SOURCE: Net Element, Inc.

Net Element, Inc.

August 14, 2017 16:30 ET

Net Element Reports Second Quarter 2017 Results

North America Transaction Solutions Segment leads with a 31% increase

MIAMI, FL--(Marketwired - Aug 14, 2017) - Net Element, Inc. (NASDAQ: NETE) ("Net Element" or the "Company"), a global financial technology and value-added solutions group that supports electronic payments acceptance in an omni-channel environment spanning across point-of-sale (POS), e-commerce and mobile devices, today reported financial results for the second quarter ended June 30, 2017 and provided an update on recent strategic and operational initiatives.

For the second quarter ended June 30, 2017, net revenues increased 18% to $16.1 million as compared to $13.7 million in the prior year. The increase in net revenues is primarily due to growth in the Company's North America Transaction Solutions and Online Solutions Segments:

  • North America Transaction Solutions Segment: Continued organic growth of SMB merchants in this segment with emphasis on value-added offerings. Revenues for this segment were $13.9 million, a 31% increase over the prior year.

  • Online Solutions Segment: Revenues for this segment were $2 million, a 33% increase over the prior year.

  • Mobile Solutions Segment: As a result of a change in business model previously reported, revenues for this segment were $0.5 million vs $1.8 million, a 71% decrease over the prior year. We expect to maintain a smaller staff at Digital Provider and we have canceled our existing office lease and will consolidate Digital Provider's physical operations into PayOnline. We also are looking to develop a new business plan for Digital Provider that includes, but is not limited to, a model that requires less working capital than the current pre-pay model and provides for diversified, scalable business.

  • Reduction of Corporate Overhead: The redundancies of our corporate staff at Net Element Russia were eliminated with responsibilities being absorbed by existing PayOnline staff. In addition, Net Element Russia's Moscow corporate office and apartment leases were cancelled with the consolidation into PayOnline.

Recent Highlights:

  • Centralized international operations;

  • Launched PayOnline platform, which supports electronic commerce in the United States;

  • Launched support for iDeal, the leading payment system in The Netherlands;

  • Expanded payment module to include InSales, a popular omni-channel commerce and CMS platform;

  • Partnered with Payvision in Europe, expands to access to global currencies;

  • Launched payment acceptance for international mobile network operator;

  • Launched "Online Cashier" fiscal cloud-based point of sale solution for Russian merchants;

  • Launched Apple Pay Support in Russia;

  • Launched "Instant Credit" for online merchants

"We are pleased with our continued growth. Our results are a reflection of our ability to deliver growth," commented Oleg Firer, CEO of Net Element. "We are excited about our strategic initiatives for the remainder of the year as we continue to streamline international operations and reduce operating expenses while managing the strong U.S. growth and expansion."

Conference Call:
The Company will host a conference call to discuss Second Quarter 2017 financial results and business highlights on August 15, 2017 at 8:30 a.m. ET. The conference call can be accessed live over the phone by dialing +1 (877) 303-9858, or for international callers +1 (408) 337-0139, and referencing conference code 67569957. It is recommended that participants dial in approximately 10 minutes prior to the start of the 8:30 a.m. Eastern call.

The call will also be webcast live from http://edge.media-server.com/m/p/kaa6hdp3. Following completion of the call, a recorded replay of the webcast will be available on the www.netelement.com/en/ir website.

Results of Operations for the Three Months Ended June 30, 2017 Compared to the Three Months Ended June 30, 2016

We reported a net loss attributable to stockholders of $1,640,340 or $0.09 per share, for the three months ended June 30, 2017 as compared to a net loss attributable to stockholders of $5,346,448, or $0.46 per share, for the three months ended June 30, 2016. This resulted in a decrease in net loss attributable to stockholders of $3,706,108 primarily due to an increase in revenues, decreases in loss from stock value guarantee, non-cash compensation and interest, partially offset by increased general and administrative expenses.

Eliminating the effects of non-cash compensation and a 2016 stock value guarantee, we reported an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $1,511,803 or $0.08 per share for the three months ended June 30, 2017 as compared to an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $1,168,998 or $0.10 per share for the three months ended June 30, 2016.

Net revenues consist primarily of payment processing fees. Net revenues were $16,141,041 for the three months ended June 30, 2017 as compared to $13,692,848 for the three months ended June 30, 2016. The increase in net revenue is primarily due to organic growth of merchants in our North American Transaction Solutions segment which resulted in an increase to North American Transaction Solutions segment revenue of $3,208,850 (or 31% increase) for the three months ended June 30, 2017 versus the three months ended June 30, 2016. Increases in our North American Transaction Solutions segment revenue were primarily due to continued growth of merchants with emphasis on value-added offerings. Our Online Solutions segment revenue increased $500,653 (or 33%), from $1,509,208 for the three months ended June 30, 2016 to $2,009,861 for the three months ended June 30, 2017 as we continue to board additional merchants. These improvements were tempered by a $1,261,310 (or 71%) decrease in our Mobile Solutions segment, as we continue to experience increased competition, decreased margins, and liquidity constraints arising from capital needed to prepay for content delivered through our platform.

The following table sets forth our sources of revenues, cost of revenues and gross margins for the three months ended June 30, 2017 and 2016:

                           
Gross Margin Analysis                          
                           


Source of Revenues
  Three
Months Ended
June 30, 2017
 

Mix
    Three
Months Ended
June 30, 2016
 

Mix
   
Increase /
(Decrease)
 
                                 
North American Transaction Solutions   $ 13,612,782   84 %   $ 10,403,932   76 %   $ 3,208,850  
Mobile Solutions     518,398   3 %     1,779,708   13 %     (1,261,310 )
Online Solutions     2,009,861   13 %     1,509,208   11 %     500,653  
  Total   $ 16,141,041   100 %   $ 13,692,848   100 %   $ 2,448,193  
                                 
Cost of Revenues   Three
Months Ended
June 30, 2017
 
% of
revenues
    Three
Months Ended
June 30, 2016
 
% of
revenues
   
Increase /
(Decrease)
 
                                 
North American Transaction Solutions   $ 11,472,508   84 %   $ 8,967,784   86 %   $ 2,504,724  
Mobile Solutions     502,742   97 %     1,566,618   88 %     (1,063,876 )
Online Solutions     1,343,142   67 %     950,391   63 %     392,751  
  Total   $ 13,318,392   83 %   $ 11,484,793   84 %   $ 1,833,599  
                                 
Gross Margin   Three
Months Ended
June 30, 2017
 
% of
revenues
    Three
Months Ended
June 30, 2016
 
% of
revenues
   
Increase /
(Decrease)
 
                                 
North American Transaction Solutions   $ 2,140,274   16 %   $ 1,436,148   14 %   $ 704,126  
Mobile Solutions     15,656   3 %     213,090   12 %     (197,434 )
Online Solutions     666,719   33 %     558,817   37 %     107,902  
  Total   $ 2,822,649   17 %   $ 2,208,055   16 %   $ 614,594  
                                 

Cost of revenues represents direct costs of generating revenues, including commissions, mobile operator fees, purchases of short numbers, interchange expense and processing fees. Cost of revenues for the three months ended June 30, 2017 were $13,318,392 as compared to $11,484,793 for the three months ended June 30, 2016. The $1,833,599 increase in cost of revenues was primarily due to a $2,504,724 increase in our North American Transaction Solutions segment due to an increase in sales volume. There was also a $392,751 increase in cost of revenues resulting from our Online Solutions segment operations also primarily due the costs associated with boarding additional merchants. This was offset by a $1,063,876 decrease in our Mobile Solutions segment cost of revenues, which resulted from the decrease in revenues for our Mobile Solutions segment for the three months ended June 30, 2017.

Gross Margin or the three months ended June 30, 2017 was $2,822,649, or 17% of net revenue, as compared to $2,208,055, or 16% of net revenue, for the three months ended June 30, 2016. The $614,594 increase in gross margin was primarily due to increased volume of processing in North American Transaction Solutions offset by a decrease of $197,434 in Mobile Solutions margin caused by a decrease in business.

Total operating expenses were $4,166,596 for the three months ended June 30, 2017, which consisted of general and administrative expenses of $2,599,178, non-cash compensation expenses of $128,537, provision for bad debts of $865,863, and depreciation and amortization of $573,018. Total operating expenses were $4,983,753 for the three months ended June 30, 2016, which consisted of general and administrative expenses of $1,999,391, non-cash compensation expenses of $2,014,589, provision for bad debts of $125,238, and depreciation and amortization of $844,535.

The components of our general and administrative expenses are discussed below.

General and administrative expenses for the three months ended June 30, 2017 and 2016 consisted of operating expenses not otherwise delineated in our Condensed Consolidated Statements of Operations and Comprehensive Loss and include salaries and benefits, professional fees, rent, travel expense, filing fees, transaction gains, office expenses, communication expense, insurance expense, and other expenses required to run our business, as follows:

                               
Three Months Ended June 30, 2017                              
                               
Category   North America
Transaction
Solutions
    Mobile
Solutions
    Online
Solutions
    Corporate
Expenses &
Eliminations
    Total  
Salaries, benefits, taxes and contractor payments   $ 464,134     $ 126,516     $ 234,950     $ 547,219     $ 1,372,819  
Professional fees     82,888       19,768       258,535       299,536       660,727  
Rent     -       12,121       40,624       83,334       136,079  
Business development     986       14       8,768       915       10,683  
Travel expense     75,646       1,729       4,165       38,391       119,931  
Filing fees     -       -       -       8,508       8,508  
Transaction (gains) losses     742       32,228       (9,508 )     1,303       24,765  
Office expenses     45,956       3,313       24,214       16,058       89,541  
Communications expenses     9,864       1,497       29,484       19,743       60,588  
Insurance expense     -       -       -       32,235       32,235  
Other expenses     1,264       -       1,125       80,913       83,302  
  Total   $ 681,480     $ 197,186     $ 592,357     $ 1,128,155     $ 2,599,178  
                                         
Three Months Ended June 30, 2016                              
                               
Category   North America
Transaction
Solutions
    Mobile
Solutions
    Online
Solutions
    Corporate
Expenses &
Eliminations
    Total  
Salaries, benefits, taxes and contractor payments   $ 415,135     $ 108,772     $ 142,663     $ 510,482     $ 1,177,052  
Professional fees     89,268       1,243       217,513       369,299       677,323  
Rent     -       832       36,282       97,949       135,063  
Business development     12,186       -       40,118       4,056       56,360  
Travel expense     49,784       3,220       7,048       29,017       89,069  
Filing fees     -       -       -       42,896       42,896  
Transaction (gains) losses     -       (328,350 )     (23,658 )     18,174       (333,834 )
Office expenses     27,148       2,127       14,774       22,723       66,772  
Communications expenses     16,817       484       11,586       26,175       55,062  
Insurance expense     -       -       -       2,658       2,658  
Other expenses     270       14       192       30,494       30,970  
  Total   $ 610,608     $ (211,658 )   $ 446,518     $ 1,153,923     $ 1,999,391  
                                         
Variance                              
                               
Category   North America
Transaction
Solutions
    Mobile
Solutions
    Online
Solutions
    Corporate
Expenses &
Eliminations
    Total  
Salaries, benefits, taxes and contractor payments   $ 48,999     $ 17,744     $ 92,287     $ 36,737     $ 195,767  
Professional fees     (6,380 )     18,525       41,022       (69,763 )     (16,596 )
Rent     -       11,289       4,342       (14,615 )     1,016  
Business development     (11,200 )     14       (31,350 )     (3,141 )     (45,677 )
Travel expense     25,862       (1,491 )     (2,883 )     9,374       30,862  
Filing fees     -       -       -       (34,388 )     (34,388 )
Transaction (gains) losses     742       360,578       14,150       (16,871 )     358,599  
Office expenses     18,808       1,186       9,440       (6,665 )     22,769  
Communications expenses     (6,953 )     1,013       17,898       (6,432 )     5,526  
Insurance expense     -       -       -       29,577       29,577  
Other expenses     994       (14 )     933       50,419       52,332  
  Total   $ 70,872     $ 408,844     $ 145,839     $ (25,768 )   $ 599,787  
                                         

Salaries, benefits, taxes and contractor payments were $1,372,819 for the three months ended June 30, 2017 as compared to $1,177,052 for the three months ended June 30, 2016.

             
Segment   Salaries and
benefits for the
three months
ended
June 30, 2017
  Salaries and
benefits for the
three months
ended
June 30, 2016
  Increase /
(Decrease)
North America Transaction Solutions   $ 464,134   $ 415,135   $ 48,999
Mobile Solutions     126,516     108,772     17,744
Online Solutions     234,950     142,663     92,287
Corporate Expenses & Eliminations     547,219     510,482     36,737
Total   $ 1,372,819   $ 1,177,052   $ 195,767
                   

The increase in salaries of $195,767 was due to the North American Transaction Solutions segment salaries increasing $48,999 due to an increase in headcount and sales incentives for key employees. In addition, there were increases of $92,287 and $17,744, respectively, in our Online Solutions and Mobile Solutions segments, which were primarily due to salary increases.

Professional fees were $660,727 for the three months ended June 30, 2017 as compared to $677,323 for the three months ended June 30, 2016.

                             
Three Months Ended June 30, 2017                            
                             
Professional Fees   North America
Transaction
Solutions
    Mobile
Solutions
    Online
Solutions
  Corporate
Expenses &
Eliminations
    Total  
General Legal   $ (20,000 )   $ -     $ 3,245   $ 24,702     $ 7,947  
SEC Compliance Legal Fees     -       -       -     79,035       79,035  
Accounting and Auditing     -       -       5,215     97,500       102,715  
Tax Compliance and Planning     -       -       -     500       500  
Consulting     102,888       19,768       250,075     97,799       470,530  
Total   $ 82,888     $ 19,768     $ 258,535   $ 299,536     $ 660,727  
                                       
Three Months Ended June 30, 2016                            
                             
Professional Fees   North America
Transaction
Solutions
    Mobile
Solutions
    Online
Solutions
  Corporate
Expenses &
Eliminations
    Total  
General Legal   $ 5,226     $ 12     $ 2,507   $ 43,949     $ 51,694  
SEC Compliance Legal Fees     -       -       -     43,750       43,750  
Accounting and Auditing     -       -       -     103,055       103,055  
Tax Compliance and Planning     -       -       -     11,000       11,000  
Consulting     84,042       1,231       215,006     167,545       467,824  
Total   $ 89,268     $ 1,243     $ 217,513   $ 369,299     $ 677,323  
                                       
Variance                            
                             
Professional Fees   North America
Transaction
Solutions
    Mobile
Solutions
    Online
Solutions
  Corporate
Expenses &
Eliminations
    Increase /
(Decrease)
 
General Legal   $ (25,226 )   $ (12 )   $ 738   $ (19,247 )   $ (43,747 )
SEC Compliance Legal Fees     -       -       -     35,285       35,285  
Accounting and Auditing     -       -       5,215     (5,555 )     (340 )
Tax Compliance and Planning     -       -       -     (10,500 )     (10,500 )
Consulting     18,846       18,537       35,069     (69,746 )     2,706  
Total   $ (6,380 )   $ 18,525     $ 41,022   $ (69,763 )   $ (16,596 )
                                       

Professional fees decreased by $16,596 mainly due to a decrease in general legal fees offset by an increase in SEC compliance fees.

Non-cash compensation expense from share-based compensation was $128,537 for the three months ended June 30, 2017, compared to $2,014,589 for the three months ended June 30, 2016. The majority of these expenses were for employee and consultant equity incentives for both periods.

We recorded bad debt expense of $865,863 for the three months ended June 30, 2017 as compared to $125,238 for the three months ended June 30, 2016. For the three months ended June 30, 2017, we recorded a loss which was primarily comprised of $671,580 in ACH rejects and a $194,283 provision from our Russian operations. Of the $671,580 of gross ACH rejects, $347,235 were passed through to independent sales organizations via a reduction in commissions.

For the three months ended June 30, 2016, we recorded a loss which was primarily comprised of $145,588 in ACH rejects offset by a $20,350 recovery from our Russian operations. Of the $145,588 of ACH rejects, $93,812 were passed through to independent sales organizations via a reduction in commissions.

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs, capitalized software expenses, trademarks, domain names and employee non-compete agreements. Depreciation and amortization expense was $573,018 for the three months ended June 30, 2017 as compared to $844,535 for the three months ended June 30, 2016. The decrease was due to the full amortization of certain software and merchant portfolio assets during 2016.

Interest expense was $322,052 for the three months ended June 30, 2017 as compared to $438,976 for three months ended June 30, 2016, representing a decrease of $116,924 as follows:

               
Funding Source   Three months
ended
June 30, 2017
  Three months
ended
June 30, 2016
  Increase /
(Decrease)
 
MBF Notes   $ 15,516   $ 28,450   $ (12,934 )
RBL Notes     220,128     110,342     109,786  
Priority Payments Note     24,747     -     24,747  
Crede CG III, LTD     -     297,435     (297,435 )
Other     61,661     2,749     58,912  
Total   $ 322,052   $ 438,976   $ (116,924 )
                     

Other interest expense for the three months ended June 30, 2017 consisted primarily of $37,245 from the financing for the PayOnline Acquisition stock price guarantee and $10,443 resulting from the promissory note entered into on March 1, 2017 with Star Capital Management, LLC. (See Note 12. Related Party Transactions). Additionally, Crede charges in 2016 for imputed interest did not occur during 2017.

The net income attributable to non-controlling interests amounted to $75,081 for three months ended June 30, 2017 as compared to $38,792 for the three months ended June 30, 2016.

Results of Operations for the Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016

We reported a net loss attributable to stockholders of $4,127,837, or $0.24 per share, for the six months ended June 30, 2017 as compared to a net loss attributable to stockholders of $7,194,167, or $0.63 per share, for the six months ended June 30, 2016. This resulted in a decrease in net loss attributable to stockholders of $3,066,330 primarily due and increase in revenues and a decrease in the loss from stock value guarantee and a decrease in noncash compensation expense.

Eliminating the effects of non-cash compensation in both years and a 2016 stock value guarantee, we reported an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $3,402,896 or $0.19 per share for the six months ended June 30, 2017 as compared to an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $2,655,733 or $0.23 per share for the three months ended June 30, 2016.

Net revenues consist primarily of payment processing fees. Net revenues were $29,702,982 for the six months ended June 30, 2017 as compared to $24,953,907 for the six months ended June 30, 2016. The increase in net revenue is primarily due to organic growth of merchants in our North American Transaction Solutions segment which resulted in an increase to North American Transaction Solutions segment revenue of $6,321,120 (or 35% increase) for the six months ended June 30, 2017 versus the six months ended June 30, 2016. Our Online Solutions segment revenue increased $825,775 (or 28%), from $2,924,115 for the six months ended June 30, 2016 to $3,749,890 for the six months ended June 30, 2017, primarily due to the boarding of additional merchants. The increases in North American Transaction Solutions and Online Solutions segments were offset by a $2,397,820 (or 64%) decrease in our Mobile Solutions segment, as we continue to experience increased competition, decreased margins, and liquidity constraints arising from capital needed to prepay for content delivered through our platform.

The following table sets forth our sources of revenues, cost of revenues and gross margins for the six months ended June 30, 2017 and 2016:

                           
Gross Margin Analysis                          
                           


Source of Revenues
  Six Months
Ended
June 30, 2017
 

Mix
    Six Months
Ended
June 30, 2016
 

Mix
   
Increase /
(Decrease)
 
                                 
North American Transaction Solutions   $ 24,577,701   83 %   $ 18,256,581   73 %   $ 6,321,120  
Mobile Solutions     1,375,391   5 %     3,773,211   15 %     (2,397,820 )
Online Solutions     3,749,890   12 %     2,924,115   12 %     825,775  
  Total   $ 29,702,982   100 %   $ 24,953,907   100 %   $ 4,749,075  
                                   


Cost of Revenues
  Six Months
Ended
June 30, 2017
 
% of
revenues
    Six Months
Ended
June 30, 2016
 
% of
revenues
   
Increase /
(Decrease)
 
                                 
North American Transaction Solutions   $ 20,933,958   85 %   $ 15,620,817   86 %   $ 5,313,141  
Mobile Solutions     1,319,704   96 %     3,381,206   90 %     (2,061,502 )
Online Solutions     2,524,722   67 %     1,868,011   64 %     656,711  
  Total   $ 24,778,384   83 %   $ 20,870,034   84 %   $ 3,908,350  
                                   


Gross Margin
  Six Months
Ended
June 30, 2017
 
% of
revenues
    Six Months
Ended
June 30, 2016
 
% of
revenues
   
Increase /
(Decrease)
 
                                 
North American Transaction Solutions   $ 3,643,743   15 %   $ 2,635,764   14 %   $ 1,007,979  
Mobile Solutions     55,687   4 %     392,005   10 %     (336,318 )
Online Solutions     1,225,168   33 %     1,056,104   36 %     169,064  
  Total   $ 4,924,598   17 %   $ 4,083,873   16 %   $ 840,725  
                                   

Cost of revenues represents direct costs of generating revenues, including commissions, mobile operator fees, purchases of short numbers, interchange expense and processing fees. Cost of revenues for the six months ended June 30, 2017 were $24,778,384 as compared to $20,870,034 for the six months ended June 30, 2016. The increase in cost of revenues was primarily due to a $5,313,141 increase in our North American Transaction Solutions segment due to increased sales volume. There was also a $656,711 increase in cost of revenues resulting from our Online Solutions segment operations also primarily due to the boarding of more merchants. This was offset by a $2,061,502 decrease in our Mobile Solutions segment cost of revenues, which resulted from the decrease in sales for our Mobile Solutions segment for the six months ended June 30, 2017.

Gross Margin for the six months ended June 30, 2017 was $4,924,598, or 17% of net revenue, as compared to $4,083,873, or 16% of net revenue, for the six months ended June 30, 2016. The $840,725 increase in gross margin was primarily due to the increased sales volume of processing and business mix in our North American Transaction Solutions offset by a decrease of $336,318 in our Mobile Solutions margin caused from a decrease in business.

Total operating expenses were $8,531,281 for the six months ended June 30, 2017, which consisted of general and administrative expenses of $5,430,338, non-cash compensation expenses of $724,941, provision for bad debts of $1,145,621, and depreciation and amortization of $1,230,381. Total operating expenses were $8,572,829 for the six months ended June 30, 2016, which consisted of general and administrative expenses of $4,087,624, non-cash compensation expenses of $2,375,573, provision for bad debts of $376,979, and depreciation and amortization of $1,732,653.

The components of our general and administrative expenses are discussed below.

General and administrative expenses for the six months ended June 30, 2017 and 2016 consisted of operating expenses not otherwise delineated in our Consolidated Statements of Operations and Comprehensive Loss and include salaries and benefits, professional fees, rent, travel expense, filing fees, transaction gains, office expenses, communication expense, insurance expense, and other expenses required to run our business, as follows:

       
Six Months Ended June 30, 2017      
       
Category   North America
Transaction
Solutions
    Mobile
Solutions
    Online
Solutions
    Corporate
Expenses &
Eliminations
    Total  
Salaries, benefits, taxes and contractor payments   $ 944,750     $ 250,334     $ 456,705     $ 1,388,739     $ 3,040,528  
Professional fees     250,964       44,839       483,877       554,737       1,334,417  
Rent     -       27,288       80,092       181,763       289,143  
Business development     2,809       977       17,788       2,496       24,070  
Travel expense     112,148       6,826       5,336       90,918       215,228  
Filing fees     -       -       -       14,934       14,934  
Transaction (gains) losses     742       (17,096 )     (6,192 )     3,034       (19,512 )
Office expenses     98,602       6,025       41,511       91,501       237,639  
Communications expenses     23,388       2,197       59,571       40,162       125,318  
Insurance expense     -       -       -       76,341       76,341  
Other expenses     3,213       -       3,276       85,743       92,232  
  Total   $ 1,436,616     $ 321,390     $ 1,141,964     $ 2,530,368     $ 5,430,338  
                                         
Six Months Ended June 30, 2016                              
                               
Category   North America
Transaction
Solutions
    Mobile
Solutions
    Online
Solutions
    Corporate
Expenses &
Eliminations
    Total  
Salaries, benefits, taxes and contractor payments   $ 808,581     $ 235,937     $ 255,436     $ 1,056,044     $ 2,355,998  
Professional fees     222,506       2,548       301,255       675,401       1,201,710  
Rent     -       2,318       68,374       200,615       271,307  
Business development     20,956       -       64,791       4,648       90,395  
Travel expense     91,095       7,095       9,986       37,902       146,078  
Filing fees     -       -       -       59,395       59,395  
Transaction (gains) losses     -       (383,813 )     39,105       25,840       (318,868 )
Office expenses     46,747       4,974       26,085       51,439       129,245  
Communications expenses     46,978       1,056       15,677       49,309       113,020  
Insurance expense     -       -       -       5,784       5,784  
Other expenses     21,063       935       333       11,229       33,560  
  Total   $ 1,257,926     $ (128,950 )   $ 781,042     $ 2,177,606     $ 4,087,624  
                                         
Variance                              
                               
Category   North America
Transaction
Solutions
    Mobile
Solutions
    Online
Solutions
    Corporate
Expenses &
Eliminations
    Total  
Salaries, benefits, taxes and contractor payments   $ 136,169     $ 14,397     $ 201,269     $ 332,695     $ 684,530  
Professional fees     28,458       42,291       182,622       (120,664 )     132,707  
Rent     -       24,970       11,718       (18,852 )     17,836  
Business development     (18,147 )     977       (47,003 )     (2,152 )     (66,325 )
Travel expense     21,053       (269 )     (4,650 )     53,016       69,150  
Filing fees     -       -       -       (44,461 )     (44,461 )
Transaction (gains) losses     742       366,717       (45,297 )     (22,806 )     299,356  
Office expenses     51,855       1,051       15,426       40,062       108,394  
Communications expenses     (23,590 )     1,141       43,894       (9,147 )     12,298  
Insurance expense     -       -       -       70,557       70,557  
Other expenses     (17,850 )     (935 )     2,943       74,514       58,672  
  Total   $ 178,690     $ 450,340     $ 360,922     $ 352,762     $ 1,342,714  
                                         

Salaries, benefits, taxes and contractor payments were $3,040,528 for the six months ended June 30, 2017 as compared to $2,355,998 for the six months ended June 30, 2016.

             
Segment   Salaries and
benefits for the
six months ended
June 30, 2017
  Salaries and
benefits for the
six months ended
June 30, 2016
  Increase /
(Decrease)
North America Transaction Solutions   $ 944,750   $ 808,581   $ 136,169
Mobile Solutions     250,334     235,937     14,397
Online Solutions     456,705     255,436     201,269
Corporate Expenses & Eliminations     1,388,739     1,056,044     332,695
Total   $ 3,040,528   $ 2,355,998   $ 684,530
                   

The increase in salaries of $684,530 was due primarily to the increase of corporate expenses for a $300,000 discretionary bonus payable to our CEO and approved by the Board of directors. The bonus is payable when cash flow of the business can support the payment. Additionally, North American Transaction Solutions segment salaries increased $136,169 due to an increase in headcount and sales incentives for key employees. There was also an increase of $201,269 and $14,397, respectively in our Online Solutions and Mobile Solutions segments which were primarily due to increasing administrative payroll on PayOnline and unfavorable changes in foreign currency exchange rates.

Professional fees were $1,334,417 for the six months ended June 30, 2017 as compared to $1,201,710 for the six months ended June 30, 2016.

                             
Six Months Ended June 30, 2017                            
                             
Professional Fees   North America
Transaction
Solutions
    Mobile
Solutions
    Online
Solutions
  Corporate
Expenses &
Eliminations
    Total  
General Legal   $ 22,599     $ -     $ 3,958   $ 58,228     $ 84,785  
SEC Compliance Legal Fees     -       -       -     102,785       102,785  
Accounting and Auditing     -       -       14,433     210,282       224,715  
Tax Compliance and Planning     -       -       -     15,400       15,400  
Consulting     228,365       44,839       465,486     168,042       906,732  
Total   $ 250,964     $ 44,839     $ 483,877   $ 554,737     $ 1,334,417  
                                       
Six Months Ended June 30, 2016                            
                             
Professional Fees   North America
Transaction
Solutions
    Mobile
Solutions
    Online
Solutions
  Corporate
Expenses &
Eliminations
    Total  
General Legal   $ 33,397     $ 212     $ 3,020   $ 68,860     $ 105,489  
SEC Compliance Legal Fees     -       -       -     87,500       87,500  
Accounting and Auditing     -       -       578     224,399       224,977  
Tax Compliance and Planning     -       -       -     11,000       11,000  
Consulting     189,109       2,336       297,657     283,642       772,744  
Total   $ 222,506     $ 2,548     $ 301,255   $ 675,401     $ 1,201,710  
                                       
Variance                            
                             
Professional Fees   North America
Transaction
Solutions
    Mobile
Solutions
    Online
Solutions
  Corporate
Expenses &
Eliminations
    Increase /
(Decrease)
 
General Legal   $ (10,798 )   $ (212 )   $ 938   $ (10,632 )   $ (20,704 )
SEC Compliance Legal Fees     -       -       -     15,285       15,285  
Accounting and Auditing     -       -       13,855     (14,117 )     (262 )
Tax Compliance and Planning     -       -       -     4,400       4,400  
Consulting     39,256       42,503       167,829     (115,600 )     133,988  
Total   $ 28,458     $ 42,291     $ 182,622   $ (120,664 )   $ 132,707  
                                       

Professional fees increased by $132,707 mainly due to an increase in Online Solutions segment's consulting fees of $167,828 offset by a decrease in general legal expenses.

Non-cash compensation expense from share-based compensation was $724,941 for the six months ended June 30, 2017, compared to $2,375,573 for the six months ended June 30, 2016. The majority of these expenses were for employee and consultant incentives in both periods.

We recorded bad debt expense of $1,145,621 for the six months ended June 30, 2017 as compared to $376,979 for the six months ended June 30, 2016. For the six months ended June 30, 2017, we recorded a loss which was primarily comprised of $958,523 in ACH rejects and a $196,551 provision from our Russian operations. Of the $958,523 of ACH rejects, $511,881 were passed through to independent sales organizations that board their merchants with us, offset by $9,453 of rejects obtained through collection procedures.

For the six months ended June 30, 2016, we recorded a loss which was primarily comprised of $409,276 in ACH rejects offset by a $32,397 recovery from our Russian operations. Of the $409,276 of ACH rejects, $168,333 were passed through as a reduction to commissions to independent sales organizations that board their merchants with us.

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs, capitalized software expenses, trademarks, domain names and employee non-compete agreements. Depreciation and amortization expense was $1,230,381 for the six months ended June 30, 2017 as compared to $1,732,653 for the six months ended June 30, 2016.

Interest expense was $591,740 for the six months ended June 30, 2017 as compared to $589,414 for six months ended June 30, 2016, representing an increase of $2,325 as follows:

               
Funding Source   Six months
ended
June 30, 2017
  Six months
ended
June 30, 2016
  Increase /
(Decrease)
 
MBF Notes   $ 34,329   $ 28,450   $ 5,879  
RBL Notes     376,494     258,126     118,368  
Priority Payments Note     24,747     -     24,747  
Crede CG III, LTD     -     297,435     (297,435 )
Other     156,169     5,403     150,766  
Total   $ 591,740   $ 589,414   $ 2,325  
                     

Other interest costs primarily consisted of $82,377 resulting from the stock price guarantee related to the PayOnline acquisition and $67,602 resulting from the promissory note entered into on March 1, 2017 with Star Capital Management, LLC. See Note 12. Related Party Transactions.

The net income attributable to non-controlling interests amounted to $125,782 for six months ended June 30, 2017 as compared to $76,668 for the six months ended June 30, 2016.

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 three and six months ended June 30, 2017 and 2016 is presented in the following Non-GAAP Financial Measures Table.

                     
    GAAP     Share-based
Compensation
  Loss from Stock
Value Guarantee
  Adjusted Non-GAAP  
Three Months Ended June 30, 2017                            
  Net (loss) income attributable to Net Element Inc stockholders   $ (1,640,340 )   $ 128,537   $ -   $ (1,511,803 )
  Basic and diluted earnings per share   $ (0.09 )   $ 0.01   $ -   $ (0.08 )
  Basic and diluted shares used in computing earnings per share     17,715,382                   17,715,382  
                             
    GAAP     Share-based
Compensation
  Loss from Stock
Value Guarantee
  Adjusted Non-GAAP  
Three Months Ended June 30, 2016                            
  Net (loss) income attributable to Net Element Inc stockholders   $ (5,346,448 )   $ 2,014,589   $ 2,162,861   $ (1,168,998 )
  Basic and diluted earnings per share   $ (0.46 )   $ 0.17   $ 0.19   $ (0.10 )
  Basic and diluted shares used in computing earnings per share     11,635,434                   11,635,434  
                             
    GAAP     Share-based
Compensation
  Loss from Stock
Value Guarantee
  Adjusted Non-GAAP  
Six Months Ended June 30, 2017                            
  Net (loss) income attributable to Net Element Inc stockholders   $ (4,127,837 )   $ 724,941   $ -   $ (3,402,896 )
  Basic and diluted earnings per share   $ (0.24 )   $ 0.04   $ -   $ (0.19 )
  Basic and diluted shares used in computing earnings per share     17,099,145                   17,099,145  
                             
    GAAP     Share-based
Compensation
  Loss from Stock
Value Guarantee
  Adjusted Non-GAAP  
Six Months Ended June 30, 2016                            
  Net (loss) income attributable to Net Element Inc stockholders   $ (7,194,167 )   $ 2,375,573   $ 2,162,861   $ (2,655,733 )
  Basic and diluted earnings per share   $ (0.63 )   $ 0.21   $ 0.19   $ (0.23 )
  Basic and diluted shares used in computing earnings per share     11,464,434                   11,464,434  
                             

Additional information regarding Net Element's results for its second quarter ended June 2017 may be found in Net Element's quarterly report on Form 10-Q, which was filed with the Security and Exchange Commission (SEC) on August 11, 2017 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 U.S. and selected emerging markets. In the U.S. it aims to grow transactional revenue by innovating SME productivity services such as its cloud based, restaurant and retail 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. Net Element was named in 2016 by South Florida Business Journal as one of the fastest growing technology companies.
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.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
    June 30,
2017
  December 31,
2016
ASSETS        
Current assets:        
  Cash   $1,274,279   $621,635
  Accounts receivable, net   6,007,143   7,126,429
  Prepaid expenses and other assets   1,219,524   1,467,897
      Total current assets, net   8,500,946   9,215,961
Fixed assets, net   103,239   117,295
Intangible assets, net   3,308,229   3,589,850
Goodwill   9,643,752   9,643,752
Other long term assets   417,574   603,209
      Total assets   21,973,740   23,170,067
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
  Accounts payable   7,516,761   7,510,113
  Accrued expenses   4,437,601   5,518,823
  Deferred revenue   439,074   1,355,972
  Notes payable (current portion)   984,720   808,976
  Due to related parties   366,636   299,004
      Total current liabilities   13,744,792   15,492,888
  Notes payable (net of current portion)   6,253,513   3,615,782
      Total liabilities   19,998,305   19,108,670
         
COMMITMENTS AND CONTINGENCIES        
         
STOCKHOLDERS' EQUITY        
  Series A convertible preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at June 30, 2017 and December 31, 2016)   -   -
  Common stock ($.0001 par value, 400,000,000 shares authorized and 17,968,317 and 15,353,494 shares issued and outstanding at June 30, 2017 and December 31, 2016)   1,797   1,535
  Paid in capital   166,220,080   163,918,685
  Accumulated other comprehensive loss   (2,620,615)   (2,486,616)
  Accumulated deficit   (161,570,423)   (157,442,585)
  Noncontrolling interest   (55,404)   70,378
    Total stockholders' equity   1,975,435   4,061,397
      Total liabilities and stockholders' equity   $21,973,740   $23,170,067
               
               
NET ELEMENT, INC.  
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS  
   
    Three Months Ended
June 30
    Six Months Ended
June 30
 
    2017     2016     2017     2016  
                                 
Net revenues                                
  Service fees   $ 15,456,310     $ 12,117,708     $ 28,362,086     $ 21,481,528  
  Branded content     684,731       1,575,140       1,340,896       3,472,379  
Total revenues     16,141,041       13,692,848       29,702,982       24,953,907  
                                 
Costs and expenses:                                
  Cost of service fees     12,653,556       10,003,934       23,475,543       17,602,087  
  Cost of branded content     664,836       1,480,859       1,302,841       3,267,947  
  General and administrative     2,599,178       1,999,391       5,430,338       4,087,624  
  Non-cash compensation     128,537       2,014,589       724,941       2,375,573  
  Bad debt expense     865,863       125,238       1,145,621       376,979  
  Depreciation and amortization     573,018       844,535       1,230,381       1,732,653  
Total costs and operating expenses     17,484,988       16,468,546       33,309,665       29,442,863  
Loss from operations     (1,343,947 )     (2,775,698 )     (3,606,683 )     (4,488,956 )
  Interest expense, net     (322,052 )     (438,976 )     (591,740 )     (589,414 )
  Loss from stock value guarantee     -       (2,162,861 )     -       (2,162,861 )
  Other income (expense)     (49,422 )     (7,705 )     (55,196 )     (29,604 )
Net (loss) income before income taxes     (1,715,421 )     (5,385,240 )     (4,253,619 )     (7,270,835 )
  Income taxes     -       -       -       -  
Net loss     (1,715,421 )     (5,385,240 )     (4,253,619 )     (7,270,835 )
  Net loss attributable to the non controlling interest     75,081       38,792       125,782       76,668  
Net loss attributable to Net Element, Inc. stockholders     (1,640,340 )     (5,346,448 )     (4,127,837 )     (7,194,167 )
  Foreign currency translation loss     (146,102 )     (496,041 )     (133,999 )     (525,782 )
Comprehensive loss attributable to common stockholders   $ (1,786,442 )   $ (5,842,489 )   $ (4,261,836 )   $ (7,719,949 )
                                 
Loss per share - basic and diluted   $ (0.09 )   $ (0.46 )   $ (0.24 )   $ (0.63 )
                                 
Weighted average number of common shares outstanding - basic and diluted     17,715,382       11,635,434       17,099,145       11,464,434  
   
   
NET ELEMENT, INC.  
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS  
   
    Six Months Ended June 30,  
    2017     2016  
Cash flows from operating activities                
Net loss attributable to Net Element, Inc. stockholders   $ (4,127,837 )   $ (7,194,167 )
Adjustments to reconcile net loss to net cash used in operating activities                
  Non controlling interest     (125,782 )     (76,668 )
  Share based compensation     596,404       2,375,573  
  Deferred revenue     (916,898 )     (417,887 )
  Provision for bad debts     192,895       -  
  Depreciation and amortization     1,230,381       1,732,652  
  Non cash interest     94,248       297,434  
Changes in assets and liabilities                
  Accounts receivable     1,913,135       (331,566 )
  Prepaid expenses and other assets     284,661       270,932  
  Accounts payable and accrued expenses     (1,845,161 )     1,876,961  
  Net cash used in operating activities     (2,703,954 )     (1,466,736 )
                 
Cash flows from investing activities                
  Client acquisition costs     (966,147 )     (741,514 )
  Receipt of excess reserves and (purchase) of fixed and other assets     180,423       (214,046 )
    Net cash used in investing activities     (785,724 )     (955,560 )
                 
Cash flows from financing activities                
  Proceeds from common stock     1,437,132       -  
  Proceeds from indebtedness     3,298,792       1,215,000  
  Repayment of indebtedness     (624,918 )     -  
  Related party advances     -       910,045  
  Net cash provided by financing activities     4,111,006       2,125,045  
                   
  Effect of exchange rate changes on cash     31,316       (94,905 )
  Net increase (decrease) in cash     652,644       (392,156 )
                   
  Cash at beginning of period     621,635       1,025,747  
  Cash at end of period   $ 1,274,279     $ 633,591  
                 
Supplemental disclosure of cash flow information                
  Cash paid during the period for:                
    Interest   $ 397,548     $ 589,414  
    Taxes   $ 64,314     $ 94,718  
Non cash activities:                
  Share issuance for settlement of unpaid compensation   $ -     $ 1,042,509  
  Shares issued for redemption of indebtedness   $ 258,107     $ 971,871  
  Shares issued in settlement of advances from board member   $ -     $ 909,285  

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