uSell.com, Inc. (OTCQB:USELD) Q4 2015 Earnings Conference Call March 30, 2016 4:30 PM ET
Jenn Calabrese – Chief Financial Officer
Nik Raman – Chief Executive Officer
Gerry Unterman – GEM Capital
Steve Wallitt – DPC Corp
Good day, ladies and gentlemen, and welcome to the uSell.com 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]
I’d like to take a quick moment to read the Safe Harbor statement. During the course of this conference call, we will make certain forward-looking statements. All statements that address expectations, opinions, or predictions about the future are forward-looking statements, including relating to the integration of uSell future growth and the outlook for 2016.
Although they reflect our current expectations and are based on our best view of the industry and of our business as we see them today, they are not guarantee the future performance. Actual results may differ materially from these forward-looking statements and reported results should not be an indication of future performance.
The statements involve a number of risks and assumptions and since those elements can change, we would ask that you interpret them in that light. We urge you to review uSell’s Form 10-K and other SEC filings for a discussion of the principal risks and uncertainties that affect our performance and other factors that could cause our actual results to differ materially.
uSell disclaims any obligation to update any forward-looking statements as a result of future developments. Also I’d like to remind you that during the course of this conference call, we will discuss adjusted EBITDA, which is a non-GAAP financial measure and talking about the company’s performance.
Reconciliation to the most directly comparable GAAP financial measure, are provided in the tables in the press release issued by the company today. There will be a transcript of this conference call available for one year at the company’s website. As a reminder, today’s call is being recorded.
I would now like to turn the conference over to your host Jenn Calabrese. You may begin.
Thank you very much, and welcome to our conference call to discuss uSell.com’s operating and financial results for 2015 and strategy and outlook for 2016. On the call we have Nik Raman, uSell’s Chief Executive Officer and myself Jenn Calabrese, uSell’s Chief Financial Officer.
I will review the Company’s financial performance, and Nik will review the Company’s business operations, initiatives and strategies and immediately thereafter we will take questions from our call participants.
Key highlights for the year were as follows. Revenues increased by $20.4 million or 306% from $6.7 million for the year ended December 31, 2014 to $27.1 million for the year ended December 31, 2015. Net loss decreased by $4.7 million, or 64%, from $7.3 million for the year ended December 31, 2014, to $2.6 million for the year ended December 31, 2015. Net loss decreased by $1.1 million, or 76%, from $1.4 million for the quarter ended December 31, 2014, to $0.3 million for the quarter ended December 31, 2015.
Adjusted EBITDA loss improved by $2.8 million, or 78%, from $3.6 million for the year ended December 31, 2014, to $0.8 million for the year ended December 31, 2015. Adjusted EBITDA was positive at $0.3 million for the quarter ended December 31, 2015, as compared to a loss of $0.8 million for the quarter ended December 31, 2014.
Working capital increased to $5.6 million at December 31, 2015, from $1.7 million at December 31, 2014. Stockholders’ equity increased to $14 million at December 31, 2015, from $2.6 million at December 31, 2014.
I will now summarize the important detail from the key line items in our consolidated P&L. Total revenue was $27.1 million for the 12 months ended December 31, 2015, a 306% increase from $6.7 million for the same period of 2014. It is important to note that this increase had two main driving factors, an increased percentage of volume from our legacy uSell.com business being recorded on a gross versus net basis since the last launch of our Managed by uSell service in 2014, and the acquisition of We Sell, which records all of its revenue on a gross basis.
Sales and marketing expense decreased $3.8 million, or 65%, from $5.8 million during the year ended December 31, 2014 to $2 million during the year ended December 31, 2015, mainly as a result of a decision to strategically reduce marketing staff and marketing spend in favor of seeking out wholesale supply.
With the acquisition of We Sell and our newfound ability to source devices directly from the carriers, retailers, and manufacturers, the company’s primary sales and marketing expenses have shifted from consumer marketing to paying out sales commissions. The Company believes this shifting profile will enable it to scale volume significantly while maintaining sales and marketing expense as a much lower percentage of sales than in prior years.
General and administrative expenses include professional fees for technology, legal and accounting services as well as consulting and internal personnel costs for back office support functions. General and administrative expenses are impacted by non-cash compensation expense pertaining to share grants and option grants for services.
Excluding non-cash compensation expense, general and administrative expenses for the year ended December 31, 2015 increased by $0.2 million, or 7%, compared to the year ended December 31, 2014. The increase is mainly attributable to the increase in depreciation and amortization expense, which increased by $0.2 million for the year ended December 31, 2015, mainly as a result of the amortization of intangible assets acquired in connection with the We Sell acquisition.
Offsetting the increase in general and administrative expense is a decrease in salary and salary-related expenses of $0.4 million and professional fees of $0.2 million. The decrease in salary and salary-related expenses is the result of the reduction in marketing headcount. Professional fees decreased mainly as a result of lower recruiting fee expense due to our hiring freeze, offset by legal and accounting expenses of $0.3 million related to the We Sell acquisition. General and administrative expenses include $556,000 of expenses related to We Sell for the period from October 27, 2015 through December 31, 2015.
Non-cash compensation expense amounted to $3 million and $1.5 million for the years ended December 31, 2015 and 2014, respectively. The increase in compensation expense is mainly the result of accelerated vesting of previously granted restricted stock units and options and the granting of certain restricted stock units in connection with the We Sell acquisition.
Net loss for the year ended December 31, 2015 was $2.6 million, an improvement of $4.7 million from a $7.3 million net loss for the year ended December 31, 2014. The resulting EPS is $0.27, compared to $1.15 a year earlier.
Net loss and EPS for the year ended December 31, 2015, included a total of $4.1 million of non-cash and/or one-time expenses, including stock-based compensation, depreciation and amortization, acquisition-related costs and interest expense, as compared to $3.7 million for the year ended December 31, 2014.
Adjusted EBITDA loss for the year ended December 31, 2015 was $0.8 million, an improvement of $2.8 million from a $3.6 million adjusted EBITDA loss for the year ended December 31, 2014. At December 31, 2015, uSell.com had $1.8 million of cash and cash equivalents, and 19.8 million shares have issued and outstanding.
Thank you, Jenn. I would now like to spend just a few minutes highlighting our results from the quarter ended December 31, 2015. Please note that the financial in the fourth quarter represent just over two months of joint operations, as the merger was consummated on October 27.
Our management focuses on specific non-GAAP metric called adjusted EBITDA which we feel accurately represents our core operation. Adjusted EBITDA for the quarter ended December 31, 2015 was positive $321,000, we arrived at this number by taking our net loss of $333,000, subtracting out an income tax benefit of $2.4 million and adding back $2.3 million of stock-based compensation, $386,000 of depreciation and amortization expense, $173,000 acquisition related costs and $188,000 interest expense.
For the first time in the company’s history we experienced a meaningfully positive adjusted EBITDA for the three months ended December 31, 2015. This is primarily the result of the We Sell Cellular acquisition, but results were positively impacted by efficiency gains within our legacy retail business. These efficiency gains were a validation of our strategic decision to reduce marketing staff and marketing spend in favor of the wholesale acquisition of devices.
While the industry changes over the last 18 months, been very challenging for us to navigate, we believe that we made the right decision in 2015 that have put us in a position to drive significant value for our shareholders in 2016 and beyond.
I’ll briefly review the impedance for the decision before I review our 2016 strategy. By the end of 2014 the trade-in market had gone mainstream as the carriers realize the trade-in was their means of eliminating the costly smartphones subsidies that they have been funding.
During the launch of the iPhone 6 and 6s, major carriers like AT&T and Verizon and big box retailers, like Apple and Best Buy became very aggressive in marketing their trade-in programs. While this market shift created a challenge in terms of marketing direct to the consumers, it opened up a much larger opportunity to exponentially increase supply in our marketplace by sourcing directly from major carriers, retailers and manufactures.
In 2015 we began seeking partnerships, the wholesalers and distributors with direct access to wholesale supply. Our efforts culminated the acquisition of top-tier wholesalers We Sell Cellular on October 27, 2015. We Sell Cellular is among a handful of top-tier wholesalers whose primary business is to buy used smartphones that have been traded in with the major carriers and the big box retailers, fully test and grade these devices, and then sell these devices wholesale and retail through its experienced sales force.
We believe that We Sell competes with a small group of wholesalers that have the infrastructure, relationship and capital to serve this market. While We Sell Cellular has developed a highly attractive business, it has experienced three limitations through scale, one, access to capital, two, the ability to scale at buyer base indefinitely, and three, technologies automated proprietary warehouse processes.
Prior to the acquisition, We Sell operating with a limit amount of capital which severely limit its ability to scale purchase, while it was able to fuel its growth by rapidly turning inventory, it is not been able to – it was not able to grow as rapidly as the market would have allowed, had been adequately financed. With the $8 million debt facility that we have secured, We Sell’s capital constraint will be greatly alleviated, or has been or rather.
The second limitation relates to We Sell’s inability to scale at buyer base indefinitely. The business currently operates with a small sales force and sell device to based buyers that has developed relationship with over the years. Due to its traditional sales process, it is unable to adequately serve a large pipeline of smaller buyer that can often pay higher prices for devices.
Most of the We Sell Cellular’s pipeline sits ideal as its sales people focus on serving its larger customers with access to uSell’s automated platform, We Sell can access much larger fragmented based buyers in a more scalable and cost effective manner.
Our third benefit of the combination is related to technology enablement within We Sell Cellular warehouse. While proprietary processes have been developed and perfected over several years, much of these processes are still run at spreadsheet that are not fully automated. With the development of this manage by uSell offering, uSell developed technology that can automate much of the test and grading process in the We Sell warehouse, which will also increase operating leverage. We believe that the second two limitations discussed a moment ago, our comment to all of the wholesalers that we now compete with as we have absorbed the general lack of technology enablement within the industry.
We believe that the combination of We Sell Cellular’s financial strength, access to supply and expertise, and uSell’s technology buyer network, and access to capital is highly synergistic and will enable us to create significant differentiation from other market participants. Together, uSell and We Sell Cellular can scale more efficiently while extracting a maximum value from used devices.
In 2016 our priority is to capitalize upon the synergies between our companies by integrating the uSell technology into the We Sell Cellular sales process. This will enable us to scale our based buyers and increase the velocity and profitability of sales overtime. By no means that we believe that this transition will be easy as the adoption of new technology can take time and requires a highly scientific disciplined approach.
Additionally, we operate in a cyclical market that is driven by product releases and is impacted by fluctuations in global demand for smartphones. We do not expect our growth to be smooth on a quarter-to-quarter basis, but we are highly confident that over the next 12 months we will be able to drive significant profit, building an efficiency improvement, while establishing meaningful differentiation from our competitors.
Thank you very much, Nik. Operator, we’d like to open the call to take questions.
[Operator Instructions] And it appears we have no further questions at this time. But I would like to give everyone an opportunity. [Operator Instructions] We do have a question from Gerry Unterman with GEM Capital. Please go ahead.
Yes. Hi, Nik. Just a question on the cash flow and financing needs, I mean, how are you fixed for money and what do you see in terms of volume needs going forward to grow the company?
Gerry, thanks for asking. Actually, you can see from the press release that we just put out that our working capital actually grew to $5.6 million, and actually today, as we did the queue we just pulled down the last $2 million of the secured term note that we had from our lender. So we feel in a very good position, and from working capital standpoint, we have the capital that we need to purchase inventory and continue to build out our platform.
All right, great. Thank you.
Thank you. We’ll go next to Steve Wallitt with DPC Corp. Please go ahead.
Hi, Nik. Unfortunately I joined the call pretty much at the end, but if you were to look back as you were contemplating the merger/acquisition and what your expectations were at the time. As we sit here today, would you say that completing the acquisition exceeded your expectations, met your expectations or underachieved your expectations, as we sit today?
I would say that the acquisition has exceeded my expectation, perhaps pretty high expectations. So let me revive that. I think it met my expectations. I feel that we’re sitting now today with a very strong balance sheet. If you look at our working capital, we showed our first profitable quarter on an adjusted EBITDA basis which was a very success, but I believe that it’s just beginning of much larger company.
So, I would say that we have a lot of work to do. We need to put our head down and continue to build out the platform that we’ve been talking about. We need to increase the efficiencies of turning inventory and our gross margins over time. So, I think that we are in the position that we wanted to be in, but I think there’s a lot of work to do over the next 12 months.
[Operator Instructions] It appears we have no further questions at this time. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.
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