Net Element, Inc.
Q2 2015 Earnings Call Transcript

Published: 15 Aug 2015

[Operator:]

Welcome to the Net Element 2015 Second Quarter 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 open for questions. [Operator Instructions]. I 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 the Safe Harbor for forward-looking statements contained by the Private Securities Litigation Reform Act of 1995. Actual results may differ from the results discussed today and therefore we refer you to more detailed discussion of the risks and uncertainties in the company's filing with the SEC. Any projections of the company's future performance represented by management include estimates today as of August 13, 2015 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'd like to turn the call over to Oleg Firer, CEO. Oleg Please go ahead.

[Oleg Firer:]

Thank you and thanks to everyone who has joined our call today. We are here today to discuss the results from the second quarter of 2015 and then give an opportunity for those of you listening in to ask questions during the Q&A session. I'd like to begin today's conference call by acknowledging the highlights for the quarter. Our revenues have increased by 41% on year-over-year basis, we have completed an acquisition a global payment innovator PayOnline, PayOnline processes online payments for over 10 million active consumers and thousands of merchants in Russian Federation, Europe and Asia. We’ve closed the financing which resulted within 5.5 million available to the company and potential financing to be upwards of 24.5 million. We have appointed David Chester industry veteran a CEO of Unified Payments, to lead our efforts in North America. We have signed premium dating networks to global merchant processing contracts. This is anticipated to yield minimum revenue to the Net Element in the amount of 1.2 million over two years, at a minimum transaction costing commitment of 300 million. PayOnline launched mobile payment solution for iOS. Which adds iPhone & iPad to the existing Windows and Android processing capabilities. We have Included Apple Pay™ in the new version of Aptito, our global cloud-based restaurant management payment system. We launched payment processing in Kazakhstan by signing cathier.com which is a premium online events ticketer in Kazakhstan. Integration with Kazkommertsbank largest bank in Kazakhstan opens new markets with 60 million populations. We announced new sales partner financing and marketing initiatives. Empowering sales partner business growth through facilitation of up to $50 million in merchant portfolio financing. We announced strategic partnership with TAS Group. Strategic partnership to develop EMV solutions, card management systems and mobile payment technologies for U.S., Latin America and selected global markets. We're pleased with our Q2 performance and continued growth. Our Q2 results include completion and consolidation of PayOnline acquisition as of May 20, 2015. With PayOnline joining our family, we are excited about opportunities in the United States and emerging markets. As we work towards delivering a multi-channel global payment with the service platform to our merchants. Which we believe will provide long term results and contribute significantly to the company's performance. I would also like to address our current share price and compliance with NASDAQ, it is our belief that our -- the current share prices does not fairly represent potential of our business and of this potential is realized to the achievement of coming milestones, it is our hope that the share price will reflect this and that we will regain compliance with NASDAQ listing requirement. We do not manage our business by the performance of our stock, we manage our business through its fundamentals and long term growth, which we are extremely focused on. We will continue communicating our development to the investment community by press releases and current report on Form 8-K and encourage our shareholders and potential investors to visit our website to stay informed and fully aware of our new development of data care. Now I would like to introduce Jonathan New, Net Element's Chief Financial Officer, who will provide comments on our financials. John, please proceed.

[Jonathan New:]

Thank you, Oleg. In an effort to present a more comparative period on period analysis, we have an adjusted -- we have adjusted net loss to remove the effects of non-cash share based compensation and gains and losses from non-cash debt activities which including extinguishment, restructuring and derivative activities. We think that allows investors to see a clear picture of the business results on a comparative period. Operating results for the three months ended June 30, 2015. Adjusted net loss for the three months ended June 30th, was 3.2 million or a loss of $0.06 per share as compared to an adjusted net loss of 1.2 million or a loss of $0.04 per share for the three months ended June 30th, 2014. The adjusted net loss increase of $2 million is primarily a result of onetime adjustment in bad debt provisions where we were set aside a reserve we didn't have the losses we were able to recover the reserve that was worth 1.7 million on a three months period. Additionally we got a reduction in general & administrative expenses offset by a 738,000 increase in general administrative expenses and a reduction of interest expense. Our interest expense is down dramatically because we paid off our debts, we were just. Looking back at December 31, 2013 we had $30 million of debt, today we have four. Net revenues were 6.9 million for the first three months ended June 30, 2015. As compared to 4.9 million for the three months ended June 30, 2014. We're pleased with our revenue increase and its primarily a result of organic growth and some portfolio purchases to next growth in addition we consolidated the transactional processing revenue for PayOnline resulted in 300,000 of additional revenues for partial quarter May 20th to June 30th 2015. Gross margin was 1.4 million as compared to 1.6 million for the three months ended June 30, 2014. The margins going down because our business facts continued to change and our composition offer changes from next side lower margin transaction processing volume in the three months ended June 30, 2015 versus '14. Total adjusted operating expenses were 3.3 million for the first three months as compared to 929,000 for the three months ended June 30, 2014. The increase of 2.4 million again as we discussed earlier is attributable to the change in the loss provision. We had 1.7 million of net favorability on variant basis for the three months. And that also we have further higher G&A and so that’s the difference. Interest expense was 1.3 million for the three months ended June 30, 2015 as compared to 1.8 million of interest for the three months ended June 30, 2014. And as I mentioned before it's really due to reduction of better outstanding we talked about 30 million of debt at December 31, 2013 dropping to 17 million at June 30, 2014. And now with this report it's 4.2 million at June 30, 2015. We move to the results for the six months ended June 30, 2015 we calculate adjusted loss for the six months was 4.8 million or $0.10 per share as compared to 4.7 million or $0.15 per share for the six months ended June 30, 2014. So we turned out a $100,000 difference in the variance but the components were again the $1.6 million bad debt un-favorability which was resulting from a 2014 take back of our reserve and we didn’t need and 300,000 of G&A favorability and 1.4 million of interest favorability. In the press release it says para 15,635 increase in adjusted G&A it should say decrease, my apologies. Net revenues were 12.4 million for the six months as compared to 9.8 million for the six months ended June 30, 2014. Again we continue to grow our businesses our Russian business was off comparatively due to restructuring that we did but it's growing nicely now and the US business just continues to grow both organically and where we can, we'll buy portfolio if we can find things at reasonable prices and with reasonable conditions. Results on additional 300,000 of PayOnline revenue was re-indicated. And as I indicated this was offset by decreasing our mobile payment processing revenues to changes that we implemented mid part of 2014 and that businesses has been on the rebound since then and doing inquire nicely. Gross margin for the six months ended June 30, 2015 was 2.4 million as compared to 2.9 million for the six months ended June 30, 2014. Primary reason for the decrease in margin was continuing change in business mix and portfolio composition. We had lower margin transaction processing volume in 2015 versus 2014. Total adjusted operating expenses and what we do there as we're just taking out non cash compensation which you can find in the tables, tables are right below if you're looking at the press release, was 5.8 million for the six months ended June 30, 2015 as compared to total adjusted operating expenses of 4.7 million for the six months ended June 30, 2014. The increase of 1.1 million is primarily attributable to the change in loss provision again. The loss provision 1.6 million of favorability in 2014 or un-favorability this period. Additionally general administrative expenses decreased 315,000 primarily resulting from a decrease in other transaction losses from 2014, which was again a onetime event offset by higher salaries and professional fees. And again interest expense was favorable 1.4 million versus 2.8 million for the six month ended June 30, 2014 and again it's due to the reductions of debt and we went over that -- so I’ll not repeat that. I would like turn it back to the operator now for questions and answers, thank you.

[Operator:]

Thank you. [Operator Instruction]. Our first question comes from Lisa Thompson from Zacks Investment Research. Your line is open please go ahead.

[Lisa Thompson:]

Good afternoon guys.

[Oleg Firer:]

Hello Lisa.

[Lisa Thompson:]

So congratulations on a great revenue number, I am particularly impressed because there was so little of PayOnline in the quarter. I guess that it would have been 1.2 million if you owned it for the whole quarter? From what I --

[Oleg Firer:]

Yes, we had about a half a quarter of activity from May 20th, to June 30th, so yes, 600 to 1 million of revenue. I mean if you just analyzing the number, you take 300,000 half a quarter 600 it would be a full based on that quarter.

[Lisa Thompson:]

Yes, now I look at the pro forma and pro forma added together if you subtract that what you reported than it's 1.2 million higher if you had the whole quarter, so--

[Oleg Firer:]

Or the actual versus the [indiscernible] okay.

[Lisa Thompson:]

It looks like, next quarter you should have another million in revenue almost just from them alone. So -- and actually credit card looked really good too, so if -- do you expect credit card processing to be up sequentially from now on.

[Oleg Firer:]

Yes we expect actually all three divisions to be growing there mobile payments in Russia, the credit card processing in United States and the PayOnline. So we believe that all three divisions should perform well over next two quarters.

[Lisa Thompson:]

So -- I mean seems to get really complicated on those operating lines, just on far as the operating lines looks like you're up sequentially in gross margin and expect that to continue also?

[Jonathan New:]

Yes, yes as revenues continue to increase the margins dollar amount, will continue to go up from where they are.

[Lisa Thompson:]

Great. And then what you think is going to happen to G&A, is there more cost cutting and you have to add a full quarter PayOnline.

[Jonathan New:]

I don’t want to see, the majority of cost cutting Oleg did already, so now we're looking to add expense as we have the growth to support it.

[Lisa Thompson:]

So, how much is a full quarter of PayOnline going to add to that?

[Jonathan New:]

We haven't put anything out like that Lisa, we haven't put out any of the [indiscernible].

[Lisa Thompson:]

All right so--

[Jonathan New:]

We just don't typically put out for -- as our company, there is benefits and detriments to putting out forward looking projections so, we just---

[Lisa Thompson:]

No, no, I know, I just thought you might know how much you're spending over there going to add another month and a half of whatever they cost. That’s all right. So, I guess the biggest concern is when did to get break even as on a far as operating losses? We have a new--

[Oleg Firer:]

It's not exactly our focus, we want to be at break even, and we had talked about a goal of maybe 12 months, the main focus is to grow revenues and grow the business and so if you see something opportunistic, that still causes us to take a burn -- we would take it otherwise we will move the existing businesses each quarter towards break even.

[Lisa Thompson:]

All right. And just for mobile line, interest expense, now that you've gotten the cash, when you closed PayOnline did you then get the 5 million out of escrow or is that still in escrow?

[Jonathan New:]

No the 5 million is still sitting in escrow and it's frozen right now as negotiate the debt-- the terms of the debt . The monies that we used to buy PayOnline from the sale of 5.5 million of preferred stock, so same transaction that was a debt portion and a preferred stock portion.

[Lisa Thompson:]

So, what steps have to be taken to get money out of escrow? What is that depend on--

[Jonathan New:]

Well, it's becomes a pursuant to the 8-K that was filed on the 4th, I think it was August 4, we have -- kind of standstill in place and there was a negotiation going on between the company and the investors. So that’s the -- that's was going on right now. And whether we decide to take that money or not as we move forward it becomes our option and so we are going through and looking at the options and scenarios on negotiating with the investors.

[Lisa Thompson:]

Okay, so if you had 1.3 million interest expenses this quarter, what is that in the next quarter, is that change at all or that stay in?

[Jonathan New:]

Yes well, I mean there is some amortization running through on some of the stuff, but it should pretty much stay the same we're not looking to increase our debt load right now. And again some of it will be a function of what happens with the 5 million we just discussed in debt interest expense.

[Lisa Thompson:]

And then the gain and change in fair value and settlement of beneficial conversion derivatives that’s 2 million. Can you explain how that works and is that a onetime thing or is that keeps changing?

[Jonathan New:]

They will be P&L impacts as we go long. And that’s -- but it's a onetime set up of the beneficial conversion feature primarily coming from the warrants that were issued with the debt. Irregardless of what happens to the debt whether we take it or not the warrants stay outstanding and so the effects of the beneficial conversion feature on those warrants will continue to run through our P&L but this was the set up of that amount so now you're going to deal with changes in fair value and the amortization.

[Lisa Thompson:]

So is that pretty much unpredictable than where that goes?

[Jonathan New:]

Well yes but it's subject to the market conditions so you can run from scenario, so it's going to amortize away over the life of the warrants.

[Lisa Thompson:]

All right it's, good so confusing. The preferred stock how many shares does that convert into?

[Jonathan New:]

Well it's a function of the market price it converts best on the dewrap and the dewrap is a calculation takes last 15 trading days then we take either that day that you convert, the day before or you take the average of the lowest three over the previous 15 days. So it's totally a function of a market conditions.

[Lisa Thompson:]

So if there like a number that you can use for June 30th or something?

[Jonathan New:]

Our number for June 30th which has gone by what if they what number would you like actually --

[Lisa Thompson:]

No But I mean this -- if it's a math on trading stuff then you can do it historically right you just can't?

[Jonathan New:]

Well it’s a function the dewrap is the volume weighted average price as per you know but probably a lot of people don't so it's a function on market price. So if the market price goes down we get more shares. For market price stays the same -- we get the same kind of number shares and if it goes up we get less shares.

[Lisa Thompson:]

Okay so just take the preferred dollar amount and divide by the stock price basically, to guesstimate it?

[Jonathan New:]

Yes.

[Lisa Thompson:]

Okay all right. So when do you talk a little bit about PayOnline because I think to set new like if you were in, in Russia and you were using it what is the most likely usage that you come across when you're there?

[Oleg Firer:]

Well, PayOnline is not only based in Russia, PayOnline covers Russia, Europe and Asia. It's a full processing platform for online e-commerce acceptance with its own frontend backend gateway, it's connected to multiple banks and financial institutions in the regions. And it has its own proprietary floor management and filtering, doesn’t only work for the online environment also works for mobile payments environment enabling payment acceptance within the applications. If you have an application that whereby you'd like to accept payments whether it's through iOS, Windows or Android we have PayOnline enables you in that purchase. It's one of the more advanced platforms available in the market today and we're able not only go after small to medium size businesses that we typically going in the United States for but able to go after larger merchants. As we demonstrated by signing of dating networks to the processing $100 million year processing also we signed up cathier.com which is one of the largest ticketers in the regions it's actual an affluent ticket masters in the United States and some other brands name merchants that we have working with us with Russia, Asia and Europe. So it's a very advanced e-commerce platform which enables payment acceptance for traditional payment metrics and alternative payment metrics within the website and mobile application.

[Lisa Thompson:]

So the consumer doesn’t know they are using PayOnline is that just --?

[Oleg Firer:]

Consumer does not know that they are using PayOnline in some scenarios, some scenarios they do where it's the hosted page, so there's two types of payments acceptance online it's either we are -- our website has its own development staff and they built their own shopping cart environment and they not pay PayOnline or it's a hosted page where PayOnline hosts the page and it marks in a checkout page you're checking out of PayOnline, in that case consumer knows they are using PayOnline also PayOnline is a partner of MasterCard in Russia. PayOnline has actually launched MasterCard's e-wallet in the region so if you using MasterCard, MasterCard's wallet in the Russian Federation region it marks PayOnline. And if you go to MasterCard's Masterpass website's you will see that PayOnline is a partner of MasterPass and that’s the consumer product.

[Lisa Thompson:]

Okay, so what's that’s-- what are the plans to integrating it with your mobile payment system, is that done already or does that need to be done or--

[Oleg Firer:]

It does need to be done we are looking to integrate, in direct care billing as another payment method within the PayOnline platform, so we are looking to -- to completely integrate all of our product across various channels to create a single entry multi channel platform for global payment acceptance. So our goal is not only to integrate mobile, its direct care billing capabilities but also integrate some abilities that we have in the United States and create a single entry platform.

[Lisa Thompson:]

Okay, so what's a focus of the PayOnline business right now, is there a certain geographies you're going after or you trying to get into different product types or--

[Oleg Firer:]

We are going to continue to focus on geographies where we have presence and grow within those geographies we have huge pipeline in sales initiatives and partnerships in those geographies. We also have a broad suite of products including the latest products that PayOnline launched for travel industry, which directly integrates into GGS. We are also on the technical side, going to take on initiative of integrating all the platforms that we have across different regions into one single platform. And it's more of expansion within the regions that we have, take opportunistic approach into new region, enter into new regions if we have the right partners to enter into the new regions. And focus on growth initiatives, there is a lot of growth initiatives there in front of us and we believe we have the staff and knowhow and technology to take the next step.

[Lisa Thompson:]

Okay good. Could you talked a little bit about Aptito what and how it's doing, we not really hear about them, can you talk about maybe like how many customers they have or how they growing, just what's going on over there?

[Oleg Firer:]

Oh, sure, sure. Aptito is growing double digit month-over-month. It's currently only available in the United States, we are looking with the consolidation and integration of world platforms into one, we are looking to launch in other regions as well. We have yet to disclose the number of clients but we could tell you the clients are satisfied, we have a very good attrition rate on the product. The product is expected widely in the restaurant community. We are also launched additional value of product which is analytics for merchants within -- for the restaurants and giving a restaurant no one was in a position to know there customers, so that product being within that Aptito suite is doing extremely well. We believe it's going to be a significant contributor to the -- to our financial performance in a long term perspective and it's been, so far we have -- we believe that the software is stable, the software is gaining traction in United States and it's time for us bring into other regions.

[Lisa Thompson:]

So what does that involve bring it to other countries with different languages do you have to set up a sales force or do you --

[Oleg Firer:]

We want to piggy back on the existing sales infrastructure that we have and it's more of teaching the product to the -- to the sales force in those regions and making the product available in the market by complying with the various rules and regulation. For instance if we want to bring the product to Russian Federation we need to make sure that we have fiscal capability where buying on the copy of sale receipt goes to the local IRS types of organizations. There's some rules and regulations that we have abide by, which we are in the process of doing to bring the product and make that product available in other regions.

[Lisa Thompson:]

So that’s the developers have to do things to the software then?

[Oleg Firer:]

Yes, developers have to integrate into a new peripheral, for instance in the United States we work with the printer that's in compliance with US rules and regulation and we will have to work with the printer as a peripheral in for instance in Russian Federation that complies with the local rules and regulations. In terms of language, localization is performed very easily through the iOS software so we not going to -- we don’t have an issues with iOS with localization and language barriers. They only piece that needs to be developed is the integration to the peripheral which is not a big deal.

[Lisa Thompson:]

So how far off is it to start moving out to other countries, is that something that's going to happen in the next quarter or so?

[Oleg Firer:]

It's on the near horizon, we believe for, we are trying to get it out this year.

[Lisa Thompson:]

Great. Okay so how, you got a new CEO or President of what is it Unified Payments or what are we calling it now?

[Oleg Firer:]

Right we still continue to call it Unified Payments -- Unified Payments is a brand that we use in United States. And the corporate name is obviously different but the brand and initiatives that do in the United States has always been done under Unified Payments. And we have brought in David Chester to lead business initiatives in the United States. David Chester is a seasoned executive in the payments industry he's got over 20 years experience in the payments industry. And we believe he's a great addition to our team and definitely he is our vision and creating our unified part. And we believe he's going to contribute significantly for the company's growth.

[Lisa Thompson:]

So he is the also been tasked with going out to find portfolios to buy or is he in charge of operations?

[Oleg Firer:]

He's been tasked with expanding our distribution and looking at opportunities they will help us expand on distribution. That might require doing few oppositions here and there, but hopefully we're looking to expand our sales initiatives in North America and he is in charge of leading that effort.

[Lisa Thompson:]

So does that involve adding more sales people or is that just looking for partners?

[Oleg Firer:]

It's both, it's creating our selective direct distribution teams and expanding our indirect sales.

[Lisa Thompson:]

Great. Okay well sound like everything's on plan I'm glad PayOnline is finally done and in the numbers and we can see it. So keep up the good work, looks like a good quarter and hopefully it won't be as messy next quarter.

[Lisa Thompson:]

Thank you Lisa we hope to do and I promise that we have completed PayOnline in the second quarter so we've so far tried to deliver on our promise.

[Lisa Thompson:]

Great thank you. Thanks for taking all my questions.

[Oleg Firer:]

Thanks Lisa.

[Operator:]

Thank you [Operator Instructions] and at this time I'm showing no further questions. I'd like to turn the call back over to management for any closing remarks.

[Oleg Firer:]

Again I want to thank everyone for participating on our call today and wish everyone a great week. Thank you.

[Operator:]

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone have a great day.