By Lisa Thompson
READ THE FULL NETE RESEARCH REPORT
In 2018, Net Element (NETE) continued to make progress toward its 2019 goal of cash flow breakeven, followed by profitability. For 2018, revenues grew 10% but more importantly losses were almost halved. On a non-GAAP basis, the net loss was $3.8 million in 2018 compared to a loss of $7.0 million in 2017. Each year the losses have been declining and we expect with revenue growth, economies of scale, and the company’s efforts in improving margins, 2019 operations will again cut those losses. Most impressively was management’s ability to keep the share count flat all calendar year despite the average shares outstanding being up 97% year over year. We expect it should be able to achieve its plan to fund the company with current credit facilities through the next twelve months. If Net Element does reach cash flow breakeven and starts to pay down debt, we imagine the stock price will also appreciate.
We believe the company could grow revenues 6% to $69.5 million in 2019. It is trading at an enterprise value of $29 million or 0.4Xs enterprise value to forecasted 2019 sales. If NETE could achieve our forecasts without further common stock dilution and no incremental debt, we believe its common stock could be worth $28.45 per share by next year based on an industry average valuation of approximately 11.3xs enterprise value to gross margin if the company achieves breakeven EBITDA results.
Total revenues for Q4 increased 4.1% year over year to $16.1 million from $15.5 million. All of the growth was organic. North America grew 12.8% to $15.2 million from $13.3 million a year ago. The international segment declined 53.8% in the quarter from a year ago to $0.7 million, and was down $717,000 sequentially from Q3. The decline in international revenues was due to the decision to exist the mobile payment market in Russia and the loss of legacy clients. The company has re-boarded new business and expects international revenues to begin to grow sequentially. New revenues in international are now primarily from companies headquartered outside of Russia doing cross border transactions. Net Element provides them with multi-currency payments and fully integrated solutions to their websites, and in some cases omni-channel or multi-channel processing as well.
Total gross margin in the quarter increased to 15.4% from 11.4% a year ago. Margins for North America increased significantly to 14.5% from 10.3% last year, while international margins increased to 29.8% versus 18.4% as cost savings from the consolidation of Russian operations bore fruit. North American margins benefited from the processing of transactions utilizing the company’s own self-designated BIN and further acceptance of value-added services by the merchant customers.
Operating expenses were $3.6 million versus $5.5 million last year with the majority decline being $2.1 million less in stock-based compensation and $400,000 less in G&A. Overall this resulted in the operating loss declining to $1.2 million versus $3.7 a year ago.
Total other expense was virtually flat with last year.
The net loss declined to $1.5 million compared to a loss of $4.1 million a year ago.
This quarter there were 3.9 million average primary shares outstanding, while last year there were only 2.8 million, or 37% more than last year. Management has been able to keep the primary share count flat this entire year. As of March 29, 2019, that number was still 3.9 million shares.
The adjusted non-GAAP net loss, taking out stock-based compensation and one-time charges, was $701,000 million versus $2.3 million last year. The adjusted non-GAAP loss per share, declined to a loss of $0.18 per share versus a loss of $0.82 per share.
Net Element now has $1.6 million in cash, negative working capital of $1.5 million and $6.8 million in debt. In its 10K filing, the company indicated it needs $3.3 million in cash to fund the next twelve months, which it plans to do with the debt facilities it already has in place.
Events In the Quarter
On December 27, 2018, Net Element acquired cash flow assets from Argus Merchant Services and Treasury Payments for $1.42 million, which are expected to generate well over $4 million in gross profits over the next four years and expected to continue generating profits thereafter. In addition, the total billing commitment by Argus over the next 5 years is expected to generate over $19 million in gross margin for the Net Element.
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. In return for Net Element’s expertise, Sputnik will give Net Element 25% of its outstanding stock and potentially, a per transaction fee. Sputnik is expected to pay for all the expenses for the venture. This agreement will not be finalized until its passes regulatory approval in Russia. The company expects to have a product available for sale within 12 months of the deal signing.
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 market is slightly different as a vertical as the banks have to approve the payment processing. The company has already signed customers for this offering.
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By Lisa Thompson