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 MARCH 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
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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 April 30, 2001, 23,122,576
shares of common stock, $.0001 par value were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
INDEX
PART I - Financial Information Page
Item 1. Financial Statements
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Consolidated balance sheets at September 30, 2000 (audited) and March 31, 2001
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated statements of operations for the six months and three months ended
March 31, 2001 and 2000 (unaudited) . . . . . . . . . . . . . . . . . . . .
Consolidated statement of cash flows for the six months ended March 31, 2001 and
2000 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to the Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis or Plan of Operation . . . . .
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PART II - Other Information . . . . . . . . . . . . . . . . . . . . . . . .
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . .
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Item 2. Changes In Securities and Use of Proceeds . . . . . . . . . . .
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Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . .
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Item 6. Exhibits and Reports on Form 8 - K . . . . . . . . . . . . . .
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Signatures
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, March 31,
2000 2001
--------------- -------------
CURRENT ASSETS (unaudited)
Cash and cash equivalents $ 398,989 $ 600,661
Restricted deposit 805,687 300,000
Subscription receivable 32,725 -
Note receivable from related party - 130,000
Equipment held for sale - 3,054,125
Prepaid expenses, deposits and other 121,491 356,355
--------------- -------------
Total current assets 1,358,892 4,441,141
PROPERTY AND EQUIPMENT - AT COST,
less accumulated depreciation and amortization 1,791,257 2,041,116
EQUIPMENT UNDER CONSTRUCTION 3,301,625 -
ADVANCES TO THE PATHWAYS GROUP, INC 1,900,825 3,250,780
ADVANCES TO ROCKSTER, INC. - 560,000
OTHER ASSETS
Intangible and deferred assets, net of accumulated amortization 370,206 580,769
Deposits and other 328,051 332,845
--------------- -------------
Total assets $ 9,050,856 $ 11,206,651
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 1,993,796 $ 4,073,049
Accrued liabilities 733,241 1,463,571
Bridge loans 799,177 82,185
Notes payable - 481,231
Equipment purchase contract payable 2,307,025 1,850,000
Royalty fee payable to Card Tech, Inc., net 487,500 812,500
Payable to related parties 175,240 1,259,840
--------------- -------------
Total current liabilities 6,495,979 10,022,376
NOTES PAYABLE, net of unamortized discount - 400,000
CONVERTIBLE DEBENTURES, net of unamortized discount 809,043 1,035,858
MINORITY INTEREST - -
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.001 par value, 50,000,000 shares authorized 20,341 21,463
Stock subscriptions 323,640 3,957,239
Additional paid in capital 36,925,837 44,172,085
Receivable from stockholders of subsidiary (266,621) (266,621)
Accumulated development stage deficit (35,257,363) (48,135,749)
--------------- -------------
1,745,834 (251,583)
--------------- -------------
Total liabilities and stockholders' equity (deficit) $ 9,050,856 $ 11,206,651
=============== =============
The accompanying notes are an integral part of these statements.
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Cumulative
Three months ended results of
Six months ended March 31, March 31, operations since
-------------------------- -------------------------- inception
2000 2001 2000 2001 (February 5, 1997)
------------ ------------ ------------ ------------ -------------------
Costs and expenses (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Research and development $ 1,869,127 $ 3,539,415 $ 1,109,319 $ 1,124,990 $ 11,690,087
Purchased in-process research and development 425,800 - 269,600 - 5,971,603
Sales and marketing 928,535 1,135,651 185,552 421,814 4,750,614
General and administrative 4,389,930 7,089,692 2,670,686 5,489,902 18,237,699
------------ ------------ ------------ ------------ -------------------
7,613,392 11,764,758 4,235,157 7,036,706 40,650,003
Other expenses (income)
Equity in losses of UltraCard - - - 1,264,316
Interest expense 520,644 1,026,842 63,893 723,230 1,990,836
Other, net (86,491) 86,786 (45,632) 62,081 328,934
------------ ------------ ------------ ------------ -------------------
434,153 1,113,628 18,261 785,311 3,584,086
Minority interest in losses
of subsidiaries (1,687,333) - (823,763) - (2,115,135)
------------ ------------ ------------ ------------ -------------------
NET LOSS $ 6,360,212 $ 12,878,386 $ 3,429,655 $ 7,822,017 $ 42,118,954
============ ============ ============ ============ ===================
LOSS PER COMMON
SHARE-BASIC AND DILUTED $ 0.38 $ 0.62 $ 0.18 $ 0.37 $ 3.54
============ ============ ============ ============ ===================
The accompanying notes are an integral part of these statements.
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended March 31, 2001 (unaudited)
Voting common stock Common stock subscribed Additional Receivable from Accumulated
------------------- --------------------- paid-in Stockholder Development
Shares Amount Shares Amount Capital of subsidiary stage deficit Total
---------- ------- --------- ---------- ------------ --------------- --------------- ------------
Balances at October 1,
2000 20,340,610 $20,341 102,609 $ 323,640 $36,925,837 $ (266,621) $ (35,257,363) $ 1,745,834
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 - - 1,350,000
Shares subscribed to at
$6.00 per share in
October 2000, net
of costs - - 233,333 920,000 (100,000) - - 820,000
Allocation of
debenture
proceeds to
common stock 167,768 168 444,435 444,603
Allocation of debenture
proceeds to
common stock
warrants - - - - 829,551 - - 829,551
Allocation of debenture
proceeds to
beneficial
conversion feature - - - - 1,051,096 - - 1,051,096
Allocation of
promissory note
proceeds to
common stock 40,000 40 - - 136,167 - - 136,207
Common stock
subscribed to at $4.00
per share in December
2000 - - 125,000 500,000 - - - 500,000
Common shares
subscribed at $2.00
per share in December
2000, net of
issuance costs - - 464,128 928,257 (102,208) - - 826,049
Common shares
subscribed in
December 2000 at
$0.25 through the
exercise of stock
warrants - - 20,000 5,000 - - - 5,000
4
Issuance of common
shares at $2.02 per
share pursuant to
conversion of
debenture 107,981 108 - - 218,014 - - 218,122
Common shares
subscribed pursuant
to warrant exercise at
$0.25 per share - - 200,000 50,000 - - - 50,000
Common shares
subscribed at $2.50
per share in January
2001, net of costs - - 200,000 500,000 (50,000) - - 450,000
Modification of warrants
granted to officer - - - - 2,414,000 - - 2,414,000
Issuance of common
shares at $1.43 per
share pursuant to
conversion of
debentures 307,509 307 - - 438,049 - - 438,356
Common shares
subscribed to at $2.50
per share in February
2001, net of costs - - 80,000 200,000 (20,000) - - 180,000
Common shares
subscribed at $3.75
per share as additional
finance fees - - 16,267 61,001 - - - 61,001
Common shares
subscribed at $3.31 as
additional finance fees - - 18,429 61,001 - - - 61,001
Common stock issued in
March for shares
previously subscribed 253,334 254 (253,334) (925,000) 924,746 - - -
Warrants issued with a
Strike price of $3.31 to
$6.00 per share as
additional finance fees - - - - 35,082 - - 35,082
Common shares
subscribed at $2.00
per share net of
replacement costs - - 828,496 1,656,980 (5,000) - - 1,651,980
Placement fees accrued
on prior financings - - - - (921,133) - - (921,133)
Allocation of debenture
proceeds to beneficial
conversion feature - - - - 790,369 - - 790,369
Adjustment to
remeasurement of
attorney stock options
- - - - (510,315) - - (510,315)
Net consolidated loss for
the six months ended
March 31, 2001 - - - - - - (12,878,386) (12,878,386)
---------- ------- --------- ---------- ------------ --------------- --------------- ------------
Balances March 31, 2001 21,462,671 $21,463 1,932,319 $3,957,239 44,172,085 $ (266,621) $(48,135,749) $ (251,583)
========== ======= ========= ========== ============ =============== =============== ============
The accompanying notes are an integral part of this statement.
4
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six months ended
March 31, Cumulative
-------------------------- since inception
2000 2001 (February 5, 1997)
------------ ------------ -------------------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $(6,360,212) $(12,878,386) $ (42,118,954)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 102,993 297,683 599,535
Amortization of beneficial conversion feature and debenture discount 477,745 963,023 1,772,066
Loss on sale of property and equipment - 3,883 3,883
Adjustment to receivable from subsidiary's shareholders 133,379
Write off of option cost 76,250
Common stock subscribed for financing fees - 122,002 122,002
Equity in loss of UltraCard 1,264,316
Purchased in-process research and
development 425,800 - 5,971,603
Warrants and options issued for services 339,500 1,903,685 5,134,175
Warrants issued for financing fees - 35,082 35,082
Shares issued for services 242,900 - 298,650
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 (1,687,333) - (2,115,135)
Changes in assets and liabilities:
Prepaid expenses, deposits and other (148,167) (251,264) 607,446
Accounts payable and accrued liabilities (200,072) 3,127,025 4,924,649
------------ ------------ -------------------
Net cash used in operating activities (6,806,846) (6,677,267) (22,696,048)
Cash flows from investing activities
Advances to The Pathways Group, Inc. - (1,349,955) (3,234,955)
Advances to Rockster, Inc. - (560,000) (560,000)
Payments on equipment under construction (1,200,000) - (1,200,000)
Acquisition of property and equipment, net (446,641) (429,364) (1,550,248)
Acquisition of Centurion Technologies, Inc.,
net of cash acquired - - (1,000,000)
Acquisition of UltraCard, Inc., net of cash acquired (260,300) - (5,571,105)
Acquisition of additional equity interest in EforNet
from a minority shareholder (200,000) - (200,000)
Additions to note receivable from related party - (130,000) (130,000)
Proceeds from sale of property and equipment 52,593
Acquisition deposit - (15,000) (15,000)
Additions to intangible assets (1,084) (65,490) (182,668)
------------ ------------ -------------------
Net cash used in investing activities (2,108,025) (2,549,809) (13,591,383)
Cash flows from financing activities
Proceeds from sale of common stock and stock subscriptions 6,258,844 5,575,614 32,099,064
Borrowings, net of loan costs 930,000 4,604,039 8,275,577
Principal payments on borrowings (367,628) (1,311,592) (3,954,335)
Release of restricted cash - 505,687 505,687
Purchase of collateral on subsidary's letter of credit - - (805,687)
Proceeds from exercise of stock options and warrants - 55,000 767,786
------------ ------------- -------------------
Net cash provided by financing activities 6,821,216 9,428,748 36,888,092
------------ ------------- -------------------
Net increase (decrease) in cash and cash equivalents (2,093,655) 201,672 600,661
Cash and cash equivalents at the beginning of the period 4,781,330 398,989 -
------------ ------------- -------------------
Cash and cash equivalents at the end of the period $ 2,687,675 $ 600,661 $ 600,661
============ ============= ===================
The accompanying notes are an integral part of these statements.
4
UPGRADE INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
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 (GAPP) 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, 2001. 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 1999
filed on January 16,2001 and the form 10-QSB that included consolidated
financial results for the three months ended December 31,2000 and 1999, filed on
February 20, 2001.
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 March 31, 2001 and September 30, 2000, 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) and Global CyberSystems PLC (GCPLC). The statements of
operations and cash flows for the six months ended March 31, 2001, 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. The
statements of operations and cash flows for the six months ended March 31, 2001
include the consolidated results of the Company and its Subsidiaries. All
significant intercompany 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
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 20,938,724 and 21,191,279 for the six
and three months ended March 31, 2001, respectively, 16,905,166 and 19,147,677
for the six and three months ended March 31, 2000, respectively and 11,891,020
since inception (February 5, 1997) through March 31, 2001. Diluted loss per
share for all periods presented equaled basic loss per share due to antidilutive
effect of the potentially dilutive securities. As of March 31, 2001, total
warrants and options of 5,745,830 were not included in loss per share
computations due to their antidilutive effect.
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. The process of commercialization of the
Company's core technology is being facilitated in part through the acquisition
of strategically aligned Companies in the information technology industry. To
date, 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 and to accelerate 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 at least
the end of second quarter of 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 or debt financing. 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.
During the three months ended March 31, 2001, the Company completed the
following debt and equity transactions:
A debtholder converted $218,122 and $438,356, respectively, in then
outstanding convertible debentures (including $18,122 and 38,356,
respectively, in accrued interest) into 107,981 and 307,509 shares of the
Company's common stock at $2.02 and $1.43 per share pursuant to the
original debenture terms.
The Company issued 200,000 shares of its common stock at $0.25 per
share pursuant to a warrant exercise for gross proceeds of $50,000.
The Company completed a private placement offering of 280,000 shares
of its common stock at $2.50 per share for gross proceeds of $700,000.
The Company completed a private placement offering of 828,496 shares
of its common stock at $2.00 per share for gross proceeds of $1,656,980.
The Company is actively pursuing various financing opportunities. Such
financing could take the form of equity, debt, or other hybrid types of
securities.
NOTE E - DEBT
In March 2001, the Company issued $790,369 in subordinated debentures that are
convertible immediately into common stock. The debentures bear simple interest
at 8% per annum, are due May 31, 2001 and are collateralized by UltraCard's
interest in the equipment held for sale.
In March 2001, the Company issued 16,267 and 18,429 shares of its common stock
at $3.75 and $3.31 per share as additional financing fees under the terms of a
modified promissory note. In addition, under the terms of the aforementioned
note, the Company granted warrants entitling the holder to purchase 20,277,
40,664 and 23,034 shares of its common stock at $3.75, $6.00 and $3.31 per
share, respectively. The warrants are exercisable immediately and expire 90 days
from the date of grant.
In March 2001, the Company obtained a 12.5% simple interest mortgage loan
totaling $400,000. The loan calls for interest only monthly payments with the
first payment due May 1, 2001 and principal plus unpaid interest due February
2002. The loan is collateralized by the condominiums owned by UltraCard.
NOTE F - ACQUISITIONS
On September 8, 2000 the Company signed an Agreement and Plan of Reorganization
("Agreement") to acquire 100% of The Pathways Group, Inc. (Pathways) On February
15, 2001 the Company delivered notice to Pathways terminating the merger
agreement between the two Companies. The advances to Pathways by the Company
are secured by a blanket assignment over the Pathways assets. Management
believes the advances are fully recoverable.
On December 11, 2000 the Company entered into a letter of intent to acquire
majority interest totaling 57 percent in Rockster, Inc. (Rockster), an
entertainment distribution technology developer. The Company and Rockster are
currently in the process of developing a definitive agreement.
On January 16, 2001, the Company discontinued negotiations with Cards & More
GMBH, for the acquisition of 60% of that Company announced in September 2000.
NOTE G - COMMITMENTS
The Company has a contract with SciVac, Inc. (SciVac) to purchase and install a
sputtering machine for $3,000,000. As of March 31, 2001, the Company has
advanced $1,200,000 to SciVac under this contract and recorded a liability of
$1,800,000. The Company decided that it no longer requires the machine for its
operations. As a result, the Company has entered into an oral agreement with
SciVac, whereas, SciVac will market and sell the sputtering machine on behalf of
the Company. This asset is classified in the accompanying condensed
consolidated balance sheet as equipment held for sale in the amount of
$3,054,125. The Company believes it will realize the carrying amount of the
asset in a sale during 2001.
On March 13, 2001, the Company entered into an operating lease agreement to
lease a 28,500 square foot facility in Los Angeles, California. The agreement
calls for monthly payment of $43,200 commencing August 1, 2001. The lease
terminates August 1, 2011.
On October 10, 1997, UltraCard licensed the rights to two technology patents
from CardTech, Inc. (CardTech). UltraCard's President is also the controlling
stockholder of CardTech. UltraCard is required to pay CardTech a minimum annual
royalty fee of $650,000. Royalty fees are due on January 1 of each calendar
year. As of March 31, 2001, $1,300,000 for both the calendar year 2000 and 2001
royalty fees remained unpaid, causing UltraCard to be past due on the agreement.
CardTech has deferred the required 2000 and 2001 payments to June 30, 2001. In
consideration for the deferral, UltraCard has granted a patent mortgage to
CardTech on all its intellectual property.
NOTE H - CONTINGENCIES
The class action lawsuits filed during February and March 2000, in the United
States District Court, against the Company and its President alleging securities
violations were dismissed, with prejudice by the United States District Court.
Plaintiffs appealed the Court's order, and the defendants filed a cross appeal
seeking sanctions. The parties have since entered into a stipulated agreement to
dismiss their appeals.
NOTE I - SUBSEQUENT EVENTS
During April, 2001, the Company issued common stock at $2 per share for a total
of $1,030,000. The offer and sales of securities was made pursuant to an
exemption from registration under Regulation S of the Securities Act of 1933
(Act), due to the foreign nationality of the investors.
During May, 2001 to the date of this report, the Company issued common stock at
$2 per share for a total of $196,000. The offer and sales of securities was made
pursuant to an exemption from registration under Regulation S of the Act, due to
the foreign nationality of the investors.
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.
Net losses aggregated $12.9 million in the first six months of the current
fiscal year ending September 30, 2001 compared with a $6.3 million net loss for
the corresponding period of the prior fiscal year. This increase in net loss
reflects a continued and growing level of investment into the Company's
technology, production processes and the development of commercialization of the
Companies core technology through the acquisition of application companies.
During the quarter, the Company's subsidiary, UltraCard Inc. has completed their
move into new facilities in Los Gatos completing the consolidation of the
operations into one location. Significant administrative costs have been
incurred in reorganizing the Company's acquisitions of application companies and
in their capital raising initiatives. UltraCard Inc., has again increased its
research and development expenditures by $2.1 million over the corresponding
prior period in a concentrated effort to complete a commercialized version of
its high memory capacity UltraCard and read write device. These increasing
expenditures reflect the Company's focused efforts upon completing its research
and development initiatives, while at the same time, establishing production
processes and specifications to facilitate the Company to engage others to
produce the UltraCard and its read write device. The other significant
operating subsidiary cQue (formerly Centurion) contributed only 3% of the total
loss reflecting the focus of the consolidated groups efforts to complete the
UltraCard technology. During the six month period, EforNet discontinued their
research and development program in light of acquisitions being developed during
the period, however the developments that they had achieved are being maintained
and protected and will be further developed within the Company's developing
infrastructure. A significant portion of the increase in research and
development expenditures was due to the addition of new personnel, prototype
development and contracts with external research and development contractors.
For the near future, research and development expenditures are expected to be
increased to meet the Company's numerous potential market opportunities. All of
the Company's research and development costs are expensed as incurred.
The net loss for the three month period ended March 31, 2001 of $7.8 million
represents a $4.4 million increase over the corresponding period in the prior
year. A significant portion of this increased loss ($2.98 million) is comprised
of non-cash financing costs associated with warrants issued for services, the
extension of warrants previously issued, debenture discounts and common shares
issued for financing fees. The additional increase is comprised of a step up in
sales and marketing expenditures of $240,000 reflecting the Company's increasing
efforts to raise market awareness of its products and potential. The balance of
the increase is allocated to general and administrative expenditures incurred by
the growing group of companies.
Interest expense has also increased significantly as the result of the valuation
of shares and warrants issued in relation to unpaid notes and debentures issued
during the period.
In an effort to accelerate the Company's market penetration with the UltraCard
and related products, and in order to augment internally developed research and
development initiatives, the Company will license technology from other
businesses, engage others to develop components and/or acquire other businesses
as an alternative to internal research and development and marketing efforts.
The marketplace is
beginning to recognize the UltraCard as a leader and superior product in the
smart card industry and management are focused upon accelerating the Companies
access to this multi-billion dollar marketplace.
Sales and marketing expenditures have decreased by approximately $0.3 million
from the prior quarter as the prior quarter costs included a technology
symposium in San Francisco, in which the Companies in the consolidated Group
showcased their products to investors, industry and the media. 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 currently under development.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents were approximately $400,000 at March 31, 2001, an increase
of approximately $500,000 from December 31, 2000. The Company is managing tight
cash flows in providing funding for an aggressive research and development
program at UltraCard while developing acquisitions in the software development
area of business. Cash flows from financing activities of $9.4 million in the
current six month period represents a 38% increase in the capital raised in the
corresponding period of the preceding year. The proceeds were used for
operations of $6.7 million, with the balance of $2.5 million allocated to
investing activities for acquisitions in process of Pathways and Rockster and
the development of the UltraCard facilities. The Company is successfully raising
capital on an ongoing basis as it has done for the last three years since
inception.
In order for the Company to meet the funding requirements from its investee
Companies and to meet ongoing operating requirements, the Company will have to
raise additional financing. The Company expects that its existing and planned
capital resources will be adequate to satisfy the requirements of the current
and planned operations until the end of the current fiscal year. 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.
PART II Other Information
Item 1. Legal Proceedings
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In Re Upgrade International Corporation Securities Litigation, U.S. District
Court, Western District of Washington at Seattle, c/a #C00-0298, the class
action against Upgrade and its president, Daniel S. Bland, was dismissed by
court dated February 9, 2001. Plaintiffs appealed the court's order, and the
defendants filed a cross appeal seeking sanctions. The parties have since
entered into a stipulated agreement to dismiss their appeals.
Lewis v. The Pathways Group, Inc. and Upgrade International Corporation, U.S.
--------------------------------------------------------------------------
District Court, Western District of Washington at Seattle, c/a #C01-0600R. The
complaint alleges copyright infringement, misappropriation of trade secrets, and
tortuous interference with business expectancies against Upgrade by virtue of
the proposed merger between Upgrade and The Pathways Group, which merger
proposal was terminated by Upgrade on February 15, 2001. The complaint seeks
injunctive relief and unspecified damages.
The Company filed an answer on May 17, 2001. Management believes the case is
without merit and intends to defend it vigorously.
Item 2. Changes in Securities and Use of Proceeds
--------
During the three months ended March 31, 2001, the Company sold unregistered
securities as follows:
In January 2001, Upgrade issued 107,981 shares of its common stock at a
price of $2.02 per share pursuant to the conversion of debentures. As reported
in the Company's Form 10-QSB for the period ended December 31, 2000, the
issuance was exempt under Rule 506 under and Section 4(2) of the Securities Act
of 1933 (the "Act").
In January 2001, Upgrade issued 200,000 shares of its common stock at a
price of $0.25 per share pursuant to the exercise of warrants. The issuance was
exempt from registration pursuant to Regulation S of the Securities Act of 1933,
due to the foreign nationality of the investor.
In January 2001, Upgrade completed a private placement offering of 200,000
shares of its common stock at a price of $2.50 per share for total proceeds of
$500,000. The offer and sale of securities was made pursuant to an exemption
from registration under Regulation S of the Act, due to the foreign nationality
of the investor.
In January 2001, Upgrade completed a private placement offering of 265,000
shares of its common stock at a price of $2.00 per share for total proceeds of
$530,000. The offer and sale of securities was made pursuant to an exemption
from registration under Regulation S of the Securities Act of 1933, due to the
foreign nationality of the investor.
In February 2001, Upgrade issued 307,509 shares of its common stock at a
price of $1.43 per share pursuant to the conversion of debentures. As reported
in the Company's Form 10-QSB for the period ended December 31, 2000, the
issuance was exempt under Rule 506 under and Section 4(2) of the Act.
In February 2001, Upgrade completed a private placement offering of 358,496
shares of its common stock at a price of $2.00 per share for total proceeds of
$716,980. The offer and sale of securities was made pursuant to an exemption
from registration under Regulation S of the Securities Act of 1933, due to the
foreign nationality of the investor.
In February 2001, Upgrade completed a private placement offering of 80,000
shares of its common stock at a price of $2.50 per share for total proceeds of
$200,000. The offer and sale was exempt under Rule 506 under and Section 4(2) of
the Act.
In March 2001, Upgrade completed a private placement offering of 205,000
shares of its common stock at a price of $2.00 per share for total proceeds of
$410,000. The offer and sale was exempt under Rule 506 under and Section 4(2) of
the Act.
In March 2001, Upgrade issued 16,267 shares of its common stock at a price
of $3.75 per share in lieu of financing fees under the terms of a promissory
note. The issuance was exempt under Rule 506 under and Section 4(2) of the Act.
In March 2001, Upgrade issued 18,429 shares of its common stock at a price
of $3.31 per share in lieu of financing fees under the terms of a promissory
note. The issuance was exempt under Rule 506 under and Section 4(2) of the Act.
In March 2001, Upgrade issued warrants to purchase 20,277 shares of its
common stock at an exercise price of $3.75 per share in lieu of financing fees
under the terms of a promissory note. The issuance was exempt under Rule 506
under and Section 4(2) of the Act.
In March 2001, Upgrade issued warrants to purchase 40,664 shares of its
common stock at an exercise price of $6.00 per share in lieu of financing fees
under the terms of a promissory note. The issuance was exempt under Rule 506
under and Section 4(2) of the Act.
In March 2001, Upgrade issued warrants to purchase 23,034 shares of its
common stock at an exercise price of $3.31 per share as additional compensation
under the terms of a promissory note. The issuance was exempt under Rule 506
under and Section 4(2) of the Act.
Item 4. Submission of Matters to a Vote of Security Holders
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On March 27, 2001, the Company held its Annual Meeting of Shareholders. The
shareholders voted on and approved the following matters, with the voting
results indicated:
Election of Directors:
Daniel S. Bland, Class 3 (term expiring 2004)
For: 11,273,980 Withheld Vote: 123,068
Malcolm P. Burke, Class 3 (term expiring 2004)
For: 11,277,580 Withheld Vote: 119,468
Ronald P. Erickson, Class 2 (term expiring 2003)
For: 11,132,474 Withheld Vote: 264,574
Howard A. Jaffe, Class 2 (term expiring 2003)
For: 11,271,930 Withheld Vote: 125,118
For approval of the Company's 2000 Omnibus Stock Option Plan
For Against Abstain Broker Non-Votes
--- ------- ------- -----------------
7,127,515 63,314 60,055 4,146,164
The appointment of Grant Thornton, L.L.P. as the Company's independent
auditors for the fiscal year 2001.
For Against Abstain Broker Non-Votes
--- ------- ------- -----------------
11,353,455 13,801 29,792 9,758,113
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Item 6. Exhibits
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Exhibit No. Description
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10.1 Form of Debenture
10.2 Form of Promissory Note
Upgrade International Corporation
Date: May 15, 2001 ------------------------------------------------
Daniel Bland, President and Chief Executive
Officer, and Secretary
Date: May 15, 2001 ------------------------------------------------
Howard A. Jaffe, Chief Operating and
Financial Officer