SOURCE: Net Element, Inc.

Net Element, Inc.

March 31, 2015 09:03 ET

Net Element Reports 2014 Annual Results and Provides Strategic Update

2014 Debt Reduced From $31 Million to $3 Million, G&A From $12 Million To $7 Million, Excluding Non-Cash Items

MIAMI, FL--(Marketwired - Mar 31, 2015) - Net Element, Inc. (NASDAQ: NETE) ("Net Element" or the "Company"), a provider of global mobile payment technology solutions and value-added transactional services today reported financial results for the fiscal year ended December 31, 2014.

Key milestones (2014 - 2015 YTD):

  • Improved access to credit to implement strategic initiatives; established $10 million credit facility in the U.S. and enhanced our Russian borrowing capacity. New financing of $10 million triggered conversion of $11 million of debt to equity

  • Advanced service offering expansion by agreeing to acquire mobile payment technology innovator PayOnline

  • Reorganized mobile payments business -- positive operating cash flow based on improved management of account receivables and restructure of business operations. Positive working capital allowed self-financing of growing mobile payments business during 2014

  • Migrated to proprietary billing system for mobile business operations

  • In January 2015, our mobile payments business exceeded 1 million recurring mobile subscribers

  • Eliminated $15.9 million of debt obligations in September 2014 through a debt-to-equity swap

  • General & administrative expenses reduced by $5 million including $1 million in salaries and $2 million in professional fees

  • Announced Apple Pay™ availability in Company's U.S. POS terminal network

  • Enhanced board with appointment of financial services veteran William Healy and payments technology industry veteran Drew Freeman

2015 Initiatives:

  •  PayOnline closing and integration

  •  Mobile payments expansion into Middle East and India

  •  Expand Russia service offerings

  •  Creation of omni-channel, payments-as-a-service platform that can be profitably adapted to local businesses globally

"Now that we have strengthened our balance sheet by eliminating most of our debt and created a restructured operational foundation, we can advance our plan to grow market share, accelerate sales and expand profitability," commented Oleg Firer, CEO.

"Our growing traditional and mobile technology base, our strengthened balance sheet and strategic emphasis on Small to Medium Enterprise (SME) are competitive advantages that we expect to capitalize on during 2015."

2014 Operating Results

In an effort to present a more comparative period on period analysis, we have adjusted net loss to remove the effects of non-recurring expenses from discontinued operations, non-cash share based compensation, goodwill impairment, debt extinguishment and debt restructuring.

The adjusted loss from continuing operations for the year 2014 was $6.9 million, or a loss of $0.19 per share, as compared to an adjusted loss from continuing operations of $19.4 million or a loss of $0.68 per share, for the year ended December 31, 2013. The adjusted loss from 2014 primarily related to general and administrative expenses (primarily salaries and professional fees) of $7.1 million, interest expense of $3.7 million and depreciation and amortization of $2.4 million. This was offset by a recovery of bad debts of $1.2 million (net) resulting primarily from the recovery of Russian receivables and advances previously reserved in 2013.

Net revenues for the year 2014 were $21.2 million, as compared to $18.7 for the year 2013. The increase in net revenues is substantially due to an increase of $4.6 million in transaction processing revenues offset by $2.1 million of reduced Russian mobile payment processing revenues as we restructured our Russian business with new management and its own proprietary billing system starting late 2013 and concluding in April 2014. Russian mobile payment revenues were $1.8 million for the year 2014 compared to $3.9 million for the year 2013. The transaction processing services business was acquired in April 2013 and the operating results for 2013 reflect 8.5 months of transaction processing services activity.

Our gross margin for the year 2014 was $5.3 million versus $5.4 million for the year 2013. While the dollar value of gross margin remained consistent year over year, the mix of business was different. For 2014 our transaction processing gross margin was $0.7 million higher than in 2013 and the mobile payments gross margin decreased by $0.8 million between 2013 and 2014. The change in margin mix reduced our overall gross margin from 29% of revenues to 25% of revenues as detailed below. The mobile payments gross margin for 2014 and 2013 was affected by penalties assessed in 2013 and successfully abated during 2014. Excluding $0.2 million in penalties, gross margin for mobile payments was 92% in 2014 and 73% in 2013. Mobile payment margins were higher in 2014 (as adjusted) due to changes in our pricing and business operations.

                             
                             
    Twelve           Twelve            
    Months Ended           Months Ended         Increase /  
Source of Revenues   December 31, 2014     Mix     December 31, 2013   Mix     (Decrease)  
                                   
  Transaction Processing Services   $ 19,373,877     91 %   $ 14,801,383   79 %   $ 4,572,494  
  Mobile Payments     1,820,584     9 %     3,948,087   21 %     (2,127,503 )
    Total   $ 21,194,461     100 %   $ 18,749,470   100 %   $ 2,444,991  
                                   
Cost of Revenues                                  
                                   
  Transaction Processing Services   $ 15,925,924     82 %   $ 12,094,998   82 %   $ 3,830,926  
  Mobile Payments     (42,243 )   -2 %     1,279,671   32 %     (1,321,914 )
    Total   $ 15,883,681     75 %   $ 13,374,669   71 %   $ 2,509,012  
                                   
Gross Margin                                  
                                   
  Transaction Processing Services   $ 3,447,953     18 %   $ 2,706,385   18 %   $ 741,568  
  Mobile Payments     1,862,827     102 %     2,668,416   68 %     (805,589 )
    Total   $ 5,310,780     25 %   $ 5,374,801   29 %   $ (64,021 )
                                       
                                       

General and administrative expenses, excluding non-cash compensation expense, were $7.1 million for 2014 as compared to $11.6 million for 2013. This was primarily due to reductions of $1.1 million in salaries and benefits; $1.7 million in professional fees; $0.6 million in transaction gains and losses and $0.4 in other general and administrative expenses. The reduction in salaries and benefits is due to net headcount reductions; professional fees are lower due to higher legal fees from our reorganization in 2013 after the Company's merger transaction with Unified Payments.

Net Element's recovery from loan loss provision was $1.2 million for 2014 as compared to an expense provision of $7.6 million of expense for 2013, representing a decrease of $8.8 million year over year. The Company recorded a net recovery in provision for loan losses for 2014 which consisted of a favorable adjustment to the bad debt allowance of $1.6 million that was associated with Russian operations, offset by loss provision for net ACH rejects of $0.4 million in U.S. credit card processing business. We reported a $7.6 million loss provision for 2013 primarily due to receivables and advances from Russian aggregators that were deemed uncollectible.

Cash provided by operating activities of continuing operations was $2.3 million for 2014 compared to cash used in operating activities of $9.8 million for 2013. Positive operating cash flow for 2014 was primarily due to the $7.9 million reduction of accounts receivable and aggregator advances offset primarily by $1.3 million of increases in accounts payable and accrued expenses.

Cash used in investing activities for 2014 was $1.8 million primarily due to $1.0 million used to purchase merchant portfolios and the write off of $0.8 million in fixed assets resulting primarily from closure of our Ukraine development office. For 2013, $4.1 million of cash was provided by investing activities primarily resulting from $4.9 million in collections of notes receivable offset by approximately ($0.8) of acquisition related costs.

Total liabilities were $8.8 million at December 31, 2014 compared to $37.9 million at December 31, 2013. The Company's total debt was $3.3 million at December 31, 2014 versus total debt and related party payables of $31.0 million at December 31, 2013, representing a reduction of $27.7 million. Net Element has significantly reduced its debt and related interest expense. On September 15, 2014, the Company completed a debt exchange program which eliminated $15.9 million in debt obligations. Pursuant to the terms of our convertible debt agreement, we converted $11.2 million of debt to equity upon obtaining a new $10 million credit facility. Additionally, Net Element's factoring lines were $0 at December 31, 2014 as compared to $8.5 million at December 31, 2013. We were able to successfully finance our Russian mobile payment business with operating cash flow generated internally. Our factoring facilities allow TOT Money to assign to the bank certain (but not all) of its accounts receivable suitable to the lender(s) under such facilities as security for financing. Accordingly, the amounts of our draws under such facilities from time to time will depend on the amounts of the accounts receivable suitable for such assignment as of the time we choose to draw under such facility. We have not drawn any funds under such credit facilities during 2014.

Reconciliation of Non-GAAP Financial Measures and Regulation G Disclosure

To supplement its consolidated financial statements presented in accordance with United Stated generally accepted accounting principles ("GAAP"), the Company provides additional measures of its operating results by disclosing its adjusted loss on a continuing operations basis and adjusted gross margin excluding penalties. Adjusted loss on a continuing operations basis is calculated as loss from continuing operations excluding discontinued operations, non-cash share based compensation, goodwill impairment, debt extinguishment and debt restructuring costs. Net Element discloses this amount on an aggregate and per share basis. Additionally, the Company is disclosing its mobile payments gross margin adjusted for penalties charged and recovered to analyze the trend of gross margin without penalties. These measures meet the definition of non-GAAP financial measures. The Company believes that application of these non-GAAP financial measures is appropriate to enhance the understanding of its historical performance through use of a metric that seeks to normalize period to period earnings and gross margin.

This press release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Pursuant to Regulation G, a reconciliation of these non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP for the twelve months ended December 31, 2014 and 2013 is presented in the following Non-GAAP Financial Measures Table.

Non-GAAP Financial Measures

                      Debt        
                      Extingushment        
          Share-       Intangible   and     Adjusted  
          based   Goodwill   Asset   Debt     Non-  
    GAAP     Compensation   Impairment   Impairment   Restructure     GAAP  
Twelve Months Ended December 31, 2014                                          
  Loss from continuing operations   $ (10,214,766 )   $ 4,267,334   $ -   $ -   $ (980,939 )   $ (6,928,371 )
  Basic and diluted earnings per share from continuing operations   $ (0.27 )   $ 0.11   $ -   $ -   $ (0.03 )   $ (0.19 )
  Basic and diluted shares used in computing earnings per share from continuing operations     37,255,052                                 37,255,052  
                                             
                                             
                             
                      Debt      
                      Extingushment      
          Share-       Intangible   and   Adjusted  
          based   Goodwill   Asset   Debt   Non-  
    GAAP     Compensation   Impairment   Impairment   Restructure   GAAP  
Twelve Months Ended December 31, 2013                            
  Loss from continuing operations   $ (48,009,020 )   $ 16,549,820   $ 11,200,000   $ 872,354   $ -   $ (19,386,846 )
  Basic and diluted earnings per share from continuing operations   $ (1.69 )   $ 0.58   $ 0.39   $ 0.03   $ -   $ (0.68 )
  Basic and diluted shares used in computing earnings per share from continuing operations     28,470,169                               28,470,169  
                                           
                                           

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Any statements contained in this press release that are not statements of historical fact may be deemed forward-looking statements. Words such as "continue," "will," "may," "could," "should," "expect," "expected," "plans," "intend," "anticipate," "believe," "estimate," "predict," "potential," and similar expressions are intended to identify such forward-looking statements. These forward-looking statements include, without limitation, whether the Company's access to credit will result in the ability to implement its strategic initiatives, whether the PayOnline transaction will be consummated and if so, will result in an advanced service offering, whether the Company's Board has in fact been improved by the appointment of the 2 new Directors, whether any of the referenced 2015 initiatives will materialize, whether the Company's plan to grow market share, accelerate sales and expand profitability will materialize, whether the growth in user base and the strategic emphasis on Small to Medium Enterprise (SME) result in competitive advantages for the Company that can be capitalized on, whether the financial reporting and adjustments calculated to present a more comparative period on period analysis achieve the stated objective, whether the application by the Company of non-GAAP financial measures is appropriate to enhance the understanding of its historical performance, whether Net Element can secure any additional financing, and if such additional financing will be adequate to meet the Company's objectives. All forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, many of which are generally outside the control of Net Element and are difficult to predict. Examples of such risks and uncertainties include, but are not limited to: (i) Net Element 's ability (or inability) to obtain additional financing in sufficient amounts or on acceptable terms when needed; (ii) Net Element 's ability to maintain existing, and secure additional, contracts with users of its payment processing services; (iii) Net Element 's ability to successfully expand in existing markets and enter new markets; (iv) Net Element 's ability to successfully manage and integrate any acquisitions of businesses, solutions or technologies; (v) unanticipated operating costs, transaction costs and actual or contingent liabilities; (vi) the ability to attract and retain qualified employees and key personnel; (vii) adverse effects of increased competition on Net Element 's business; (viii) changes in government licensing and regulation that may adversely affect Net Element 's business; (ix) the risk that changes in consumer behavior could adversely affect Net Element 's business; (x) Net Element 's ability to protect its intellectual property; (xi) local, industry and general business and economic conditions; (xii) adverse effects of potentially deteriorating U.S.-Russia relations, including, without limitation, over a conflict related to Ukraine, including a risk of U.S. government sanctions or other legal restrictions on U.S. businesses doing business in Russia. Additional factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements can be found in the most recent annual report on Form 10-K and the subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K filed by Net Element with the Securities and Exchange Commission. Net Element anticipates that subsequent events and developments may cause its plans, intentions and expectations to change. Net Element assumes no obligation, and it specifically disclaims any intention or obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as expressly required by law.

NET ELEMENT, INC.
CONSOLIDATED BALANCE SHEETS

    December 31, 2014     December 31, 2013  
ASSETS            
Current assets:                
  Cash   $ 503,343     $ 126,319  
  Accounts receivable, net     3,417,173       10,619,289  
  Advances to aggregators, net     18,455       1,109,538  
  Prepaid expenses and other assets     944,243       834,025  
    Total current assets     4,883,214       12,689,171  
Fixed assets, net     70,918       137,267  
Intangible assets, net     2,492,050       2,964,424  
Goodwill     6,671,750       6,671,750  
Other long term assets     204,737       -  
Investment in affiliate     -       46,113  
    Total assets   $ 14,322,669     $ 22,508,725  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                
Current liabilities:                
  Accounts payable   $ 2,698,257     $ 3,190,215  
  Deferred revenue     472,482       239,398  
  Accrued expenses     2,351,885       3,484,963  
  Short term loans     -       8,478,810  
  Notes payable (current portion)     98,493       3,816,093  
  Due to related parties     -       1,451,357  
    Total current liabilities     5,621,117       20,660,836  
  Note payable (non-current portion)     3,216,507       17,255,531  
    Total liabilities     8,837,624       37,916,367  
                 
STOCKHOLDERS' EQUITY (DEFICIT)                
  Preferred stock ($.01 par value, 1,000,000 shares                
  authorized and no shares issued and outstanding)     -       -  
  Common stock ($.0001 par value, 200,000,000 shares                
  authorized and 45,881,523 and 32,273,298 shares issued and outstanding at December 31, 2014 and 2013, respectively)     4,589       3,229  
  Paid in capital     136,689,629       103,486,144  
  Stock subscription receivable     (1,111,130 )     329,406  
  Accumulated other comprehensive loss     (1,251,461 )     (170,550 )
  Accumulated deficit     (129,116,344 )     (118,930,828 )
  Noncontrolling interest     269,762       (125,043 )
    Total stockholders' equity (deficit)     5,485,045       (15,407,642 )
      Total liabilities and stockholders' equity (deficit)   $ 14,322,669     $ 22,508,725  
                     
                     

NET ELEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

    Twelve months ended December 31,  
    2014     2013  
             
             
Net revenues   $ 21,194,461     $ 18,749,470  
                 
Costs and expenses:                
  Cost of revenues     15,883,681       13,374,669  
    General and administrative (includes $4,267,334 and $16,549,820 of share basedcompensation for the twelve months ended December 31, 2014 and 2013 respectively)                
  11,353,244       28,166,387  
  (Recovery of) provision for loan losses     (1,153,147 )     7,640,008  
  Goodwill impairment charge     -       11,200,000  
  Intangible assets impairment charge     -       872,354  
  Depreciation and amortization     2,358,136       2,242,504  
    Total costs and operating expenses     28,441,914       63,495,922  
Loss from operations     (7,247,453 )     (44,746,452 )
  Interest expense, net     (3,705,694 )     (2,979,102 )
  Gain on change in fair value and settlement of beneficial conversion derivative     5,569,158       -  
  Loss on debt extinguishment     (6,184,219 )     -  
  Gain on debt restructure     1,596,000       -  
  Loss from asset disposal     (87,151 )     -  
  Other expense     (155,407 )     (160,182 )
  Loss from continuing operations before income taxes     (10,214,766 )     (47,885,736 )
  Income taxes     -       (213,284 )
Loss from continuing operations     (10,214,766 )     (48,099,020 )
Net loss attributable to the noncontrolling interest     29,250       1,129,319  
Net loss from continuing operations attributable to Net Element, Inc.     (10,185,516 )     (46,969,701 )
Discontinued operations:                
  Loss from operations of discontinued entities     -       (1,018,003 )
  Loss on disposition of assets pertaining to discontinued operations     -       (321,643 )
Net loss     (10,185,516 )     (48,309,347 )
Foreign currency translation     (1,080,911 )     (449,115 )
Comprehensive loss   $ (11,266,427 )   $ (48,758,462 )
                 
Loss per share - basic and diluted   $ (0.27 )   $ (1.65 )
Loss per share - basic and diluted discontinued operations     -       (0.05 )
Total loss per share   $ (0.27 )   $ (1.70 )
                 
Weighted average number of common shares outstanding - basic and diluted     37,255,052       28,470,169  
                 
                 

NET ELEMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

    Common Stock     Paid in     Stock     Comprehensive     Non-controlling     Accumulated     Equity (Deficiency)  
    Shares     Amount     Capital     Subscription     Income     interest     Deficit     in Assets  
Balance December 31, 2012 (Restated)   28,303,659     $ 2,830     $ 87,452,060     $ -     $ 278,565     $ (103,437 )   $ (70,621,481 )   $ 17,008,537  
Non cash compensation related to TOT Group stock exchange   2,812,771       281       12,197,823       -       -       1,107,713       -       13,305,817  
Non cash compensation- other   1,265,109       129       3,243,874       -       -       -       -       3,244,003  
Cash paid for repurchase of common shares   (175,953 )     (17 )     (482,400 )     -       -       -       -       (482,417 )
Note Payable and other assumed by T1T Lab, net of contributions payable   -       -       685,449       -       -       -       -       685,449  
Shares issued pursuant to purchase agreement   67,712       6       389,338       -       -       -       -       389,344  
Unissued shares pursuant to purchase agreement   -       -       -       329,406       -       -       -       329,406  
Foreign currency exchange   -       -       -       -       (449,115 )     -       -       (449,115 )
  Net loss   -       -       -       -       -       (1,129,319 )     (48,309,347 )     (49,438,666 )
  Balance Dec 31, 2013   32,273,298     $ 3,229     $ 103,486,144     $ 329,406     $ (170,550 )   $ (125,043 )   $ (118,930,828 )   $ (15,407,642 )
                                                               
Share based compensation   1,755,749       176       3,677,937       -       -       -       -       3,678,113  
Shares issued and issuable for acquisitions   57,288       6       329,400       (329,406 )     -       -       -       -  
Shares issued to acquire non-controlling interest   323,085       32       617,060       -       -       424,055       -       1,041,147  
Shares issued in connection with debt conversion   5,569,158       556       10,636,537       (1,111,130 )     -       -       -       9,525,963  
Shares issued in connection with debt restructuring   100,000       10       203,990       -       -       -       -       204,000  
Shares issued in connection with note conversion   5,802,945       580       16,711,901       -       -       -       -       16,712,481  
Extinguishment of T1T obligation   -       -       1,086,968       -       -       -       -       1,086,968  
NASDAQ share registration fees   -       -       (60,308 )     -       -       -       -       (60,308 )
  Net loss   -       -       -       -       -       (29,250 )     (10,185,516 )     (10,214,766 )
  Comprehensive loss - foreign currency translation   -       -       -       -       (1,080,911 )     -       -       (1,080,911 )
                                                               
Balance Dec 31, 2014   45,881,523     $ 4,589     $ 136,689,629     $ (1,111,130 )   $ (1,251,461 )   $ 269,762     $ (129,116,344 )   $ 5,485,045  
                                                               
                                                               

NET ELEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

    Twelve Months Ended December 31,  
    2014     2013  
Cash flows from operating activities:                
Net loss   $ (10,185,516 )   $ (48,309,347 )
Loss from discontinued operations     -       321,643  
Adjustments to reconcile net loss to net cash used in operating activities:                
  Non controlling interest     394,286       (1,129,319 )
  Non cash compensation     4,267,334       16,549,820  
  Deferred revenue     233,084       -  
  Note receivable (current portion)     -       -  
  Depreciation and amortization     2,358,136       2,242,504  
  Impairment of Goodwill     -       11,200,000  
  Intangible assets impairment     -       872,354  
  Amortization of debt discount     1,644,626       -  
  (Recovery of ) provision for loan losses     (1,649,858 )     7,640,008  
  Loss on disposal of fixed assets     16,137       -  
  Gain on disposal of derivative     (5,569,158 )     -  
  Loss on debt extinguishment     6,184,219       -  
  Gain on MBF debt restructure     (1,596,000 )     -  
Changes in assets and liabilities, net of acquisitions and the effect ofconsolidation of equity affiliates                
             
  Account receivable     6,974,701       (562,294 )
  Advances to aggregators     934,816       (3,267,679 )
  Prepaid expenses and other assets     (445,555 )     1,952,570  
  Accounts payable     (338,618 )     2,268,233  
  Accrued expenses     (968,609 )     429,556  
Adjustments for operating activities of continuing operations     12,439,541       38,195,753  
Adjustments for operating activities of discontinued operations     -       (1,018,003 )
                 
  Net cash provided by (used in) operating activities     2,254,025       (10,809,954 )
                 
Cash flows from investing activities- net of acquisitions:                
  Purchase of portfolio and client acquisition costs     (1,039,752 )     -  
  Note receivable     (2,650 )     4,920,510  
  Acquisition of intangible assets     -       (380,025 )
  Acquisition of Aptito     -       (458,747 )
  Investment in subsidiary     -       (46,113 )
  (Purchase) disposal of fixed and other assets     (750,936 )     67,266  
    Net cash (used in) provided by investing activities     (1,793,338 )     4,102,891  
                 
Cash flows from financing activities- net of acquisitions:                
  Proceeds from indebtedness     10,088,870       2,000,000  
  Repayment of indebtedness     (10,433,367 )     (272,103 )
  Change in restricted cash     -       1,978,527  
  Cash paid for shares and warrants     -       (482,417 )
  Related party advances (payments)     418,099       (75,000 )
  Net cash provided by financing activities     73,602       3,149,007  
                   
  Effect of exchange rate changes on cash     (157,265 )     137,588  
  Net increase (decrease) in cash     377,024       (3,420,468 )
                   
  Cash at beginning of period     126,319       3,546,787  
  Cash at end of period   $ 503,343     $ 126,319  
                 
Supplemental disclosure of cash flow information                
  Cash paid during the period for:                
    Interest   $ 1,109,731     $ 1,635,360  
Taxes   $ 38,993     $ 196,425  
                 
Issuance of stock upon conversion of indebtedness   $ 25,233,473     $ -  
                 
Issued and outstanding common stock (10% of TOT Group's common stock)   $ -     $ 609,000  
Assumed debt     -       20,631,000  
Total value of consideration for Unified Payments acquisition   $ -     $ 21,240,000  
                 
Stock subscription in connection with acquisition of Aptito   $ -     $ 718,750  
Transfer of K1 note liability to T1T Lab, LLC in connection with divesture of OOO Music 1   $ -     $ 2,000,000  
                 
                 

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