By Lisa Thompson
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In the first quarter of 2019, Net Element (NETE) improved its margins significantly despite reporting down revenues for the very first time in its history. As a sign of improving profitability, EBITDA was a negative $38,500, a huge improvement over past quarters. Revenues declined 5.9% but gross margin was still up on a dollar and percentage basis. On a non-GAAP basis, the net loss was $1.1 million in Q1 2019 compared to a loss of $1.5 million in 2018. Each year the losses have been declining and we expect, with a return to revenue growth, economies of scale, and the company’s efforts in improving margins, 2019 operations will again cut those losses.
We expect Net Element should be able to achieve its plan to fund the company with current credit facilities (currently $11.1 million) 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. The company is currently at a $250,000 per month cash burn rate.
Total revenues for Q1 decreased 5.9% year over year to $15.0 million from $16.0 million. North America grew 2.8% to $14.4 million from $14.0 million a year ago. The international segment declined 66.1% in the quarter from a year ago to $684,000, and was down $251,000 sequentially from Q4 2018. The decline in international revenues was due to the decision to exist the mobile payment market in Russia and the loss of legacy clients, some of which went out of business. The company has re-boarded new business and expects international revenues to begin to grow sequentially although they have not replaced lost revenues as soon as expected. 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 again improved year over year and sequentially to 18.5% from 14.8% a year ago. Margins for North America increased significantly to 18.1% from 13.6% last year and benefited from the purchase of cash flow assets of Argus Merchant Services and Treasury Payments in December, the processing of transactions utilizing the company’s own self-designated BIN, and further acceptance of value-added services by its merchant customers. International margins increased to 28.1% versus 22.9% from cost savings from the consolidation of Russian operations.
Operating expenses were $3.6 million versus $3.4 million last year. This resulted in the operating loss declining to $0.8 million versus $1.0 a year ago.
Total other expense was $331,000 versus $594,000 last year.
The net loss declined to $1.1 million compared to a loss of $1.6 million a year ago.
This quarter there were again 3.9 million average primary shares outstanding, flat with last year. Management had been able to keep the primary share count flat since the beginning of 2018. On May 14, 2019, that number was 4.1 million shares.
The adjusted non-GAAP net loss, taking out stock-based compensation and one-time charges, was $1.1 versus $1.5 million last year. The adjusted non-GAAP loss per share, declined to a loss of $0.28 per share versus a loss of $0.40 per share a year ago.
During the first quarter EBITDA almost reached breakeven and was a slightly negative $38,500, a decrease of 94% compared to a negative $636,500 during the first quarter of 2018. In Q2 however there will be $1.5 million in stock based compensation recorded, which will affect EBITDA negatively.
Net Element now has $476,989 in cash, negative working capital of $2.7 million and $6.6 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.
In 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, however Sputnik did not get regulatory approval as it fell below capital requirements. Thereafter, PayOnline entered into an agreement with MOBI.Money CJSC, and VTB Bank as sponsoring and transaction clearing banks, which did get regulatory approval. This new financial services agreement for transaction clearing services will allow for greater scalability and sponsorship of PayOnline to card brands. Following the successful registration with card brands, PayOnline plans direct integrations with international payment networks (“IPNs”). PayOnline has identified several investors for financing a proposed venture and working to select the most capable financial partner for this venture.
We believe the company could grow revenues to $66.5 million in 2019 while decreasing losses. It is trading at an enterprise value of $28 million or 0.4Xs enterprise value to forecasted 2019 sales.
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By Lisa Thompson