NETE: Net Element is Considering Strategic Alternatives To Unlock Shareholder Value

By Lisa Thompson

NASDAQ:NETE

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The most important recent news is that the Board of Directors of Net Element (NASDAQ:NETE has decided to explore strategic alternatives to further unlock value for shareholders. This includes a sale of the company, licensing of its technology, spin-offs, or business combinations. Until there is a definitive decision, management does not plan to discuss the efforts. Certainly the public market has not put much of a valuation on the company and the value of its portfolios alone is worth more than is reflected in its current enterprise value.

Q1 2020 Results Were Much Better than Expected

Q1 came in better than expected as Net Element onboarded new customers in January and February and reaped a full quarter of revenues from customers it had onboarded in November and December. Business for the first two months of the quarter were very strong and this made up for weakness at the end of March. Transactions really dropped off in April and have made a slight comeback since then, giving hope that that was the bottom. While some customers begin to open up, the company fears others will be throwing in towels due to irreparable damage. In the restaurant vertical, Net Element has been hurt by the popularity of GrubHub delivery, because when their customer's orders go through that service, GrubHub get the transaction rather than Net Element. It may take another six months from now to see where it all shakes out. Q2 will be bad, but could be the bottom. We are forecasting year over year sales down 35%.

Q1 2020 Results

Net Element grew revenues 5.3% in Q1 to $15.8 million compared with $15.0 million in Q1 2019. North American sales increased 5.5% year over year to $15.2 million, while international was flat year over year at $683,000.

Margins for North America declined to 15.4% versus 18.1% a year ago as competition stiffened. International sales margins increased to 30.3% versus 28.1% a year ago despite being at the same revenues level, as there was a reduction of credit card exchange fees in Russia from 1.7% to 1%.

The operating loss was $1.0 million versus a loss of $0.8 million last year. EBITDA for the quarter was a negative $221,000 compared with a positive $63,000 last year.

The GAAP loss was $1.4 million versus last year's $1.1 million. The non-GAAP loss was $1.3 million versus a non-GAAP loss of $1.1 million in Q1 2019.

The non-GAAP loss per share was $0.32 per share compared with a loss of $0.28 per share last year.

This quarter there were 4.1 million average primary shares outstanding, compared to 3.9 million last year. On March 25, 2020, the share count was still 4.1 million shares.

On March 31, Net Element had $606,672 in cash, negative working capital of $2.6 million and $9.3 million in debt down from $9.4 million last quarter. Net Element moved quickly to submit two applications to the government for aid. One was for the Paycheck Protection Program, which it received in May in the amount of $491,492. It was also approved for the $150,000 the EIDL loan, which provides a 30-year loan with a 3.5%. In addition Russia has a stimulus plan and the Russian entities have applied there for whatever they qualify. In Q1 2020, Net Element had negative cash flow of $1 million, and negative free cash flow of $1.4 million after paying for commissions and equipment.

While we do not know the outcome of any possible strategic alternative valuations we do know that even using the lowest peer valuation of 1.2x EV/2020 estimated sales, the stock would be worth $15.80 per share.

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