
|
Exhibit Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
Share
Exchange Agreement dated July 23, 2008 **
|
|
8-K
|
|
7/29/08
|
|
2.1
|
|
|
2.2
|
|
Share
Exchange Agreement dated May 5, 2009 **
|
|
10-Q
|
|
8/19/09
|
|
2.2
|
|
|
3.1
|
|
Certificate
of Incorporation
|
|
10-QSB
|
|
6/7/06
|
|
3.1
|
|
|
3.2
|
|
Certificate
of Amendment – Increase in Capital
|
|
10-QSB
|
|
6/7/06
|
|
3.1
|
|
|
3.3
|
|
Certificate
of Amendment – Effective Profitable Software
|
|
10-QSB
|
|
6/7/06
|
|
3.1
|
|
|
3.4
|
|
Certificate
of Amendment – Money4Gold Holdings, Inc.
|
|
8-K
|
|
7/29/08
|
|
3.1
|
|
|
3.5
|
|
Certificate
of Amendment – Increase in Capital
|
|
10-K
|
|
3/31/10
|
|
3.5
|
|
|
3.6
|
|
Certificate
of Correction
|
|
10-Q
|
|
11/19/08
|
|
3.2
|
|
|
3.7
|
|
Certificate
of Amendment – Increase in Capital
|
|
10-Q
|
|
8/19/09
|
|
3.3
|
|
|
3.8
|
|
Certificate
of Amendment – Upstream Worldwide, Inc.
|
|
S-1A
|
|
7/12/10
|
|
3.8
|
|
|
3.9
|
|
Amended
and Restated Certificate of Designation – Series B
|
|
|
|
|
|
|
|
Filed
|
3.10
|
|
Amended
and Restated Bylaws
|
|
10-Q
|
|
5/20/09
|
|
3.3
|
|
|
10.1
|
|
Form
of Executive Option Agreement*
|
|
|
|
|
|
|
|
Filed
|
10.2
|
|
Form
of Director Option Agreement
|
|
10-Q
|
|
8/20/10
|
|
10.2
|
|
|
10.3
|
|
Form
of Director Restricted Stock Agreement
|
|
10-Q
|
|
8/20/10
|
|
10.3
|
|
|
10.4
|
|
Stock
Purchase Agreement – March 2010
|
|
10-Q
|
|
5/14/10
|
|
10.2
|
|
|
10.5
|
|
Registration
Rights Agreement – March 2010
|
|
10-Q
|
|
5/14/10
|
|
10.3
|
|
|
10.6
|
|
Amendment
to CEO and CFO Employment Agreements*
|
|
|
|
|
|
|
|
Filed
|
10.7
|
|
Securities
Purchase Agreement – August 2010
|
|
|
|
|
|
|
|
Filed
|
10.8
|
|
Form
of Warrant – August 2010
|
|
|
|
|
|
|
|
Filed
|
31.1
|
|
Certification
of Principal Executive Officer (Section 302)
|
|
|
|
|
|
|
|
Filed
|
31.2
|
|
Certification
of Principal Financial Officer (Section 302)
|
|
|
|
|
|
|
|
Filed
|
32.1
|
|
Certification
of Principal Executive Officer and Principal Financial Officer
(Section 906)
|
|
|
|
|
|
|
|
Furnished
|
*
Management compensatory plan or arrangement
**The confidential
disclosure schedules are not filed in accordance with SEC Staff policy, but will
be provided to the Staff upon request. Certain material agreements
contain representations and warranties, which are qualified by the following
factors:
(i)
|
the
representations and warranties contained in any agreements filed with this
report were made for the purposes of allocating contractual risk between
the parties and not as a means of establishing
facts;
|
(ii)
|
the
agreement may have different standards of materiality than standards of
materiality under applicable securities
laws;
|
(iii)
|
the representations are qualified
by a confidential disclosure schedule that contains nonpublic information
that is not material under applicable securities
laws;
|
(iv)
|
facts
may have changed since the date of the agreements;
and
|
(v)
|
only parties to the agreements
and specified third-party beneficiaries have a right to enforce the
agreements.
|
Notwithstanding
the above, any information contained in a schedule that would cause a reasonable
investor (or that a reasonable investor would consider important in making a
decision) to buy or sell our common stock has been included. We have been
further advised by our counsel that in all instances the standard of materiality
under the federal securities laws will determine whether or not information has
been omitted; in other words, any information that is not material under the
federal securities laws may be omitted. Furthermore, information which may have
a different standard of materiality will nonetheless be disclosed if material
under the federal securities laws.
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 Upstream Worldwide, Inc., 200 E. Broward Boulevard, Suite
1200, Fort Lauderdale, Florida 33301 Attention: Mr. Michael
Brachfeld.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
UPSTREAM
WORLDWIDE, INC.
|
|
|
|
November
12, 2010
|
|
/s/ Douglas
Feirstein
|
|
|
Douglas
Feirstein
|
|
|
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
November
12, 2010
|
|
/s/ Daniel Brauser
|
|
|
Daniel
Brauser
|
|
|
Chief
Financial Officer
(Principal
Financial Officer)
|