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READ THE FULL NETE RESEARCH REPORT
Since Q2 ended, the Net Element (NETE) announced two deals that should improve revenues and margins immediately. On July 31, 2018, Net Element acquired a portfolio from a partner for $2.7 million. Revenues from this portfolio had already been included in Net Element’s income statement, however now as the owner, Net Element will no longer pay the partner which will reduce the company cost of sales and increase gross margins in the North American segment. This acquisition is expected to generate well over $5 million in gross profitsover the next four years and expected to continue generating profits thereafter. Using linear arithmetic, this translates to $312,500 gross margin dollars per quarter.
Aug. 09, 2018 Net Element announced a partnership agreement with Payment Club of Garden Grove, California (www.paymentclub.com.) Payment Club offers subscription-based payment processing aimed at small businesses in the US who wish to pay a flat monthly fee for payment services and hardware. The deal is expected to add over $1.5 million in gross profits and corresponding revenues over the next four years. Net Element believes these revenues will be at higher gross margins than its current average. It is also providing a $5 million credit facility as part of Unified Payments' partnership program and financing program to fuel Payment Club’s growth.
Q2 2018 Results
Total revenues for Q2 increased 2% year over year to $16.5 million from $16.1 million. North America grew 5.9% to $14.4 million from $13.6 million a year ago. The international segment declined 19% in the quarter from a year ago to $2 million, again sequentially flat with Q1 and Q4 2017. The decline in international revenues was due to the elimination of the branded content business, which accounted for $684,000 of net revenues in 2017. Taking the branded content business revenues out of both years results in 11% year over year growth in international, and total revenue growth of 6.5%. Sequentially, international has been steady, at $2 million per quarter for the last three quarters.
Total gross margin declined to 16.1% from 17.5% a year ago, but up meaningfully from Q4’s 11.4%. Margins for North America declined slightly to 15.2% from 15.7% last year, while international margins dropped to 22.4% versus 27.0% without the higher margin branded product.
Q2 of this year and last year were remarkably similar with this year showing a decline in gross margin dollars of $100,000 and a decline in expenses of $100,000. The main difference was in other income, where the company reported gain of $674,000 for a number of charges including writing off the stock guarantee accrual for the acquisition of PayOnline of $312,000 and legacy payables $600,000, netted with an expense of $225,000 from the aborted Bunker Capital deal.
With this, the operating loss decreased to $1.0 million from $1.7 million a year ago.
The net loss was $0.9 million versus $1.6 million in 2017.
This quarter there were 3.9 million average primary shares outstanding, while last year there were only 1.8 million, or 118% 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, taking out stock-based compensation, but leaving in other expense, declined to $0.20 per share versus a loss of $0.85 per share.
During the quarter, net cash declined by $4.1 million. Net Element now has $6.5 million in cash and $6.5 million in debt. In its 10Q filing, the company indicated it needs $6 million in cash to fund the next twelve months.