uSell.com (OTCQB:USEL) Q1 2016 Results Earnings Conference Call May 16, 2016 4:30 PM ET
Nikhil Raman - Chief Executive Officer, Chief Operating Officer and Director
Jennifer Calabrese - Interim Chief Financial Officer
Good day, ladies and gentlemen, and welcome to the uSell.com 2016 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 future gross margins, improving efficiencies including inventory turns, establishing new supplier relationships.
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 guarantees of 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, other SEC filings, and our press release issued today 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 in talking about the company’s performance. Reconciliations 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 like to turn the conference over to your host, Jen Calabrese. You may begin.
Thank you very much and welcome to our conference call to discuss uSell.com’s operating and financial results for the quarter ended March 31, 2016, and strategy and outlook for the full year 2016.
On the call, we have Nik Raman, uSell’s Chief Executive Officer; and myself, Jen 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: working capital increased from $5.6 million at December 31, 2015 to $6.8 million at March 31, 2016; revenues increased by $20.3 million or 948% from $2.1 million for the three months ended March 31, 2015 to $22.5 million for the three months ended March 31, 2016.
Loss from operations decreased $0.5 million or 31% from $1.5 million for the three months ended March 31, 2015 to $1 million for the three months ended March 31, 2016; adjusted EBITDA, a non-GAAP financial measure, improved from a loss of $1.1 million for the three months ended March 31, 2015 to $0.4 million for the three months ended March 31, 2016. Adjusted EBITDA for the three months ended March 31, 2016 includes a $379,000 provision for slow moving and obsolete inventory, without which adjusted EBITDA would have been slightly positive.
I will now summarize the important details from the key line items in our consolidated P&L. Total revenue was $22.5 million for the three months ended March 31, 2016, a 948% increase from $2.1 million for the prior year ago quarter. This increase had two main driving factors: one, an increasing percentage of volume from its legacy uSell.com business being recorded on a gross versus net basis since the launch of our Managed by uSell service in 2014; and two, the acquisition of We Sell, which records all of its revenue on a gross basis.
Sales and marketing expense decreased $0.6 million, or 63%, from $1 million during the three months ended March 31, 2015 to $0.4 million during the three months ended March 31, 2016. With the We Sell acquisition and the company's newfound ability to source devices directly from carriers, retailers and manufacturers, its primary sales and marketing expenses have shifted from consumer marketing to paying out sales commissions. Management believes this shifting profile will enable the company to scale volume significantly while maintaining sales and marketing expense as a much lower percentage of sales than in prior years.
Operating loss for the three months ended March 31, 2016 was $1 million, an improvement of $0.5 million from a $1.5 million operating loss for the three months ended March 31, 2015.
Net loss for the three months ended March 31, 2016 was $2.1 million, an increase of $0.6 million from a $1.5 million net loss for the three months ended March 31, 2015. The resulting EPS improved to negative $0.11, as compared to negative $0.20 for the prior year ago quarter, due to the increase in shares outstanding from 7.5 million to 19.8 million.
Adjusted EBITDA loss for the three months ended March 31, 2016 was $0.4 million, an improvement of $0.7 million from a $1.1 million adjusted EBITDA loss for the three months ended March 31, 2015.
At March 31, 2016, uSell.com had $0.5 million of cash and cash equivalents, $1.1 million of restricted cash and 20.1 million shares issued and outstanding.
Thank you, Jen. I’d now like to provide some commentary on our results and offer some insight into the progress we’ve made against our plan for 2016.
During the quarter ended March 31, 2016, the company experienced gross margin pressure, primarily in the months of February and March. This was caused by global volatility in pricing related to, one, instability in China and Europe, and two, the unanticipated launch of the iPhone SE, Apple's first ever iPhone launched in the first quarter, which resulted in a speculative drop in the value of certain legacy iPhone models. After review, we decided that the most conservative position was to take a write down on certain inventory the company was holding on March 31, 2016.
While gross margins came under pressure in February and March due to unanticipated, unprecedented volatility in pricing, we believe that this is not a trend, as we have seen margins bounce back and stabilize in April and so far in May. Moving forward, we will mitigate such risk by focusing on increasing inventory turns through improved efficiency in the warehouse and by building out and servicing demand through automated technology
In April, we rebranded and re-launched the We Sell Cellular website located at www.wesellcellular.com, and in early May we ran our first We Sell Cellular auction. The auction was run for exclusive set of buyers [and a subset of our] products and we’re very pleased with the results. These results provide support for our belief that our shift from offline to online will enable us to increase inventory turns and device margins over time.
I also want to spend some time discussing our current liquidity position and improvements we’ve made on this front. On March 31, 2016, as anticipated, uSell borrowed the final $2 million under its Note Purchase Agreement with its financial lending partner, B Asset Management, and amended the terms of the agreement to offer more flexibility and greater access to liquidity. The following summarizes the changes made to the facility.
The EBITDA covenants will not apply until September 2017; the amortization period of the principal will not commence until September 1, 2017; uSell will now get 75% credit for new purchase orders towards the borrowing base of the facility instead of 50% previously; and uSell will get 90% credit for inventory in transit towards the borrowing base instead of previous 75%. The interest rate was increased by one-quarter of one percent, 25 basis points, from 13.0% to 13.25%.
These modifications to our lending agreement provide substantial benefits to the company. The new structure greatly increases our access to liquidity and defers amortization payments for 18 months. This long-term working capital provides us with ample opportunity to execute on our business plan and create long-term equity value. With the additional capital, we will seek to open up new supply relationships to grow revenues, while diversifying our vendor base.
In the past, [uSell seller] did not have enough capital to diversify its supply relationships as many of the major suppliers have minimum purchasing requirements. With this capital infusion, we are in a position to aggressively pursue such relationships. We feel that the successful diversification of our vendor base is critical to improving our volatility and increasing the long-term predictability of the business.
Overall, while we experienced some challenges in the first quarter, we’re very pleased with what we were able to accomplish. Despite the worse environment that we’ve seen in the last several years, we were able to weather the storm by controlling cost and rapidly flushing out bad inventory. We feel that the steps we have taken will enable us to expand margins in the second quarter, while focusing on executing our technological vision for the combined business.
Thank you very much, Nik. Operator, we’d like to open the call to take questions.
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