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, 2002
----------------------------------------------------
[ ] 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 May 15, 2002, 44,173,400
shares of common stock, $.0001 par value were outstanding. (Excludes
45,000,000 shares registered in the Company's name and deposited into a custody
account to support loan transaction to the Company. See Footnote F )
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
INDEX
PART I - Financial Information Page
Item 1. Financial Statements
------------------------------
Consolidated balance sheets at September 30, 2001 (audited) and March 31, 2002 (unaudited). . . . . . . . . . . . . 3
Consolidated statements of operations for the three and six months ended March 31, 2001 and 2002 (unaudited) and
cumulative since inception (February 5, 1997) through March 31, 2002 (unaudited). . . . . . . . . . . . . . . . . . 4
Consolidated statement of stockholders' equity since inception through September 30, 2001 and for the six months
ended March 31, 2002 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-7
Consolidated statement of cash flows for the six months ended March 31, 2001 and 2002 (unaudited) and
Cumulative since inception (February 5, 1997) through March 31, 2002 (unaudited). . . . . . . . . . . . . . . . . . 8
Notes to the Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . . . . . . . . . . 12
-------------------------------------------------------------------
PART II - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
------- -----------------
Item 2. Changes In Securities and Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
------- -----------------------------------------
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
------- -----------------
Item 6. Exhibits and Reports on Form 8 - K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
------- ----------------------------------
Signatures
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, March 31,
2001 2002
------------- -------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 2,551,465 $ 668,786
Restricted deposit 300,000 300,000
Subscriptions receivable 500,000 -0-
Note receivable from related party 135,243 135,300
Prepaid expenses, deposits and other 110,022 92,583
------------- -------------
Total current assets 3,596,730 1,196,669
PROPERTY AND EQUIPMENT - AT COST,
less accumulated depreciation and amortization 2,071,663 1,750,458
SPUTTERING MACHINE, held for sale 2,000,000 2,000,000
ADVANCES TO ROCKSTER GROUP 1,084,000 1,590,500
OTHER ASSETS
Intangible and deferred assets, net of accumulated
amortization 466,256 889,033
Acquisition deposits 1,820,715 1,820,715
Deposits 194,128 194,128
------------- -------------
Total assets $ 11,233,492 $ 9,441,503
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 3,853,950 $ 4,825,003
Payable to related parties 5,503,022 3,271,911
Accrued liabilities 2,972,713 2,781,733
Notes payable 1,717,231 1,967,594
Equipment purchase contract payable 2,024,748 2,024,748
Royalty and license fee payable to CardTech, Inc. 1,161,873 2,426,918
------------- -------------
Total current liabilities 17,233,537 17,297,907
CONVERTIBLE DEBENTURES, net of unamortized discount 2,004,488 1,075,756
LOAN PAYABLE -0- 1,210,000
MINORITY INTEREST 1,473,179 -0-
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' DEFICIT
Common stock - $.0001 par value, 250,000,000 shares authorized 24,524 40,059
Stock subscriptions 2,742,586 1,793,248
Additional paid in capital 53,947,618 74,776,915
Deferred compensation (498,559) (407,686)
Receivable from stockholders of subsidiary (266,621) (266,621)
Accumulated development stage deficit (65,427,260) (86,078,075)
------------- -------------
(9,477,712) (10,142,160)
------------- -------------
Total liabilities and stockholders' deficit $ 11,233,492 $ 9,441,503
============= =============
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
Three months ended results of
Six months ended March 31, March 31, operations since
-------------------------- -------------------------- inception
2001 2002 2001 2002 (February 5, 1997)
------------ ------------ ------------ ------------ -------------------
Costs and expenses (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Research and development $ 3,539,415 $ 2,609,469 $ 1,124,990 $ 830,799 $ 17,141,872
Purchased in-process research & development - - - - 5,971,603
Sales and marketing 1,135,651 141,214 421,814 33,824 5,380,019
General and administrative 7,089,692 5,361,813 5,489,902 3,040,715 28,292,470
------------ ------------ ------------ ------------ -------------------
11,764,758 8,112,496 7,036,706 3,905,338 56,785,964
Other expenses (income)
Equity in losses of UltraCard - - - - 1,264,316
Interest expense 1,026,842 11,655,096 723,230 4,040,146 18,377,397
Loss on advances to Pathways - - - - 3,549,780
Other, net 86,786 1,628,754 62,081 714,915 3,397,154
------------ ------------ ------------ ------------ -------------------
1,113,628 13,283,850 785,311 4,755,061 26,588,647
Minority interest in losses
of subsidiaries - (745,531) - (46,179) (3,313,331)
------------ ------------ ------------ ------------ -------------------
NET LOSS $12,878,386 $ 20,650,815 $ 7,822,017 $ 8,614,220 $ 80,061,280
============ ============ ============ ============ ===================
LOSS PER COMMON
SHARE-BASIC AND DILUTED $ 0.62 $ 0.57 $ 0.37 $ 0.22 $ 5.21
============ ============ ============ ============ ===================
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 September 30, 2001 through March 31, 2002 (unaudited)
Voting common stock Common stock subscribed Additional Receivable from
------------------- ------------------------ paid-in Deferred stockholders
Shares Amount Shares Amount capital compensation of subsidiary
---------- ------- ----------- ----------- ---------- ------------- --------------
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
--------------- -------------
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
The accompanying notes are an integral part of these statements.
5
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued
Since September 30, 2001 through March 31, 2002 (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 lieu of
fees and penalties in connection
with October 10 through 12, 2001
conversion of convertible
debentures - 973,485
The accompanying notes are an integral part of these statements.
6
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued
Since September 30, 2001 through March 31, 2002 (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 -
Shares issued on January 13, 2002
pursuant to penalty and interest
adjustments to convertible debenture
at prices of $1.02 & $1.03 59,953 60 50,103
Shares issued February 4, 2002 as
loan inducement fees for shares
previously subscribed in November &
December 2001 354,300 354 (354,300) (119,024) 118,670
Shares issued February 4, 2002 at
prices from $1.03 to $1.08 pursuant to
loan inducement fees for loans provided
to the Company in January 2002 35,063 35 131,380
Shares issued February 4, 2002 as
payment of penalties and interest on
Loan agreements 345,683 346 (323,875) (329,036) 412,072
Shares issued February 4, 2002 as
payment of penalty and interest on
loan agreements incurred in January
2002 299,993 300 315,446
Shares and warrants issued
February 4,2002 as
payment of penalties and interest
On loan agreements incurred in
February 2002 34,231 34 48,574
Shares issued and warrants
granted on January 15, 2002 and
Issued on February 26, 2002
in settlement of debts 1,000,000 1,000 1,465,000
Shares issued March 4, 2002 for
shares previously subscribed
Pursuant to private placements
at $2.00 per share 12,000 12 (12,000) (24,000) 23,988
Shares subscribed in connection with
February penalties and interest on loan
Agreements 350,204 526,255
Adjustmenbt to shares subscribed and
warrants issued in March
in connection with notes payable 29,300 484,846
Warrants issued during the three
months ended March 31, 2002 as
penalties and interest on promissory
notes 2,923,527
Shares and warrants granted in
Connection with March 2002 notes 350,000 181,275 166,245
Shares and warrants granted in March
2002 at $1.01 to $1.08 per share
pursuant to loan inducement fees for
loan provided in March 2002 144,375 155,925 417,244
Amortization of deferred compensation for
the three months ended March 31, 2002 41,547
Net loss for the six months ended
March 31, 2002
--------- ------- ----------- ------------ ----------- -------------- ---------------
Balances at March 31, 2002 40,059,026 $40,059 $ 1,210,146 $ 1,793,248 $74,776,915 $ (407,686) $ (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
Shares issued on January 13, 2002
pursuant to penalty and interest
adjustments to convertible debenture
at prices of $1.02 & $1.03 50,163
Shares issued February 4, 2002 as
loan inducement fees for shares
previously subscribed in November &
December 2001 -
Shares issued February 4, 2002 at
prices from $1.03 to $1.08 pursuant to
loan inducement fees for loans provided
to the Company in January 2002 131,415
Shares issued February 4, 2002 as
payment of penalties and interest on
Loan agreements 83,382
Shares issued February 4, 2002 as
payment of penalty and interest on
loan agreements incurred in January
2002 315,746
Shares and warrants issued
February 4,2002 as
payment of penalties and interest
On loan agreements incurred in
February 2002 48,608
Shares and warrants issued February 26, 2002
in settlement of debts 1,466,000
Shares issued March 4, 2002 for
shares previously subscribed
Pursuant to private placements
at $2.00 per share -
Shares subscribed in connection with
February penalties and interest on loan
Agreements 526,255
Adjustment to shares subscribed and
warrants issued in March
in connection with notes payable 514,146
Warrants issued during the three
months ended March 31, 2002 as
penalties and interest on promissory
notes 2,923,527
Shares and warrants granted in
Connection with March 2002 notes 347,520
Shares and warrants granted in March
2002 at $1.01 to $1.08 per share
pursuant to laon inducement fees for
loan provided in March 2002 573,169
Amortization of deferred compensation for
the three months ended March 31, 2002 41,547
Net loss for the six months ended
March 31, 2002 (20,650,815) (20,650,815)
--------------- ------------
Balances at March 31, 2002 $ ( 86,078,075) $ 10,097,160
=============== ============
The accompanying notes are an integral part of this statement.
7
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six months ended March 31, Cumulative
------------------------------------- since inception
Increase (Decrease) in Cash and Cash Equivalents 2001 2002 (February 5, 1997)
----------------- ------------------ -------------------
Cash flows from operating activities
Net loss $ (12,878,386) $ (20,650,815) $ (80,061,280)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 297,683 185,887 1,376,497
Amortization of beneficial conversion feature and debt discount 963,023 1,495,189 5,293,382
Amortization of loan costs - 729,391 729,391
Write off of leasehold improvements - 210,805 210,805
Modification of loan agreements - 232,922 232,922
Equity securities issued in lieu of interest and penalties on debt - 11,044,688 13,723,434
Employee stock options issued below fair value - 90,873 1,354,877
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 property and equipment 3,883 - 26,021
Common stock subscribed for Financing fees 122,002
Equity in loss of UltraCard - - 1,264,316
Purchased in-process research and
development - - 5,971,603
Warrants and options issued for services 1,903,685 - 5,134,175
Warrants issued for financing fees 35,082
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 - (745,531) (3,313,331)
Changes in assets and liabilities:
Prepaid expenses, deposits and other (251,264) 14,818 1,018,920
Payables, accrued liabilities and other 3,127,025 3,223,983 11,532,564
----------------- ------------------ -------------------
Net cash used in operating activities (6,677,267) (4,217,790) (29,658,515)
Cash flows from investing activities
Advances to The Pathways Group, Inc. (1,349,955) - (3,533,955)
Advances to Rockster, Inc. (560,000) (506,500) (1,590,500)
Advances to eCourier - - (130,000)
Payments on equipment under construction - - (1,200,000)
Acquisition of property and equipment, net (429,364) (54,649) (1,753,416)
Acquisition of Centurion Technologies, Inc.,
net of cash acquired - - (1,000,000)
Acquisition of UltraCard, Inc., net of cash acquired - (339,164) (5,910,269)
Acquisition of equity interest in EforNet Corp.
from a minority shareholder - - (200,000)
Additions to note receivable from related party (130,000)
Acquisition deposit (15,000) - (62,500)
Additions to intangible assets (65,490) (22,770) (217,957)
----------------- ------------------ -------------------
Net cash used in investing activities (2,549,809) (923,083) (15,598,597)
Cash flows from financing activities
Proceeds from sale of common stock and stock subscriptions 5,575,614 971,746 36,701,964
Borrowings, net of loan costs 4,604,039 2,302,500 12,455,120
Principal payments on borrowings (1,311,592) (16,052) (3,698,972)
Purchase of collateral on subsidiary's letter of credit - - (805,687)
Release of restricted cash 505,687 - 505,687
Proceeds from exercise of stock options and warrants 55,000 767,786
----------------- ------------------ -------------------
Net cash provided by financing activities 9,428,748 3,258,194 45,925,898
----------------- ------------------ -------------------
Net increase (decrease) in cash and cash equivalents 201,672 (1,882,679) 668,786
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 $ 600,661 $ 668,786 $ 668,786
================= ================== ===================
The accompanying notes are an integral part of these statements.
8
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001 and 2002
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 (deficit) and cash flows for the years then
ended and since inception (February 5, 1997), and the form 10-QSB for the
quarters ended December 31, 2000 and 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 September 30, 2001 and March 31, 2002, 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 for the three and six months ended March 31,
2001 and 2002 and for the period from inception (February 5, 1997) and the
statements of cash flows for the six months ended March 31, 2001 and 2002 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 for the six and three months ended March
31, 2002 was 36,355,727 and 39,182,748, respectively and 20,938,724 and
21,191,279 for the six and three months ended March 31, 2001 respectively, and
15,360,066 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.
In addition at March 31, 2002, 48,356,000 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 loan payable. In
October 2001, the Company assumed the president's liability on the loan
and issued 2,000,0000 shares. The original collateral shares were then
transferred into the Company's name by the president.
- Contingently issued, 45,000,0000 restricted shares issued to an
institutional syndicator , held as collateral on a future financing as
described in note F.
9
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001 and 2002
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 March 31, 2002:
In January 2002, the Company borrowed $170,000 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. In addition, as a cost of the financing, the Company granted a
$18,700 note payable, 35,063 shares of common stock, and warrants entitling
holder to purchase 105,188 shares of common stock at $.80 to $1.00 per share.
The warrants are exercisable immediately and expire five years from the date of
grant.
In February 2002, the Company issued 350,204 shares pursuant to the terms of
certain loan agreements maturing within 30 days of the date of issuance. Loan
penalties and interest payable in shares is required for a 30 day extension on
the loans.
In March 2002, the Company issued 371,427 shares pursuant to the terms of
certain loan agreements maturing within 30 days of the date of issuance. Loan
penalties and interest payable in shares is required for a 30 day extension on
the loans.
In March 2002, the Company borrowed $700,000 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 $.80.
In addition, as a cost of the financing, the Company granted a $77,000 note
payable, 144,375 shares of common stock, and warrants entitling holder to
purchase 433,125 shares of common stock at $.80 per share. The warrants are
exercisable immediately and expire five years from the date of grant.
10
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001 and 2002
NOTE D - MANAGEMENT PLANS - Continued
During the three month period ended March 31, 2002, the Company borrowed
$587,500 from an officer. On April 30, 2002 this balance, combined with then
outstanding $150,000 loan due to the officer, along with additional advances
subsequent to March 31, 2002, which brought the total to $775,000, 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 December 31, 2002. In addition, on April 30, 2002,
the Company granted 750,000 warrants issued as part of the debt transaction, 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 January 2002, the Company settled a payable to a related party of
approximately $955,000 for services performed and the reimbursement of expenses
incurred, in exchange for the payment of $25,000, $125,000 payable in cash in
the future, the issuance of 1,000,000 shares of the Company's common stock and
the granting of warrants to purchase 500,000 shares of common stock at $1.25 per
share on or before January 15, 2005. In connection with this transaction, the
Company recognized $666,730 in additional compensation expense representing
excess of equity consideration granted over the fair value of the debt settled.
In February 2002, the Company entered into a debt financing agreement with an
institutional syndicator to obtain up to $15 million in working capital for
Upgrade and its group of Companies. The debt instrument is for a seven-year term
with the principal due at maturity, and interest payable quarterly commencing in
year three of the financing. The loan is secured by the issuance of 40 million
shares of Company Stock, which have been issued under Rule 144A along with 5
million restricted common shares issued under Rule 506D . The shares issued
under Rule 144A carries a different CUSIP number from the Company's Common
Stock. These shares are restricted, and can only be traded among qualified
institutional investors. Upon repayment of the credit facility, the shares are
to be returned to the Company. Contained in the agreement is the stipulation
that the voting rights of the 45 million shares by way of proxy will be voted in
proportion with the existing shareholder base. The Company also retains the
right to substitute collateral 18 months after closing of the transaction. This
transaction has not yet funded and continues to be unfunded subsequent to period
end.
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.
11
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001 and 2002
NOTE E - COMMITMENTS AND CONTINGENCIES
The Company is in default on its payments on its ten-year lease for office space
located in Los Angeles, California. As of March 31, 2002, the Company is past
due on approximately $170,000 in lease payments, plus facility expenses.
Rockster, Inc. had been occupying this facility, but vacated it in April 2002.
Subsequent to March 31, 2002, the Company began negotiations with the landlord
to terminate the lease and settle the amounts owing. These negotiations are
expected to be completed during the current fiscal year. Additional amounts
owing, if any, will be recorded upon settlement. The carrying amount of the
related leasehold improvements were approximately $211,000, which were written
off during the quarter ended March 31, 2002.
The Company remains in default on its payments under various agreements to
purchase 826,482 shares of UltraCard, Inc. common stock and 10,000 shares of
CardTech, Inc. (CardTech) common stock. Cash flow permitting, the Company plans
to become current on its obligations under these agreements during the quarter
ending June 30, 2002. If the Company is unable to do this, it may have to
write-off as much as $1,820,715 in acquisition deposits recorded at March 31,
2002.
As of March 31, 2002, $2,426,918 in license and royalty payments remained unpaid
for the calendar years 2000, 2001 and 2002, resulting in UltraCard being past
due on the CardTech license agreement. CardTech has agreed to defer payment of
amounts owed until June 30, 2002.
NOTE F - SUBSEQUENT EVENTS
In April 2002, the Company borrowed a further $425,000 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. In addition, as
a cost of the financing, the Company entered into note payable agreements of
$33,000, issued 33,000 shares of common stock, and granted warrants entitling
holder to purchase 33,000 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.
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.
BUSINESS OPPORTUNITIES & THE COMMERCIALIZATION PROCESS
Since the Company's year-end, there has been good progress toward completing the
commercialization process for the UltraCard technology. As pointed out in the
previously filed 2001 Form 10-KSB, among the steps necessary to complete the
process include: final design and production of the cardbody; (the proprietary
hard drive like media, "shim", which is housed inside the cardbody, which meets
the international standards for card size, thickness and flexibility), final
design of the first read-write device and the operating and application software
which resides on the "shim". The software includes the operating system and
specific application software that will define the functionality of the
UltraCard.
12
The Company is in the process of aligning with others to commercialize the
UltraCard technology. This has taken form in the case of contracted
manufacturing or consulting services, i.e. Pemstar, Infineon, and Komag, or
potential partnerships / joint ventures, like the one currently being negotiated
with Giesecke & Devrient, Inc. ("G & D"). Pemstar, Infineon and Komag have made
significant contributions to the commercialization of the UltraCard technology.
Without their individual efforts, the accomplishments to date would have taken
Longer. These types of relationships have proven successful for the Company,
and management believes they will continue to provide the necessary resources to
achieve commerialization of the UltraCard technology.
Management believes that the UltraCard technology can be commercialized much
sooner by using contract manufacturing from disk drive companies to produce its
products than by establishing its own manufacturing facilities. As a result of
the excess in manufacturing capacity in the disk drive industry today, the
contract manufacturing approach should result in lower short-term investment by
the Company, maximize the ability to vary production levels to meet demand and
lower the risk of early manufacturing start-up problems.
Additionally, chip manufacturers are readily available, and with the low cost
memory afforded using the UltraCard solution, low cost chips can be used while
still increasing the overall functionality of the card.
However, the Company does intend to maintain control over manufacturing from the
perspectives of manufacturing process and inventory exposure. The Company
intends to monitor the quality processes in the individual contract
manufacturers' plants including incoming inspection procedures, in-cycle quality
assurance and final burn-in and test. The Company also will establish ongoing
reliability inspection to ensure they meet specifications and reliability goals
before shipping to customers.
The negotiations with G & D are continuing as the parties identify the various
aspects of the relationship, including both pre and post commercialization
timeframes. This includes the points of manufacturing, as well as, licensing,
marketing and potential joint-venture relationships. At the present time, G&D
and the Company are continuing their dialogue attempting to work out all of the
details with respect to the agreement. The Company will make an announcement
upon the signing of the definitive agreement.
The commercial version of the read-write device design, 51/4" half-height,
(similar in size to a CD-ROM drive that can be inserted into the standard
computer tower, has been substantially completed during the quarter and the
pre-production soft tooled units for the initial pilot tests and demonstration
are expected to be completed by the Research and Development team at UltraCard
prior to the end of the fiscal year 2002. The Company is currently in
negotiations with a number of potential manufacturing partners to complete the
commercial version of the read-write device.
Another significant issue toward commercialization is that of the operating
system for the UltraCard technology. We believe that there are several systems
available with only slight modifications necessary. However, we believe that a
more attractive and longer-term option would be for the Company to develop its
own operating system. The advantage of developing its own system would be that
the Company would then enjoy proprietary rights over the initial and later
applications. This would result in licensing revenues being earned on a
continuing basis. The Company is exploring this possibility and has hired
consultants and contract employees for this purpose.
These perspectives lead to the conclusion that a time-horizon based on this
calendar year cannot at all be ruled out. In fact, it is quite likely that the
process will be done within that timeframe.
It cannot be stressed enough that an upward shift in the priority given by
Upgrade is to complete the commercialization process of its core, patented
technology as soon as possible. Through strategic partnerships and licensing of
its proprietary technology, the Company can plan its revenue stream. The
UltraCard technology product development strategy is guided by the tactic to
accumulate and retain ownership of as broad and comprehensive an intellectual
property package as possible in order to retain as much ownership of
intellectual property as possible.
It is planned that all research and development activities will be controlled
in house by the Company.
13
FINANCIAL RESULTS
Net losses aggregated $8.6 million in the three months ended March 31, 2002
compared with a $7.8 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 $4.0 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
The Company's general and administrative costs of $3.9 million in the current
quarter represents a decrease in the quarterly general and administrative
expenditure from the prior year attributed in the most part to curtailing
certain expenditures as a result of limited cash resourses. The Company is
managing to keep its expenses to a minimum during the tight cash flow periods.
Expenses relating to cQue were kept to a minimum 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 $34,000 represent a significant decrease
over the same quarter the prior fiscal year reflecting the Company's focus upon
product completion, and not necessarily of potential sales. Sales and marketing
expenditures typically 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.
For the first six months of the fiscal year, net losses were $20.7 million, of
which $11.7 related to the costs of capital. During this period the capital
markets has been difficult in raising capital, as a result, the Company has had
to pay higher costs to obtain operating capital. The cost is significantly
higher than the Company would prefer; and Management continues to spend a
significant amount of time and resources seeking other forms and lower cost
capital to support operations. However, the Company's investment in research and
development, of $2.6 million for the first six months, illustrates management's
objective of moving the technology forward towards commercialization. Other
expenses have been kept to only those essential in keeping the business
operational with minimal discretionary expenses during this tight cash flow
period. General and administrative expenses were reduced 25%, as the Company
reduced all non- essential expenses.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001 the Company had available cash balances of approximately
$668,000. The Company is managing very tight cash flows but still providing
funding for its research and development program at UltraCard. During the six
months ended March 31, 2002, 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 March 31, 2002, the Company had total indebtedness
of approximately $2,553,000 under these arrangements.
Other funds were raised in the forms of convertible debentures of approximately
$588,000 from a related party of the Company. The Company's cash used in
operations was $4.2 million, which represents a decrease compared to the prior
quarter of $2.5 million. This decrease results from the increase in accounts
payable and accrued liability levels.
Cash flows from financing activities of $3.3 million in the six month period
ended March 31, 2002 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 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.
14
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. The case is
currently is discovery.
Item 2. Changes in Securities and Use of Proceeds
--------
During the Three Months ended March 31, 2002 the Company made the following
sales of unregistered securities;
In January, 2002, the Company issued 48,776 shares of its common stock pursuant
to the conversion of debentures at prices ranging from $1.02 to $1.03 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.
During the period November and December 2001 the Company entered into 13
promissory notes for aggregate proceeds to the Company of $1,008,500. In
February, 2002, the Company issued 354,300 shares of the common stock of the
Company to the note holders as an inducement to enter into the said note
agreements.
The shares were valued at $119,024. 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 and share
issuances were issued pursuant to exemptions from registration under Regulation
S, Rule 506 and Section 4(2).
During January 2002 the Company entered into a further 4 promissory notes for
aggregate proceeds to the Company of $170,000, net of financing costs of 18,700.
In February, 2002, the Company issued 77,563 shares of the common stock of the
Company to the note holders as an inducement to enter into the said note
agreements. The shares were valued at $1.03 to $1.08 per share. 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
note holders. 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 and share issuances were issued pursuant to exemptions from
registration under Regulation S, Rule 506 and Section 4(2).
On February 4, 2002 the Company issued 1,094,160 shares to holders of promissory
notes in payment of penalties and interest on the notes outstanding (including
678,175 of shares previously subscribe unissued). but. In addition the Company
issued 3,178,954 warrants to acquire common stock in the Company at prices
ranging from $.47 to $1.34. The warrants were issued in payment of penalties and
interest on the notes payable. The share and warrant issuances were issued
pursuant to exemptions from registration under Regulation S, Rule 506 and
Section 4(2).
On February 26, 2002 the Company issued 1,000,0000 shares to a related party in
settlement of liabilities due to that Company. The share issuance was valued at
$1,100,000. The share issuances were issued pursuant to exemptions from
registration under Regulation S, and Section 4(2) of the securities act. In
addition the Company issued 500,000 common stock warrants as part of the the
same settlement agreement.
In March 2002, the Company issued 12,000 shares pursuant to a private placement
for aggregate proceeds of $24,000. The offer and sale of 12,000 shares was made
pursuant to an exemption from registration under Regulation S, and Section 4(2).
In March 2002, the Company borrowed $700,000 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 $.80.
In addition, as a cost of the financing, the Company granted a $77,000 note
payable, 494,375 shares of common stock, and warrants entitling holder to
purchase 783,125 shares of common stock at $.80 per share. The warrants are
exercisable immediately and expire five years from the date of grant. The note,
share and warrant issuances were issued pursuant to exemptions from
registration under Regulation S, Rule 506 and Section 4(2).
During the three month period ended March 31, 2002, the Company borrowed
$587,500 from an officer. On April 30, 2002 this balance, combined with then
outstanding $150,000 loan due to the officer, and increased by further advances
to $775,000, 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 December 31, 2002. In
addition, on April 30, 2002 the Company granted 750,000 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 March 31, 2002. The convertible debenture issuance
was issued pursuant to exemptions from registration under Rule 506 and Section
4(2).
15
Item 5. Other Information
--------
In February 2002, the Company entered into a debt financing agreement with an
institutional syndicator to obtain up to $15 million in working capital for
Upgrade and its group of Companies. The debt instrument is for a seven-year term
with the principal due at maturity, and interest payable quarterly commencing in
year three of the financing. The loan is secured by the issuance of 40 million
shares of Company Stock, which will be issued under Rule 144A. These shares will
carry a different CUSIP number from the Company's Common Stock. Additionally, 5
million restricted shares under Rule 506D were also deposited into the custody
account. All shares are restricted , and can only be traded among qualified
institutional investors. Upon repayment of the credit facility, the shares are
to be returned to the Company. Contained in the agreement is the stipulation
that the voting rights of the 45 million shares by way of proxy will be voted in
proportion with the existing shareholder base. The Company also retains the
right to substitute collateral 18 months after closing of the transaction. This
transaction has not as yet funded.
Item 6. Exhibits
--------
Exhibit No. Description
Upgrade International Corporation
/s/ Daniel Bland
Date: May 20, 2002 ---------------------------------
Daniel Bland, President and Chief
Executive Officer, and Secretary
/s/ Howard A. Jaffe
Date: May 20, 2002 ---------------------------------
Howard A. Jaffe, Chief Operating
and Financial Officer
16