Net Element, Inc.
Q2 2017 Earnings Call Transcript

Published: 16 Aug 2017

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Net Element 2017 Second Quarter Financial Results and Business Update Conference Call. [Operator Instructions] I'd like to remind listeners that during the 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 as of today, August 15, 2017, 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. Please go ahead

[Oleg Firer:]

Good morning, everyone. Thanks to everyone for joining our call this morning to discuss second quarter 2017 operational and financial results, as well as give an opportunity for those of you listening in to ask questions during the Q&A session. I would like to begin today's call by highlighting our accomplishments during the second quarter of 2017. For three-months ended June 30, 2017, our net revenues increased 18% to $16.1 million, as compared to $13.7 million in the prior year. The $2.4 million increase in net revenues is primarily due to organic growth in our North America Transaction Solutions segment, which demonstrated net revenues increase of 31% as compared to the prior year. North America Transaction Solutions segment continued the organic growth of SMB merchants in the segment with emphasis on value-added offerings. Revenues for the segment continued to lead the growth for second quarter. Revenues for the second -- for this segment were $13.9 million, a 31% increase over the prior year. Online Solutions segment continued organic growth in global online payment acceptance services with emphasis on value-added offerings. Revenues for this segment for the second quarter were $2 million, a 33% increase over the prior year. Mobile Solutions segment, as previously reported and as a result of a change in the business model, revenues for this segment were $0.5 million versus $1.8 million, a 71% decrease over the prior year. Going forward, we expect to maintain a smaller staff at Digital Provider and we have canceled our existing office lease as we continue to consolidate Digital Provider's physical operations into PayOnline. We also are looking to develop a new business plan for Digital Provider that includes, but is not limited to, model that requires less working capital than the current prepay model and provides for a diversified, scalable business. During the second quarter of 2017, we have launched PayOnline, electronic commerce platform in United States; we have launched Online Cashier, a fiscal cloud-based point-of-sale solution; we launched Apple Pay support in Russia; launched Instant Credit for online merchants; extended payment module to include InSales, popular omni-channel commerce and CMS platform; launched support for iDEAL, the leading payment system in Netherlands; partnered with Payvision in Europe, which expanded access to global currencies; launched payment acceptance for international mobile network operator. We have also made significant progress during the second quarter of 2017 to centralize our international operations and further reduce redundant operational costs. This resulted in an elimination of Net Element in Russia and centralization of key functions into PayOnline operations. Now I'd like to introduce Jonathan New, Net Element's Chief Financial Officer, who will provide comments on our financials. Jon, please proceed.

[Jonathan New:]

Thank you, Oleg. Let's walk through the financial results for the first quarter. We reported a net loss attributable to stockholders of $1.6 million or $0.09 a share for the three months ended June 30, 2017, as compared to a net loss of $5.3 million or $0.46 per share for the three months ended June 30, 2016. This resulted in a decrease in the net loss attributable to stockholders of $3.7 million, primarily due to an increase in revenues, decrease in loss from stock value guarantee, and change in noncash compensation and interest, partially offset by increased in G&A. Eliminating the effects of the one-time charges, noncash compensation and stock value guarantee, we reported an adjusted non-GAAP net loss attributable to Net Element stockholders of $1.5 million or $0.08 per share for the 3 months ended June 30, 2017 as compared to an adjusted non-GAAP net loss attributable to Net Element, Inc. stockholders of $1.2 million or $0.10 per share for the 3 months ended June 30, 2016. The increase in revenues, as Oleg pointed out, is primarily due to the growth of merchants in North America Transaction Solutions, and that revenue is up nicely 31%, $3.2 million for the 3 months ended June 30, 2017. They were primarily due to continued growth of merchants with an emphasis on value-added offerings. Our Online Solutions segment revenue increased $0.5 million, 33%, from $1.5 million for the three months ended June 30, 2016 to $2 million, just over $2 million for the three months ended June 30, 2017. We continue to board additional merchants, we have some favorable FX wins, these improvements were tempered by a $1.2 million decrease in Mobile Solutions segment as we continue to experience increased competition, decrease margins, and we continue to hold down putting any liquidity into that business as we look to change the model. Gross margin for the three months ended June 30 was $2.8 million or 17% of net revenues as compared to $2.2 million or 16% of net revenues. The increase in gross margin was primarily due to increased volume processed in North America Transaction Solutions, offset by a decrease of [$197,000] in Mobile Solutions as we just discussed the business decrease. Total operating expenses were $4.2 million for the three months ended June 30, 2017 versus total operating expenses of $4.95 million for the 3 months ended March 31, 2016. Total operating expenses were $4.2 million for the three months ended June 30, and that consist of G&A, [$2.6 million]; non-cash compensation of $128,000; provision for bad debts of $866,000; depreciation, amortization of $573,000. Total operating expenses were $5 million for the three months ended June 30, which consisted of G&A of $2 million; noncash comp of $2 million; bad debt provisions, $125,000; and depreciation, $844,000. Salaries, benefits, taxes and contractor payments were $1.4 million for the 3 months ended June 30, 2017, as compared to $1.2 million for the 3 months ended June 30, 2016. The increase of $200,000 was primarily -- the increase that was due to the North American Transaction Solutions segment salaries increasing $49,000 as we grow that business and judiciously grow headcount and sales incentives. In addition, there was increases of $92,000 and $17,000 respectively in our Online Solutions and Mobile Solutions, which were primarily due to salary increases and also foreign-exchange. Professional fees were $661,000 for the 3 months ended June 30, 2017, as compared to $677,000 for the 3 months, so it was mainly flat, we had some additional filing fees. Noncash compensation was $128,000 versus $2 million for the 3 months ended June 30, 2016. The majority of these expenses were for employees and consultant equity incentives for both periods noncash comp, more to look on a year-to-date basis than a quarter-on-quarter, sometimes it's a lumpy quarter-on-quarter. We recorded bad debt expense of $866,000 for the 3 months ended June 30, 2017 as compared to $125,000 for the 3 months ended June 30, 2016. For the 3 months ended June 30, 2017, we recorded a loss, which was primarily comprised of $672,000 in ACH rejects and then there was a $194,000 provision from our Russian operations, as we restructure that and watch that. Of the $671,000 of gross ACH rejects, $347,000 were passed through to independent sales organizations via reduction in commissions. Depreciation and amortization expense consists primarily the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs, capitalized software expenses, trademarks, domain names and employee non-complete agreements. Depreciation and amortization was $573,000 for the 3 months ended June 30, 2017 as compared to $844,000 same period last year, primarily some of the portfolios that we had purchased are now fully amortized and so we see our amortization expense going down on acquired portfolios. Interest expense was $322,000 for the 3 months ended June 30, as compared to $438,000 for the 3 months ended June 30, 2016. So interest expense went down $117,000. So interest -- our interest expense for the 3 months ended June 30 -- consisted June 30, 2017, consisted primarily of $37,000 from financing of the PayOnline acquisition stock price guarantee and $10,500 from the promissory note entered into a March 1, 2017 with star capital. Additionally, Crede charges in 2016 from [imputed] interest did not occur in 2017, and that was one of the main reasons our expenses went down, as we financed a little more economically. The net income attributable to noncontrolling interest amounted to $75,000 for the 3 months ended June 30, 2017, as compared to $39,000 for the 3 months ended June 30, 2016. On a year basis, we reported -- year-to-year basis, we reported net loss attributable to stockholders of $4.1 million or $0.24 for the 6 months ended June 30, 2017, as compared to a net loss attributable to stockholders of $7.2 million or $0.63 for the same period last year. This resulted in a decrease in net loss attributable to stockholders of $3 million, primarily due to increased revenues, decrease in the loss from stock value guarantee and a decrease in noncash compensation expense. Eliminating the one-time effects of or eliminating the effects of noncash compensation in both years and a 2016 stock value guarantee, we reported an adjusted non-GAAP net loss attributable to stockholders of $3.4 million or $0.19 a share for the 6 months ended June 30, 2017, as compared to an adjusted non-GAAP net loss attributable to stockholders of $2.7 million or $0.23 a share through the 3 months ended June 30, 2016. Net revenues were just under $30 million, for the 6 months ended June 30, 2017 as composed -- compared to $25 million for the 6 months ended June 30, 2016. Again, the increase in net revenues on a yearly basis is primarily due to organic growth of merchants in our North America Transaction Solutions segment, which resulted in increased segment revenues of $6.3 million, 35% year-to-date versus the 6 months ended June 30, 2016. Our Online Solutions revenue increased $825,000 or 28% year-to-date, from $2.9 million to $3.7 million for the six months ended June 30, 2017. Primarily the boarding of additional merchants in that group. The increase in North America were offset by a $2.4 million or 64% decrease in Mobile Solutions, as we discussed. We're changing the business model, cutting expenses, consolidating operations there and we'll see this as all positive stuff for that. The gross margin for the six months ended June 30, 2017 was $4.9 million or 17% of net revenues, as compared to $4.1 million or 16% of net revenues for the 6 months ended June 30, 2016. The $841,000 increase in gross margin was primarily due to increased sales volume of processing and the business mix in our North America Transaction Solutions group, offset by a decrease of $336,000 in Mobile Solutions margin as discussed, decrease in that business. Total operating expenses were $8.5 million for the six months ended June 30, 2017. We had G&A of $5.4 million; non-cash comp of $725,000; bad debt provision, $1.1 million; depreciation and amortization, $1.2 million. So for the 6 months ended June 30, 2016, total operating expenses were $8.6 million, which consists of G&A of $4.1 million, noncash comp of $2.4 million, provision for bad debts of $377,000, and depreciation and amortization of $1.7 million, all these numbers off the face of the income statement. Salaries, benefits and taxes, contractor payments were $3 million for the 6 months ended June 30, 2017, as compared to $2.4 million for the 6 months ended June 30, 2016. Increase in salaries was primarily due to increase of corporate expenses, $300,000 for discretionary bonus, when cash flow can permit, that bonus will be paid. Additionally, North American Transaction Solutions segment salaries increased $136,000 year-to-date as we grow 30% a quarter. We are judiciously adding headcount in risk and in customer service and other places. There was also an increase of $201,000 and $14,000 respectively in online solutions and mobile solutions segment, which were primarily due to increasing administrative payroll at PayOnline and unfavorable changes in foreign currency. Professional fees were $1.3 million for the six months ended June 30 as compared to $1.2 million, we have some increased filing expenses and some changes and slight decrease in general legal fees as there is no litigation like we had last year. Noncash compensation expense from share-based compensation was $725,000 for the six months ended June 30, 2017, as compared to $2.4 million for the six months ended June 30, 2016. The majority of these expenses were for employee and consultant incentives in both periods. We reported bad debt expense of $1.1 million for the six months ended June 30, as compared to $377,000 for the six months ended June 30, 2016. For the six months ended June 30, 2017, we recorded a loss, which was primarily comprised of $959,000 in ACH rejects and $200,000 from Russian operations. Of the ACH rejects were $958,000, $512,000 of that was passed through to independent sales organizations that board the merchants with us. For the six months ended June 30, 2016, we recorded a loss, which was primarily $400,000 in ACH rejects offset by a recovery of $32,000 in Russia. Of that, $409,000 of ACH rejects in 2016, $168,000 were passed through as a reduction to commissions to the independent sales organizations that board merchants with us. Depreciation and amortization expense consists primarily of amortization of merchant portfolios plus depreciation expenses on fixed assets, client-acquisition costs, capitalized software expenses, trademarks, domain names and non-compete. Depreciation and amortization was $1.2 million for the six months ended June 30, 2017 as compared to $1.7 million for the six months June 30, 2016. As discussed, a lot of the decrease was due to the fully-amortized portfolios that we acquired now. Interest expense was $592,000 for the six months ended June 30, 2017 as compared to $589,000 for the six months ended June 30, 2016. So we have just basically a flat year-to-date with interest. Interest cost primarily consisted of $82,000 from the stock price guarantee related to the PayOnline acquisition, and $69,000 -- $68,000 from promissory note entered into in March, 2017 with Star Capital Management. Net income attributable to noncontrolling interests amounted to $126,000 for the six months ended June 30, 2017 as compared to $77,000 for the 6 months ended June 30, 2016. This concludes our formal remarks. And I'd now like to ask the operator to open the call for questions.

[Operator:]

[Operator Instructions] And our first question comes from [Christopher Scurry], Private Investor.

[Unidentified Analyst:]

There was a reimbursement cost in a contract to purchase PayOnline where value were reimbursed by granter for the loss with any value of stock not sold after one year. When you were just giving your remarks, this is the loss of stock -- loss from stock value guarantee?

[Jonathan New:]

Yes, that's correct.

[Unidentified Analyst:]

Okay, the way I'm reading the SEC filings, the last payment for this is due October 20 of 2017, is that correct?

[Jonathan New:]

That's correct. We owe less than $600,000, there are $600,000 total remaining, under $600,000 remaining to be paid over the next 3 months.

[Unidentified Analyst:]

So this quarter alone, the way I read in the statement, there was a -- basically $1.8 million. I don't see that in the balance sheet. Was that paid in the previous quarter or is that going to be paid in the third quarter? How does that go?

[Jonathan New:]

I think what you're looking at is the balance sheet amount. There was a, that was an amendment to the way we were paying. So we're still talking about the same thing. Of that $1.8 million, there are under $600,000 to be paid, it will be paid over the next 3 months. Does that make sense?

[Unidentified Analyst:]

I think so. So this quarter, the $323,000 figure, that's just what was paid this quarter for it?

[Jonathan New:]

Yes.

[Unidentified Analyst:]

Okay. And last conference call, you predicted that, that you might be self-funding by the end of this year, is the PayOnline agreement or -- finally paying off PayOnline the big reason for that?

[Jonathan New:]

No, and I'll let Oleg speak a little bit more to that, but that's not it. Basically as we grow our recurring revenue stream, it provides more recurring revenue. And so if we wanted to temper our growth down, we could become cash positive, but if we want to grow at 30-plus percent a quarter, it takes money to do that. Maybe Oleg will add to that comment.

[Oleg Firer:]

Right, right. So to Jon's point, when we predicted that we could reach [breakeven on a profitable], is due to the fact that we are growing, we continue to grow our recurring revenues, both domestically and internationally. As recently announced and like we promised in the previous call, we have introduced a PayOnline platform to United States, so we now have a centralized online e-commerce platform that will drive more value-added services and as we demonstrated, it increases our margin when we do sell value-added services into our merchant base. So we are, to the point that Jon said, we're continuing to grow and as we continue to grow, our recurring revenues catch up to our expenses and this way we'll reach profitability, and we have a path for profitability. As we continue to build on our more merchants internationally.

[Unidentified Analyst:]

Okay, so these still predicted to be year-end this year? Or maybe into next year?

[Oleg Firer:]

Well, we are hoping it'll be sooner than later. So we are definitely are positive on the fact that we're doing all the right things to get there in a short order. And update -- we'll continue to update our shareholders as we proceed on that, and we're still optimistic enough that we'll get there very soon.

[Jonathan New:]

On a GAAP basis, we're looking maybe at 12 months, 16 months out. Cash flow basis, it's depending on how fast we want to grow.

[Unidentified Analyst:]

Now your North American Transaction Solutions segment, it had an increase in margin of 2.2% quarter-over-quarter. In quarter 2 of -- this quarter, quarter 2 of 2017, for every dollar spent, there was $1.18 of revenue. How specifically do you see immigration of PayOnline in the United States increasing that margin?

[Oleg Firer:]

Right, so we -- there's several reasons why we can increase the margin. First, we're currently paying fees to third-party gateways, which we're not going to have to pay once PayOnline is fully up and running and reaches a certain mass. We are also opening up PayOnline to value-added integrators and resellers, which will integrate products into our platform, which will allow us to sell more value-added service offerings to our merchants. So there'll be -- the value-added service offerings will increase, and the cost that we pay to third parties will decrease.

[Unidentified Analyst:]

Do you have any plans to license PayOnline to other companies to add like another source of revenue?

[Oleg Firer:]

Correct. Yes, we do. We actually, one of our business plans is to provide white label solutions to other processers, hence the reason why we certified PayOnline with most of the payment processing platforms in the United States, which will allow us to provide -- this platform that allows international boarding and has all the value-added service offerings in it to other providers and create another revenue source for us.

[Unidentified Analyst:]

And then you have a -- recently, you achieved a funding deal with Cobblestone. How much money do you anticipate needing from Cobblestone before the company's self-funding?

[Oleg Firer:]

Well Cobblestone is a $10 million equity line and we were very cautious as we drilled down in it. We [periled] Cobblestone, we are also working on improving our debt facility. So we are, even though we got Cobblestone, it will be -- once we get our debt facility in order, we foresee to use more debt than equity as we continue to grow our business. And we're in conversations into diligence stages with several providers to increase our debt facility on more favorable terms.

[Unidentified Analyst:]

So there's not a figure you have in mind, of how much money you're going to need from Cobblestone before season ends?

[Oleg Firer:]

No, not yet. It depends on timing. If we can get our debt facility in order in the next 2 days, we're not going to need any. If we are going to get it in order in the next [8 or 6 days], we're going to need some. So it's really, the devil is in the timing, so it will be [yes], sooner than later, we don't anticipate we're going to be using it at all.

[Unidentified Analyst:]

The stock price closed yesterday at $0.40 per share. Do you have any immediate plans to raise the stock price before diluting more to Cobblestone, so that the net effect won't result in such a large number of shares being issued?

[Oleg Firer:]

When you say raise the stock, what do you mean?

[Unidentified Analyst:]

Any plans to increase the market value, like any new ideas? Whether it be, anytime or something.

[Oleg Firer:]

Well we're doing as much as we can, we're putting out news releases, we're informing the shareholders -- our shareholders on what we're doing. It's just unfortunate that stock price has dropped, but we're still committed to the business, we continue to be committed to the business. I personally have acquired shares and converted some of the compensation due to [meaty] shares, so it's something that is not cutting our hands, it's -- the community has to be believe in us and give us a chance to grow the business without selling shares that [we're going to get].

[Unidentified Analyst:]

You just said you converted some of your compensation shares. So there has been insider buying of the stock?

[Oleg Firer:]

Well I converted it, if you look at the -- Jon, when did I convert last time?

[Jonathan New:]

Let me look, I'll get back to you in a minute.

[Oleg Firer:]

It was either beginning of this year or end of last year I've converted a big chunk and we've, all the shareholders last year bought -- all the -- most of the directors and management bought stock last year as well, at higher prices than it is today.

[Jonathan New:]

Think it was fourth quarter last year.

[Oleg Firer:]

How much did I convert in the fourth quarter, Jon?

[Jonathan New:]

I'll look it up, hold on.

[Oleg Firer:]

It was probably like a million dollars.

[Unidentified Analyst:]

While he's looking it up, I want to go back to PayOnline real quickly. That was a pretty costly purchase, do you foresee any other purchases of that magnitude before you can restart funding?

[Oleg Firer:]

We don't need to purchase any more companies to sell funding stage. PayOnline was a platform acquisition and we believe that it can give great results to the business as an overall. With respect to other add-ons, we're very selective in what we're looking for. If we are to do anymore acquisitions, they'll be smaller in size.

[Unidentified Analyst:]

Okay. And then on average, are you able to speak on what type of deals or incentives you're offering to new merchants for them to come onboard?

[Oleg Firer:]

Right. So we are, when we go off to new merchants, most of our distribution is through indirect sales. So when we -- when our indirect sales people go out to the merchants, they don't typically compete on price, they compete on value-added offerings that they offer to merchants, such as POS devices, integrated solutions, marketing tools to drive more traffic to merchants doors. Our focus is small to medium size merchants, so it's really not a price competition, it's more of a value-added service offering stance and we believe that our model is a proven model. We have proven year in and year out that we could continue to compete and continue to successfully onboard merchants.

[Unidentified Analyst:]

Are you able to speak on like what percentage of the merchants stay up [until] the deals of the incentives expire?

[Oleg Firer:]

Well most of the merchants stay in. The life cycle of the merchant is large, we, our attrition is in the low teens. So it's really below industry standards. As we go after most of the merchants are sticking to us because of the integrations and value-added services that we offer to them. So our attrition levels are very low as compared to the industry standards.

[Unidentified Analyst:]

And on to another subject. You had a delisting meeting with the NASDAQ I want to say like five days ago. How do you feel that meeting went?

[Oleg Firer:]

We believe the meeting went very well. We don't have obviously, the response from NASDAQ yet, but we have provided them with all the information. And we believe that we could -- they will listen to us and give us a positive result, but it remains to be seen if really nothing more that we could comment on.

[Unidentified Analyst:]

And if an extension is granted by the NASDAQ and a [reversed stock split is] approved in this upcoming meeting with the stock shareholders, can you guarantee that the reverse stock split's not going to be implemented until the end of the extension?

[Oleg Firer:]

Yes, we're going to wait. We're going to wait and see how well it all develops.

[Unidentified Analyst:]

And I don't know if you'll be able to answer this, but what do you believe the true current market of capitalization of Net Element should be right now?

[Oleg Firer:]

I don't want to speculate. I believe it's significantly more than the market capital of the company. And I believe it's a multiple of that personally, as a shareholder. But I can't comment on what that is, because it will be more than [indiscernible].

[Unidentified Analyst:]

Okay. And then have other companies doing the same -- basically having the same business model as Net Element, approaching Net Element as towards like buying out Net Element?

[Oleg Firer:]

I can't comment on that at this point.

[Operator:]

[Operator Instructions] And our next question comes from [Jay Roger], private investor. And I'm showing no further questions at this time. I'd like to turn the call back over to management for any closing remarks.

[Oleg Firer:]

Again, I would like to thank everyone for participating in our call today. Please do not hesitate to contact me or Jon with any follow-up questions that you might have.

[Operator:]

Ladies and gentlemen, that does conclude the Net Element 2017 Second Quarter Financial Results Conference Call. Thank you for your participation, and you may now disconnect.