Net Element : Zacks Small-Cap Research

Zacks Small-Cap Research

November 17, 2020

Lisa Thompson

Sponsored Impartial - Comprehensive

312-265-9154 [e-mail]

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Net Element Inc.	(NASDAQ: NETE)
Net Element Q3 Shows Sequential	OUTLOOK
Rebound as the Merger Proceeds

Using the electric vehicle peer valuation of 10x EV/sales, and owning 15-21.7% of the post merger company the company could be worth $30.00 per share once the deal closes and twice that by 2023.

Current Price (11/16/20)	$7.35
Valuation	$30.00

Net Element signed an agreement to merge with Mullen Technologies, an electric vehicle assembler and manufacturer, and plans to divest its payment processing business before year-end. We expect the Mullen merger to close in Q1 of 2021.

At its current enterprise value of $43.6 million, the stock is getting no premium for its pending merger and is valued only on its card processing business.

SUMMARY DATA

52-Week High

52-Week Low

One-Year Return (%)

Beta

Average Daily Volume (sh)

Shares Outstanding (mil)

Market Capitalization ($mil)

Short Interest Ratio (days)

Institutional Ownership (%)

Insider Ownership (%)

Annual Cash Dividend

Dividend Yield (%)

5-Yr. Historical Growth Rates

Sales (%)

Earnings Per Share (%)

Dividend (%)

P/E using TTM EPS

P/E using 2020 Estimate P/E using 2021 Estimate

$16.67	Risk Level	High
$1.56	Type of Stock	Small Growth
96.0	Industry	Internet Commerce
1.6
613,195

ZACKS ESTIMATES

4.8

$34	Revenue
(in millions of $)
0.1
	Q1	Q2	Q3	Q4	Year
7
	(Mar)	(Jun)	(Sep)	(Dec)	(Dec)
13
2018	16.0 A	16.5 A	17.2 A	16.1 A	65.8 A
$0.00	2019	15.0 A	16.5 A	16.8 A	16.6 A	65.0 A
0.00	2020	15.8 A	13.7 A	16.7 A	16.7 E	63.0 E
	2021					68.0 E

11.2 Earnings Per Share

N/A	(Non-GAAP EPS before non-recurring items)
	Q1	Q2	Q3	Q4	Year
N/A
	(Mar)	(Jun)	(Sep)	(Dec)	(Dec)
N/M	2018	-$0.40 A	-$0.23 A	-$0.23 A	-$0.22 A	-$1.07 A
2019	-$0.28 A	$0.11 A	-$0.24 A	-$0.35 A	-$0.76 A
N/M	2020	-$0.32 A	-$0.08 A	-$0.28 A	-$0.21 E	-$0.88 E
N/M	2021					-$0.08 E
	Zacks Projected EPS Growth Rate - Next 5 Years %	5.0

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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.

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Update on Mullen Technologies Transaction

Net Element is still diligently working on completing the transaction with Mullen Technologies. Mullen is still in process of an audit and the S-4 document is being drafted. We expect to see it filed by year-end.

Mullen Technologies itself has been progressing on its plans to sell and produce electric vehicles in the US. It started on construction of its pilot manufacturing facility in October and started also taking pre- orders on its $55,000 MX-05 fully electric SUV then. It is repurposing its high voltage battery R&D center as a pilot facility for its line of SUVs. The construction is planned for completion by April 2021 and we have no information that that timeline has changed. There the MX-05 SUVs will be assembled to be delivered to customers by the second quarter of 2022. The facility is designed to assemble as many as a thousand SUVs annually with other models possible later. The company said it plans to hire 100 people to assemble the SUV, the battery, conduct R&D, and provide warehousing. Once completed the plant will build prototypes that will we used to get government approval and certification, a process that should take 16 months. After that, the company could begin deliveries to consumers. Customers can also pre-order the imported Dragonfly K50 super sports car from Mullen.

VALUATION

Overview of Reverse Merger Transaction with Mullen Technologies

Net Element and Mullen have a definitive deal for a triangular reverse merger with Mullen Technologies, a private company based in California. The closing of the transaction is conditional on the satisfactory completion of due diligence, shareholder and NASDAQ approval, and the completion of a capital raise of $10 million. We are in the due diligence phase.

Figure 1. Mullen MX-05

Source: Mullen Technologies

Net Element shareholders are expected to own between 15% and 21.7% of the surviving company. If Mullen can reach revenues of $100 million in the next 24 months, it is entitled to another 5% of the shares leaving Net Element shareholders with 10%. If revenue is less than $80 million, then the Net Element shareholders will get another 5% leaving Mullen shareholders with 80% of the fully diluted common shares

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of the company. NETE shareholders can end up with an additional 6.7% of the depending on the financing NETE brings to the closing.

At Net Element s current enterprise value of $43.6 million (using a $7.27 stock price) this puts the entire valuation of Mullen Technologies at between $201 million and $291 million. We will get financial information on the privately held Mullen once the S-4 is filed in the next few weeks.

Until then, we can look at the valuations of other EV companies and (taking out Nikola), they trade at an average of 12.2 times sales. If Mullen can produce and sell 5,000 MX-05 SUVs at $55,000 per car that is revenue of $275 million add to that used car sales of maybe $40 million, and 200 Dragonflys at $150,000 or another $30 million. This adds to a conservative $345 million. 12.2 times that is an enterprise value of $4.2 billion by 2023. Keep in mind the company should need at least another $400 million to get there and we expect much of that should be loans.

If Net Element ends up post merger with 50 million shares outstanding, EV per share could be $70 per share by 2023 with no further equity dilution. Discounting that for risk and dilution and time, we could easily see a current share price over $30 per share once the deal closes.

	Ticker		Gross		Revenue	Revenue	Revenue	EBIDTA	EV/21E	EV/20E	EV/LTM			Included	Enterprise
Company		EBITDA Margin	%	2021E	2020E	LTM	Margin	Sales	Sales	Sales	EV/GM EV/EBITDA	in Average?	Value
Kandi Technologies	KNDI	3	25	24%	137	78	106	3%	3.7	6.6	4.8	20.1	155.6	y	512
Li Auto	LI	NA	10	6%	2,580	1,310	173	NA	11.9	23.4	177.4	3187.5	NA	y	30,600
NIO	NIO	NA	NA	NA	4,080	2,280	1,387	NA	15.1	27.0	44.3	NA	NA	y	61,500
Nikola	NKLA	(0)	0	176%	76	0	0	-214%	98.2	NM	NM	35545.0	-29262.6	y	7,500
Tesla	TSLA	4,020	4,070	14%	44,830	30,850	28,180	14%	8.6	12.5	13.7	95.1	96.3	y	387,000
Workhorse Group	WKHS	(22)	(5)	-736%	133	9	1	-2936%	18.4	263.7	3295.0	-447.9	-112.2	y	2,450
Xpeng	XPEV	NA	(558)	-106%	2,020	783	526	NA	15.7	40.4	60.1	-56.7	NA	y	31,620
Average									12.2	62.3	599.2				98,014

INVESTMENT THESIS

Net Element is in the process of a reverse merger and has plans to sell off its payment processing business. If the deal goes according to plan, Net Element shareholders will own between 15% and 21.7% of the survivor company.

Mullen Technologies is an electric car vendor that is raising money to build an assembly plant in the US for cars that are already being produced and sold in China. Its first model is expected to be delivered in the US in the first half of 2021. This transaction should make the required capital raising process faster, less costly, and require less regulatory approval.

The S-4 will provide more information allowing investors to see the inherent value of Mullen and could compel the stock price higher.

Net Elements current valuation is based solely on its value as a payment processor leaving little down size for investors and much upside as business returns to normal after pandemic lockdowns are lifted.

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