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NETE: Q1 2018 Results Show Revenue Growth Declining Losses

By Lisa Thompson

NASDAQ:NETE

Net Element, Inc.'s (NETE) total revenues for Q1 increased 18% year over year to $16.0 million from $13.6 million, despite a 22% decline in international revenues. North America grew 27.4% to $14 million, sequentially up from Q4 and defying typical seasonality. With additional capital the company has been able to spend on growth. In addition, transactions are in larger dollar amounts as Net Element focuses more on eat-in dining and retail, which generate higher bills. The international segment declined 22% in the quarter from a year ago to $2 million, but was sequentially flat with Q4. The combined Russian operations are now stable and should begin to show growth again.

During the quarter of 2018, Jon Narjarian of CNBC’s Halftime Report and Fast Money and Jonathan Fichman, a fintech executive joined the board of the company.

Netevia, Net Element’s proprietary multi-channel payments platform was launched in the quarter. Net Element will continue to add features to Netevia and is working to integrate blockchain into its system although this may take a while as the blockchain ecosystem matures and is put into practical applications. The company joined the Enterprise Ethereum Alliance, the world's largest open-source blockchain initiative with over 250- member companies. In January, Net Element completed a $7.55 million PIPE with a New York-based family office to provide capital specifically for investment blockchain technology platforms. 

Total gross margin declined to 14.8% from 15.5% a year ago, but rebounded from Q4’s 11.4%. Margins were flat for both segments, but the lower margin US business was a bigger percent of total sales causing the decline.

Total operating expenses were reduced by $1 million to $3.4 million from $4.4 million. Half a million dollars of the decline was in stock-based compensation, and $400,000 in SG&A. SG&A is benefiting from the reduction of staff, rent, and consulting fees primarily in Russia due to the reorganization. The operating loss decreased to $1.0 million from $2.3 million a year ago.

Interest expense decreased by $26,000 in Q1 2017 to $243,000, of which $226,000 was in cash. Other expenses were $350,813. These were from: a penalty charge of $75,506 paid to Esousa for not having a registration statement effective by March 31, 2018, plus a write-off of prepaid fees to Bunker Capital of $221,160 for the cancelled deal. While the Bunker write-off was a one-time event, there will be a further $225,000 expensed in Q2 for the Esousa penalty. The registration was delayed by the SEC and is not the fault of Net Element.

The net loss was $1.6 million versus $2.4 million in 2017.

This quarter there were 3.9 million average primary shares outstanding, while last year there were only 1.6 million, or 134% more than last year. As of May 14, 2018, that number was still 3.9 million shares.

The adjusted non-GAAP operating loss was $1.5 million versus $1.9 million last year. The adjusted non-GAAP loss per share declined to $0.40 per share versus a loss of $1.15 per share.

During the quarter the company reduced its cash by $2.1 million. It now has $9.2 million in cash and $6.5 million in debt. If it uses between $2 and $3 million in cash per quarter it will need to raise additional cash in the next 12 months.

The company expects to see sequential growth in revenues and continued margin improvement especially since the Russian operations have been streamlined and focused. Now that is has funding the company is refocused on bringing Aptito to Russia and possibly other countries. It is planning to work with established partners for marketing, at least one of which plans to white label Aptito under its name. In addition, the company has brought on a consultant at the cost of $300,000 to recommend changes to increase compliance with Sarbanes Oxley so that its material weaknesses in financial reporting are identified and fixed. This will likely involve adding more staff to accounting.

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