E EC USell: Renewed Growth Model Provides A Probable 100% Return Opportunity

As said, uSell is a growing company and they are making dollars on every transaction, as shown by cost of revenue / revenue. This stands at almost 90%:

You can also see that the operating loss can be attributed mostly to sales and marketing expenses.

Regarding the balance sheet, the working capital and stockholders equity improved dramatically in the course of 2014. The balance sheet is currently free of debt, free of goodwill and they have about $3.7 million in cash per end of September 2014, thanks to an equity offering they closed late August.

A sound balance sheet limits downside risk which I regard as an important aspect in small cap investing. It’s also helpful from a strategic perspective; the $3.7 million in net cash provides management the financial capabilities to expand business.

As so many early-stage innovations, uSell makes a net loss. As per same SEC filing, net loss accumulated to almost $6 million over the last 9 months. Again, the sales & marketing expenses caused this loss. The good news is that the general expenses dropped, while revenue went up. uSell’s operational infrastructure has become leaner and more efficient. Based on the last 3 annual statements, the company burns about 200k per month, so the cash available is good enough for 1,5 years of continuity. But I expect revenue to ramp up significantly, and if management (strategically) decides to tone back the sales & marketing expenses, uSell should report profitability, certainly given the extremely high level of margins.

Share structure

According to the latest SEC filing uSell had per end of September803k warrants outstanding with an average strike price of $3.21. The SEC filing of end of June revealed an average strike price of$3.04 while the most recent offering disclosed that the company has added warrants with a strike price of $3.20.

So warrant conversion can only kick in when the share price rises more than 40%. Remember than conversion leads to a cash influx,although it does (temporarily) cap the share price. There are no convertible notes outstanding. Total shares outstanding sum up to approximately 6.7 million (includes the recent offering).

uSell has a pretty clean share structure, which is quite unusual for early stage OTC stocks.

The competitive landscape

The online resale space is very competitive. Ebay and Amazon are clearly the biggest players. Gazelle and EcoATM fill up the space. But this is hardly a surprise. The addressable market is gigantic. In my view, people will eventually use the platform that is the most user-friendly, trustworthy, fast and economical. Based on this mix, uSell appears to be in a good position. It also is somewhat different from the rest. The company specializes in the ‘sell it now ‘ niche, whereas Ebay focuses more on the buyer. Go google ‘sell iPhone'. uSell appears on the top page. Again, uSell does not hold inventory, it's a pure software-based platform. Could competitors copy their model? It could be, but since uSell IP's is protected and with a serious time advantage in mind, I consider that risk to be fairly low. Applying logic convinces me that an easier route is simply buying uSell in its entirety. I don't invest in small caps just based on take-over speculation aspect, but it does add weight to the bull case.

Overview catalysts

A few short-term catalysts should unlock shareholder value, and drive shares higher. The most important one is profitability. I don't expect uSell to report a net profit this year, but I expect green headlines in the first half of 2015. Needless to say, a company that reports a profit for the first time almost always results in a significant higher share price.

The other catalyst is an uplisting to the NASDAQ. Management has stated that this is one of uSell's goals, and I expect an uplisting will take place in 2015. Such a move would generate more investor awareness and enables institutional investors to initiate a position. It ‘s hard to predict to what extent the share price will be impacted,but I regard an uplisting as a positive event, and expect a bump because of the simple fact that the pool of potential buyers enlarges dramatically (not everybody can or is allowed to trade on the OTCboard).

Then we have the partnerships with Staples and Tracfone, allowing uSell access to their existing customer bases, which can be very profitable because these existing customer bases don't have acquisition or marketing costs. TracFone has over 20 million subscribers and Staples has 30 million unique visitors per month going to their website, so the economic potential for both these partnerships is tremendous. I won't be surprised if uSell manages to land more partnerships in the near future.

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Disclosure: Long uSell. Please do your due diligence before investing.

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Comments

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George Lipton 5 years ago Member's comment

Hard to find current coverage on this stock. Have any updates on this or other stocks worth keeping an eye on?

Vintage Vixen 5 years ago Member's comment
Any updates on this report?
Kate Hayden 5 years ago Contributor's comment

Thank you for the extremely detailed report. I am certainly thinking about this much more than I would have otherwise.

Small Cap Gems 5 years ago Author's comment

Another insider buy two days ago: The CEO bought 3000 shares in the open market.

Kate Hayden 5 years ago Contributor's comment

It's also encouraging to see an author add insights to an article. I know this site is still small and new but I'm encouraged by the level of commentary.

Stock Sanity 5 years ago Member's comment

That's encouraging news!

Harry Sinclair 5 years ago Member's comment

I picked up some of this stock after reading John Ford's analysis and hint that it could be an acquisition target for ebay. The expected increase never materialized but I still have hopes for USEL. I agree that it is a gem and is under-priced.