Item
1.
|
Financial
Statements.
|
uSell.com,
Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
494,698
|
|
|
$
|
390,810
|
|
Restricted cash
|
|
|
3,066,443
|
|
|
|
942,274
|
|
Accounts receivable, net
|
|
|
186,482
|
|
|
|
236,674
|
|
Inventory
|
|
|
7,716,358
|
|
|
|
10,642,531
|
|
Due from related party
|
|
|
68,069
|
|
|
|
139,333
|
|
Prepaid expenses and other current assets
|
|
|
81,229
|
|
|
|
99,381
|
|
Total Current Assets
|
|
|
11,613,279
|
|
|
|
12,451,003
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
177,594
|
|
|
|
188,056
|
|
Intangible assets, net
|
|
|
2,754,251
|
|
|
|
2,948,294
|
|
Capitalized technology, net
|
|
|
853,793
|
|
|
|
868,449
|
|
Other assets
|
|
|
61,750
|
|
|
|
61,750
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
15,460,667
|
|
|
$
|
16,517,552
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,301,132
|
|
|
$
|
1,787,571
|
|
Accrued expenses
|
|
|
908,091
|
|
|
|
1,165,348
|
|
Deferred revenue
|
|
|
351,338
|
|
|
|
394,780
|
|
Promissory note payable
|
|
|
8,365,512
|
|
|
|
8,325,355
|
|
Capital lease obligation
|
|
|
14,686
|
|
|
|
14,400
|
|
Total Current Liabilities
|
|
|
12,940,759
|
|
|
|
11,687,454
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, net of current portion
|
|
|
42,272
|
|
|
|
46,053
|
|
Total Liabilities
|
|
|
12,983,031
|
|
|
|
11,733,507
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Convertible Series A preferred stock; $0.0001 par value; 325,000 shares authorized; no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Convertible Series B preferred stock; $0.0001 value per share; 4,000,000 shares authorized; no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Convertible Series C preferred stock; $0.0001 value per share; 146,667 shares authorized; no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Convertible Series E preferred stock; $0.0001 value per share; 103,232 shares authorized; no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock; $0.0001 par value; 43,333,333 shares authorized; 28,341,999 shares and 28,290,999 shares issued and outstanding, respectively
|
|
|
2,834
|
|
|
|
2,829
|
|
Additional paid in capital
|
|
|
75,536,739
|
|
|
|
75,469,350
|
|
Accumulated deficit
|
|
|
(73,061,937
|
)
|
|
|
(70,688,134
|
)
|
Total Stockholders’ Equity
|
|
|
2,477,636
|
|
|
|
4,784,045
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
15,460,667
|
|
|
$
|
16,517,552
|
|
See
accompanying notes to unaudited interim condensed consolidated financial statements.
u
Sell.com,
Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
$
|
14,173,604
|
|
|
$
|
27,631,499
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue
|
|
|
14,792,160
|
|
|
|
24,903,258
|
|
|
|
|
|
|
|
|
|
|
Gross (Loss) Profit
|
|
|
(618,556
|
)
|
|
|
2,728,241
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
281,365
|
|
|
|
598,479
|
|
General and administrative
|
|
|
1,099,587
|
|
|
|
1,586,863
|
|
Total operating expenses
|
|
|
1,380,952
|
|
|
|
2,185,342
|
|
(Loss) Income from Operations
|
|
|
(1,999,508
|
)
|
|
|
542,899
|
|
|
|
|
|
|
|
|
|
|
Other Expense:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(374,295
|
)
|
|
|
(1,289,379
|
)
|
Total Other Expense
|
|
|
(374,295
|
)
|
|
|
(1,289,379
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,373,803
|
)
|
|
$
|
(746,480
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Loss per Common Share:
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the period –
basic and diluted
|
|
|
28,336,499
|
|
|
|
20,136,999
|
|
See
accompanying notes to unaudited interim condensed consolidated financial statements.
uSell.com,
Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Three
Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,373,803
|
)
|
|
$
|
(746,480
|
)
|
Adjustments to reconcile net loss to net cash and cash equivalents provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
352,592
|
|
|
|
356,132
|
|
Stock based compensation expense
|
|
|
67,394
|
|
|
|
118,573
|
|
Amortization of debt issue costs into interest expense
|
|
|
40,157
|
|
|
|
990,063
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
50,192
|
|
|
|
(360,504
|
)
|
Inventory
|
|
|
2,926,173
|
|
|
|
(2,164,890
|
)
|
Due from related party
|
|
|
71,264
|
|
|
|
—
|
|
Prepaid and other current assets
|
|
|
18,152
|
|
|
|
(23,356
|
)
|
Other assets
|
|
|
—
|
|
|
|
12,608
|
|
Accounts payable
|
|
|
1,513,561
|
|
|
|
235,451
|
|
Accrued expenses
|
|
|
(257,257
|
)
|
|
|
627,327
|
|
Deferred revenues
|
|
|
(43,442
|
)
|
|
|
(124,204
|
)
|
Net Cash, Cash Equivalents and Restricted Cash Provided by (Used in )Operating Activities
|
|
|
2,364,983
|
|
|
|
(1,079,280
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Website development costs
|
|
|
(128,661
|
)
|
|
|
(135,949
|
)
|
Cash paid to purchase property and equipment
|
|
|
(4,770
|
)
|
|
|
(3,672
|
)
|
Net Cash, Cash Equivalents and Restricted Cash Used in Investing Activities
|
|
|
(133,431
|
)
|
|
|
(139,621
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
|
—
|
|
|
|
8,572,400
|
|
Principal repayments of note payable
|
|
|
—
|
|
|
|
(8,080,000
|
)
|
Payment of capital lease obligations
|
|
|
(3,495
|
)
|
|
|
(2,799
|
)
|
Cash paid for debt issue costs
|
|
|
—
|
|
|
|
(301,509
|
)
|
Net Cash, Cash Equivalents and Restricted Cash (Used in) Provided by Financing Activities
|
|
|
(3,495
|
)
|
|
|
188,092
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
|
|
|
2,228,057
|
|
|
|
(1,030,809
|
)
|
Cash, Cash Equivalents and Restricted Cash - Beginning of Period
|
|
|
1,333,084
|
|
|
|
2,639,486
|
|
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents and Restricted Cash - End of Period
|
|
$
|
3,561,141
|
|
|
$
|
1,608,677
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash Paid During the Period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
336,538
|
|
|
$
|
—
|
|
Taxes
|
|
$
|
900
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment through capital leases
|
|
$
|
—
|
|
|
$
|
14,686
|
|
See
accompanying notes to unaudited interim condensed consolidated financial statements.
uSell.com,
Inc and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
March 31, 2018
(Unaudited)
Note
1 - Organization and Business
uSell.com,
Inc., through its wholly-owned subsidiaries (collectively, “uSell,” or the “Company”), is a large market
maker of used smartphones. uSell acquires products from both individual sellers, on its website, uSell.com, and from major carriers,
big box retailers, and manufacturers through its subsidiary, We Sell Cellular, LLC (“We Sell Cellular”). The Company
maximizes the value of these devices by reclassifying them, adding value to them, and moving them throughout the world to those
who want them most. In order to serve its global and highly diverse customer base, uSell leverages both a traditional sales force
and an online marketplace where professional buyers of used smartphones can buy inventory on-demand. Through participation on
uSell’s online platform and through interaction with uSell’s salesforce, buyers can acquire high volumes of inventory
in a cost effective manner, while minimizing risk.
Going
Concern Consideration
At March 31, 2018 the Company has cash and cash equivalents of $495,000, a working capital deficit of
$1,327,000 and an accumulated deficit of $73,062,000. In addition, the Company generated a net loss of $2,374,000 for the three
months ended March 31, 2018. 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 Note Purchase Agreement (“NPA”)
and therefore was in default under the agreement for the quarter ended March 31, 2018. The Lender granted the Company a forbearance
of existing remedies on the default until June 30, 2018 (see Notes 5 and 11). In addition, the Company agreed to dissolve the Special
Purpose Entity by April 30, 2018 (see Noe 11). The Company does not yet have a history of financial stability and may continue
to generate operating losses for the foreseeable future. Historically, the principal source of liquidity has been the issuance
of debt and equity securities. These conditions raise substantial doubt about the Company’s ability to continue as a going
concern within one year after the date that the condensed consolidated financial statements are issued. Management plans to address
this uncertainty through further implementation of its business plan or by continuing to raise funds through debt and/or equity.
There can be no assurances that the plans and actions proposed by management will be successful or that unforeseen circumstances
will not require additional funding sources in the future or effectuate plans to conserve liquidity. Future efforts to raise additional
funds may not be successful or they may not be available on acceptable terms, if at all. These consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Note
2 - Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the
instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”).
Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been
condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not
include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations,
or cash flows. It is management’s opinion, however, that the accompanying unaudited interim condensed consolidated financial
statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the
financial position, operating results and cash flows for the periods presented.
The
accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s
Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the SEC, which contains the audited financial statements
and notes thereto, together with Management’s Discussion and Analysis, for the years ended December 31, 2017 and 2016. The
financial information as of December 31, 2017 is derived from the audited financial statements presented in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2017. The interim results for the three months ended March 31, 2018
are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any future interim periods.
Principles
of Consolidation
The
accompanying unaudited interim condensed consolidated financial statements include the accounts of uSell and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Segment
Information
Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation
by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance.
The Company’s chief operating decision maker is its Chief Executive Officer. The Company and its Chief Executive Officer
view the Company’s operations and manage its business as one operating segment.
uSell.com,
Inc and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
March 31, 2018
(Unaudited)
Use
of Estimates
The
preparation of unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Making
estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect
of a condition, situation or set of circumstances that existed at the date of the unaudited interim condensed consolidated financial
statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming
events. Accordingly, the actual results could differ significantly from our estimates.
Restricted Cash
The Company maintains a dedicated
bank account with a third party custodian pursuant to which all accounts receivable and Collateral proceeds (as defined in the
NPA) are deposited to this account. The Company can only access funds in this account in accordance with the terms of the NPA.
This account is controlled by the Lender and is presented as restricted cash in the accompanying consolidated balance sheet.
Accounts
Receivable
Accounts
receivable represent obligations from the Company’s customers and are recorded net of allowances for cash discounts, doubtful
accounts, and sales returns. The Company’s policy is to reserve for uncollectible accounts based on its best estimate of
the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable
to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due accounts and other factors
that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged
to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance
for doubtful accounts was $1,300 at March 31, 2018 and $0 at December 31, 2017.
Inventory,
net
Inventory,
comprised of all finished goods, is stated at the lower of cost (average cost method) or net realizable value. Inventory is recorded
net of allowances.
Allowances for slow-moving or obsolete inventory are provided based on historical experience of a variety
of factors, including sales volume, product life and levels of inventory at the end of the period. The change in the provision
for slow-moving inventory amounted to $8,000 and $0 for the three months ended March 31, 2018 and 2017, respectively. The inventory
reserve was $292,000 and $54,000 as of March 31, 2018 and 2017, respectively.
Substantially
all of the Company’s inventory purchases are paid for before inventory is received in the Company’s warehouse. Prepaid
inventory amounted to approximately $1,164,000 and $474,000 at March 31, 2018 and December 31, 2017, respectively, and is included
in inventory, net in the accompanying condensed consolidated balance sheets.
Revenue
Recognition
The
Company adopted Accounting Standards Codification (“ASC”) 606 – Revenue from Contracts with Customers”
(“ASC 606”) as of January 1, 2018 using the modified retrospective method. This method allows the Company to apply
ASC 606 to new contracts entered into after January 1, 2018 , and to its existing contracts for which revenue earned through December
31, 2017 has been recognized under the guidance in effect prior to the effective date of ASC 606. The revenue recognition processes
the Company applied prior to adoption of ASC 606 align with the recognition and measurement guidance of the new standard,
therefore adoption of ASC 606 did not require a cumulative adjustment to opening equity.
Under ASC 606, a performance obligation is a promise within a contract to transfer a distinct good or service,
or a series of distinct goods and services, to a customer. Revenue is recognized when performance obligations are satisfied and
the customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which
the Company expects to be entitled to receive in exchange for goods or services. Under the standard, a contract’s transaction
price is allocated to each distinct performance obligation. To determine revenue recognition for arrangements that the Company
determines are within the scope of ASC 606, the Company performs the following five steps: (i) identifies the contracts with a
customer; (ii) identifies the performance obligations within the contract, including whether they are distinct and capable of being
distinct in the context of the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance
obligations in the contract; and (v) recognizes revenue when, or as, the Company satisfies each performance obligation.
Principal
Device Revenue
The
Company, through We Sell Cellular, generates revenue from the sales of its cellular telephones and related equipment. The Company
recognizes revenue “FOB shipping point” on such sales. Delivery to the customer is deemed to have occurred when the
customer takes title to the product. Generally, title passes to the customer when the products leave the Company’s warehouse.
Payment terms generally require payment once an order is placed. The Company allows customers to return product within 30 days
of shipment if the product is defective. Allowances for product returns are recorded as a reduction of sales at the time revenue
is recognized based on historical data. The estimate of the allowance for product returns amounted to approximately $374,000 and
$267,000 at March 31, 2018 and December 31, 2017, respectively, and is recorded in accrued expenses in the accompanying condensed
consolidated balance sheets.
uSell.com,
Inc and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
March 31, 2018
(Unaudited)
Agent
Commission Revenue
Sellers
on the Company’s uSell.com website are shown a list of offers from third party buyers interested in purchasing their devices.
If a seller chooses one of these offers, the seller will ship their device directly to the buyer. The buyer is then responsible
for testing the device, servicing the customer, and ultimately paying the seller for the device or returning it. The Company charges
a commission to the buyers only when the seller sends in a device and is successfully paid for it. As such, the Company recognizes
Agent Commission Revenue upon payment to the seller.
Fulfillment
Revenue
The
Company offers fulfillment services on behalf of its buyers for the items sold using the Agent Commission Revenue approach outlined
above. The Company acts as the agent in these fulfillment services transactions, passing orders booked by its buyers to its third
party fulfillment vendor, who then assembles the kits and mails them directly to the sellers. The Company earns a standard fee
from its buyers and recognizes revenue upon shipment of the kits to the sellers. The Company evaluated the presentation of revenue
on a gross versus net basis and determined that since the Company performs as an agent without assuming the risks and rewards
of ownership of the goods, revenue should be reported on a net basis.
Advertising
Revenue
Advertising
revenues primarily come from payments for text-based sponsored links and display advertisements. Generally, the Company’s
advertisers pay the Company on a cost per click, or CPC basis, which means advertisers pay only when someone clicks on one of
their advertisements, or on a cost per thousand impression basis, or CPM. Paying on a CPM basis means that advertisers pay the
Company based on the number of times their advertisements appear on the Company’s websites or mobile applications. Advertising
revenue is recognized as income when the advertising services are rendered.
Deferred
revenue represents amounts billed to customers or payments received from customers prior to providing services and for which the
related revenue recognition criteria have not been met.
Shipping
and Handling Costs
Shipping
and handling costs included in cost of revenue were approximately $63,000 and $184,000 for the three months ended March
31, 2018 and 2017, respectively.
Advertising
Advertising
costs are expensed as they are incurred and are included in sales and marketing expenses. Advertising expense amounted to approximately
$9,000 and $11,000 for the three months ended March 31, 2018 and 2017, respectively.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable.
The
Company minimizes credit risk associated with cash by periodically evaluating the credit quality of its primary financial institutions.
At times, the Company’s cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation
(“FDIC”) insurance limit. At March 31, 2018 and December 31, 2017, the Company had not experienced losses on these
accounts and management believes the Company is not exposed to significant risks on such accounts.
Concentrations
of credit risk with respect to accounts receivables is minimal due to the large number of customers comprising the Company’s
customer base and generally short payment terms.
uSell.com,
Inc and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
March 31, 2018
(Unaudited)
Fair
Value of Financial Instruments
Financial
instruments, including cash and cash equivalents, accounts receivable and accounts payable are carried at cost, which management
believes approximates fair value due to the short-term nature of these instruments. The fair value of debt approximates its carrying
amounts as a market rate of interest is attached to the repayment.
Net
Loss per Share
Basic
loss per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number
of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives
effect to all dilutive potential of shares of common stock outstanding during the period, including stock options and warrants,
using the treasury stock method, and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS
excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.
The
computation of diluted EPS excludes the common stock equivalents of the following potentially dilutive securities because their
inclusion would be anti-dilutive:
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Unvested Restricted Stock
|
|
|
130,000
|
|
|
|
198,334
|
|
Vested and Unvested Restricted Stock Units
|
|
|
493,020
|
|
|
|
743,020
|
|
Stock Options
|
|
|
455,667
|
|
|
|
391,998
|
|
Stock Warrants
|
|
|
797,083
|
|
|
|
797,083
|
|
|
|
|
1,875,770
|
|
|
|
2,130,435
|
|
Recent Accounting Pronouncements
In May 2014, the Financial
Accounting Standard Board (the “FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers”
(“ASU 2014-09”). ASU 2014-09 provides guidance for revenue recognition and affects any entity that either enters into
contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes
the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. The
core principle of ASU 2014-09 is the recognition of revenue when a company transfers promised goods or services to customers in
an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services.
ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, companies will need to use more judgment
and make more estimates than under the current guidance. These may include identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each
separate performance obligation. ASU 2014-09 was initially effective for fiscal years beginning after December 15, 2016 and interim
periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application
of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective
approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional
footnote disclosures). Early adoption is not permitted. The Company adopted the standard on January 1, 2018 using the modified
retrospective transition method. The adoption of this standard did not have a material effect on the Company’s financial
position or results of operations.
In August 2016, the FASB issued
ASU No. 2016-15, “Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”),
which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement
of cash flows, by adding or clarifying guidance on eight specific cash flow issues: debt prepayment or debt extinguishment costs;
settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation
to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds
from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned
life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions;
and separately identifiable cash flows and application of the predominance principle. ASU 206-15 is effective for annual and interim
periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-15 provides for retrospective application
for all periods presented. The Company adopted the standard on January 1, 2018. The adoption of this standard did not have a material
effect on the Company’s financial position or results of operations.
In October 2016, the FASB
issued ASU No. 2016-16, “Income Taxes (Topic 740)” (“ASU 2016-16”), which reduces the complexity in the
accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other
than inventory, when the transfer occurs. This guidance is effective for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years, with early adoption permitted using a modified retrospective transition approach. The Company
adopted the standard on January 1, 2018. The adoption of this standard did not have a material effect on the Company’s financial
position or results of operations.
In November 2016, the FASB
issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), providing
specific guidance on the cash flow classification and presentation of changes in restricted cash and restricted cash equivalents.
ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and is to be applied retrospectively. The Company
adopted the standard on January 1, 2018. Effective with the adoption of the new guidance, the Company changed the presentation
of restricted cash in its consolidated statements of cash flows to conform to the new requirements.
In January 2017, the FASB
issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business” (“ASU 2017-01”).
The amendments in ASU 2017-01 is to clarify the definition of a business with the objective of adding guidance to assist entities
with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition
of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is
effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted
the standard on January 1, 2018. The adoption of this standard did not have an effect on the Company’s financial position
or results of operations.
In May 2017, the FASB issued
ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting “(“ASU 2017-09”).
ASU 2017-09 provides clarity and reduces both (i) diversity in practice and (ii) cost and complexity when applying the guidance
in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments
in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity
to apply modification accounting in Topic 718. ASU 2017-09 is effective for all annual periods, and interim periods within those
annual periods, beginning after December 15, 2017, with early adoption permitted. The Company adopted the standard on January
1, 2018. The adoption of this standard did not have an effect on the Company’s financial position or results of operations.
Note
3 - Intangible Assets
Intangible
assets, net is as follows:
March 31, 2018
|
|
Useful Lives
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Trade Name
|
|
7
|
|
|
$
|
2,622,000
|
|
|
$
|
(905,206
|
)
|
|
$
|
1,716,794
|
|
Customer Relationships
|
|
5
|
|
|
|
2,008,000
|
|
|
|
(970,543
|
)
|
|
|
1,037,457
|
|
eBay Reputation Relationship
|
|
1
|
|
|
|
369,000
|
|
|
|
(369,000
|
)
|
|
|
—
|
|
Non-Compete Agreement
|
|
1
|
|
|
|
283,000
|
|
|
|
(283,000
|
)
|
|
|
—
|
|
Intangible assets, net
|
|
|
|
|
$
|
5,282,000
|
|
|
$
|
(2,527,749
|
)
|
|
$
|
2,754,251
|
|
December 31, 2017
|
|
Useful Lives
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Trade Name
|
|
7
|
|
|
$
|
2,622,000
|
|
|
$
|
(811,564
|
)
|
|
$
|
1,810,436
|
|
Customer Relationships
|
|
5
|
|
|
|
2,008,000
|
|
|
|
(870,142
|
)
|
|
|
1,137,858
|
|
eBay Reputation Relationship
|
|
1
|
|
|
|
369,000
|
|
|
|
(369,000
|
)
|
|
|
—
|
|
Non-Compete Agreement
|
|
1
|
|
|
|
283,000
|
|
|
|
(283,000
|
)
|
|
|
—
|
|
Intangible assets, net
|
|
|
|
|
$
|
5,282,000
|
|
|
$
|
(2,333,706
|
)
|
|
$
|
2,948,294
|
|
Intangible
assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense amounted to $194,000 for
the three months ended March 31, 2018 and 2017.
Future
annual estimated amortization expense is summarized as follows:
Years ending December 31,
|
|
|
|
|
2018 (remaining nine months)
|
|
|
$
|
582,129
|
|
2019
|
|
|
|
776,171
|
|
2020
|
|
|
|
709,228
|
|
2021
|
|
|
|
374,571
|
|
2022
|
|
|
|
312,152
|
|
|
|
|
$
|
2,754,251
|
|
uSell.com,
Inc and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
March 31, 2018
(Unaudited)
Note
4 – Capitalized Technology, Net
Capitalized
technology consists of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Gross value
|
|
$
|
3,836,349
|
|
|
$
|
3,707,688
|
|
Accumulated amortization
|
|
|
(2,982,556
|
)
|
|
|
(2,839,239
|
)
|
Net value
|
|
$
|
853,793
|
|
|
$
|
868,449
|
|
Capitalized
technology is amortized on a straight-line basis over estimated useful lives of three years. Amortization expense amounted to
$143,000 and $148,000 for the three months ended March 31, 2018 and 2017, respectively, and is included in cost of revenue.
Future
annual estimated amortization expense is summarized as follows:
Years
ending December 31,
|
|
|
|
|
2018
(remaining nine months)
|
|
|
$
|
374,172
|
|
2019
|
|
|
|
333,540
|
|
2020
|
|
|
|
139,307
|
|
2021
|
|
|
|
6,774
|
|
|
|
|
$
|
853,793
|
|
Note
5 - Promissory Note
At
March 31, 2018, the Company’s Note (as defined below) is comprised of the following:
Total Notes
|
|
$
|
8,660,000
|
|
Less: Unamortized discount and debt issue costs
|
|
|
(294,488
|
)
|
Total Notes, net of unamortized discount and debt issue costs
|
|
$
|
8,365,512
|
|
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 Lender granted the Company a forbearance of existing
remedies on the default until June 30, 2018 (see Note 11). The Company cannot provide assurance that it will be able to meet its
financial covenants for the quarter ended June 30, 2018 and cannot provide assurance that the Lender will waive the potential default.
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 Note as a current liability.
The
Company maintains a dedicated bank account with a third party custodian pursuant to which all accounts receivable and Collateral
proceeds (as defined in the NPA) are deposited to this account. The Company can only access funds in this account in accordance
with the terms of the NPA. This account is controlled by the Lender and is presented as restricted cash in the accompanying condensed
consolidated balance sheet.
The
Company recorded a discount on the secured term note (the “Note”) of $88,000 which is being accreted to non-cash interest
expense over the contractual term of the Note. During the three months ended March 31, 2018 and 2017, accretion of the discount
amounted to $7,000 and $5,000, respectively. Contractual interest expense on the Note amounted to $333,000 and $259,000 for the
three months ended March 31, 2018 and 2017, respectively.
uSell.com,
Inc and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
March 31, 2018
(Unaudited)
The
Company incurred fees associated with the closing of the Note of $360,000. These amounts have been treated as a debt issue cost
and, accordingly, have been recorded as a direct deduction from the carrying amount of Note and are being amortized to interest
expense over the contractual term of the Note. During the three months ended March 31, 2018 and 2017, accretion of the fees amounted
to $33,000 and $20,000, respectively.
Note
6 – Special Purpose Entity
On
the January 13, 2017, the Company and the Lender (the “Manager”) formed a special purpose entity as a Delaware limited
liability company (the “SPE”), for the purpose of purchasing, refurbishing, repairing and reselling cell phones, smart
phones, tablets and related accessories. The Manager is the sole manager of the SPE. The Manager invested $5,200,000 in equity
in exchange for all of the membership interests. Of this sum, $5,000,000 was to be used by the SPE for the purchase of approved
inventory. Profits from the SPE were to be distributed to the Manager and to the Company based on certain return thresholds, as
defined in Limited Liability Company Agreement. As more fully discussed in Note 11, the Company and the Lender dissolved the SPE
on April 30, 2018.
The
Company provided all administrative and inventory and cash management services necessary to the SPE’s daily operations pursuant to
a Services Agreement entered into between the Company and the SPE. The Company and its personnel were not compensated for providing
services to the SPE, and the Company was generally responsible for the costs of providing services to the SPE. However, the SPE
was responsible for costs directly related to acquiring and refurbishing the SPE’s inventory, shipping, certain tax accounting
fees approved by the Manager, and other costs. The Services Agreement allowed the Company to purchase inventory for its account
and not for the SPE’s account until the Company had no available capital to purchase inventory.
The
Company conducted an evaluation of its involvement with the SPE, which is considered to be a related party business entity, as
of March 31, 2018, in order to determine whether the SPE was a variable interest entity (“VIE”) requiring consolidation
or disclosure in the condensed consolidated financial statements of the Company. The SPE was determined to be a related party
business entity because the Manager of the SPE is also the Lender to the Company’s NPA, as described in Note 5. The Company
evaluated the purpose for which the SPE was created and the nature of the risks in the entity as required by the guidance under
ASC 810-10-25, “Consolidation.” Based upon the Company’s analysis, the Company concluded that it is not the
primary beneficiary, and therefore, no consolidation is necessary.
As
of March 31, 2018, the net amount due from the SPE for expense reimbursements was $68,000 and is recorded as due from related
party in the accompanying condensed consolidated balance sheets.
Expense
reimbursements for the three months ended March 31, 2018 amounted to $89,000, of which $71,000 was recorded in cost of revenues
and $18,000 was recorded in sales and marketing. Expense reimbursements for the three months ended March 31, 2017 amounted to
$83,000, of which $55,000 was recorded in cost of revenues and $28,000 was recorded in sales and marketing. There were no profit
distributions made to the Company from the SPE during the three months ended March 31, 2018 and 2017. The compensation for all
services that the Company is rendering is going to be received in the form of profit distributions, as available.
Note
7 – Capital Lease Obligations
We
are obligated under capital leases under which the aggregate present value of the minimum lease payments amounted to $75,000.
The present value of the minimum lease payments was calculated using a discount rate of 8.6%. The future minimum lease payments
under the capital lease at March 31, 2018 is as follows:
Years
ending December 31,
|
|
|
|
|
2018
(remaining nine months)
|
|
|
$
|
13,958
|
|
2019
|
|
|
|
18,611
|
|
2020
|
|
|
|
18,611
|
|
2021
|
|
|
|
13,506
|
|
2022
|
|
|
|
550
|
|
|
|
|
|
65,236
|
|
Less:
Amounts representing interest
|
|
|
|
8,278
|
|
Principal portion
|
|
|
|
56,958
|
|
Less:
Current portion
|
|
|
|
14,686
|
|
Capital lease obligations,
net of current portion
|
|
|
$
|
42,272
|
|
uSell.com,
Inc and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
March 31, 2018
(Unaudited)
The
capital lease obligations are collateralized by underlying property and equipment. As of March 31, 2018, the gross amount of property
and equipment under non-cancelable capital leases was $80,000 and the amount of accumulated amortization was $21,000.
Note
8 - Commitments and Contingencies
Management
Incentive Compensation Plan
On
July 27, 2016, the Company adopted its Management Incentive Compensation Plan (the “Incentive Plan”). The Incentive
Plan provides that each quarter that the Company meets certain gross EBITDA thresholds, participants will be eligible to receive
quarterly bonuses. The Incentive Plan is effective through September 2018. The Incentive Plan provides for minimum bonus eligibility
thresholds set at quarterly gross EBITDA levels that ensure that the Company will remain cash-flow positive and in compliance
with all debt covenants over the term after payment of bonuses. If the Company does not meet the minimum EBITDA threshold in a
given quarter, no bonus is payable under the Incentive Plan for that quarter. Bonuses will be subject to adjustment in the event
the Company’s year-end audit results in restatement of a prior quarter’s EBITDA. Effective March 16, 2018, Mr. Nik
Raman’s base salary was reduced to $100,000 and Brian Tepfer and Scott Tepfer’s base salaries were reduced
to $150,000 per year. Each of them also agreed to waive any bonuses due to them under the Incentive Plan.
For
the three months ended March 31, 2018 and 2017, a total of $0 and $180,000, respectively, was earned under the Incentive
Plan. As of March 31, 2018 and December 31, 2017, $0 and $90,000 is included in accrued expenses.
Legal
Proceedings
From
time to time, the Company is a party to or otherwise involved in legal proceedings arising in the normal and ordinary course of
business. As of the date of this report, the Company is not aware of any proceeding, threatened or pending, against the Company
which, if determined adversely, would have a material effect on its business, results of operations, cash flows or financial position.
Operating
Leases
The
Company leases space for operations, sales, customer support and corporate purposes under a lease agreement that expires in August
2018. The Company also leases space for its warehouse and office under a lease that expires in September 2021. The leases contain
provisions requiring the Company to pay maintenance, property taxes and insurance and require scheduled rent increases. Rent expense
is recognized on a straight-line basis over the terms of the leases.
Rent
expense, amounting to $86,000 and $90,000 for the three months ended March 31, 2018 and 2017, respectively, is included in general
and administrative expense in the accompanying condensed consolidated statements of operations.
Note
9 - Stock-Based Compensation
Stock
Option Grants
The
following table summarizes the Company’s stock option activity for the three months ended March 31, 2018:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding - December 31, 2017
|
|
|
482,000
|
|
|
$
|
1.39
|
|
|
|
3.2
|
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or Canceled
|
|
|
(26,333
|
)
|
|
|
(2.68
|
)
|
|
|
|
|
|
|
|
|
Outstanding – March 31, 2018
|
|
|
455,667
|
|
|
$
|
1.32
|
|
|
|
3.1
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – March 31, 2018
|
|
|
241,500
|
|
|
$
|
1.84
|
|
|
|
2.2
|
|
|
$
|
—
|
|
uSell.com,
Inc and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
March 31, 2018
(Unaudited)
The
Company recorded non-cash compensation expense of $17,000 and $4,000 for the three months ended March 31, 2018 and 2017, respectively,
pertaining to stock option grants.
Total
unrecognized compensation expense related to unvested stock options at March 31, 2018 amounts to $121,000 and is expected to be
recognized over a weighted average period of 2.2 years.
The
following table summarizes the Company’s stock option activity for non-vested options for the three months ended March 31,
2018:
|
|
Number of
Options
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Balance at December 31, 2017
|
|
|
240,832
|
|
|
$
|
0.59
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(26,665
|
)
|
|
|
(0.62
|
)
|
Forfeited or Canceled
|
|
|
—
|
|
|
|
—
|
|
Balance at March 31, 2018
|
|
|
214,167
|
|
|
$
|
0.59
|
|
Warrants
As
of March 31, 2018 and December 31, 2017, there were 797,083 warrants outstanding and exercisable, with a weighted average exercise
price of $3.19 per share. The weighted average remaining contractual life of the warrants outstanding and exercisable at March
31, 2018 and December 31, 2017 was 1.4 and 1.6 years, respectively, and the aggregate intrinsic value was $0.
The
Company did not grant any warrants to purchase shares of common stock during the three months ended March 31, 2018 and 2017.
There
was no expense pertaining to warrants recorded during the three months ended March 31, 2018 and 2017.
Restricted
Stock Awards and Restricted Stock Units
During
the three months ended March 31, 2018, the Company granted 6,000 fully vested shares of common stock to an advisor for services
provided. The fair value of the common stock on the dates of grant ranged from $0.19 to $0.36 per share, based upon the closing
market price on the grant dates. The aggregate grant date fair value of the awards amounted to $1,584, which was recorded as compensation
expense during the three months ended March 31, 2018.
During
the three months ended March 31, 2018, the Company awarded 45,000 shares of restricted common stock to an employee for services
provided. The restricted common stock vests quarterly over three years, beginning on the date of grant. The fair value of the
common stock on the date of grant was $0.49 per share, based upon the closing market price on the grant date. The aggregate grant
date fair value of the award amounted to $22,050, of which $1,226 was recorded as compensation expense during the three months
ended March 31, 2018.
A
summary of the restricted stock award and restricted stock unit activity for the three months ended March 31, 2018 is as follows:
|
|
|
Number
of
Shares
|
|
|
|
|
|
|
Unvested
Outstanding at December 31, 2017
|
|
|
|
413,333
|
|
Granted
|
|
|
|
51,000
|
|
Forfeited
|
|
|
|
—
|
|
Vested
|
|
|
|
(169,750
|
)
|
Unvested Outstanding
at March 31, 2018
|
|
|
|
294,583
|
|
uSell.com,
Inc and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
March 31, 2018
(Unaudited)
The
Company recorded non-cash compensation expense of $51,000 and $115,000 for the three months ended March 31, 2018 and 2017, respectively.
Total
unrecognized compensation expense related to unvested stock awards and unvested restricted stock units at March 31, 2018 amounts
to $230,000 and is expected to be recognized over a weighted average period of 1.2 years.
Note
10 – Customer and Vendor Concentrations
Customer
Concentration
During
the three months ended March 31, 2018, no customers represented 10% or more of the Company’s revenues. During the three
months ended March 31, 2017, one customer represented at least 10% of revenues, accounting for 10% of the Company’s revenues.
During the three months ended March 31, 2018 61%, 28% and 5% of the Company’s revenues, respectively, were originated in
the United States, Europe and Hong Kong, respectively. During the three months ended March 31, 2017 64%, 26% and 6% of the Company’s
revenues, respectively, were originated in the United States, Europe and Hong Kong, respectively.
At
March 31, 2018, no customers represented 10% or more of the Company’s accounts receivable. At December 31, 2017, two customers
represented at least 10% of accounts receivable, accounting for 26% and 18% of the Company’s accounts receivable.
Vendor
Concentration
During
the three months ended March 31, 2018, four vendors represented 10% or more of purchases, accounting for 29%, 20%, 20% and 15%
of the Company’s purchases. During the three months ended March 31, 2017, two vendors represented at least 10% of purchases,
accounting for 66% and 13% of the Company’s purchases.
At
March 31, 2018 and December 31, 2017, one vendor represented 10% or more of accounts payable, accounting for 65% and 82% of accounts
payable, respectively.
Note
11 – Subsequent Events
The
Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the financial
statements were issued for potential recognition or disclosure. Other than as described below, the Company did not identify any
subsequent events that would have required adjustment or disclosure in the financial statements.
Note
Purchase Agreement
On May 4, 2018, the
Company entered into a Forbearance and Third Amendment Agreement, pursuant to which the Lender granted the Company a forbearance
of existing remedies of its default under one of its financial covenants (the “Default”) until June 30, 2018. In addition,
the Company amended the terms of its financial covenant related to its debt coverage ratio and repaid $3,304,068 of the NPA, inclusive
of $4,068 of accrued interest.
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.
SPE
The
Company and the Manager agreed to dissolve the SPE by April 30, 2018. All cash proceeds and remaining cash proceeds from inventory
in the SPE would go to the Manager, except for:
|
i.
|
Up
to $20,000 of proceeds to the Company for reimbursement of expenses under the Services
Agreement, with the Company waiving any other current or future fees under the Services
Agreement.
|
|
ii.
|
Up
to $15,000 for third party legal or accounting costs and filing fees for dissolving SPE.
|
The
Company has not provided for any uncollectible receivables from related parties.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements
and related notes appearing elsewhere in this report on Form 10-Q. In addition to historical information, this discussion and
analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited
to those set forth under “Risk Factors” in our Annual Report on Form 10-K, as filed with the United States Securities
and Exchange Commission, or the SEC, on April 5, 2018.
The
content included on uSell.com and wesellcellular.com is not incorporated in this report.
Overview
uSell.com,
Inc. is a large market maker of used smartphones. uSell acquires products from both individual sellers, on its website, uSell.com,
and from major carriers, big box retailers, and manufacturers through its subsidiary, We Sell Cellular. The Company maximizes
the value of these devices by reclassifying them, adding value to them, and moving them throughout the world to those who want
them most. In order to serve its global and highly diverse customer base, uSell leverages both a traditional sales force and an
online marketplace where professional buyers of used smartphones can buy inventory on-demand. Through participation on uSell’s
online platform and through interaction with uSell’s salesforce, buyers can acquire high volumes of inventory in a cost
effective manner, while minimizing risk.
Device
Acquisition
uSell
has two primary means of sourcing devices to satisfy demand from its global base of customers. The first source is through its
wholly-owned subsidiary, We Sell Cellular, which was acquired in the fourth quarter of 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 inspect and grade these devices, and then sell these devices wholesale and retail through its highly
experienced sales force. We Sell Cellular is one of a few wholesalers that has qualified for R2 certification, the industry standard
for both data destruction and environmental protection.
uSell’s
second method of sourcing devices is through its website, uSell.com, where individual consumers can find cash offers for their
items based on the make, model, and condition of each item. Upon accepting an offer, consumers can ship their devices for free
using either a prepaid shipping kit or shipping label, and then track the progress of their orders online from initiation to final
payment of their devices. We have historically utilized consumer oriented advertising efforts, such as direct response television
commercials and various forms of Internet advertising, to attract sellers to our website. However, during 2015, we decided to
strategically reduce our marketing spend in favor of seeking out wholesale supply.
Device
Disposition
We
sell devices through three primary means:
|
●
|
Utilizing
our proprietary marketplace bidding platforms where buyers can source devices on demand
|
|
●
|
Employing
our highly experienced sales force to sell devices to its global client base
|
|
●
|
Leveraging
third party eCommerce platforms such as eBay and Amazon
|
While
a minority of our product is sold directly to consumers via third party eCommerce platforms, the majority of our sales are to
professional buyers. These buyers include brick and mortar retailers, online retailers, large and small wholesalers, small repair
shops, large refurbishing providers, and insurance companies. Approximately two-thirds of our customer base is in the United States,
with the balance abroad. We are able to provide all of our buyers with a low risk, cost-efficient way to acquire inventory. Through
participation on uSell’s online marketplace or through interaction with our salesforce, our buyers gain access to the high
volume of devices that we acquire through both wholesale and retail means, without taking on the risk and investment involved
in marketing directly to consumers or purchasing directly from carriers, big box retailers, and manufacturers.
Revenue
Model
We
generate revenue by either taking possession of devices and selling these devices for a premium (“Principal Device Revenue”)
or by facilitating transactions between buyers and sellers and collecting a commission (“Agent Commission Revenue”).
The bulk of our revenue is from Principal Device Revenue.
Business
derived from our uSell.com website utilizes an Agent Commission Revenue model, whereby we do not take possession of the devices
that are sold to us by sellers, but rather facilitate transactions between these consumers and our network of professional buyers.
Historically, some of the devices we acquired through our usell.com website utilized our Managed by uSell service, whereby we
partnered with a third party logistics company to inspect and process devices before passing them along to buyers offering the
highest prices for each device. Through this approach, we took possession of devices for a brief period of time before they were
passed on to the ultimate buyer. However, by the end of 2016, we shut down our Managed by uSell service and shifted all of our
business from uSell.com to the Agent Commission Revenue model.
Devices
sourced wholesale through our subsidiary, We Sell Cellular, are all bought and sold using the Principal Device Revenue model.
Given that our wholesale sourcing channel is substantially larger than our retail sourcing channel, the vast majority of our business
is characterized by the Principal Device Revenue approach.
Critical
Accounting Policies
In
response to financial reporting release FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, from
the SEC, we have selected our more subjective accounting estimation processes for purposes of explaining the methodology used
in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on
the our financial condition. The accounting estimates involve certain assumptions that, if incorrect, could have a material adverse
impact on our results of operations and financial condition. Our more significant accounting policies can be found in Note 2 of
our unaudited interim condensed consolidated financial statements found elsewhere in this report and in our Annual Report on Form
10-K for the year ended December 31, 2017, as filed with the SEC. There have been no material changes to our Critical Accounting
Policies during the period covered by this report.
Results
of Operations
2018
Financial Highlights
Key
financial metrics are as follows:
|
●
|
Revenues
decreased by $13,457,000, or 49%, to $14,174,000 for the three months ended March 31, 2018, from $27,631,000 for the three
months March 31, 2017
|
|
●
|
Operating
loss for the three months ended March 31, 2018 was $2,000,000, compared to operating income of $543,000 for the three months
ended March 31, 2017, a decrease of $2,543,000
|
|
●
|
We
sustained a negative gross profit of $618,000 for the quarter ended March 31, 2018, compared to a gross profit of $2,728,000
for the same quarter of 2017
|
|
●
|
Net
loss for the three months ended March 31, 2018 was $2,374,000, compared to $746,000 for the three months ended March 31, 2017
|
|
●
|
Adjusted
EBITDA, a non-GAAP financial measure, was $(1,580,000) for the three months ended March 31, 2018, compared to $1,018,000 for
the three months ended March 31, 2017. See “Non-GAAP Financial Measure - Adjusted EBITDA” below.
|
|
●
|
We
had a working capital deficit of $1,327,000 at March 31, 2018
|
Beginning
with Apple’s announcement of a dual iPhone launch in September (the iPhone 8 and X), the market experienced an atypical
pricing pattern, followed by a softening of demand caused by disruptions in key global markets. Typically, after an iPhone launch,
the industry experiences a significant decrease in pricing, after which a prolonged period of price stability is observed. During
this cycle, we experienced a very different dynamic due to the fact that Apple’s initial launch of the iPhone 8 did not
drive the expected amount of demand or trade-ins. The industry thus experienced an inventory shortage immediately after the launch
of the iPhone 8, which led to relatively inflated prices through most of the fourth quarter. The iPhone X was not released until
November, resulting in substantial volume towards the end of the fourth quarter and into the first quarter. However, during this
period the industry also saw disruptions in key global markets that resulted in a softening of global demand and continued price
volatility. During the first three months of 2018, we continued to face substantial challenges resulting from our inventory position
and the highly unusual industry events described above. These events forced management to maintain a substantial inventory reserve
at March 31, 2018. However, we believe that as of the filing of this Quarterly Report, the majority of our slow moving inventory
has been sold and the market has stabilized. We cannot provide assurance that future events will confirm this expectation.
Despite
challenging market conditions, we have made substantial progress along two fronts: we have transitioned the vast majority of
our We Sell Cellular business online and we have dramatically diversified our supplier base. We believe that we have now
built and validated the key aspects of our online platform. We are now in a position to go to market with this technology in
order to offer a new and much needed demand channel directly to our suppliers. We believe that our suppliers were also
impacted negatively by the market events that have occurred over the last few months, and are interested, more than ever, in
new channels that can provide liquid demand at premium prices. We have amassed substantial data indicating that our platform
can drive higher average selling prices than those of our suppliers, and we plan to expose this channel directly to one or
more of our supply partners through technology integration. While we will continue to run our legacy “Proprietary
Trading” business, we will scale these operations down based on the market opportunity. Our goal, through this new
“Platform Partnership” business model, is to develop a new, low risk, high margin line of business that leverages
the processes and proprietary technology that we have developed over the last several years.
On the supplier side,
we continued to develop a wider net of supplier relationships while deepening our relationships with existing suppliers. We purchased
from 9 suppliers in the first quarter of 2018, with our largest supplier’s share of purchases decreasing to 29% of our purchases,
compared to 66% during the same period in 2017.
On
the finance side, our primary lender has requested that we seek to refinance our debt facility with a different party. As further
described in Notes 5 and 11 to the financial statements, we failed to meet our operating margin covenant in the first quarter
of 2018. We have signed a forbearance agreement with our lender until June 30, 2018 as we pursue opportunities to refinance the
loan. Based on progress on our results and our refinancing efforts, the forbearance agreement (at the sole option of the lender)
may be extended. We cannot assure you that we will get an extension from our lender or that we will refinance the loan.
In
summary, despite industry-wide challenges towards the end of 2017 and into 2018, we have made substantial progress towards our
technological vision. We intend to leverage our platform to create value for both our suppliers and our customers.
Comparison
of the Three Months Ended March 31, 2018 to the Three Months Ended March 31, 2017
The
following tables set forth, for the periods indicated, results of operations information from our unaudited interim condensed
consolidated financial statements:
|
|
Three Months Ended
March 31,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percentage)
|
|
Revenue
|
|
$
|
14,174,000
|
|
|
$
|
27,631,000
|
|
|
$
|
(13,457,000
|
)
|
|
|
(49
|
)%
|
Cost of Revenue
|
|
|
14,792,000
|
|
|
|
24,903,000
|
|
|
|
(10,111,000
|
)
|
|
|
(41
|
)%
|
Gross (Loss) Profit
|
|
|
(618,000
|
)
|
|
|
2,728,000
|
|
|
|
(3,346,000
|
)
|
|
|
(123
|
)%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
282,000
|
|
|
|
598,000
|
|
|
|
(316,000
|
)
|
|
|
(53
|
)%
|
General and Administrative
|
|
|
1,100,000
|
|
|
|
1,587,000
|
|
|
|
(487,000
|
)
|
|
|
(31
|
)%
|
Total Operating Expenses
|
|
|
1,382,000
|
|
|
|
2,185,000
|
|
|
|
(803,000
|
)
|
|
|
(37
|
)%
|
Operating (Loss) Income
|
|
|
(2,000,000
|
)
|
|
|
543,000
|
|
|
|
(2,543,000
|
)
|
|
|
(468
|
)%
|
Other Expense, Net
|
|
|
(374,000
|
)
|
|
|
(1,289,000
|
)
|
|
|
915,000
|
|
|
|
(71
|
)%
|
Net Loss
|
|
$
|
(2,374,000
|
)
|
|
$
|
(746,000
|
)
|
|
$
|
(1,628,000
|
)
|
|
|
218
|
%
|
Revenue
by Type
The
following table breaks down our revenue by type:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Principal Device Revenue
|
|
$
|
14,049,000
|
|
|
|
99
|
%
|
|
$
|
27,442,000
|
|
|
|
99
|
%
|
Agent Commission Revenue
|
|
|
124,000
|
|
|
|
1
|
%
|
|
|
178,000
|
|
|
|
1
|
%
|
Other
|
|
|
1,000
|
|
|
|
0
|
%
|
|
|
11,000
|
|
|
|
0
|
%
|
|
|
$
|
14,174,000
|
|
|
|
100
|
%
|
|
$
|
27,631,000
|
|
|
|
100
|
%
|
Principal Device Revenue
decreased by $13,393,000, or 49%, from $27,442,000 for the three months ended March 31, 2017 to $14,049,000 for the three months
ended March 31, 2018. The decrease in our Principal Device revenue resulted from the market slowdown caused by Apple’s atypical
product launch, followed by disruptions in key global markets.
Agent
Commission Revenue decreased by $54,000, or 30%, from $178,000 for the three months ended March 31, 2017 to $124,000 for the three
months ended March 31, 2018. The decrease in Agent Commission Revenue is due to the decline in our uSell.com business, which has
been deprioritized in favor of our wholesale business.
Due
to the fact that devices sourced through We Sell Cellular are bought and sold using the Principal Device Revenue model, we anticipate
that the percentage of the Agent Commission Revenue will remain minimal for the foreseeable future, as we continue to increase
the volume that we purchase through wholesale channels.
Cost
of Revenue
Cost of revenue decreased
by $10,111,000, or 41% from $24,903,000 for the three months ended March 31, 2017 to $14,792,000 for the three months ended March
31, 2018. As noted above, our revenue for this period decreased by 49%, which caused a corresponding decrease in our cost of revenue.
Our
gross margin loss was (4.4)% for the three months ended March 31, 2018, compared to a gross profit of 9.9% for the three months
ended March 31, 2017. This loss was due to the atypical market phenomena that occurred towards the end of last year and into the
first quarter of this year.
Sales
and Marketing Expenses
Sales
and marketing expense decreased $316,000, or 53%, from $598,000 during the three months ended March 31, 2017 to $282,000 during
the three months ended March 31, 2018. The decrease is primarily attributable to the lower fees paid as a result of the decreased
eBay sales during the three months ended March 31, 2018, compared to the three months ended March 31, 2017. Our primary sales
and marketing expenses concentrated on paying out sales commissions and selling fees. Because the vast majority of our sales and
marketing expenses are paid to third party selling platforms, such as eBay and Amazon, any increases or decreases in these expenses
are directly tied to sales for the period.
General
and Administrative Expenses
General
and administrative expenses include professional fees for technology, legal and accounting services as well as consulting and
internal personnel costs for our back office support functions. General and administrative expenses are impacted by non-cash compensation
expense pertaining to stock grants and option grants for services. Non-cash compensation expense amounted to $67,000 and $119,000
for the three months ended March 31, 2018 ad 2017, respectively.
Excluding
non-cash compensation expense, general and administrative expenses for the three months ended March 31, 2018 decreased by $435,000,
or 30%, compared to the three months ended March 31, 2017. The decrease is mainly attributable to a decrease in payroll and payroll-related
expenses.
Other
Expense
Other
expense during the three months ended March 31, 2018 and 2017 is comprised of interest expense attributable to the contractual
interest expense and amortization of debt issue costs on the January 2017 Note Purchase Agreement (“NPA”).
Non-GAAP
Financial Measures - Adjusted EBITDA and Gross Merchandise Volume or GMV
We
make reference to “Adjusted EBITDA” which is a measure of financial performance not calculated in accordance with
accounting principles generally accepted in the United States (“GAAP”). Generally, a non-GAAP financial measure is
a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts
that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with
GAAP.
This
non-GAAP measure is not in accordance with, or an alternative to, measures prepared in accordance with GAAP and may be different
from non-GAAP measures used by other companies. In addition, this non-GAAP measure is not based on any comprehensive set of accounting
rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results
of operations as determined in accordance with GAAP. This measure should only be used to evaluate our results of operations in
conjunction with the corresponding GAAP measures.
Reconciliations
of Adjusted EBITDA to the most directly comparable GAAP financial measure, net loss, to the extent available without unreasonable
effort, are set forth below. The Company defines Adjusted EBITDA as loss from operations before the items noted in the table below.
Management
believes Adjusted EBITDA provides a meaningful representation of our operating performance that provides useful information to
investors regarding our financial condition and results of operations. Adjusted EBITDA is commonly used by financial analysts
and others to measure operating performance. Furthermore, management believes that this non-GAAP financial measure may provide
investors with additional meaningful comparisons between current results and results of prior periods as they are expected to
be reflective of our core ongoing business. However, while we consider Adjusted EBITDA to be an important measure of operating
performance, Adjusted EBITDA and other non-GAAP financial measures have limitations, and investors should not consider them in
isolation or as a substitute for analysis of our results as reported under GAAP. Further, Adjusted EBITDA, as we define it, may
not be comparable to EBITDA, or similarly titled measures, as defined by other companies.
The
following table presents Adjusted EBITDA, a non-GAAP financial measure, and provides a reconciliation of Adjusted EBITDA to the
directly comparable GAAP measure reported in the Company’s consolidated financial statements:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(2,374,000
|
)
|
|
$
|
(746,000
|
)
|
Stock-based compensation expense
|
|
|
67,000
|
|
|
|
119,000
|
|
Depreciation and amortization
|
|
|
353,000
|
|
|
|
356,000
|
|
Interest expense
|
|
|
374,000
|
|
|
|
1,289,000
|
|
Adjusted EBITDA
|
|
$
|
(1,580,000
|
)
|
|
$
|
1,018,000
|
|
Liquidity
and Capital Resources
We
do not yet have a sustained history of financial stability and may continue to generate operating losses for the foreseeable future.
Since the acquisition of We Sell Cellular, we have relied on institutional debt to provide our working capital and complete the
We Sell Cellular acquisition. Prior to the acquisition, our principal source of liquidity had been the issuances of convertible
debt and equity securities (including to related parties), including preferred stock, common stock and various debt financing
transactions. These conditions raise substantial doubt about the Company’s ability to continue as a going concern through
May 2019. Management plans to address this uncertainty through further implementation of its business plan or by continuing to
raise funds through debt and/or equity. There can be no assurances that the plans and actions proposed by management will be successful
or that unforeseen circumstances will not require additional funding sources in the future or effectuate plans to conserve liquidity.
Future efforts to raise additional funds may not be successful or they may not be available on acceptable terms, if at all.
Our
cash flow has been significantly impacted by the We Sell Cellular acquisition. On January 13, 2017, we entered into the NPA with
a lender pursuant to which we issued the lender a secured term note in the principal amount of $8,660,000 at an original issue
discount of 1%, for gross proceeds of $8,572,400. The NPA requires repayment of principal in January 2020 and bears interest at
an annual rate of 15.00%, which interest is due and payable monthly in arrears. In addition, the lender from whom the Company
borrowed the funds under the NPA, established an SPE with the Company. Under the SPE, the lender provided $5 million of equity
capital to purchase smartphones and similar inventory. The Company entered into a Services Agreement with the SPE and will provide
all necessary services including inventory management. The Company will receive a percentage of the SPE’s profits, if any.
As of the date of this Quarterly Report, we have not received any distributions from the SPE.
As
a result of the downturn in our business relating in part to the disruptions in key global markets, we did not meet one of the
financial covenants under the NPA and therefore we were in default under the agreement for the quarter ended March 31, 2018. The Lender granted us a forbearance of existing remedies on the default until
June 30, 2018. We cannot provide assurance that we will be able to meet our financial covenants for the quarter ended June 30,
2018 and cannot provide assurance that the Lender will waive the 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.
On May 4, 2018, we
entered into a Forbearance and Third Amendment Agreement, pursuant to which the Lender granted us a forbearance of existing remedies
of its default under one of our financial covenants (the “Default”) until June 30, 2018. In addition, we amended the
terms of our financial covenant related to our debt coverage ratio and repaid $3,304,068 of the NPA, inclusive of $4,068 of accrued
interest.
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 remained at January 13, 2020.
In
addition, the Company and the Manager agreed to dissolve the SPE by April 30, 2018. All cash proceeds and remaining cash proceeds
from inventory in the SPE would go to the Manager, except for:
|
iii.
|
Up
to $20,000 of proceeds to the Company for reimbursement of expenses under the Services
Agreement, with the Company waiving any other current or future fees under the Services
Agreement.
|
|
iv.
|
Up
to $15,000 for third party legal or accounting costs and filing fees for dissolving SPE.
|
Cash
Flows from Operating Activities
Operating
activities provided $2,365,000 of cash during the three months ended March 31, 2018. Our net loss during the three months ended
March 31, 2018 of $2,374,000 was offset by $353,000 of depreciation and amortization, $67,000 of stock-based compensation, and
$40,000 of amortization of debt issue costs related to our NPA. Changes in operating assets and liabilities provided $4,279,000
of cash during the three months ended March 31, 2018.
Operating
activities used $1,079,000 of cash during the three months ended March 31, 2017. Our net loss during the three months ended March
31, 2017 of $746,000 was offset by $356,000 of depreciation and amortization, $119,000 of stock-based compensation, and $990,000
of amortization of debt issue costs related to our NPA. Changes in operating assets and liabilities used $1,798,000 of cash during
the three months ended March 31, 2017.
Cash
Flows from Investing Activities
During the three months
ended March 31, 2018, we capitalized $129,000 of website development costs and purchased $5,000 of property and equipment.
During the three months
ended March 31, 2017, we capitalized $136,000 of website development costs and purchased $4,000 of property and equipment.
Cash
Flows from Financing Activities
During
the three months ended March 31, 2018, we made payments of $3,000 under our capital lease obligations.
During
the three months ended March 31, 2017, we received $8,572,000 in proceeds under our NPA and paid $302,000 in costs associated
with the NPA. In addition, we repaid $8,080,000 of principal under the previous facility and made payments of $3,000 under our
capital lease obligations.
Recent
Accounting Pronouncements
See
Note 2 to our unaudited interim condensed consolidated financial statements regarding recent accounting pronouncements.
Cautionary
Note Regarding Forward-Looking Statements
This
report includes forward-looking statements including statements regarding liquidity, stabilization of the market, the leveraging
of our platform and whether our lender will waive a covenant default and whether we can procure a new lender.
The
words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,”
“should,” “plan,” “could,” “target,” “potential,” “is likely,”
“will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking
statements. We have based these forward-looking statements largely on our current expectations and projections about future events
and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial
needs.
The
results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks
that may cause actual results to differ materially from these forward-looking statements are contained in the Risk Factors contained
in our Annual Report for the year ended December 31, 2017. Further, we may be subject to internal matters affecting our lender.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information,
future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the
Risk Factors and our other filings with the SEC.