In the second quarter of 2019, Net Element (NASDAQ:NETE) beat both our top and bottom line non-GAAP numbers. Total revenues were flat with last year; North American sales increased 9.1% year over year while international improved sequentially, but was down 63% year over year.
Margins for North America declined to 14.6% versus 15.2% a year ago and 18.1% in Q1 2019. Although down year over year, International sales improved 10% sequentially and margin grew to 39% from 22% a year ago, and 28% in Q1 2019, as sales ramped for a major new merchant customer. The company is finally reaping the benefit of the restructuring of its operations and its change in strategy last year and should start to grow in the fourth quarter.
While revenues and gross margin were virtually flat with a year ago, the company continues to reduce costs in SG&A and amortization. This quarter saw $2 million stock-based compensation compared with only $23,000 in last year’s quarter and only $142,000 for all of 2018. Because of this, the operating loss was $2.6 million versus $1.4 million last year. On a non-GAAP basis, without stock-based compensation, the loss was only $604,000 compared to last year’s $1.4 million and Q1’s $803,000. It is apparent that the company is doing its best to control costs and it is working.
Most importantly we are looking for Net Element to reach cash flow breakeven. EBITDA for the quarter was again positive at $144,000 compared with a negative $727,000 last year. The company is still burning cash at $250,000 a month after paying cash taxes and interest.
The GAAP earnings surprise came from other income. In the quarter the company took a one-time gain, reversing a reserve from PayOnline. Back in 2016, Net Element entered into an amendment to the PayOnline acquisition agreement to assume $1,433,475 of certain refundable merchant deposit reserves. The accrual consisted of an obligation of approximately $1.1 million for refundable merchant reserves. At June 30, 2019, management determined that any potential future claims from these certain merchants for these reserves were remote and reversed the amounts that remained in accrued expenses and recognized other income of approximately $1.1 million. Many of the merchants are now out of business now, and with the shut down of the subsidiary, legal concluded there was little liability for Net Element. With this reversal, the loss for the quarter was reduced to $1.5 million.
Taking out the $1.1 million gain, and the $2.0 million in stock-based compensation, the non-GAAP loss was $0.6 million or $0.15 per share compared with $0.9 million and $0.23 per share last year. This is the smallest quarterly non-GAAP operating loss in the company’s history and is evidence that the company is on track toward profitability with increasing revenues.
This quarter there were 4.2 million average primary shares outstanding, compared to 3.9 million last year, up 8.9%. On August 14, 2019, the share count had declined slightly to 4.1 million shares.
On June 30, Net Element had $840,170 in cash, negative working capital of $1.0 million and $7.5 million in debt up from $6.6 million last quarter. It had $10.1 million in available credit facilities. In its 10K filing, the company indicated it would need $3.3 million in cash to fund the next twelve months. This quarter Net Element had positive cash flow of $641,000, and free cash flow of $27,000. If Net Element can achieve it breakeven goals, it may be able to raise equity at a much higher valuation and pay down debt.
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