usell.com, Inc.

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). In September 2017, the FASB issued ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)”, which provides additional implementation guidance on the previously issued ASU 2016-02. ASU 2016-02 increases transparency and comparability among organizations by reporting lease assets and lease liabilities, both finance (capital) and operating leases, on the balance sheet and disclosing key information about leasing arrangements. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements.

As a result of the downturn in the Company’s business relating in part to the disruptions in key global markets, the Company did not meet one of the financial covenants under the NPA and therefore was in default under the agreement for the quarter ended March 31, 2018. The Company entered into a series of forbearance and amendment agreements with the Lender, pursuant to which the Lender granted the Company a forbearance of existing remedies of its default under one if its financial covenants (the “Default”) until September 30, 2018. On October 1, 2018, the Company entered into a Forbearance and Fifth Amendment Agreement (the “Fifth Amendment”) extending the Lender’s forbearance until December 3, 2018 (see Note 11). In addition, the Company amended the terms of its financial covenant related to its operating margin requirements and debt coverage ratio and repaid $3,304,068 of the NPA during the quarter ended September 30, 2018, inclusive of $4,068 of accrued interest. As consideration for entering into the amendments, the Company agreed to pay the Lender a sum of $187,600, which sum was added to the principal balance of the NPA. In addition, during the three months ended September 30, 2018, the Company added an aggregate of $231,600 of interest due to the Lender to the principal balance of the NPA. As a result of these transactions, the principal balance of the Note was increased to $5,779,219.

On May 4, 2018, the Company entered into a Second Amended and Restated Secured Term Note, pursuant to which the NPA’s interest rate was increased from 15.0% to 16.0% commencing June 1, 2018. The maturity date for the NPA remained at January 13, 2020. The Company cannot provide assurance that it will be able to meet its financial covenants for the quarter ended December 31, 2018 and cannot provide assurance that the Lender will continue to provide a forbearance. If the Company is unable to obtain a waiver from the Lender, the Lender will be able to foreclose on all of the Company’s assets and the Company will have to cease operations. Accordingly, the Company has classified the NPA as a current liability.

As consideration for entering into the Amendment, the Company agreed to pay the Lender an initial forbearance fee of $250,000 on the October 1, 2018, with additional forbearance fees accruing on November 19, 2018, November 26, 2018, and December 3, 2018, of $100,000, $125,000, and $150,000, respectively (collectively the “Additional Forbearance Fees”) unless the loan is paid in full. Notwithstanding the above-mentioned accrual dates, the Additional Forbearance Fees are automatically due and payable upon the event of a Forbearance Default, as defined in the NPA. The Company owed $6,029,219 under the NPA as of October 1, 2018. Subsequent to October 1, 2018, the Company made a payment to the Lender bringing the balance due under the NPA to $5,029,219. Pursuant to the terms of the Amendment the Lender agreed to waive the prepayment penalty and accrued default interest under the NPA if the loan is paid in full prior to November 16, 2018.

The Company is in the process of finalizing a new loan agreement with a new senior secured lender, borrowing $4,780,000 from a limited number of investors through the issuance of four-year convertible notes convertible at $0.30 per share and entering into a significant license with a third party relating to the use of the Company’s technology.  

On May 4, 2018, we entered into a Second Amended and Restated Secured Term Note, pursuant to which the NPA’s interest rate was increased from 15.0% to 16.0% commencing June 1, 2018. The maturity date for the NPA remains at January 13, 2020. We cannot provide assurance that we will be able to meet our financial covenants for the quarter ended September 30, 2018 and quarters thereafter and cannot provide assurance that the Lender will waive any potential default. If we are unable to obtain a waiver from the Lender, the Lender will be able to foreclose on all of our assets and we will have to cease operations.

Under the Fifth Amendment, unless we pay the Lender in full by November 19, 2018, we will incur material additional charges as described in Note 11 - “Subsequent Events.” We are finalizing a series of agreements including entering into a new credit facility which we expect to close in the days following the filing of this report. Assuming we close all of these agreements, we expect that we will have sufficient liquidity to meet our working capital needs for at least the next 12 months. If we fail to close each of these agreements or reach additional necessary agreements to provide us with liquidity, we may cease operations.