Q3 2019 Earnings Call

And gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

Welcome to the net elements third quarter 2019 financial results and business update conference call.

During today's presentation, all parties will be in listen only mode. Following the presentation. The conference will be open for questions.

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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 the protection under Safe Harbor for forward looking statements contain.

And in the private Securities Litigation Reform Act of 1995.

Actual results may differ from results discuss today and therefore, we refer you to a more detailed discussion of these risk and uncertainties in the company's filings with the FCC any projections as to the company's future performance represented by management include estimates today as November 15 2019.

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 Dot net element dot com.

Investor Relations page at this time I would like to turn the call Oh like fiber CEO I like please go ahead.

Good morning, everyone welcome to our third quarter 2019 financial and business update.

I would like to expend on our challenge is going to humans for the quarter I'd reporting all filings in the press release filed yesterday a.

Revenues were down approximately 2.4% of compared to the same period last year. This closer revenues made up.

Expected decline in our international transaction solution segment, an effort on it and an effect, although not unexpected industry wide change for enhanced car Association sponsoring bank compliance in certain merchandise categories for North American transaction, social second basic terms <unk>, starting with North American transaction social segment.

Certain merchants they were considered acceptable nonres merchant why the card associations, such a visa and Mastercard and sponsoring settlement banks are now consider prohibited categories and their accounts have to be media. We terminated. This resulted in a net loss of merchant account and revenues associated with it. We have however, immediately took action and we pay.

These revenues with the new category value added solutions, which include.

Licensing opportunities your blood from other service along with its suite of solutions, such as the people restaurant and retail management system unified MPOG mobile point of sale solution and zero pay our innovative platform, which allows merchants except transactions with local.

[noise] are the result of these efforts in the North American transaction solutions segment, our net revenues for the second one couple increased to $15.920 million a slight increase were $15.9 million for the same comparable periods. While our gross margin was approximately $2.74 million were 16.3% them that's revenue.

That's like increased from $2.68 million or 15.6% of net revenue of the over the course of the same comparable period.

$572000, all the new revenue for the quarters attributable to the value added solutions category up 50% over the same comparable period last year and $226000 a gross margin for 39.5% of net revenues an increase of 47% over the same comparable period.

Our quarterly results demonstrated the men for suite the value of the same thing with acceptance solutions fueled by the continued growth in transactions processed utilizing our proprietary and if you go platform. Despite the challenges we have experienced as part of the industry changes. In addition to the loss of revenue in our International solutions segment, we have demonstrated a continued and.

<unk> gross margin for North American transaction solution segment, and our ability to replace most goodness, we continue to execute our strategy with a focus on delivering long term value for shareholders.

He will be exploring strategic alternatives for certain markets you know international transaction social second continue we're working diligently to improve both the top and bottom line and reaching profitability.

Now I'd like to introduce Jeffery Ginsberg, that's almost chief financial Officer to review our financial results in more detail Jeff. Please proceed.

Thank you all leg and good morning, everyone.

We reported a net loss attributable to common stockholders of approximately 1 million or $24 per share loss.

For the Threed months ended September Thirtyth 2019.

As compared to a net loss of approximately $900000 or 23 cents per share loss for the three months ended September Thirtyth 2018.

The increase in net loss attributable to stockholders of approximately $100000 was primarily due to a decrease in the service fees of approximately $423000 a corresponding increase of approximately $362000 in amortization of client acquisition cost.

And then reversal of an over accrued liability of approximately $153000 reflected as other income.

Net revenues consist primarily of service fees and transaction processing net revenues were approximately $16.8 million in approximately $17.2 million for the three months ended.

10 to 32019 in 2018, respectively.

The decrease in net revenues is probably another related to our international transaction solution segment, which experienced competition certain economic challenges and the loss of the major customer. In addition growth in our North American transaction solution segment was offset by the wind down of certain much in categories due to the industry.

Why changes for enhanced card association and sponsoring compliance.

The gross revenue for the three months ended September Thirtyth, 2019 was approximately $2.7 million or 16.3% them net revenues as compared to approximately $2.7 million were 5.6 <unk> percent of net revenues for the three months ended September Thirtyth two down.

As an 18.

Well I never reason for the increase in the overall gross margin percentage was the result of North American transaction fees associated with the processing of transactions utilizing our self designated Ben.

Hi, and due to an increase in dollar volume processed as compared to prior comparable quarter.

Operating expenses were approximately $3.6 million for three months ended September Thirtyth 2019.

As compared to 3.4 million for the three months ended September Thirtyth 2018.

Operating expenses for the three months ended September Thirtyth, primarily consisted of selling and generally general administrative expenses of approximately $2.1 million.

Bad debt expense of approximately $400000 and depreciation and amortization expense of approximately $800000 operating expenses for the three months ended September Thirtyth 2018, primarily consisted of selling generally an administrative expenses of approximately 2.3 million dollar.

Bad debt expense of 600000, and depreciation and amortization expense of approximately $500000.

With that we conclude a formal comments for today operator, we're now ready to open the call for questions.

Thank you, Sir ladies and gentlemen, we'll now begin the question and answer session. As a reminder, if you had a question. Please press the star followed by the one on your Touchtone phone. If you would like to withdraw your question. Please press the pound symbol and if I using speaker equipment, you'll need to lift the handset before making a selection.

Our first question comes from the line of Lisa Thompson with Zacks investment research.

Your line is now open.

Good morning, Oh look good job.

Good morning, Good morning, Lisa.

So I haven't seen specific questions on what happened in the quarter I'd like to move.

Just a big picture strategy kind of question. So first off could you explain more specifically what happened with this.

Industry wide change explained it you know in late and when exactly this happen.

Sure. It's happened at the beginning of this year or we were to shutdown certain merchant category called came from a from visa Mastercard no sponsor sponsoring banks.

And the visa and Mastercard being the card associations sponsoring banks are just stuck them and banks that we use a we have our unique bankrate implication numbers.

And so we were told to shut down certain merchant categories and well do you know into in this industry. If you were told to shut it down there to shut it down and the reason is that those category codes are no longer something.

For processing by visa Mastercard, and we're not the only once affected right, but so right. There there's other companies in the industry that meets legends quota.

So do you know what how much of that you had in the fourth quarter of last year revenues from the cabin. Yes. We we have so we do have that number and we actually have we have we put it out there.

If we then it'll give with you.

We do have those numbers.

For Q4 to one coming up.

Oh into Q4, no I have the Q3 I do not have the yeah, no I thought we would definitely.

Yeah, Okay. The Q4 I do get it for you, but we already Oh, we set a.

Press release on just play said on the full we were we already replaced those revenues or wouldn't do would.

You ever thought solutions segment that we've been building so we'd have flow older products to the launching them and on the TV platform, we're licensing it out and so that's creating a lot of traction and Oh, we believe that's going to continue and Oh do you saw the margins are pretty healthy them.

Right. So valuation solutions, what do you define that as specifically is that like the property management stuff and decide include up no Oh, okay. So you dogs, including people. So we have the Ti Vo platform is though is a robot so oh merchant Melbourne platform, we have the front end in the Bakken the front end is a bit.

A little to the merchants to manage their transactions to do a load balancing on certain car types. Oh includes fraud management tool those are the some of the tools on the front on as well as marketing Oh data mining tools and the sounds artificial intelligence the build up for a full scoring and the backend.

It allows for our agents our value added resellers to manage their portfolios to manage the merchant relationships, who see the risk do see pretty much everything in real time, So it's a comprehensive front and back and black from the we have licensing on and that's the biggest line item Oh induct category right now.

In addition to that I'd also includes optical it also includes a unified I'm Park, which is our mobile Pos So oh application, but we are we we license out and that includes licensing it all to book value added resellers and directly to the merchants who would collect the licensing secret. In addition, it Olson.

Routes or a zero pay system, where we allow merchants the process Oh without the C rockets transactional fee and we also license.

The platform for Ti.

Okay that sounds good so I assume that that's going to continue to grow sequentially.

Correct, Yes, it is a new York.

So it's it's if they said we have demonstrated double digit growth.

And we will continue to do so and so you know with the margins you know we've we've always discuss margins. This type of business. It is onboarding a 39 help so merger.

Right Okay.

Just on international just pick on that I know, it's not a lot of dollars, but the margin was down a lot.

Like that to go back up is there something unusual that happened this quarter.

No well, it's a did the new merchant the we have on border because at the lower margin, but we also don't start up expenses, it's not that it's costing us a lot to maintain a business, but we are as I explained on the call due to the fact that we've been trying to secure some financing no international markets and we weren't able to secure differ.

Financing will be looking at strategic opportunities or for the second.

And the you know just broadly looking at a picture and seeing how we could monetize it or more for the shareholders and well we'll exhausted options.

Okay interesting.

Uh huh.

My question Oh.

Okay. So then I'm going to move on to my Big picture question. So it looks like this year.

It's going to kind of end up where you were last year.

So what do you feel like it's gonna take to just get you over that hurdle.

We get the profitability I know, you're really close as far as cash burn and it just seems like you need I don't know.

As a 3 million 5 million in revenues no no no no additional so so what do we know some no let's let's break it down a little so we have four actually improved our cash position our character burned by a lot Oh, no kind of looking there. This year on an EBITDA cash flows basis right now for the for the past quarter whereby hundred 50000.

Dollars.

Loss per month.

And dots improving on a month to month basis.

So we are aware, we're narrowing down the losses were still believe the when the trucks to.

Reach breakeven profitability very soon and with the with the new business that we're putting other high margins. We believe that's going to happen sooner than later and they said, we're very close it. So yes, we're comparing to last year. It. So it's a significant improvement it's 150000 wells versus you know I believe this time last year, we talk about 300.

Great. Okay. So that does looks a lot better.

Oh.

And so I'm just kicking thing on the Q4 last year you were down sequentially.

Because the seasonality it's at the same that you expect for this year or has your merchant mix changed.

No. We're not we're not expecting did the down we're expecting growth normal the old depends on how Christmas we're going to do but we're not.

Expecting a down quarter.

Okay, not sequentially or would you on older right fine.

Great. Okay, because I know in the past that you had like long time ago. He has a lot of schools and things that were closed in the fourth quarter I assume it that right. It will change, but just about dot dot that's changed that demographic has changed we no longer Oh, yeah, you you're right. We used to service. So some schools, we used to service some of those relationships.

We still service some of them, but it's more on a on the platform basis, rather than acquiring basis. So would so you know it's a fixed fee type of arrangement.

So we've we've already we've already seen dot dot com. So we're not seeing any any signs of decline for the fourth quarter.

At this point.

Oh, great I look forward to to seeing it then thank you. So much. That's so my question. Thank you Lisa.

Thank you, ladies and gentlemen, if there any additional questions. Please press the star followed by the one at this time.

You are using speaker equipment, you'll need to lift the handset definitely making a selection one moment. Please find next question.

And I'm showing no further questions at this time I'd now like to attend the call back over to management for closing remarks.

Thank you everyone for being on the call. This morning, please do not hesitate to confidence with any follow up questions that you might have have a great deal in the wonderful we can thank you.

Ladies and gentlemen that does conclude the net elements third quarter 2019 financial results and business update conference call. Thank you for your participation you may now disconnect.