By Lisa Thompson
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Net Element (NETE) continues to make progress growing revenues and reducing losses. While the going has been slow, the company’s goal for 2019 is to reach cash flow breakeven followed by profitability. Certainly the recent acquisition of JetPay at 2.9 times sales was a clear indication that a profitable processing business is valuable in the M&A market and highlights how undervalued Net Element is. Its tragic flaw has been operating losses. With organic growth and new products such as third party processing for banks in Russia and a new cannabidiol vertical market offering, there could be added opportunity to accelerate revenues in 2019.
Total revenues for Q3 increased 15.7% year over year to $17.2 million from $14.9 million. All of the growth was organic. North America grew 18.8% to $15.6 million from $13.1 million a year ago. The international segment declined 7.1% in the quarter from a year ago to $1.7 million, and was down $394,000 sequentially from Q2. The decline in international revenues was due to the decision to exist the mobile payment market in Russia. Taking that business out of 2017 numbers, revenues would have been up 2.7%. Sequentially, international had been steady, at $2 million per quarter for the previous three quarters but it dipped slightly due to seasonality.
Total gross margin increased to 15.6% from 14.4% a year ago, and up significantly from the low of 11.4% in Q4 2017. Margins for North America increased slightly to 14.8% from 14.1% last year, while international margins increased to 22.4% versus 16.9% as cost savings from the consolidation of Russian operations bore fruit.
Operating expenses were flat with last year and with the increase in gross margin dollars, the operating loss declined to $0.8 million versus $1.3 million in 2017.
Other expense declined $200,000 with approximately half due to reduced interest expense as debt was paid down compared with a year ago.
With this, the operating loss and the net loss were both $0.9 million compared to a loss of $1.7 million a year ago.
This quarter there were 3.9 million average primary shares outstanding, while last year there were only 1.9 million, or 106% more than last year. As of November 14, 2018, that number was still 3.9 million shares.
The adjusted non-GAAP operating loss was $0.9 million versus $1.6 million last year. The adjusted non-GAAP loss per share, taking out stock-based compensation, declined to a loss of $0.23 per share versus a loss of $0.84 per share.
During the quarter, net cash declined by $3.5 million sequentially, primarily due to the purchase of a portfolio. Net Element now has $2.6 million in cash, negative working capital and $6.0 million in debt. In its 10Q filing, the company indicated it needs $6 million in cash to fund the next twelve months.
Events In the Quarter
On July 31, 2018, Net Element acquired a portfolio from a partner for $2.7 million.
Aug. 09, 2018 Net Element announced a partnership agreement with Payment Club of Garden Grove, California
After the Quarter Ended
Net Element to Partner With Sputnik Bank to Bring Third Party Bank Processing to Russia
On October 2nd, Net Element announced a memo of understanding with Sputnik Bank of Russia to launch a new business offering third party processing to other banks in Russia. This agreement will not be finalized until its passes regulatory approval in Russia, which is expected some time in the fourth quarter of 2018. This approval is the only thing keeping the deal from being signed as all the terms have already been agreed upon. Sputnik will be the first entity to offer third party processing in Russia and it should fill a much-needed demand.
Net Element Launches a Cannabis Vertical Market Product
On October 22, Net Element announced the launch of a secure and compliant payment processing offering aimed at the legal cannabis industry, also called cannabidiol (CBD.) Payment processing and compliance for the legal cannabis industry has become increasingly complex; Unified Payments is addressing the challenges by offering a compliant, seamlessly integrated payment solution that makes it simple to transact. This product has been show at trade shows and has gotten great interest. This market is slightly different as a vertical as the banks have to approve the payment processing. Net Element has already signed some customers and is beginning to on board them.
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By Lisa Thompson