Net Element, Inc.
Q4 2018 Earnings Call Transcript

Published: 2 Apr 2019

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Net Element 2018 Financial Results and Business Update Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. [Operator Instructions] I'd like to remind listeners that during today's call, Management's prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore, the company claims protection under Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today, and therefore, we refer you to a more detailed discussion of these risks and uncertainties in the Company's filings with the SEC. Any projections as to the Company's future performance represented by Management include estimates today as of April 2, 2019, and the Company assumes no obligation to update these projections in the future as market conditions change. The recording and certain financial information provided during the call is available at www.netelement.com on the Investor Relations page. At this time, I would like to turn the call over to Oleg Firer, CEO. Oleg, please go ahead.

[Oleg Firer:]

Good morning, everyone. Thanks to everyone for joining our call today to discuss the 2018 annual operational and financial results. 2018 was a year of continued organic growth as we strengthened our competitive posture by focusing on value-added payment solutions and along the way executed several complex initiatives, took bold steps to increase our margins, and we're again regarded as one of the fastest growing technology companies in North America on Deloitte's 2018 Technology Fast 500 and top 10 retail payment service company of 2018 by Retail CIO Outlook Magazine. Our net revenues for 2018 increased to $65.8 million, an increase of 10% compared to 2017. The increase in net revenues is primarily due to growth in our North American Transaction Solutions segment which experienced 16% growth over the prior year. International Transaction Solutions segment experienced a decline of 26%, due to consolidation and elimination of branded content business. Geographically, the United States accounted for 90% of total revenues in 2018, while international revenues were 10%. Total processing volume for 2018, increased to $3.3 billion, an increase of 18% compared to $2.8 billion in 2017. North America accounted for $2.9 billion, an increase of 27% compared to 2017, while International decreased by 33% to $354 million. Total transactions processed during 2018 was $149 million, a decrease of 3% compared to 2017 due to elimination of branded content business. Our North American Transaction segment has shown some positive trends on the business development and acquisition side. During 2018, we have acquired the recurring cash flow portfolios from our sales partners, projected to add over $9 million in gross profit over the next four years. Jon Najarian of CNBC, Halftime Report and Fast Money; and Jonathan Fichman, a fintech and startup executive joined Net Element's Board of Directors. Net Element’s subsidiary, Unified Payments is among the first companies to achieve self-regulatory certification from the Electronics Transactions Association. The payments industry continues to evolve rapidly based on the application of new technology and changing customer needs. We intend to continue to evolve with the market to provide the necessary technological advances to meet the ever changing needs of our marketplace. During 2018, we have launched Netevia platform, as the core of the Company's technology stack, internally developed future ready payments and merchant management platform, connecting simplified payments across multiple channels through a single integration point. During 2018, we have enhanced Netevia platform with value-added modules which include, payment gateway with multi-channel blockchain-powered cryptocurrency payments acceptance application, Light POS application available interactive smart payment terminals, centralized onboarding and merchant management platform, fully integrated invoicing solutions and intelligent reporting. Successful execution of our strategy in 2018 has created a predictable and resilient business model for the Company entering 2019. We believe our technology-centered service offerings built around payment ecosystem will continue to differentiate our Company as we continue to provide value-added payment solutions to our clients. Now, I'd like to introduce Jeffrey Ginsberg, Net Element's Chief Financial Officer, to review our financial results in more detail. Jeff, please proceed.

[Jeffrey Ginsberg:]

Thank you, Oleg, and good morning everyone. We reported a net loss attributable to common stockholders of approximately $4.9 million or $1.28 per share for the year ended December 31, 2018, as compared to a net loss of approximately $9.9 million or $5.04 loss per share for the year ended December 31, 2017. This resulted in a decrease in net loss attributable to stockholders of approximately 50%, primarily due to an increase in revenues and other income, decreases in costs related to branded content, combined with selling, general, and administrative expenses and non-cash compensation, which was partially offset by an increase in bad debt expense. Net revenues consist primarily of service fees from transaction processing. Net revenues were approximately $65.8 million for the year ended December 31, 2018 as compared to approximately $60 million for the year ended December 31, 2017. The increase in net revenues is primarily due to a continued organic growth of North America merchants with an emphasis on value added offerings and the acquisition of a recurring cash flow portfolio in July 2018. Cost of revenues represents direct costs of generating revenue and includes commissions, mobile operator fees, interchange expense processing, and non-processing fees. Cost of revenues for the year ended December 31, 2018 were approximately $55.6 million as compared to approximately $51.2 million for the year ended December 31, 2017. The increase of cost of revenues in 2018 as compared to 2017 of approximately $4.4 million was primarily driven by the increase in the North American Transaction Solutions revenue and expenses associated with new sponsoring bank relationships. Gross margin for the year ended December 31, 2018, was approximately $10.2 million or 15.5% of net revenue as compared to approximately $8.8 million or 14.7% of net revenue for the year ended December 31, 2018. The primary reason for the increase in gross margin percentage was the result of North American Transaction Solutions segment processing of transactions utilizing our self-designated BIN and further acceptance of value-added services by the merchants. Total operating expenses were approximately $4.5 million for the year ended December 31, 2018 as compared to operating expenses of approximately $17.4 million for the year ended December 31, 2017. Total operating expenses for the year ended December 31, 2018 consisted of selling and general administrative expenses of approximately $9.8 million, non-cash compensation of approximately $142,000; bad debt expense of approximately $2.1 million, and depreciation and amortization expense of approximately $2.5 million. The primary reason for the decrease is a $2.7 million decrease in non-cash compensation for the year ended December 31, 2018. We had a good year and we encourage you to review our 10-K on our website or sec.gov for further details. With that, we conclude our formal comments for today. Operator, we are now ready to open the call for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from the line of Lisa Thompson with Zacks Investment Research. Your line is now open.

[Lisa Thompson:]

I'm excited to see that it looks like we’ve got the new Net Element out there with a whole different attitude. I read in the 10-K that you said that you're going to need about $3.3 million in operating cash for this year, but you don't think that you'll be needing any more sale of equity or anything different than using your current facilities, can you talk a little bit about how you're going to fund the next year?

[Oleg Firer:]

Sure. We do, as we disclosed in our 10-K, we have about $10.8 million available to us for drawdown through our credit facilities. As we mentioned last year we're going to focus on stabilizing the business which we have done. Now, we want to focus on reaching sustainable profitability and we do not anticipate raising equity for that. We anticipate to use our existing credit facilities to reach breakeven profitability.

[Lisa Thompson:]

Excellent, that'll be very exciting to see going forward. I also noticed that you had a - the quarter was down sequentially, and I think this is like the first time I've ever seen Q4 to be down from Q3. Can you talk a little bit about your customer base and why it wasn't like a big Christmas quarter?

[Oleg Firer:]

Right, so the North American business has grown in the fourth quarter. If you look at our fourth quarter results, we have shown growth in that segment, actually the growth was over $2 million in revenue growth quarter-over-quarter. However, our International business has struggled, it was down and it was down because we have lost few large clients. They were legacy clients for the business. But we have since then replaced them and we anticipate that you will see the results of it in the next quarter, maybe even earlier because the clients are re-boarded and they're going to be processing, re-processing actually with us. Well, we have struggled in the last quarter on International side as we lost several clients that have contributed heavily to the revenue.

[Lisa Thompson:]

That's good to know that it's coming back.

[Oleg Firer:]

Turning back, it's just going to take time. As you know, when we onboard a new client, it takes time until they get to their full volume. So, we anticipate that it's coming back.

[Lisa Thompson:]

What are you doing for those new clients specifically?

[Oleg Firer:]

Well, the clients that are joining on the International side are the clients that require cross-border solutions. They're not just clients, and even though we’re saying that the clients were originated from business in Russia, they're not predominantly Russian based clients. They're clients that require solutions on a cross-border levels where we provide them with multi-currency payments and fully integrated solutions to their websites, in some cases omni-channel and multi-channel processing as well.

[Lisa Thompson:]

Jeff, in the income statement there were a number of one-time charges and gains. Can you describe a little bit what you did there with PayOnline and where those numbers came from?

[Jeffrey Ginsberg:]

Yes, a majority of the operating -- the non-operating gains and losses were attributable to one-time write-offs of accounts receivables and accounts payables, majority being accounts payables. We reviewed some of these payables that were on our books, and we noticed that they've been on since probably legacy, and we determined that they were no longer collectible and we wrote them off. And the other charge specifically to PayOnline was stock price guarantee dealing with the acquisition. That was a long time ago and it's long past the terms of the contract, so we wrote that off.

[Lisa Thompson:]

And what is this gain transfer that you had in here, the $792,000?

[Jeffrey Ginsberg:]

That was a combination of what I just described to you, I'm not sure.

[Lisa Thompson:]

Okay. All right, so it's something that you've reversed?

[Jeffrey Ginsberg:]

Yes.

[Lisa Thompson:]

Okay. So that's not going forward.

[Jeffrey Ginsberg:]

Yeah, they're non-recurring. They are not going to --.

[Lisa Thompson:]

So, is there anything else we should know about what your goals are for the year? Are there any more product announcements or plans you have as far as technology offerings?

[Oleg Firer:]

As I’ve said in my opening statement, we are focused on launching this platform that we launched called Netevia, which is the core of the Company's technology stack. We have launched several key modules to that platform already. In more detail, we've described those modules in our annual report. We plan to enhance the platform with more modules as it relates to value-added service offerings and introduce more products to our existing merchant base and the new prospective merchants that will ultimately result in higher margins and better stickiness for our merchants. As you know, when we sign up merchants on fully integrated solutions, merchants tend to stick [indiscernible] that the merchants that have traditional pure play – fewer payments play solutions. So we think that the key differentiator this year is going to be our platform that we launched, that's going to focus around value added services and we're going to drive it home. We're going to start adding more services and more products to it, create a marketplace and continue selling it.

[Operator:]

Our next question comes from [Darrin Duffy with Duffy Investment]. Your line is now open.

[Unidentified Analyst:]

Hey, I wanted to ask you if you guys have received any buyout or acquisition offers? And then the second question is if you could speak maybe to the challenges associated with breakeven and kind of the game plan that you have in place to be able to achieve that, and what kind of time frame are you thinking on that?

[Oleg Firer:]

We have obviously during the normal course of business, there's a lot of strategic opportunities come to play. We have not received anything that in terms of buyout or strategic offers that have been tangible, even though people talk and people come, but there has been nothing that is worth to bring to our shareholders or the Board of Directors. At this time, with respect to breakeven profitability, still about reaching critical math, we have last year started onboarding business on to our own dedicated BIN's, which is Bank Identification Numbers at several financial institutions. We have introduced our technology platform. Ultimately, a combination of those things will give us greater scalability and ability to reach our breakeven profitability in the very near future. As stated in our 10,-K we have the financial means to get there and we're pushing, we're working on all cylinders to get there as soon as possible.

[Operator:]

I'm showing no further questions at this time. I'd like to turn the call back over to Management for closing remarks.

[Oleg Firer:]

Thank you to everyone for being on the call this morning. Please do not hesitate to contact us with any questions that you have. And have a great day.

[Operator:]

Ladies and gentlemen, that does conclude the 2018 annual financial results and business update conference call. Thank you for your participation. You may now disconnect.