U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 2001
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission File No. 0-27649
-------
UPGRADE INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Washington 58-2441311
---------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 FOURTH AVENUE - SUITE 629 SEATTLE, WASHINGTON 98101
(Address of principal executive offices)
(206) 903-3116
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES x NO
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: As of January 31, 2002, 41,331,578
shares of common stock, $.0001 par value were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
INDEX
PART I - Financial Information Page
Item 1. Financial Statements
------------------------------
Consolidated balance sheets at September 30, 2001 (audited) and December 31, 2001 (unaudited) . . . . . . . . . . . 3
Consolidated statements of operations for the three months ended December 31, 2000 and 2001 (unaudited) and
cumulative since inception (February 5, 1997) through December 31, 2001 (unaudited) . . . . . . . . . . . . . . . . 4
Consolidated statement of stockholders' equity since inception through September 30, 2001 and for the three months
ended December 31, 2001 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-11
Consolidated statement of cash flows for the three months ended December 31, 2000 and 2001 (unaudited) and
Cumulative since inception (February 5, 1997) through December 31, 2001 (unaudited) . . . . . . . . . . . . . . . . 12
Notes to the Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . . . . . . . . . . 16
-------------------------------------------------------------------
PART II - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
------- -----------------
Item 2. Changes In Securities and Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
------- -----------------------------------------
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
------- -----------------
Item 6. Exhibits and Reports on Form 8 - K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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Signatures
2
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2001 2001
------------- -------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 2,551,465 $ 350,928
Restricted deposit 300,000 300,000
Subscriptions receivable 500,000 -
Note receivable from related party 135,243 137,864
Prepaid expenses, deposits and other 110,022 109,190
------------- -------------
Total current assets 3,596,730 897,982
PROPERTY AND EQUIPMENT - AT COST,
less accumulated depreciation and amortization 2,071,663 2,055,707
SPUTTERING MACHINE, held for sale 2,000,000 2,000,000
ADVANCES TO ROCKSTER GROUP 1,084,000 1,449,000
OTHER ASSETS
Intangible and deferred assets, net of accumulated
amortization 466,256 361,969
Acquisition deposits 1,820,715 1,820,715
Deposits 194,128 194,128
------------- -------------
Total assets $ 11,233,492 $ 8,779,501
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 3,853,950 $ 3,769,004
Payable to related parties 5,503,022 3,471,810
Accrued liabilities 2,972,713 2,233,380
Notes payable 1,717,231 2,474,874
Convertible debentures, net of unamortized discount - 1,075,756
Equipment purchase contract payable 2,024,748 2,024,748
Royalty fee payable to Card Tech, Inc. 1,161,873 2,233,168
------------- -------------
Total current liabilities 17,233,537 17,282,740
CONVERTIBLE DEBENTURES, net of unamortized discount 2,004,488 -
MINORITY INTEREST 1,473,179 46,179
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' DEFICIT
Common stock - $.0001 par value, 100,000,000 shares authorized 24,524 37,918
Stock subscriptions 2,742,586 1,372,553
Additional paid in capital 53,947,618 68,219,820
Deferred compensation (498,559) (449,233)
Receivable from stockholders of subsidiary (266,621) (266,621)
Accumulated development stage deficit (65,427,260) (77,463,855)
------------- -------------
(9,477,712) (8,549,418)
------------- -------------
Total liabilities and stockholders' deficit $ 11,233,492 $ 8,779,501
============= =============
The accompanying notes are an integral part of these statements.
3
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Cumulative
results of
operations since
Three months ended December 31, inception
2000 2001 (February 5, 1997)
---------------- ------------------ -------------------
Costs and expenses
Research and development $ 2,414,425 $ 1,778,670 $ 16,311,073
Purchased in-process research and development - - 5,971,603
Sales and marketing 713,837 107,390 5,346,195
General and administrative 1,599,790 2,321,098 25,251,755
---------------- ------------------ -------------------
4,728,052 4,207,158 52,880,626
Other expenses
Equity in losses of UltraCard - - 1,264,316
Interest expense 303,112 7,614,950 14,337,251
Loss on advances to Pathway - - 3,549,780
Other, net 24,205 913,839 2,682,239
---------------- ------------------ -------------------
328,317 8,528,789 21,833,586
Minority interest in losses of subsidiaries - (699,352) (3,267,152)
---------------- ------------------ -------------------
NET LOSS $ 5,056,369 $ 12,036,595 $ 71,447,060
================ ================== ===================
LOSS PER COMMON
SHARE-BASIC AND DILUTED $ 0.24 $ 0.36 $ 5.05
================ ================== ===================
The accompanying notes are an integral part of these statements.
4
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
Since inception through September 30, 2001 and December 31, 2001 (unaudited)
Voting common stock Common stock subscribed Additional Receivable from
------------------- ------------------------ paid-in Deferred stockholders
Shares Amount Shares Amount capital compensation of subsidiary
---------- ------- ----------- ----------- --------- ------------- --------------
Balance at February 5, 1997 - $ - - $ - $ - $ - $ -
Issuance of founder's shares at
$.03 per share in February 1997
adjusted for December 1997
1:2 reverse stock split 500,000 500 - - 29,500 - -
Issuance of common stock in
February 1997 at $.10 per share
adjusted for December 1997
1:2 reverse stock split 29,000 29 - - 5,771 - -
Issuance of common stock at
$.0025 per share in December
1997 Reg. D Rule 504 offering 4,000,000 4,000 - - 6,000 - -
Issuance of common stock in
December 1997 to an officer
in exchange for property
contribution 4,000,000 4,000 - - 47,250 - -
Sale of common stock at $.50
per share in January 1998
Reg. D Rule 504 offering 1,680,988 1,681 - - 838,813 - -
Common stock subscribed in
September 1998 at $.065
per share - - 2,250,000 146,250 - - -
Net loss for the year ended
September 30, 1998 - - - - - - -
---------- ------- ----------- ----------- --------- ------------- --------------
Balances at September 30, 1998 10,209,988 10,210 2,250,000 146,250 927,334 - -
Issuance of subscribed shares
in November 1998 Reg. D Rule
04 offering 2,250,000 2,250 (2,250,000) (146,250) 144,000 - -
Issuance of common stock in
January 1999 to satisfy trade
liabilities 437,500 438 - - 103,312 - -
Issuance of common stock
warrants at $.25 per share in
January 1999 - - - - 221,000 - -
Common stock subscribed at
$1.80 per share in February
1999 private placement - - 999,999 1,799,998 - - -
Issuance of common stock
warrants for services in
August 1999 - - - - 64,155 - -
Common stock subscribed at $.25
per share in August 1999
through exercise of common
stock warrants - - 27,500 71,030 (64,155) - -
Issuance of common stock
warrants and options at
exercise prices of $.25 and
$2.50 per share in September
1999 for services - - - - 671,893 - -
Issuance of common stock at
$.25 per share in September
1999 through exercise of
employee stock options 60,000 60 - - 14,940 - -
Accumulated
Development
stage deficit Total
--------------- ------------
Balance at February 5, 1997 $ - $ -
Issuance of founder's shares at
$.03 per share in February 1997
adjusted for December 1997
1:2 reverse stock split - 30,000
Issuance of common stock in
February 1997 at $.10 per share
adjusted for December 1997
1:2 reverse stock split - 5,800
Issuance of common stock at
$.0025 per share in December
1997 Reg. D Rule 504 offering - 10,000
Issuance of common stock in
December 1997 to an officer
in exchange for property
contribution - 51,250
Sale of common stock at $.50
per share in January 1998
Reg. D Rule 504 offering - 840,494
Common stock subscribed in
September 1998 at $.065
per share - 146,250
Net loss for the year ended
September 30, 1998 (1,213,530) (1,213,530)
----------- ------------
Balances at September 30, 1998 (1,213,530) (129,736)
Issuance of subscribed shares
in November 1998 Reg. D Rule
04 offering - -
Issuance of common stock in
January 1999 to satisfy trade
liabilities - 103,750
Issuance of common stock
warrants at $.25 per share in
January 1999 - 221,000
Common stock subscribed at
$1.80 per share in February
1999 private placement - 1,799,998
Issuance of common stock
warrants for services in
August 1999 - 64,155
Common stock subscribed at $.25
per share in August 1999
through exercise of common
stock warrants - 6,875
Issuance of common stock
warrants and options at
exercise prices of $.25 and
$2.50 per share in September
1999 for services - 671,893
Issuance of common stock at
$.25 per share in September
1999 through exercise of
employee stock options - 15,000
Continued
5
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued
Since inception through September 30, 2001 and December 31, 2001 (unaudited)
Voting common stock Common stock subscribed Additional Receivable from
------------------- ------------------------ paid-in Deferred stockholders
Shares Amount Shares Amount capital compensation of subsidiary
----------- ------ ----------- ------------ ----------- ------------ --------------
Common shares subscribed at
$2.50 per share in September
1999 - - 4,189,434 10,473,585 - - -
Receivable from UltraCard
stockholders for payroll
taxes and related charges in
connection with stock issued
by UltraCard as compensation - - - - - - (400,000)
Net loss for the year ended
September 30, 1999 - - - - - - -
----------- ------ ----------- ------------ ----------- ------------ --------------
Balances at September 30, 1999 12,957,488 12,958 5,216,933 12,344,613 2,082,479 - (400,000)
Common shares subscribed by a
broker at $2.50 per share in
October 1999 in connection
with placement of $1 million
in convertible debentures - - 16,000 40,000 (40,000) - -
Issuance of common stock warrants
with a strike price of $.25
per share in October 1999 - - - - 339,500 - -
Issuance of subscribed shares in
November 1999 999,999 1,000 (999,999) (1,799,998) 1,798,998 - -
Issuance of common shares,
including shares subscribed,
in November 1999 at $2.50 per
share, net of expenses 4,652,281 4,652 (4,045,583) (10,113,957) 11,521,038 - -
Common shares subscribed by a
broker at $2.50 per share in
November 1999 in connection
November 2000 private placements - - 24,000 60,000 (60,000) - -
Issuance of common stock at $.25
per share in December 1999
through exercise of employee
stock options 90,000 90 - - 22,410 - -
Common shares issued for
services in December 1999 70,000 70 - - 242,830 - -
Allocation of debenture proceeds
to beneficial conversion feature - - - - 676,360 - -
Allocation of debenture proceeds
to stock warrants - - - - 323,640 - -
Issuance of common stock at $44
per share in January 2000
through a private placement,
net of expenses 100,000 100 - - 4,289,900 - -
Issuance of common stock at $.25
and $2.50 per share in February
2000 through exercise of
stock warrants 294,449 295 - - 304,046 - -
Accumulated
Development
stage deficit Total
-------------- ------------
Common shares subscribed at
$2.50 per share in September
1999 - 10,473,585
Receivable from UltraCard
stockholders for payroll
taxes and related charges in
connection with stock issued
by UltraCard as compensation - (400,000)
Net loss for the year ended
September 30, 1999 (10,623,048) (10,623,048)
-------------- ------------
Balances at September 30, 1999 (11,836,578) 2,203,472
Common shares subscribed by a
broker at $2.50 per share in
October 1999 in connection
with placement of $1 million
in convertible debentures - -
Issuance of common stock warrants
with a strike price of $.25
per share in October 1999 - 339,500
Issuance of subscribed shares in
November 1999 - -
Issuance of common shares,
including shares subscribed,
in November 1999 at $2.50 per
share, net of expenses - 1,411,733
Common shares subscribed by a
broker at $2.50 per share in
November 1999 in connection
November 2000 private placements - -
Issuance of common stock at $.25
per share in December 1999
through exercise of employee
stock options - 22,500
Common shares issued for
services in December 1999 - 242,900
Allocation of debenture proceeds
to beneficial conversion feature - 676,360
Allocation of debenture proceeds
to stock warrants - 323,640
Issuance of common stock at $44
per share in January 2000
through a private placement,
net of expenses - 4,290,000
Issuance of common stock at $.25
and $2.50 per share in February
2000 through exercise of
stock warrants - 304,341
Continued
6
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued
Since inception through September 30, 2001 and December 31, 2001 (unaudited)
Voting common stock Common stock subscribed Additional Receivable from
------------------- ----------------------- paid-in Deferred stockholders
Shares Amount Shares Amount capital compensation of subsidiary
---------- ------- --------- ---------- ----------- ------------ --------------
Issuance of common stock in
February 2000 subscribed to in
August 2000 through exercise
of common stock warrants 27,500 27 (27,500) (71,030) 71,003 - -
Issuance of common stock in
April 2000 in connection with
reverse acquisition of Second
CMA, Inc. 45,000 45 - - 1,155 - -
Issuance of common stock
options with a strike price
of $10.00 per share in April
2000 for legal services - - - - 1,047,670 - -
Issuance of common stock at $10
per share in April 2000
through a private placement,
net of expenses 50,000 50 - - 449,950 - -
Issuance of common stock at
$11.31 per share in May 2000
through a private placement,
net of expenses 80,000 80 - - 859,480 - -
Common shares subscribed to
through a cashless exercise of
common stock warrants in
May 2000 - - 102,609 323,640 (323,640) - -
Issuance of common stock at
$2.50 per share in June 2000
through exercise of stock
warrants 91,878 92 - - 229,603 - -
Issuance of common stock at
$10.48 per share in July 2000
through a private placement 160,000 160 - - 1,676,640 - -
Issuance of common stock at
$.25 and $2.50 per share in
July 2000 through exercise
of stock warrants 130,000 130 - - 156,120 - -
Distribution of common stock
warrants on August 16, 2000 - - - - 6,016,795 - -
Issuance of common stock at
$12.25 per share in September
2000 through a private
placement, net of expenses 408,164 408 - - 4,899,301 - -
Issuance of common stock in
September 2000 subscribed in
September 1999 143,851 144 (143,851) (359,628) 359,484 - -
Issuance of common stock in
September 2000 subscribed in
October and November of 1999 40,000 40 (40,000) (100,000) 99,960 - -
Adjustment to market of options
granted for services in April
2000 - - - - (118,885) - -
Adjustment to receivable from
subsidiary's stockholders - - - - - - 133,379
Net loss for the year ended
September 30, 2000 - - - - - - -
---------- ------- --------- ---------- ----------- ------------ --------------
Balances at September 30, 2000 20,340,610 $20,341 102,609 323,640 36,925,837 - (266,621)
Issuance of shares in October
2000 subscribed to shares in
May 2000 102,609 102 (102,609) (323,640) 323,538 - -
Issuance of common shares at
$10.50 per share in October
2000, net of costs 142,860 143 - - 1,349,857 - -
Shares subscribed to at $6.00
per share in October 2000,
net of costs - - 258,333 1,070,000 (100,000) - -
Allocation of debenture proceeds
to common stock 167,768 168 - - 444,435 - -
Allocation of debenture proceeds
to common stock warrants - - - - 829,551 - -
Allocation of debenture proceeds
to beneficial conversion
feature - - - - 1,051,096 - -
Allocation of promissory note
proceeds to common stock 40,000 40 - - 136,167 - -
Common stock subscribed to at
$4.00 per share in December
2000 - - 125,000 500,000 - - -
Common shares subscribed at
$2.00 per share in December
2000, net of issuance costs - - 389,129 778,257 (102,208) - -
Accumulated
development
stage deficit Total
-------------- ------------
Issuance of common stock in
February 2000 subscribed to in
August 2000 through exercise
of common stock warrants - -
Issuance of common stock in
April 2000 in connection with
reverse acquisition of Second
CMA, Inc. - 1,200
Issuance of common stock
options with a strike price
of $10.00 per share in April
2000 for legal services - 1,047,670
Issuance of common stock at $10
per share in April 2000
through a private placement,
net of expenses - 450,000
Issuance of common stock at
$11.31 per share in May 2000
through a private placement,
net of expenses - 859,560
Common shares subscribed to
through a cashless exercise of
common stock warrants in
May 2000 - -
Issuance of common stock at
$2.50 per share in June 2000
through exercise of stock
warrants - 229,695
Issuance of common stock at
$10.48 per share in July 2000
through a private placement - 1,676,800
Issuance of common stock at
$.25 and $2.50 per share in
July 2000 through exercise
of stock warrants - 156,250
Distribution of common stock
warrants on August 16, 2000 (6,016,795) -
Issuance of common stock at
$12.25 per share in September
2000 through a private
placement, net of expenses - 4,899,709
Issuance of common stock in
September 2000 subscribed in
September 1999 - -
Issuance of common stock in
September 2000 subscribed in
October and November of 1999 - -
Adjustment to market of options
granted for services in April
2000 - (118,885)
Adjustment to receivable from
subsidiary's stockholders - 133,379
Net loss for the year ended
September 30, 2000 (17,403,990) (17,403,990)
-------------- ------------
Balances at September 30, 2000 (35,257,363) 1,745,834
Issuance of shares in October
2000 subscribed to shares in
May 2000 - -
Issuance of common shares at
$10.50 per share in October
2000, net of costs - 1,350,000
Shares subscribed to at $6.00
per share in October 2000,
net of costs - 970,000
Allocation of debenture proceeds
to common stock - 444,603
Allocation of debenture proceeds
to common stock warrants - 829,551
Allocation of debenture proceeds
to beneficial conversion
feature - 1,051,096
Allocation of promissory note
proceeds to common stock - 136,207
Common stock subscribed to at
$4.00 per share in December
2000 - 500,000
Common shares subscribed at
$2.00 per share in December
2000, net of issuance costs - 676,049
Continued
7
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued
Since inception through September 30, 2001 and December 31, 2001 (unaudited)
Voting common stock Common stock subscribed Additional Receivable from
------------------- ------------------------- paid-in Deferred stockholders
Shares Amount Shares Amount capital Compensation of subsidiary
---------- ------- ----------- ------------ ------------ -------------- ---------------
Common shares subscribed in
December 2000 at $0.25 through
the exercise of stock warrants - - 20,000 5,000 - - -
Issuance of common shares at
$2.02 per share pursuant to
conversion of debenture 107,981 108 - - 218,014 - -
Issuance of common shares
pursuant to warrant exercise
at $0.25 per share - - 200,000 50,000 - - -
Shares subscribed to at $2.50
per share in January 2001,
net of costs - - 200,000 500,000 (50,000) - -
Modification of warrants - - - - 2,414,000 - -
Issuance of common shares at
$1.43 per share pursuant to
conversion of debentures 307,509 307 - - 438,049 - -
Shares subscribed to at $2.50
per share in February 2001 net
of costs - - 80,000 200,000 (20,000) - -
Common shares subscribed at
$3.75 per share as additional
consideration on debt - - 16,267 61,001 - - -
Common shares subscribed at
$3.31 as additional
consideration on debt - - 18,429 61,001 - - -
Common stock issued in March
2001 for shares previously
subscribed 253,334 254 (253,334) (925,000) 924,746 - -
Warrants issued with a strike
price of $6.00 per share as
additional compensation on debt - - - - 7,708 - -
Warrants issued with a strike
price of $3.75 per share as
additional compensation on debt - - - - 14,659 - -
Warrants issued with a strike
price of $3.31 per share as
additional compensation on debt - - - - 12,715 - -
Issuance of common shares at
$2.00 per share net of
financing costs - - 806,073 1,612,146 (5,000) - -
Placement fees accrued on prior
financings - - - - (831,133) - -
Allocation of debenture proceeds
to beneficial conversion
feature - - - - 790,369 - -
Adjustment to remeasurement of
attorney stock options - - - - (510,315) - -
Issuance of common stock in April
for shares previously
subscribed 1,606,721 1,607 (1,606,721) (3,703,442) 3,701,835 - -
Common stock subscribed at $2.00
per share in April - - 15,000 30,000 - - -
Common stock subscribed at $1.74
per share pursuant to
conversion of debentures in
June 2001 - - 12,784 22,203 - - -
Common stock subscribed at $2.70
per share in connection with
debt in June 2001 - - 50,000 106,299 - - -
Common stock subscribed at $2.32
to $2.83 per share from April
through June 2001 as
additional financing fees - - 47,490 125,000 - - -
Shares issued pursuant to
conversion of debentures at
$1.25 per share 82,000 82 - - 102,418 - -
Shares issued pursuant to
conversion of debentures
at $1.74 115,606 116 - - 200,692 - -
Shares issued pursuant to
conversion of debentures
at $1.00 29,433 29 - - 29,404 - -
Shares subscribed in April, 2001
for $2.00 per share pursuant
to private placement net of
stock issue costs 375,000 375 - - 649,625 - -
Issuance of warrants issued at
$2.03 to $3.75 as additional
financing fees - - - - 1,383,353 - -
Accumulated
development
stage deficit Total
--------------- -------------
Common shares subscribed in
December 2000 at $0.25 through
the exercise of stock warrants - 5,000
Issuance of common shares at
$2.02 per share pursuant to
conversion of debenture - 218,122
Issuance of common shares
pursuant to warrant exercise
at $0.25 per share - 50,000
Shares subscribed to at $2.50
per share in January 2001,
net of costs - 450,000
Modification of warrants - 2,414,000
Issuance of common shares at
$1.43 per share pursuant to
conversion of debentures - 438,356
Shares subscribed to at $2.50
per share in February 2001 net
of costs - 180,000
Common shares subscribed at
$3.75 per share as additional
consideration on debt - 61,001
Common shares subscribed at
$3.31 as additional
consideration on debt - 61,001
Common stock issued in March
2001 for shares previously
subscribed - -
Warrants issued with a strike
price of $6.00 per share as
additional compensation on debt - 7,708
Warrants issued with a strike
price of $3.75 per share as
additional compensation on debt - 14,659
Warrants issued with a strike
price of $3.31 per share as
additional compensation on debt - 12,715
Issuance of common shares at
$2.00 per share net of
financing costs - 1,607,146
Placement fees accrued on prior
financings - (831,133)
Allocation of debenture proceeds
to beneficial conversion
feature - 790,369
Adjustment to remeasurement of
attorney stock options - (510,315)
Issuance of common stock in April
for shares previously
subscribed - -
Common stock subscribed at $2.00
per share in April - 30,000
Common stock subscribed at $1.74
per share pursuant to
conversion of debentures in
June 2001 - 22,203
Common stock subscribed at $2.70
per share in connection with
debt in June 2001 - 106,299
Common stock subscribed at $2.32
to $2.83 per share from April
through June 2001 as
additional financing fees - 125,000
Shares issued pursuant to
conversion of debentures at
$1.25 per share - 102,500
Shares issued pursuant to
conversion of debentures
at $1.74 - 200,808
Shares issued pursuant to
conversion of debentures
at $1.00 - 29,433
Shares subscribed in April, 2001
for $2.00 per share pursuant
to private placement net of
stock issue costs - 650,000
Issuance of warrants issued at
$2.03 to $3.75 as additional
financing fees - 1,383,353
Continued
8
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued
Since inception through September 30, 2001 and December 31, 2001 (unaudited)
Voting common stock Common stock subscribed Additional Receivable from
------------------- ------------------------- paid-in Deferred stockholders
Shares Amount Shares Amount capital Compensation of subsidiary
---------- ------- ----------- ------------ ------------ -------------- ---------------
Allocation of debenture proceeds
to beneficial conversion
feature - - - - 281,843 - -
Allocation of debenture proceeds
to cashless exercise warrants - - - - 48,487 - -
Common stock subscribed in lieu
of loan origination fees - - 50,000 145,000 - - -
Common stock issued at $3.19
per share form April through
June 2001 as additional
financing fees 53,185 53 - - 169,474 - -
Common stock subscribed at $0.54
per share pursuant to conversion
of debentures in September 2001 - - 563,080 304,063 - - -
Common stock subscribed at $0.60
per share pursuant to conversion
of debentures in September 2001 - - 284,042 170,425 - - -
Common stock subscribed at $1.30
in September 2001 to satisfy
penalty on late filing of the
Registration Statement with the
SEC for conversion shares in
connection with convertible
debt agreements dated
November 2000 - - 124,721 162,141 - - -
Common stock issued in July 2001
for shares previously subscribed 262,784 263 (262,784) (178,506) 178,243 - -
Common stock issued at $2.70 per
share in June 2001 in lieu of
loan origination fee 50,000 50 - - 134,950 - -
Common stock subscribed at $1.00
per share in July 2001 - - 37,000 74,000 - - -
Common stock subscribed at $1.00,
net of financing costs,
per share in September 2001 - - 200,000 200,000 - - -
Common stock subscribed at $0.50, net
per share in September 2001 - - 1,000,000 500,000 - - -
Common stock issued at $0.72 to
$2.08 per share form July
through September 2001 as
additional finance fees 363,432 363 - - 361,774 - -
Common stock issued in September
2001 for shares previously
subscribed 82,186 82 - - 246,920 - -
Common stock issued at $1.98 per
share in July 2001 for late
issuance of debt converted
in June 2001 2,649 3 (82,186) (247,002) 5,242 - -
Common stock issued at $1.56 per
share in July 2001 for prepaid
debt penalty 14,322 14 - - 22,328 - -
Common stock issued at $0.96 per
share in August 2001 as prepaid
debt penalty 23,534 24 - - 22,569 - -
Warrants issued between July and
September 2001, with exercise
price form $0.72 to $6.00, as
additional financing fees - - - - 828,602 - -
Adjustment of warrants issued
between January and June 2001
as a result of settlement
agreement dated June 2001
regarding additional finance
fees - - - - (559,273) - -
Warrants issued in August 2001
with exercise price of $1.00 in
connection with debt - - - - 114,484 - -
Stock option issued to employees
below fair market value on
March 27, 2001 - - - - 1,763,563 (498,559) -
Common stock subscribed on
September 26, 2001 at $0.70,
net per share - - 1,600,000 1,120,000 - - -
Net loss for the year ended
September 30, 2001 - - - - - - -
---------- ------- ----------- ------------ ------------ -------------- ---------------
Balances at September 30, 2001 24,523,523 24,524 3,892,323 2,742,586 53,947,618 (498,559) (266,621)
Shares issued on October 5, 2001
in connection with September
2001 conversions of debentures
at $.54 to $1.30 per share 971,725 972 (971,843) (636,625) 635,653 - -
Contribution from minority
interest - - - - 727,648 - -
Shares issued on October 11, 2001
in lieu of loan interest and
penalties at $1.48 per share 52,434 52 - - 77,550 - -
Accumulated
development
stage deficit Total
--------------- -------------
Allocation of debenture proceeds
to beneficial conversion
feature - 281,843
Allocation of debenture proceeds
to cashless exercise warrants - 48,487
Common stock subscribed in lieu
of loan origination fees - 145,000
Common stock issued at $3.19
per share form April through
June 2001 as additional
financing fees - 169,527
Common stock subscribed at $0.54
per share pursuant to conversion
of debentures in September 2001 - 304,063
Common stock subscribed at $0.60
per share pursuant to conversion
of debentures in September 2001 - 170,425
Common stock subscribed at $1.30
in September 2001 to satisfy
penalty on late filing of the
Registration Statement with the
SEC for conversion shares in
connection with convertible
debt agreements dated
November 2000 - 162,141
Common stock issued in July 2001
for shares previously subscribed - -
Common stock issued at $2.70 per
share in June 2001 in lieu of
loan origination fee - 135,000
Common stock subscribed at $1.00
per share in July 2001 - 74,000
Common stock subscribed at $1.00,
net of financing costs
per share in September 2001 - 200,000
Common stock subscribed at $0.50,
net per share in September 2001 - 500,000
Common stock issued at $0.72 to
$2.08 per share form July
through September 2001 as
additional finance fees - 362,137
Common stock issued in September
2001 for shares previously
subscribed - -
Common stock issued at $1.98 per
share in July 2001 for late
issuance of debt converted
in June 2001 - 5,245
Common stock issued at $1.56 per
share in July 2001 for prepaid
debt penalty - 22,342
Common stock issued at $0.96 per
share in August 2001 as prepaid
debt penalty - 22,593
Warrants issued between July and
September 2001, with exercise
price form $0.72 to $6.00, as
additional financing fees - 828,602
Adjustment of warrants issued
between January and June 2001
as a result of settlement
agreement dated June 2001
regarding additional finance
fees - (559,273)
Warrants issued in August 2001
with exercise price of $1.00 in
connection with debt - 114,484
Stock option issued to employees
below fair market value on
March 27, 2001 - 1,264,004
Common stock subscribed on
September 26, 2001 at $1.10,
net of financing costs
per share - 1,120,000
Net loss for the year ended
September 30, 2001 (30,169,897) (30,169,897)
--------------- -------------
Balances at September 30, 2001 (65,427,260) (9,477,712)
Shares issued on October 5, 2001
in connection with September
2001 conversions of debentures
at $.54 to $1.30 per share - -
Contribution from minority
interest - 727,648
Shares issued on October 11, 2001
in lieu of loan interest and
penalties at $1.48 per share - 77,602
Continued
9
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued
Since inception through September 30, 2001 and December 31, 2001 (unaudited)
Voting common stock Common stock subscribed Additional Receivable from
------------------- ------------------------- paid-in Deferred stockholders
Shares Amount Shares Amount capital Compensation of subsidiary
---------- ------- ----------- ------------ ------------ -------------- ---------------
Shares issued on October 20 and
21, 2001 at $1.58 per share in
lieu of loan interest and
penalties 151,671 152 - - 239,488 - -
Shares issued on November 7, 2001
in connection with October 10,
11 and 12, 2001 conversion of
debentures at $.535 per share 3,116,633 3,117 - - 1,684,299 - -
Shares issued on November 7, 2001
in connection with October 12,
2001 conversion of convertible
debentures $.543 per share 979,095 979 - - 595,830 - -
Shares issued on November 7, 200
1 at $1.48 per share in lieu of
penalties in connection with
October 11, 2001 conversion
of convertible debentures 351,743 352 - - 520,228 - -
Shares issued on November 7, 2001
at $1.41 per share in lieu of
penalties in connection with
October 12, 2001 conversion
of convertible debentures 445,540 445 - - 627,766 - -
Shares issued on November 7, 2001
at $1.71 per share in lieu of
penalties in connection with
October 10, 2001 conversion
of convertible debentures 413,864 414 - - 707,293 - -
Shares issued on November 9, 2001
(previously subscribed to in
September 2001 at $.50, $.70,
and $1.00 per share) 2,800,000 2,800 (2,800,000) (1,820,000) 1,817,200 - -
Shares issued on November 9, 2001
in lieu of finder's fees on
previous placements 750,000 750 - - (750) - -
Shares issued on November 9, 2001
at a $1.00 in lieu of settlement
of payables to stockholders
and cash, net of fees 905,205 905 - - 901,700 - -
Shares issued on November 9, 2001
at a $1.41 lieu of fees in
connection with a private
placement 25,000 25 - - (25) - -
Shares issued on November 9, 2001
(previously subscribed to in
July 2001 at $2.00 per share) 25,000 25 (25,000) (50,000) 49,975 - -
Shares issued on November 9, 2001
in connection with October 15,
2001 conversion of debentures
at $1.25 and $1.50 per share 776,919 777 - - 1,010,433 - -
Shares subscribed to on
November 11, 2001 at $1.41 per
share in lieu of interest and
penalties - - 56,970 80,328 - - -
Shares subscribed to on November
19 and 21, 2001 at $1.15 per
share in lieu of interest and
penalties - - 48,532 55,812 - - -
Shares subscribed to on December
1 and 2, 2001 at $1.34 per
share in lieu of interest
and penalties - - 56,419 75,601 - - -
Shares subscribed to on
December 9, 2001 at $1.09 per
share in lieu of interest and
penalties - - 32,593 35,526 - - -
Shares subscribed to on December
12, 2001 at $1.05 per share in
lieu of interest and penalties - - 22,070 23,102 - - -
Shares subscribed to on December
19, 2001 at $0.88 per share in
lieu of interest and penalties - - 47,124 41,469 - - -
Shares subscribed to on December
22 and 29, 2001 at $0.80 per
share in lieu of interest and
penalties - - 33,914 27,131 - - -
Shares subscribed to on December
31, 2001 at $0.78 per share in
lieu of interest and penalties - - 26,253 20,477 - - -
Shares issued on November 26, 2001
in lieu of payment of legal fees 100,000 100 - - 99,900 - -
Shares issued on November 26, 2001
in connection with a private
placement at $1.36 per share 18,437 18 - - 24,982 - -
Shares issued on November 26,
2001 in connection with a
private placement and
satisfaction of liabilities at
$1.10, net of transactions
costs per share 562,171 562 - - 443,184 - -
Shares issued on December 7, 2001
at $1.09 per share in lie of
fees and penalties in connection
with October 10 through 12, 2001
conversion of convertible
debentures 948,843 949 - - 972,536 - -
Accumulated
development
stage deficit Total
--------------- -------------
Shares issued on October 20 and
21, 2001 at $1.58 per share in
lieu of loan interest and
penalties - 239,640
Shares issued on November 7, 2001
in connection with October 10,
11 and 12, 2001 conversion of
debentures at $.535 per share - 1,687,416
Shares issued on November 7, 2001
in connection with October 12,
2001 conversion of convertible
debentures $.543 per share - 596,809
Shares issued on November 7, 200
1 at $1.48 per share in lieu of
penalties in connection with
October 11, 2001 conversion
of convertible debentures - 520,580
Shares issued on November 7, 2001
at $1.41 per share in lieu of
penalties in connection with
October 12, 2001 conversion
of convertible debentures - 628,211
Shares issued on November 7, 2001
at $1.71 per share in lieu of
penalties in connection with
October 10, 2001 conversion
of convertible debentures - 707,707
Shares issued on November 9, 2001
(previously subscribed to in
September 2001 at $.50, $.70,
and $1.00 per share) - -
Shares issued on November 9, 2001
in lieu of finder's fees on
previous placements - -
Shares issued on November 9, 2001
at a $1.00 in lieu of settlement
of payables to stockholders
and cash, net of fees - 902,605
Shares issued on November 9, 2001
at a $1.41 lieu of fees in
connection with a private
placement - -
Shares issued on November 9, 2001
(previously subscribed to in
July 2001 at $2.00 per share) - -
Shares issued on November 9, 2001
in connection with October 15,
2001 conversion of debentures
at $1.25 and $1.50 per share - 1,011,210
Shares subscribed to on
November 11, 2001 at $1.41 per
share in lieu of interest and
penalties - 80,328
Shares subscribed to on November
19 and 21, 2001 at $1.15 per
share in lieu of interest and
penalties - 55,812
Shares subscribed to on December
1 and 2, 2001 at $1.34 per
share in lieu of interest
and penalties - 75,601
Shares subscribed to on
December 9, 2001 at $1.09 per
share in lieu of interest and
penalties - 35,526
Shares subscribed to on December
12, 2001 at $1.05 per share in
lieu of interest and penalties - 23,102
Shares subscribed to on December
19, 2001 at $0.88 per share in
lieu of interest and penalties - 41,469
Shares subscribed to on December
22 and 29, 2001 at $0.80 per
share in lieu of interest and
penalties - 27,131
Shares subscribed to on December
31, 2001 at $0.78 per share in
lieu of interest and penalties - 20,477
Shares issued on November 26, 2001
in lieu of payment of legal fees - 100,000
Shares issued on November 26, 2001
in connection with a private
placement at $1.36 per share - 25,000
Shares issued on November 26,
2001 in connection with a
private placement and
satisfaction of liabilities at
$1.10 per share, net of transaction
costs - 443,746
Shares issued on December 7, 2001
at $1.09 per share in lie of
fees and penalties in connection
with October 10 through 12, 2001
conversion of convertible
debentures - 973,485
Continued
10
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued
Since inception through September 30, 2001 and December 31, 2001 (unaudited)
Voting common stock Common stock subscribed Additional Receivable from
------------------- ------------------------- paid-in Deferred stockholders
Shares Amount Shares Amount capital Compensation of subsidiary
---------- ------- ----------- ------------ ------------ -------------- ---------------
Warrants granted in lieu of
interest and penalties - - - - 1,956,457 - -
Shares subscribed to and warrants
issued in lieu of additional
interest on convertible
debentures - - 434,220 594,881 580,035 - -
Shares subscribed at $.80 through
$1.37 per share in connection
with November and December 2001
promissory notes - - 202,167 182,265 - - -
Warrants issued in connection with
November through December 2001
promissory notes - - - - 217,898 - -
Adjustment due to modification
of warrants - - - - 32,922 - -
Adjustment due to added conversion
feature on notes payable - - - - 200,000 - -
Allocation to beneficial
conversion feature - - - - 150,000 - -
Amortization of deferred
compensation for the three
months ended December 31, 2001 - - - - - 49,326 -
Net loss for the three months
ended December 31, 2001 - - - - - - -
---------- ------- ----------- ------------ ------------ -------------- ---------------
Balances at December 31, 2001 37,917,803 $37,918 1,055,742 $ 1,372,553 $68,219,820 $ (449,233) $ (266,621)
========== ======= =========== ============ ============ ============== ===============
Accumulated
development
stage deficit Total
--------------- -------------
Warrants granted in lieu of
interest and penalties - 1,956,457
Shares subscribed to and warrants
issued in lieu of additional
interest on convertible
debentures - 1,174,916
Shares subscribed at $.80 through
$1.37 per share in connection
with November and December 2001
promissory notes - 182,265
Warrants issued in connection with
November through December 2001
promissory notes - 217,898
Adjustment due to modification
of warrants - 32,922
Adjustment due to added conversion
feature on notes payable - 200,000
Allocation to beneficial
conversion feature - 150,000
Amortization of deferred
compensation for the three
months ended December 31, 2001 - 49,326
Net loss for the three months
ended December 31, 2001 (12,036,595) (12,036,595)
--------------- -------------
Balances at December 31, 2001 $ (77,463,855) $ (8,549,418)
=============== =============
The accompanying notes are an integral part of this statement.
11
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended December 31, Cumulative
------------------------------------- since inception
Increase (Decrease) in Cash and Cash Equivalents 2000 2001 (February 5, 1997)
----------------- ------------------ -------------------
Cash flows from operating activities
Net loss $ (5,056,369) $ (12,036,595) $ (71,447,060)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 140,999 92,734 1,283,344
Amortization of beneficial conversion feature and debt discount 263,815 1,226,913 5,025,106
Amortization of loan costs - 443,050 443,050
Modification of loan agreements - 232,922 232,922
Equity securities issued in lieu of interest and penalties on debt - 6,638,044 9,316,790
Employee stock options issued below fair value - 49,326 1,313,330
Adjustment to receivables from subsidiary's stockholders - - 133,379
Write off of uncollectible advances - - 3,549,780
Write off due to impairment - - 1,054,125
Write off of option cost - - 76,250
Loss on sale of equipment - - 26,021
Equity in loss of UltraCard - - 1,264,316
Purchased in-process research and
development - - 5,971,603
Warrants and options issued for services (672,685) - 5,134,175
Shares issued for services - - 488,650
Expenses incurred through loan assumption - - 470,005
Stock of subsidiary issued in exchange for
contribution of intellectual property
charged to expense - - 125,000
Minority interest - (699,352) (3,267,152)
Changes in assets and liabilities:
Prepaid expenses, deposits and other (272,516) (1,789) 1,002,313
Payables, accrued liabilities and other 1,155,823 744,216 9,052,797
----------------- ------------------ -------------------
Net cash used in operating activities (4,440,933) (3,310,531) (28,751,256)
Cash flows from investing activities
Advances to The Pathways Group, Inc. (1,264,955) - (3,533,955)
Advances to Rockster, Inc. (150,000) (365,000) (1,449,000)
Advances to eCourier - - (130,000)
Payments on equipment under construction - - (1,200,000)
Acquisition of property and equipment, net (403,144) (65,588) (1,764,355)
Acquisition of Centurion Technologies, Inc.,
net of cash acquired - - (1,000,000)
Acquisition of UltraCard, Inc., net of cash acquired - (276,164) (5,847,269)
Acquisition of equity interest in EforNet Corp.
from a minority shareholder - - (200,000)
Acquisition deposit (15,000) - (62,500)
Additions to intangible assets (55,658) - (195,187)
----------------- ------------------ -------------------
Net cash used in investing activities (1,888,757) (706,752) (15,382,266)
Cash flows from financing activities
Proceeds from sale of common stock and stock subscriptions 3,428,774 971,746 36,701,964
Proceeds from exercise of stock options and warrants 5,000 - 767,786
Borrowings, net of loan costs 3,107,880 845,000 10,997,620
Principal payments on borrowings (1,037,245) - (3,682,920)
Purchase of collateral on subsidiary's letter of credit - - (805,687)
Proceeds from release of collateral on subsidiary's
letter of credit 505,687 - 505,687
----------------- ------------------ -------------------
Net cash provided by
financing activities 6,010,096 1,816,746 44,484,450
----------------- ------------------ -------------------
Net increase (decrease) in cash and cash equivalents (319,594) (2,200,537) 350,928
Cash and cash equivalents at the beginning of the period 398,989 2,551,465 -
----------------- ------------------ -------------------
Cash and cash equivalents at the end of the period $ 79,395 $ 350,928 $ 350,928
================= ================== ===================
The accompanying notes are an integral part of these statements.
12
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 2001
NOTE A - FINANCIAL STATEMENTS
The unaudited consolidated financial statements of the Company and its
subsidiaries have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles of the United States of
America (GAAP) have been condensed or omitted pursuant to such rules and
regulations. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire fiscal year ending
September 30, 2002. This form 10-QSB should be read in conjunction with the form
10-KSB that includes audited consolidated financial statements for the year
ended September 30, 2000 and 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended and
since inception (February 5, 1997).
NOTE B - BASIS OF PRESENTATION
The Company consolidates all companies in which it has a controlling financial
interest. This generally occurs when the Company owns more than 50% of the
outstanding voting shares of the company. The Company also consolidates
50%-owned companies in which it has voting control through agreements with other
shareholders. Investments in Companies where the Company has significant
influence through ownership of 20% to 50% of the investors voting shares or
contractual arrangements are accounted for by the equity method.
The balance sheet as of September 30, 2001 and December 31, 2001, reflects the
consolidated financial position of the Company and its subsidiaries
(Subsidiaries) as follows: UltraCard, Inc. (UltraCard); cQue Corporation
(formerly Centurion Technologies, Inc.); CTI Acquisition Corporation (CTI);
Global CyberSystems, Inc. (Global); EforNet Corporation (EforNet); Global
CyberSystems SA. (GCSA), Global CyberSystems PLC (GCPLC) and UltraCard China
Inc. The statements of operations and cash flows for the three months ended
December 31, 2000 and 2001 and for the period from inception (February 5, 1997)
reflect the consolidated results of operations and cash flows of the Company and
the results of the subsidiaries beginning on the dates the Company acquired
control. All significant inter-company balances and transactions have been
eliminated in consolidation. Minority interest represents the minority
stockholders' proportionate share in the equity of the Company's consolidated
Subsidiaries. The losses incurred by a subsidiary are allocated on a
proportionate basis to minority interest until the carrying amount of minority
interest is eliminated. Further losses are then included in the net loss of the
Company.
NOTE C - LOSS PER COMMON SHARE AND SHARES OUTSTANDING
Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. The weighted
average number of shares outstanding was 20,966,989 and 33,528,705 for the three
months ended December 31, 2000 and 2001, respectively, and 14,148,744 since
inception (February 5, 1997) through December 31, 2001. Diluted loss per share
for all periods presented equaled basic loss per share due to antidilutive
effect of the potentially dilutive securities. At December 31, 2000 and 2001,
the Company had 5,371,869 and 8,346,042 in additional common stock equivalents.
At December 31, 2001, 3,356,000 shares of the Company's common stock were not
included in the shares issued and outstanding on the consolidated statement of
stockholders' deficit or loss per share computations. The excluded shares were
as follows:
- Shares issued in lieu of finders' fees in connection with future findings -
1,365,000 (with 1,000,000 shares outstanding at September 30 , 2001 and
365,000 shares issued during the quarter ended December 31, 2001).
- Shares held by the Company in connection with loan assumptions - 2,000,000
shares. In October 2001, the Company issued 2,000,000 to replace the
2,000,000 shares originally transferred by the Company's president to an
unrelated third party as a collateral for $1,210,000 notes payable. In
October 2001, the Company assumed the president's liability on the loans
and issued 2,000,0000 shares. The original collateral shares were then
transferred into the Company's name by the president.
13
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 2001
NOTE D - MANAGEMENT PLANS
The Company is a development stage enterprise as defined under Statement of
Financial Accounting Standards No. 7. The Company is devoting its present
efforts into establishing a new business in the information technology industry
and, is currently in the process of identifying markets and establishing
applications for its technologies. Accordingly, no operating revenues have been
generated. The Company's operations to date have consumed substantial and
increasing amounts of cash. The Company's negative cash flow from operations is
expected to continue in the foreseeable future. The development of the Company's
technology and potential products will continue to require a commitment of
substantial funds. The Company expects that its existing and expected financings
will be adequate to satisfy the requirements of its current and planned
operations until the end of the fiscal year 2002. However, the rate at which the
Company expends its resources is variable, may be accelerated, and will depend
on many factors. The Company will need to raise substantial additional capital
to fund its operations and may seek such additional funding through public or
private equity, debt financing or through strategic relationships with
development partners. There can be no assurance that such additional funding
will be available on acceptable terms, if at all. The Company's continued
existence as a going concern is ultimately dependent upon its ability to secure
additional funding for completing and marketing its technology and the success
of its future operations.
The following summarizes the debt and equity transactions completed by the
Company during the three months ended December 31, 2001/
In October 2001, the Company received $500,000 pursuant to subscription
agreement for a Regulation S private placement and debt settlement, subscribed
in September 2001 at a net price of $0.50 per share.
In October 2001, the Company settled $100,000 of liabilities owed to a law firm
for the services rendered by the issuance of 100,000 shares of the Company's
common stock.
In November 2001, the Company issued 905,205 shares in settlement of $802,605 in
loans from shareholders and $100,000 cash.
In November 2001, the Company issued 562,171 shares pursuant to a private
placement for aggregate proceeds of $468,746 (including $132,000 of funds
received prior to October 1, 2001). In conjunction with the placement, the
Company issued to the shareholders warrants to acquire 562,171 shares of the
Company at an exercise price of $1.00. The warrants have a five-year term and
cashless exercise provision.
In November 2001, the Company issued 18,437 shares of common stock at $1.35 per
share for total proceeds of $25,000.
14
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 2001
NOTE D - MANAGEMENT PLANS - Continued
In November 2001, the holders of then outstanding $3,037,935 of convertible
debentures elected to convert into the Company's common stock. The conversion
prices were determined in accordance with terms of the original agreements and
varied from $0.54 to $1.50 per share. Total shares issued upon conversions
(including shares received in lieu of accrued interest and penalties) were
5,821,490.
In November 2001, the Company borrowed $520,000 from existing debt holders
pursuant to 30-day note agreements. Interest and penalties are required under
the terms of the notes payable every 30 days comprised of 10% interest, 10% to
12.5% of the original loan amount payable in common stock and up to 37.5% of the
original loan amount in warrants at an exercise price of market but not more
than $1.00 to $1.50. In addition, as a cost of the financing, the Company
granted a $50,000 note payable, 74,000 shares of common stock, and warrants
entitling holder to purchase 72,250 shares of common stock at $1.37 per share.
The warrants are exercisable immediately and expire five years from the date of
grant. Additionally, in connection with November 2001 notes agreements, the
Company agreed to reduce exercise price on then outstanding warrants (previously
issued in connection with June 2001 note agreements) from $6 to $3 per share,
and added a conversion feature for $200,000 of the June 2001 loans that allows
conversion into the Company's common stock. As a result of the aforementioned
modifications, the Company recognized $232,922 in additional expenses.
In December 2001, the Company borrowed $350,000 from existing shareholders
pursuant to 30-day note agreements. Interest and penalties are required under
the terms of the notes payable upon maturity comprised of 10% interest, 12.5%
payable in share capital and warrants of 37.5% of the loan value, at a current
market strike price but not to exceed $0.80 to $1.00. In addition, as a cost of
the financing, the Company granted notes payable of $38,500, 117,937 shares, and
warrants entitling the holder to purchase 218,363 shares of common stock
exercisable at a price of $0.80 per share. The warrants are exercisable
immediately and expire five years from the date of grant.
In December 2001, the Company borrowed $25,000 from an officer. This balance,
combined with then outstanding $125,000 loan due to the officer, was rolled into
a convertible note payable bearing interest at a rate of 8% per annum and
convertible into the common stock of the Company at $0.75 per share. The
convertible debenture is due March 15, 2002. In addition, the Company granted
350,000 warrants to acquire common stock at a price of $0.75 per share with a
cashless exercise provision and a five-year term. In connection with this
transaction, the Company recognized $150,000 in debt discount, with $87,500
being expensed in the first quarter of the year ending
September 30, 2002.
In addition to debt and equity transactions by the parent company described
above, in October 2001, one of the Company's subsidiaries completed the sale of
shares of its common stock to a minority shareholder for total proceeds of
$1,425,000 (the money was received prior to October 1, 2001). This transaction
resulted in an increase of consolidated additional paid-in capital of $727,648.
The Company is actively pursuing new investment into the Company. This
financing may take the form of equity, convertible debentures and other types of
debt instruments.
15
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 2001
NOTE E - SUBSEQUENT EVENTS
In January 2002, the Company borrowed a further $170,000 from existing
shareholders pursuant to certain 30-day note agreements. Interest and penalties
are required under the terms of the notes payable upon maturity comprised of 10%
interest, 12.5% payable in share capital and warrants of 37.5% of the loan
value, at a current market strike price but not to exceed $0.80 to $1.00. In
addition, as a cost of the financing, the Company entered into note payable
agreements of $18,700, issued 37,400 shares of common stock, and granted
warrants entitling holder to purchase 37,400 shares of common stock at a price
of $0.25 per share. The warrants are exercisable immediately and expire five
years from the date of grant.
During January and February 2002, the Company completed the issuance of a
further convertible debenture for $200,000, to an officer of the Company,
bearing interest at a rate of 8% per annum and convertible into the common stock
of the Company at $0.75 per share. The convertible debenture is due March 15,
2002. In addition, the Company granted 200,000 warrants to acquire 200,000
shares of common stock at $0.75 per share with a cashless exercise provision and
a five-year term.
In February 2002, the Company entered into a letter of intent to grant Giesecke
& Devrient the right to be the exclusive provider to UltraCard for card body
design, assembly, production, embedding, initialization and personalization of
the UltraCard. The document also outlines joint efforts in product development
and marketing for both companies' products. The Companies intend to enter into a
definitive agreement within 45 days of the above referenced date.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-QSB, including,
without limitation, statements containing the words "believes, " anticipates,"
"estimates," "expects," and words of similar import, constitute "forward looking
statements." You should not place undue reliance on these forward- looking
statements. Our actual results could differ materially from those anticipated
in these forward- looking statements for many reasons, including the risks faced
by us described in this Quarterly Report and in other documents we file with the
Securities and Exchange Commission.
16
Net losses aggregated $12 million in the first three months of the current
fiscal year ended December 31, 2001 compared with a $5.1 million net loss for
the corresponding period of the prior fiscal year. This increase in net loss is
reflective of the increased cost of capital incurred by the Company from
financings through short-term loan agreements. Interest costs of $7.6 million
have been recorded in the current quarter which is comprised, in the most part,
of shares, warrants and notes issued for interest and penalties on short term
loans payable. In addition, the Company has accrued $1.1 million in licensing
fees related to the UltraCard technology, which is reflected as a part of the
Company's research and development expenditures. The balance of the expenditures
of 3.3 million reflects the ongoing level of investment into the Company's
technology, development of production specifications and the cost associated
with the commercialization process of the Company's core technology.
The Company's general and administrative costs of $2.3 million represents an
increase in the average quarterly general and administrative expenditure from
the prior year attributed in the most part to the Companies current focus upon
the development of it's core technology. This increase is offset somewhat by
lower legal costs, and reduced compensation components related to equity grants
to key employees . Research and development expenditures decreased from $2.4
million compared in the corresponding prior period to $1.8 million primarily due
to minimal operations of cQue and dormant condition of EForNet. The other
significant operating subsidiary cQue (formerly Centurion) and UltraCard China
Inc. contributed $57,000 and $80,200 respectively of the total loss reflecting
the focus of the consolidated groups efforts to complete the UltraCard
technology. For the near future research and development expenditures are
expected to increase to meet the Company's numerous potential market
opportunities. All of the Company's research and development costs have been
expensed as incurred.
Sales and marketing expenditures of $107,000 represent a 70% decrease over the
prior quarter reflecting the Company's focus upon product completion. Sales and
marketing expenditures are associated with the Company's attendance at trade
shows and industry awareness programs as the Company builds market awareness to
establish and develop new markets and prepare for effective product launches for
products which are nearing the first phase of completion.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001 the Company had available cash balances of $350,928. The
Company is managing tight cash flows in providing funding for an aggressive
research and development program at UltraCard in an effort to put into place the
Company's first pilot project in China, comprised of 2,000,000 cards and 10,000
read write device.
During the quarter ended December 31, 2001, the Company raised approximately
$870,000 in smaller financings comprised of promissory notes with equity kickers
(common stock and warrants) and equity penalties (common stock and warrants) for
failure either to repay the notes or register shares owned by the noteholders.
The Company is not in default under these notes as long as it complies with the
equity penalty provisions. At December 31, 2001, the Company had total
indebtedness of approximately $1,265,000 under these arrangements.
The Company's cash used in operations was $3.3 million, which represents a
decrease compared to the prior quarter of $4.4 million. This decrease results
from the increase in accounts payable and accrued liability levels.
Cash flows from financing activities of $1.8 million in the current period
represents a level consistent with the last two quarters of the year ended
September 30, 2001. The Company has begun to focus it's efforts upon financing
initiatives which have a much larger magnitude than prior financings and such
initiatives have much longer lead times. While these initiatives are in progress
the Company is limiting the number of smaller more expensive financings to
critical needs.
In July, 2001, the Company received from its President and Chief Executive
Officer, Daniel S. Bland, funds in the amount of $1,210,000 as a loan to the
company. The Company's Board of Directors as of November 1, 2001, converted the
$1,210,000 loan into equity by issuing 2,000,000 shares of common stock to Bland
in full satisfaction of the company's loan obligation to him. As part of this
transaction, Upgrade assumed the obligations of Bland, as borrower, under
Bland's loan agreements with International Mercantile Holding Group, Inc.
(IMHG), the original lender of the funds. Under the terms of the loan
agreements, repayment of the loan amount is secured by collateral in the form of
2,000,000 shares of Upgrade, which have been pledged by Bland to IMHG. Bland has
assigned his residual rights in the 2,000,000 pledged shares of common stock to
the Company. Upon repayment of the loan and return of the collateral, Upgrade
intends to cancel the 2,000,000 shares of stock. The term of the loan is five
years.
In order for the Company to meet the funding requirements of its investee
companies and to meet ongoing operating requirements, it will have to raise
additional financing. However the rate at which the Company expends its
resources is variable, may be accelerated, and will depend on many factors. The
Company will need to raise substantial additional capital to fund its operations
and may seek such additional funding through public or private equity or debt
financing, or through the licensing of its technology. There can be no assurance
that such additional funding will be available on acceptable terms, if at all.
The Company's continued existence as a going concern is ultimately dependent
upon its ability to secure additional funding for completing and marketing its
technology and the success of its future operations.
17
PART II Other Information
Item 1. Legal Proceedings
--------
Upgrade, its president, Daniel S. Bland, and Chief Financial Officer, Howard
Jaffe, are defendants in The Pathways Group, Inc. v. Upgrade International
---------------------------------------------------
Corporation et al., Superior Court of the State of California in for the County
-------------------
of Sonoma, c/a 227650. The complaint, filed August 3, 2001, alleges breach of
merger and collateral agreements between Upgrade and plaintiff, breach of oral
argument, fraud, and negligent material misrepresentation, and seeks specific
performance of the agreements, an injunction against exercising provisions
pursuant to the merger agreement whereby Upgrade could obtain control of
Pathways, and damages in excess of $150 million. Specifically, the complaint
alleges that Upgrade failed to provide interim financing to Pathways pending
consummation of the proposed merger transaction, and prevented Pathways from
obtaining alternate sources of financing. Upgrade believes that the plaintiff's
allegations are without legal or factual basis and therefore it has not accrued
any potential losses resulting from this claim except for the $3.4 million debt
owed by Pathways to Upgrade, which Upgrade has recorded a provision for
potentially uncollectible advances to Pathways as of June 30, 2001.
Item 2. Changes in Securities and Use of Proceeds
--------
In October, 2001, the Company issued 971,725 shares of its common stock pursuant
to the conversion of debentures at prices ranging from $.54 to $1.30 per share.
The issuances were pursuant to contractual rights granted in prior securities
offerings that were exempt under Rule 506 and Section 4(2) of the Act.
In October, 2001, the Company issued warrants to purchase 766,980 shares of its
common stock at an exercise price of $1.00 per share for financial advisory
services performed on behalf of the Company in the form of a private placement
for 905,205 shares for total proceeds of $905,205. Due to the foreign
nationality of the investor, the issuance was exempt under Regulation S of the
Act, as well as Rule 506 and Section 4(2) of the Act.
In October, 2001, the Company issued 250,000 shares and warrants to purchase an
additional 230,363 shares of its common stock at exercise prices ranging from
$1.00-$2.00 per share for financial advisory services performed on behalf of the
Company in the form of a private placement of 1,200,000 shares for total
proceeds of $700,000. Due to the foreign nationality of the investor, the
issuance was exempt under Regulation S of the Act, as well as Rule 506 and
Section 4(2) of the Act.
In November, 2001, the Company issued 3,116,633 shares of its common stock
pursuant to the conversion of debentures at $.535 per share. The issuances were
pursuant to contractual rights granted in prior securities offerings that were
exempt under Rule 506, Section 4(2), and Regulation S of the Act.
In November, 2001, the Company issued 979,095 shares of its common stock
pursuant to the conversion of debentures at $.543 per share. The issuances were
pursuant to contractual rights granted in prior securities offerings that were
exempt under Regulation S, Rule 506 and Section 4(2) of the Act.
In November, 2001, the Company issued 351,743 shares of its common stock at
$1.48 per share in lieu of penalties in connection with the conversion of
debentures. The issuances were pursuant to contractual rights granted in prior
securities offerings that were exempt under Rule 506 and Section 4(2) of the
Act.
In November, 2001, the Company issued 445,540 shares of its common stock at 1.41
per share in lieu of penalties in connection with the conversion of debentures.
The issuances were pursuant to contractual rights granted in prior securities
offerings that were exempt under Rule 506, Section 4(2), and Regulation S of the
Act.
In November, 2001, the Company issued 413,864 shares of its common stock at 1.71
per share in lieu of penalties in connection with the conversion of debentures.
The issuances were pursuant to contractual rights granted in prior securities
offerings that were exempt under Regulation S, Rule 506 and Section 4(2) of the
Act.
In November, 2001, the Company issued 525,000 shares of its common stock for
financial advisory services performed on behalf of the Company in connection
with a private placement of 1,600,000 shares for proceeds of $1,120,000. The
issuance was exempt under Regulation S due the to foreign nationality of the
investors, and Rule 506 and Section 4(2) of the Act.
In November, 2001, the Company issued 905,205 shares of its common stock at 1.00
per share in lieu of settlement of payables to stockholders. The issuances were
exempt under Regulation S, Rule 506 and Section 4(2) of the Act.
In November, 2001, the Company issued 776,919 shares of its common stock
pursuant to the conversion of debentures at prices ranging from $1.25 - $1.50
per share. The issuances were pursuant to contractual rights granted in prior
securities offerings that were exempt under Rule 506, Section 4(2), and
Regulation S of the Act.
In November, 2001, the Company issued 100,000 shares of its common stock as a
settlement of debt. The issuances were exempt under Rule 506 and Section 4(2) of
the Act.
In November, 2001, the Company completed a private placement of 18,437 units of
one share of common stock at $1.36 per share and one warrant to acquire one
additional share of common stock at the same price. The offer and sale of
securities was made pursuant to an exemption from registration under Rule 506
and Section 4(2) of the Act.
In November 2001, the Company issued 562,171 shares pursuant to a private
placement for aggregate proceeds of $468,746 (including $132,000 of funds
received prior to October 1, 2001). In conjunction with the placement, the
Company issued to the shareholders warrants to acquire 562,171 shares of the
Company at an exercise price of $1.00. The warrants have a five-year term and
cashless exercise provision. The offer and sale of 66,275 shares was made
pursuant to an exemption from registration under Regulation S, Rule 506 and
Section 4(2) and the offer and sale of 495,896 shares was made pursuant to an
exemption from registration under Rule 506 and Section 4(2) of the Act.
In November, 2001, the Company converted a $1,210,000 loan received from its
President and Chief Executive Officer, Daniel S. Bland, into equity by issuing
2,000,000 shares of common stock to Bland in full satisfaction of the Company's
loan obligation to him. As part of this transaction, the Company assumed the
obligations of Bland, as borrower, under Bland's loan agreements with
International Mercantile Holding Group, Inc. (IMHG), the original lender of the
funds. Under the terms of the loan agreements, repayment of the loan amount is
secured by collateral in the form of 2,000,000 shares of common stock, which
have been pledged by Bland to IMHG. Bland has assigned his residual rights in
the 2,000,000 pledged shares of common stock to the Company. Upon repayment of
the loan and return of the collateral, the Company intends to cancel the
2,000,000 shares of stock. The term of the loan is five years. The offer and
sale of securities was made pursuant to an exemption from registration under
Rule 506 and Section 4(2) of the Act.
In November, 2001, the Company issued seven short term promissory notes totaling
$520,000. Each note carries an interest rate of 10%, as well as penalties in the
form of stock and warrants for failure either to repay the notes or register
shares owned by the noteholders. The Company is not in default under these notes
as long as it complies with the equity penalty provisions. None of the notes was
paid at maturity. The notes were issued pursuant to exemptions from registration
under Regulation S, Rule 506 and Section 4(2).
In November, 2001, the Company issued 434,200 shares of common stock pursuant to
the conversion of debentures at $1.37 per shares. In addition, the Company
issued cashless warrants to purchase 523,181 additional shares of common stock
at prices ranging from $.535 to $3.00 in conjunction with the conversion. The
offer and sale of securities were made pursuant to contractual rights granted in
prior securities offerings that were exempt from registration under Regulation
S, Rule 506 and Section 4(2) of the Act.
In November, 2001, the Company issued 57,000 shares of common stock at prices
ranging from $1.37 to $1.41 per share along with warrants to purchase 55,250
additional shares of common stock at $1.37 per share in conjunction with
promissory notes. The offer and sale of securities was made pursuant to an
exemption from registration under Regulation S, Rule 506 and Section 4(2) of the
Act.
In December, 2001, the Company issued 948,843 shares of its common stock
pursuant to the conversion of debentures at $1.09 per share. The issuances were
made pursuant to contractual rights granted in prior securities offerings that
were exempt under Rule 506, Section 4(2), and Regulation S of the Act.
In December, 2001, the Company issued 65,730 shares of common stock at prices
ranging from $.83 to $1.09 along with warrants to purchase 218,363 additional
shares of common stock at prices ranging from $.80 to $1.37 per share in
conjunction with promissory notes. The offer and sale of securities was made
pursuant to an exemption from registration under Regulation S, Rule 506 and
Section 4(2) of the Act.
In December, 2001, the Company issued eight short term promissory notes totaling
$388,500. Seven of the notes carry interest rates of 12.5%, and one carries an
interest rate of 10%. Each note carries penalties in the form of stock and
warrants for failure either to repay the notes or register shares owned by the
noteholders. The Company is not in default under these notes as long as it
complies with the equity penalty provisions. None of the notes was paid at
maturity. The notes were issued pursuant to exemptions from registration under
Regulation S, Rule 506 and Section 4(2).
The Company has entered into short term promissory notes pursuant to which it is
required to pay penalties in the form of stock and warrants if not paid in full
on the maturity date.
During the month of October, the Company issued a total of 204,105 shares of
common stock as such penalties at deemed prices ranging from $1.48 to $1.58 per
share. 152,891 shares were issued pursuant to contractual rights granted in
prior securities offerings that were exempt from registration under Regulation
S, Rule 506 and Section 4(2) of the Act and 51,214 shares were issued pursuant
to contractual rights granted in prior securities offerings that were exempt
under 506 of Regulation D and Section 4(2) of the Act. During the month of
October, the Company also issued a total of 637,974 warrants to purchase shares
of common stock as penalties at strike prices ranging from $.72 to $6.00 per
share. 484,303 of the warrants were issued pursuant to contractual rights
granted in prior securities offerings that were exempt under Regulation S, Rule
506 and Section 4(2) of the Act and 153,671 were issued pursuant to contractual
rights granted in prior securities offerings that were exempt under Regulation D
and Section 4(2) of the Act.
During the month of November, the Company issued a total of 105,502 shares of
common stock as such penalties at deemed prices ranging from $1.15 to $1.41 per
share. 80,151 shares were issued pursuant to contractual rights granted in prior
securities offerings that were exempt from registration under Regulation S, Rule
506 and Section 4(2) of the Act and 25,351 shares were issued pursuant to
contractual rights granted in prior securities offerings that were exempt under
506 of Regulation D and Section 4(2) of the Act. During the month of November,
the Company also issued a total of 685,099 warrants to purchase shares of common
stock as penalties at strike prices ranging from $1.03 to $6.00 per share.
539,769 of the warrants were issued pursuant to contractual rights granted in
prior securities offerings that were exempt under Regulation S, Rule 506 and
Section 4(2) of the Act and 145,420 were issued pursuant to contractual rights
granted in prior securities offerings that were exempt under Regulation D and
Section 4(2) of the Act.
During the month of December, the Company issued a total of 235,568 shares of
common stock as such penalties at deemed prices ranging from $.78 to $1.34 per
share. 175,524 shares were issued pursuant to contractual rights granted in
prior securities offerings that were exempt from registration under Regulation
S, Rule 506 and Section 4(2) of the Act and 60,044 shares were issued pursuant
to contractual rights granted in prior securities offerings that were exempt
under 506 of Regulation D and Section 4(2) of the Act. During the month of
December, the Company also issued a total of 764,051 warrants to purchase shares
of common stock as penalties at strike prices ranging from $.72 to $6.00 per
share. 577,586 of the warrants were issued pursuant to contractual rights
granted in prior securities offerings that were exempt under Regulation S, Rule
506 and Section 4(2) of the Act and 186,465 were issued pursuant to contractual
rights granted in prior securities offerings that were exempt under Regulation D
and Section 4(2) of the Act.
Item 5. Other Information
-------
During the period of May, 2000, through June, 2001, the Company issued eight
short term promissory notes totaling $989,322. Six of the notes carry interest
rates of 10%, as well as penalties in the form of stock and warrants for failure
either to repay the notes or register shares owned by the noteholders. The
Company is not in default under these notes as long as it complies with the
equity penalty provisions. The other two notes carry interest rates of 8%
without penalty. None of the notes was paid at maturity. The notes were issued
pursuant to exemptions from registration under Regulation S, Rule 506 and
Section 4(2).
Item 6. Exhibits
--------
Exhibit No. Description
------------ -----------
Upgrade International Corporation
Date: February 18, 2002 ---------------------------------
Daniel Bland, President and Chief
Executive Officer, and Secretary
Date: February 18, 2002 ---------------------------------
Howard A. Jaffe, Chief Operating
and Financial Officer
18