Net Element (NETE) Zach's Small-Cap Research Report

Zacks Investment Research Page 2 scr.zacks.com WHAT S NEW Q3 2020 Revenues Improve Despite Continued Shutdowns in NY and California Net Element is showing surprising business strength despite lockdowns persisting in New York where it has a numerous customers in the restaurant business. Management claims the US economy is running on the Sunbelt and business could be gangbusters if shut down states would just open up. While it is impossible to predict when this might happen, it will someday at which point we expect Net Element business to rebound sharply. With 45% of its customers in the restaurant business this is the most important factor to improvements at Net Element s card processing volumes. Another meaningful factor is tourism, especially in Florida, which is impacted by people s perception of the safety of travel as well as the quarantine requirements in various states. Revenues did however improve sequentially despite these headwinds. Q3 revenues came in at $16.7 million down slightly from $16.7 million a year ago but up from $13.7 million in Q2 2020. North American sales were up1% year over year at $16.1 million, while international was down 26.1% to $662,000 from Q3 2019 s $896,000 and Q2 2020 s $741,000. Margins for North America declined to 12.4% versus 15.8% a year ago. International sales margins improved to 28.0% versus 25.8% a year ago. Total gross margin was 13.0% versus 16.3% a year ago. The operating loss was $1.9 million versus a loss of $0.9 million last year caused mostly by the $1.1 million in stock-based compensation in this year s quarter. The GAAP loss to common stockholders was $2.3 million versus last year s $1 million. All of the increase was due to stock-based compensation of $1.1 million in the 2020 quarter. The company always has one quarter with large stock-based comp and this year it was in Q3 while last year it was in Q2. The non- GAAP loss declined to $1.2 million versus $1.0 in Q3 2019. All of the other expense lines were down (other than stock-based compensation) as the company cut staff earlier in the year, except for loan loss provisions, which was $169,000 higher this year. The GAAP loss per share was $0.52 versus $0.24 while the non-GAAP loss per share was $0.28 per share compared with a loss of $0.24 per share last year. This quarter there were 4.5 million average primary shares outstanding versus 4.2 million last year. On November 11, 2020, the share count was 4.8 million shares. Balance Sheet On September 30, Net Element had $2.1 million in cash, working capital of $1.9 million and $10.2 million in debt up from $10.0 million last quarter. In the quarter Net Element received cash in three tranches of RBL promissory notes: On August 11, 2020, a gross amount of $707,000 in exchange for 66,190 shares of common stock. On August 21, 2020, a gross amount of $401,000 in exchange for 45,654 shares of common stock. On September 25, 2020 a gross amount of $426,000, in exchange for 50,000 shares of common stock. In Q3 2020, Net Element had negative cash flow of $892,000, and negative free cash flow of $1.5 million. The free cash flow was affected by changes in the lease and leasehold improvements as the company moved office space from one part of the building to another.