SOURCE: Net Element, Inc.

Net Element, Inc.

March 31, 2016 09:36 ET

Net Element Reports 2015 Annual Financial Results and Provides Business Update

Annual Revenue Increased 89.5% to $40.2 Million for 2015 Versus $21.2 Million for 2014

MIAMI, FL--(Marketwired - Mar 31, 2016) - 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, 2015 and provided an update on recent strategic and operational initiatives.

For full-year 2015, net revenue increased 89.5% to $40,235,362 million as compared to $21,236,704 in the prior year. The $18,998,658 increase in net revenues is primarily due to growth in the Company's three segments:

  • North America Transaction Solution segment: Continued organic growth of SMB merchants in this segment with emphasis on value-added offerings. Revenues for this segment were $27.4 million, a 41% increase over the prior year.
  • Mobile Solutions segment: As a result of a new business model, which was introduced in the third quarter of 2015, the Company began generating revenues from branded content. Revenues for this segment were $9 million, a 385% increase over the prior year.
  • Online Solutions: The Company completed its acquisition of PayOnline and began consolidating our Online Solutions segment in May. As a result of this acquisition we recorded $3.8 million of revenue during 2015, which represent a partial year of results.

2015 Business Highlights:

  • Acquired PayOnline, leading online payment platform in emerging markets
  • Digital Provider exceeded 3 million recurring mobile subscribers
  • PayOnline successfully deployed MasterCard's MasterPass digital wallet to over 800 online merchants
  • Expanded into Kyrgyzstan and signed leading e-commerce company in the region
  • Expanded to Kazakhstan by creating partnerships with leading mobile operators
  • Launched payment processing in Kazakhstan through partnership with KAZKOM bank
  • Launched joint venture to focus on Gulf Cooperation Council (GCC) states and India

2015 Product Launches:

  •  Launched Restoactive, a comprehensive mobile restaurant solution. Integrated with some of the biggest POS and restaurant management platforms such as MICROS, POSitouch, Aloha and Symphony. By integrating into the leading POS and restaurant management platforms Restoactive is now available to over 500,000 restaurants in the United States.
  • PayOnline launched "Pay-Travel" to automate payments for travel industry including integration with Global Distribution Systems (GDS), which includes Amadeus and Sabre and available for online and mobile application payments acceptance
  • PayOnline launched new mobile payment solution for iOS to existing Microsoft and Android processing capabilities. The new software developer kit (SDK) enables integration of PayOnline transaction processing into Apple's iPad and iPhone applications
  • Aptito added EMV and mobile payments acceptance including Android Pay, Apple Pay and Samsung Pay to its POS offering. Merchants Using Aptito POS Systems are provided secure EMV-compliant and mobile payment acceptance hardware
  • Expanded our service offerings to over 100 payment methods internationally

"We are very pleased with our strong finish to the year with positive momentum across all channels. Our results are a reflection of our ability to deliver growth," commented Oleg Firer, CEO of Net Element. "Our growth for 2015, included completing our strategic acquisition of PayOnline, expanding organic growth throughout the year, and leveraging our strengths in omni-channel transaction processing to win new business."

Conference Call:
The Company will host a conference call to discuss 2015 financial results and business highlights on March 31, 2016 at 4:30 PM Eastern time. Those interested in participating in the call are invited to dial +1 (877) 303-9858, or for international callers +1 (408) 337-0139 approximately 10 minutes prior to the start of the call. The conference call will also be webcast live at http://edge.media-server.com/m/p/kw2rnhus

Following completion of the call, a recorded replay of the webcast will be available on the investors section of the Company's website at www.netelement.com.

Full-year 2015 Financial Review
We reported an adjusted net loss of $9,833,106, or $0.15 loss per share for the twelve months ended December 31, 2015 as compared to an adjusted net loss of $6,928,371, or $0.19 loss per share, for the twelve months ended December 31, 2014. This resulted in a net loss increase of $2,904,735 which is discussed further below.

Net revenues were $40,235,362 for the twelve months ended December 31, 2015 as compared to $21,236,704 for the twelve months ended December 31, 2014. The $18,998,658 increase in net revenues is primarily due to three factors:

1. Organic growth of SMB merchants in our North America Transaction Solutions segment (+$8 million).
2. We acquired and began consolidating revenues from our Online Solutions segment from PayOnline, acquired in May of 2015 for an additional $3.8 million in revenues during 2015.
3. We began generating revenues for branded content in our Mobile Solutions segment beginning the quarter ending September 30, 2015 and recognizing gross revenues for the sale of our own branded content (+$7.2 million).

Gross Margin for the twelve months ended December 31, 2015 was $6,258,147, or 16% of net revenue, as compared to $5,310,780, or 25% of net revenue, for the twelve months ended December 31, 2014. The primary reason for the decrease in the margin percentage was a change in revenue composition mix and associated costs as well as full restructure of the Mobile Solutions business in July 2014 as compared to the new business model of Mobile Solutions business for 2015. Our 2015 business mix had more branded content revenues which yield lower margins, and lower margins on revenues from North America Transaction Solutions despite higher sales volume for 2015 versus 2014. Higher margin legacy merchant portfolios have run off and are replaced with new portfolios with lower margins in North America.

Adjusted general and administrative expenses increased by $2,224,567 to $9,310,477 for the twelve months ended December 31, 2015 as compared to $7,085,910 for the twelve months ended December 31, 2014. This was primarily due to a $1,403,268 increase in professional fees and $606,245 increase in salaries and benefits.

Category   Twelve
Months Ended
December 31, 2015
  Twelve
Months Ended
December 31, 2014
  Increase / (Decrease)
Salaries, benefits, taxes and contractor payments   3,816,241   3,209,996   606,245
Professional fees   3,563,885   2,160,617   1,403,268
Rent   475,808   459,798   16,010
Business development   109,515   68,735   40,780
Travel expense   322,156   303,293   18,863
Filing fees   100,001   101,836   (1,835)
Transaction (gains) losses   (77,094)   (44,127)   (32,967)
Other expense   999,965   825,762   174,203
  Total   $9,310,477   $7,085,910   $2,224,567

Salaries, benefits, taxes and contractor payments increased $606,245 primarily resulting from $332,961 from the acquisition of PayOnline in May 2015. The balance of the increase was due to increased management headcount.

Professional fees increased $1,403,268 primarily resulting from the May 2015 acquisition of PayOnline ($789,197) and increased legal and accounting fees from increased public filings in 2015 versus 2014.

Other expenses increased to $999,965 in 2015 from $825,762 in 2014. The $174,203 increase was primarily comprised of a $46,332 increase due to the acquisition of PayOnline and $507,660 due to an increase in expenses our Mobile Solutions segment, $44,553 increase in North American Transaction Solutions segment primarily due to an increase in communications and office expenses offset by a $424,342 decrease in other Corporate expenses. Other expenses that decreased in Corporate for the year ended December 31, 2015 include general office expenses and expenses related to communications.

We recorded a provision for bad debts of $649,571 for the twelve months ended December 31, 2015 as compared to a recovery of ($1,153,147) for the twelve months ended December 31, 2014. The recovery in 2014 was due to the reversal of $1.6 million loss provisions that were not required during the reorganization of the Mobile Solutions segment offset by $0.5 million of ACH rejects.

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs, capitalized software expenses and employee non-compete agreements. Depreciation and amortization expense was $2,513,162 for the twelve months ended December 31, 2015 as compared to $2,358,136 for the twelve months ended December 31, 2014. The $155,026 increase in depreciation and amortization expense was primarily due to purchased merchant portfolios reaching full amortization during 2014 resulting in decrease in amortization offset by an increase the amortization of intangible assets acquired in the purchase of PayOnline.

Interest expense was $3,575,698 for the twelve months ended December 31, 2015 as compared to $3,705,694 for the twelve months ended December 31, 2014, representing a decrease of $129,996. The reduction is due to reduced amount of credit facility balance outstanding in 2015 versus 2014. The majority of 2015 interest was due to the amortization of the derivatives attributed to beneficial conversion features from debt and warrants.

Gains and losses on derivatives, debt extinguishment and debt restructure were as follows:

Item   2015   2014   Variance
Settlement of beneficial conversion derivative
Gain / (Loss)
  ($26,932,496)   $5,569,158   ($32,501,654)
Debt Extinguishment / Debt Restructuring
Gain / (Loss)
  27,743,980   (4,588,219)   32,332,199
Total   $811,484   $980,939   ($169,455)

We reported a net gain on derivatives, debt extinguishment and debt restructure of $811,484 and $980,939 for 2015 and 2014 respectively. The gain in 2014 was $169,455 higher than the gain for 2015 as the deal terms and market conditions were different each year.

Reconciliation of Non-GAAP Financial Measures and Regulation G Disclosure
To supplement its consolidated financial statements presented in accordance with United States generally accepted accounting principles ("GAAP"), the Company provides additional measures of its operating results by disclosing its adjusted net loss. Adjusted net loss is calculated as net loss excluding non-cash share based compensation and other one-time, non-recurring items not present in this year or last year results. Net Element discloses this amount on an aggregate and per share basis. 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.

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 year ended December 31, 2015 and 2014 is presented in the following Non-GAAP Financial Measures Table.

  GAAP   Share-based
Compensation
  Derivative Activity, Debt Extinguishment
and Restructure
  Adjusted Non-GAAP
Twelve Months Ended December 31, 2015              
  Net loss $(13,327,926)   $4,306,304   $(811,484)   $(9,833,106)
  Basic and diluted earnings per share $(0.21)   $0.07   $(0.01)   $(0.15)
  Basic and diluted shares used in computing earnings per share 63,911,199           63,911,199
               
Twelve Months Ended December 31, 2014              
  Net loss $(10,214,766)   $4,267,334   $(980,939)   $(6,928,371)
  Basic and diluted earnings per share $(0.27)   $0.11   $(0.03)   $(0.19)
  Basic and diluted shares used in computing earnings per share 37,255,052           37,255,052

Additional information regarding Net Element's results 2015 may be found in Net Element's annual report on Form 10-K, which was filed with the Security and Exchange Commission (SEC) on March 30, 2016 and may be obtained from the SEC's Internet website at http://www.sec.gov.

About Net Element
Net Element, Inc. (NASDAQ: NETE) operates a payments-as-a-service transactional and value-added services platform for small to medium enterprise ("SME") in the US and selected emerging markets. In the US it aims to grow transactional revenue by innovating SME productivity services such as its cloud based, restaurant point-of-sale solution Aptito. Internationally, Net Element's strategy is to leverage its omni-channel platform to deliver flexible offerings to emerging markets with diverse banking, regulatory and demographic conditions such as UAE, Kazakhstan, Kyrgyzstan and Azerbaijan where initiatives have been recently launched. Further information is available at www.netelement.com.

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. 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 further 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, 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, 2015     December 31, 2014  
ASSETS              
Current assets:              
  Cash $ 1,025,747     $ 503,343  
  Accounts receivable, net   5,198,993       3,417,173  
  Prepaid expenses and other assets   1,106,016       962,698  
    Total current assets, net   7,330,756       4,883,214  
Fixed assets, net   162,123       70,918  
Intangible assets, net   5,423,880       2,492,050  
Goodwill   9,643,752       6,671,750  
Other long term assets   353,050       204,737  
    Total assets   22,913,561       14,322,669  
               
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities:              
  Accounts payable   5,858,837       2,698,257  
  Deferred revenue   743,910       472,482  
  Accrued expenses   2,975,066       2,351,885  
  Notes payable (current portion)   518,437       98,493  
  Due to related parties   329,881       -  
    Total current liabilities   10,426,131       5,621,117  
  Notes payable (net of current portion)   3,446,563       3,216,507  
    Total liabilities   13,872,694       8,837,624  
               
  Series A Convertible Preferred stock              
    ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding, at December 31, 2015)   -       -  
               
STOCKHOLDERS' EQUITY              
  Common stock ($.0001 par value, 300,000,000 shares authorized and 112,619,596 and 45,881,523 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively)   11,262       4,589  
  Paid in capital   154,351,558       136,689,629  
  Stock subscription receivable           (1,111,130 )
  Accumulated other comprehensive loss   (1,565,822 )     (1,251,461 )
  Accumulated deficit   (143,955,048 )     (129,116,344 )
  Noncontrolling interest   198,917       269,762  
    Total stockholders' equity   9,040,867       5,485,045  
      Total liabilities and stockholders' equity $ 22,913,561     $ 14,322,669  
               
               
               
NET ELEMENT, INC.        
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS   
         
         
  Twelve months ended December 31,  
  2015   2014  
             
Net revenues            
    Service fees $ 31,204,871   $ 21,236,704  
    Branded content   9,030,491     -  
Total Revenues   40,235,362   $ 21,236,704  
             
Costs and expenses:            
    Cost of service Fees   25,858,098     15,925,924  
    Cost of branded content   8,119,117     -  
  General and administrative (includes $4,306,304 and $4,267,334 of share based            
  compensation for the twelve months ended December 31, 2015 and 2014 respectively)   13,616,781     11,353,244  
  Provision for (recovery of) bad debt   649,571     (1,153,147 )
  Depreciation and amortization   2,513,162     2,358,136  
      Total costs and operating expenses   50,756,729     28,484,157  
Loss from operations   (10,521,367 )   (7,247,453 )
  Interest expense, net   (3,575,698 )   (3,705,694 )
  (Loss) gain on change in fair value and settlement of beneficial conversion derivative   (26,932,496 )   5,569,158  
  Gain (loss) on debt extinguishment   27,743,980     (6,184,219 )
  Gain on debt restructure   -     1,596,000  
  Gain (loss) from asset disposal   40,369     (87,151 )
  Other expense   (82,714 )   (155,407 )
  Net loss before income taxes   (13,327,926 )   (10,214,766 )
  Income taxes   -     -  
Net loss   (13,327,926 )   (10,214,766 )
Net loss attributable to the noncontrolling interest   74,314     29,250  
Net loss attributable to Net Element, Inc. stockholders   (13,253,612 )   (10,185,516 )
             
Dividends for the benefit of preferred stockholders   (1,585,092 )   -  
             
Net loss attributable to common stockholders   (14,838,704 )   (10,185,516 )
             
Foreign currency translation   (314,361 )   (1,080,911 )
Comprehensive loss attributable to common stockholders $ (15,153,065 ) $ (11,266,427 )
             
Loss per share - basic and diluted $ (0.23 ) $ (0.27 )
             
Weighted average number of common shares outstanding - basic and diluted   63,911,199     37,255,052  
             
             
             
NET ELEMENT, INC. 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 
   
  Preferred Stock     Common Stock   Paid in     Stock     Comprehensive     Non-controlling     Accumulated     Equity (Deficiency)  
  Shares     Amount     Shares   Amount   Capital     Subscription     Income     interest     Deficit     in Assets  
Balance December 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 December 31, 2014 -     $ -     45,881,523   $ 4,589   $ 136,689,629     $ (1,111,130 )   $ (1,251,461 )   $ 269,762     $ (129,116,344 )   $ 5,485,045  
                                                                       
Share based compensation -       -     4,015,315     406     4,305,898       -       -       -       -       4,306,304  
Preferred shares issued 5,500       5,287,082     -     -     -       -       -       -       -       -  
Preferred shares converted to common shares (5,500 )     (5,287,082 )   33,760,446     3,371     9,032,713       -       -       -       -       9,036,084  
Preferred share dividends paid -       -     6,128,908     613     1,584,479                                       1,585,092  
Shares issued in connection with debt restructuring -       -     4,208,049     421     1,346,227       -       -       -       -       1,346,648  
Shares issued in exchange for warrants, net of discount               2,500,000     250     (2,680,111)                                       (2,679,861 )
Shares issued and issuable for acquisitions -       -     4,768,212     477     3,599,523       -       -       -       -       3,600,000  
Repurchase of non-controlling interest -       -     -     -     (3,489 )     -       -       3,469       -       (20 )
Shares issued for insider financing -       -     11,357,143     1,135     1,587,819       -       -       -       -       1,588,954  
Write-off of stock subscription receivable -       -     -           (1,111,130 )     1,111,130       -       -       -       -  
    Net loss -       -     -     -     -       -       -       (74,314 )     (14,838,704 )     (14,913,018 )
    Comprehensive loss - foreign currency translation -       -     -     -     -       -       (314,361 )     -       -       (314,361 )
  Balance December 31, 2015 -       -     112,619,596   $ 11,262   $ 154,351,558     $ -     $ (1,565,822 )   $ 198,917     $ (143,955,048 )     9,040,867  
                                                                       
                                                                       
                                                                       
NET ELEMENT, INC.            
CONSOLIDATED STATEMENT OF CASH FLOWS            
    Twelve Months Ended December 31,  
    2015     2014  
Cash flows from operating activities                
Net loss   $ (13,253,612 )   $ (10,185,516 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities                
    Non controlling interest     (74,309 )     394,286  
    Share based compensation     4,306,304       4,267,334  
                 
    Loss (gain) on change in fair value and settlement of beneficial conversion derivative     26,932,495       (5,569,158 )
    (Gain) loss on debt extinguishment     (27,743,980 )     6,184,219  
    Depreciation and amortization     2,513,162       2,358,136  
    Amortization of debt discount     3,027,354       1,644,626  
    (Recovery of ) provision for loan losses     -       (1,649,858 )
    (Gain) loss on disposal of fixed assets     (40,369 )     16,137  
    Gain on MBF debt restructure     -       (1,596,000 )
  Changes in assets and liabilities, net of acquisitions and the effect of consolidation of equity affiliates                
    Accounts receivable, net     (1,502,205 )     6,974,701  
    Advances to aggregators     10,022       934,816  
    Deferred revenue     271,428       233,084  
    Prepaid expenses and other assets     291,631       (445,555 )
    Accounts payable     3,160,577       (338,618 )
    Accrued expenses     410,730       (968,609 )
    Net cash (used in) provided by operating activities     (1,690,772 )     2,254,025  
                 
  Cash flows from investing activities                
    Purchase of portfolio and client acquisition costs     (878,085 )     (1,039,752 )
    Sale of portfolio     300,000       -  
    Note receivable     -       (2,650 )
    Acquisition of PayOnline assets, net of cash received     (3,195,452 )     -  
    Purchase of fixed and other assets     (579,209 )     (750,936 )
    Net cash used in investing activities     (4,352,746 )     (1,793,338 )
                 
  Cash flows from financing activities                
    Repayment to Financial Institutions     -       10,088,870  
    Proceeds from preferred stock     5,500,000       -  
    Proceeds from indebtedness     650,000       (10,433,367 )
    Related party advances     331,273       418,099  
    Net cash provided by financing activities     6,481,273       73,602  
                 
    Effect of exchange rate changes on cash     84,649       (157,265 )
    Net increase in cash     522,404       377,024  
                 
    Cash at beginning of period     503,343       126,319  
    Cash at end of period   $ 1,025,747     $ 503,343  
                 
  Supplemental disclosure of cash flow information                
    Cash paid during the period for:                
      Interest   $ 548,344     $ 1,109,731  
      Taxes   $ 74,563     $ 38,993  
                 
    Issuance of Stock upon conversion of indebtedness   $ 1,436,648     $ 25,233,473  
    Issuance of Common Stock upon redemption of Preferred Stock   $ 9,036,084     $ -  
    Issuance of Common Stock in exchange for Warrants   $ 2,679,861     $ -  
    Issuance of Common Stock for acquisition   $ 9,036,084     $ -  

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