uSell.com, Inc. (OTCQB:USEL) Q2 2016 Results Earnings Conference Call August 16, 2016 5:00 PM ET
Nik Raman - Chief Executive Officer
Jen Calabrese - Chief Financial Officer
Good day, ladies and gentlemen, and welcome to the uSell.com Earnings Conference Call for the Quarter Ended June 30, 2016. 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 terms and establishing new supply 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 non-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 and other SEC filings and our press release issued yesterday for 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 statement 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. Reconciliation to the most directly comparable GAAP financial measure are provided in the tables in the press release issued by the company yesterday. 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, 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 June 30, 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 quarter were as follows. Working capital increased to $7 million at June 30, 2016, from $5.6 million at December 31, 2015. Revenues increased by $23.1 million or 849% to $25.8 million for the three months ended June 30, 2016, from $2.7 million for the three months ended June 30, 2015. Revenues increased by $43.4 million or 893% to $48.3 million for the six months ended June 30, 2016, from $4.9 million for the six months ended June 30, 2015. Net loss decreased $502,000 or 94% to $33,000 for the three months ended June 30, 2016, from $535,000 for the three months ended June 30, 2015. Net loss increased $118,000 or 6% from $2.1 million for the six months ended June 30, 2016, from $2 million for the six months ended June 30, 2015. Adjusted EBITDA, a non-GAAP financial measure, improved to $0.6 million for the three months ended June 30, 2016, from negative $0.2 million for the three months ended June 30, 2015. Adjusted EBITDA, a non-GAAP financial measure, improved to $0.2 million for the six months ended June 30, 2016, from negative $1.2 million for the six months ended June 30, 2015.
I will now summarize the important details from the key line items in our consolidated P&L. Total revenue was $25.8 million for the three months ended June 30, 2016, an 849% increase from $2.7 million for the three months ended June 30, 2015. Principal Device Revenue increased by $23.2 million or 912% from $2.5 million for the three months ended June 30, 2015, to $25.8 million for the three months ended June 30, 2016. Principal Device Revenue related to We Sell Cellular amounted to $24.5 million for the three months ended June 30, 2016. Gross profit increased substantially to 7% for the three months ended June 30, 2016, compared to 4% for the three months ended March 31, 2016. Margins improved during the second quarter of 2016, confirming that the margin pressure that was experienced in the first quarter was not a trend, but rather a cyclical event triggered by the unanticipated launch of the iPhone SE.
Sales and marketing expense increased $65,000 or 19% from $349,000 during the three months ended June 30, 2015, to $414,000 during the three months ended June 30, 2016. Sales and marketing include $378,000 of expenses related to We Sell Cellular for the three months ended June 30, 2016. With the We Sell Cellular acquisition and our newfound ability to source devices directly from the carriers, retailers, and manufacturers, our primary sales and marketing expenses have shifted from consumer marketing to paying out sales commissions. We believe this shifting profile will enable us 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 June 30, 2016, were $60,000, an improvement of $0.5 million from a $0.5 million operating loss for the three months ended June 30, 2015. Net loss for the three months ended June 30, 2016, was $33,000, an improvement of $0.5 million from the $0.5 million net loss of three months ended June 30, 2015. The resulting EPS improved to zero as compared to negative $0.07 for the prior year ago quarter. Adjusted EBITDA for the three months ended June 30, 2016, was $0.6 million, an improvement of $0.8 million from a $0.2 million adjusted EBITDA loss for the three months ended June 30, 2015. Excluding a $0.4 million negative change in the fair value of derivative liability, adjusted EBITDA would have been $0.9 million. At June 30, 2016, uSell had $1 million of cash and cash equivalents, $1.6 million of restricted cash and 20.1 million shares issued and outstanding.
Thank you, Jen. I would now like to provide some commentary on our results and offer some insight into the progress that we’ve made against our plan for 2016. During the quarter ended June 30, 2016, the company experienced a substantial bounceback in margins confirming that the margin pressure in the first quarter of 2016 was not a trend but rather a cyclical event triggered by the unanticipated launch of the iPhone SE. uSell.com was able to liquidate most of the inventory associated with the write-down it took in the first quarter by mid-May, which enabled it to purchase new inventory at favorable prices. While margins have stabilized, the company has continued to maintain a conservative philosophy and has taken steps to minimize the impact on its financial statements of any potential price fluctuations due to the anticipated iPhone 7 release in September.
From a technology perspective, uSell has made great strides in the second quarter of 2016. In early May, the company began running auctions through its newly rebranded We Sell Cellular website. In May and June, approximately $1.7 million in value of devices was sold through the eCommerce auction. Through this process, it was proven that by leveraging uSell’s technology, the company is able to drive sales in a much more efficient and scalable manner. The auction technology that uSell.com developed was targeted at a specific subset of We Sell Cellular’s customers. The company will not move 100% of We Sell Cellular’s volume through this particular mechanism, but is in the process of building additional mechanisms to move the bulk of We Sell Cellular’s sales online over the next 12 months.
I am pleased with our results, as we have not only made substantial operational gains, but we also proved that the synergy between uSell and We Sell Cellular is real. Technology improvements are transforming the business by making our processes more efficient and scalable. Technology enhancements are also making a positive impact on our approach to inventory purchasing and management, which has stabilized and improved our margins. We continue to see this trend in July and August. We will continue to transition more of the business from offline to online, enabling us to increase inventory turns and device margins over time. We continue to see favorable trends in the industry and believe that we are well positioned to continue to take market share and grow our business in a profitable manner.
It is also important to note that as we grow, we do not anticipate substantial CapEx and our fixed costs are relatively stable, which will result in incremental gross margin dollars falling straight to the bottom line. On the suppliers’ side, uSell’s also made great progress. Supplier concentration dropped from 97% in the first quarter of 2016, to 85% in the second quarter of 2016. Given the high volume of purchases, this small move in percentage is meaningful and management continues to have confidence in its ability to diversify the supplier base over the next six to nine months.
Finally, uSell.com made substantial improvements to its balance sheet by restructuring the terms of its bank facility with its lender and by eliminating Brian and Scott Tepfers’ placement rights. The modification of the agreement with its lender resulted in an increase in uSell’s working capital to close to 7 million, while the elimination of the Tepfers’ placement rights will add 1.5 million of equity to the balance sheet. The placement rights had resulted in cumulative income statement charges of 0.37 million for the six months ended June 30, 2016. We are very happy about the elimination of these rights which has caused substantial overhang for the company. Brian and Scott’s willingness to waive these rights confirms their long term belief in the company and in the synergies that will be realized by the uSell.com and We Sell Cellular merger over the next year.
Thank you very much, Nik. Operator, we’d like to open the call to take questions.
[Operator Instructions] We’ll pause for a moment to allow questions to queue. We’ll take our first question from John Ford, a private investor. Your line is open.
Nik, my main question has to do with, you break even now, how and when are you going to be able to leverage this to really some positive EPS numbers? I don’t know what the timeframe is, whether its one quarter, a year, that’s sort of the basis of my question.
We are early in the integration of the two companies and obviously, we are starting to see some real positive momentum. We still feel that we’re a little bit early to give too much forward guidance but we do think that over the next 12 months things are going to continue to improve. So beyond saying the trends are going the right direction and we think that the type of progress that our investors are looking for is right over the horizon, I think beyond that, we’re not going to go into too much more detail.
My only other question is with the rights being taken off the table, can you explain to me exactly what that means?
Yes, so when we actually consummated the merger with We Sell Cellular, Brian and Scott Tepfer were given the right to sell $1.5 million of shares every quarter at their option. There was actually a floor price on those sales of $1.20 and if you were not able to -- company was obligated to use its best efforts to assist them to sell and if we sold at a lower price, we would have to issue them additional shares to make up the difference. If we sold their shares at $1, we have to issue them additional shares to make up for the $0.20 they didn’t get. Obviously, with where the stock has gone, that could have been a highly dilutive event for the company. Obviously, Brian and Scott, their best interest is to protect the company. They also believe in the long-term of the business, so we were able to get them to agree to waive those rights. It’s really a great development for the company for two reasons. One is, it eliminates the possibility of a dilutive event in the future. It also confirms that management is all working in the same direction. We all believe in the long-term vision. Brian and Scott believe that their value will come from the growth in the business over the next two years.
We have no further questions at this time. I’d like to turn the call back to our presenters for any closing remarks today.
There are no closing remarks, but thank you very much for joining.
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