SOURCE: Net Element, Inc.

Net Element, Inc.

November 14, 2017 16:31 ET

Net Element Reports Third Quarter 2017 Results

North America Transaction Solutions leads in revenue growth; Loss per share narrows significantly vs same period last year

MIAMI, FL--(Marketwired - Nov 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 third quarter ended September 30, 2017 and provided an update on recent strategic and operational initiatives.

Third Quarter 2017 Results:

  • Revenues increased to $14.9 million, an increase of 6.4% compared to $14.0 million in the prior year. The increase is primarily due to organic revenue growth in the North America Transaction Solutions segment, which experienced 17.3% growth over the prior year;
  • US accounted for 88% of Revenue, while international revenues were 12%.

Recent Highlights:

  • Net Element ranked as one of the fastest growing companies in North America on Deloitte's 2017 Technology Fast 500™
  • Unified Payments launched web-based, integrated same-day ACH payment processing
  • PayOnline launched payment acceptance for Azimuth Airlines
  • Unified Payments supported Florida SMB merchants affected by Hurricane Irma with the free mobile POS card readers
  • Unified Payments launched Zero-Fee processing program for SMB merchants in the U.S., giving merchants the flexibility to pass through credit card processing costs to their customers
  • PayOnline launched payment acceptance module for Telegram, Viber, Facebook and VK instant messengers
  • PayOnline launched support for electronic commerce in the U.S. as a fully integrated offering that allows merchants to expand their business without limiting the way customers can pay
  • PayOnline added support for iDEAL, the most popular payment system in Netherlands
  • PayOnline expanded payments module to include inSales Platform

"Third quarter was an important period for the Company as we streamlined international operations to build a more profitable and less capital intensive Mobile and Online Solutions business. Additionally, we regained compliance with the Nasdaq continued listing requirements," commented Oleg Firer, CEO of Net Element. "In the United States we continue to grow organically with the focus on value-added solutions."

Conference Call:

The Company will host a conference call to discuss Third Quarter 2017 financial results and business highlights on November 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 4797319. 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 https://edge.media-server.com/m6/p/mn6s3mja. 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 September 30, 2017 Compared to the Three Months Ended September 30, 2016

We reported a net loss attributable to our stockholders of $1,702,536, or $0.90 per share, for the three months ended September 30, 2017 as compared to a net loss attributable to our stockholders of $3,469,540, or $2.47 per share, for the three months ended September 30, 2016. This resulted in a decrease in net loss attributable to stockholders of $1,767,004 primarily due to an increase in revenues, decreases in non-cash compensation and interest expenses, partially offset by an increase in other expenses.  Net loss attributable to stockholders for the three months ended September 30, 2016 was also negatively affected by an expense for loss from stock value guarantee related to the PayOnline acquisition.

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 $1,591,259 or $0.84 per share for the three months ended September 30, 2017 as compared to an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $2,736,839 or $1.95 per share for the three months ended September 30, 2016.

Net revenues consist primarily of payment processing fees. Net revenues were $14,901,131 for the three months ended September 30, 2017 as compared to $14,009,652 for the three months ended September 30, 2016. The increase in net revenue is primarily due to an increase to North American Transaction Solutions segment revenue of $1,936,917 (or 17% increase) for the three months ended September 30, 2017 versus the three months ended September 30, 2016. Increases in our North American Transaction Solutions segment revenue were primarily due to continued organic growth of merchants with emphasis on value-added offerings partially offset by some loss of processing revenues resulting from storms primarily affecting merchants processing in Florida and Texas. Our Online Solutions segment revenue increased $180,803 (or 11%), from $1,597,124 for the three months ended September 30, 2016 to $1,777,927 for the three months ended September 30, 2017. Net revenue for the three months ended September 30, 2017 was also negatively affected by a $1,226,241 (or 100%) decrease in revenue in our Mobile Solutions segment, as we experience increased competition, decreased margins and reorganizing assignments of the Mobile Solutions segment to employees at PayOnline and TOT Group Russia. 

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

 
Gross Margin Analysis
 
    Three         Three            
    Months Ended         Months Ended            
    September 30,         September 30,         Increase /  
Source of Revenues   2017   Mix     2016   Mix     (Decrease)  
                           
  North American Transaction Solutions   $ 13,123,204   88 %   $ 11,186,287   80 %   $ 1,936,917  
  Mobile Solutions     -   0 %     1,226,241   9 %     (1,226,241 )
  Online Solutions     1,777,927   12 %     1,597,124   11 %     180,803  
    Total   $ 14,901,131   100 %   $ 14,009,652   100 %   $ 891,479  
                       
    Three       Three          
    Months Ended       Months Ended          
    September 30,   % of    September 30,   % of    Increase /  
Cost of Revenues   2017   revenues    2016   revenues    (Decrease)  
                           
  North American Transaction Solutions   $ 11,279,098   86 %   $ 9,585,952   86 %   $ 1,693,146  
  Mobile Solutions     -   0 %     1,045,836   85 %     (1,045,836 )
  Online Solutions     1,477,529   83 %     1,063,380   67 %     414,149  
    Total   $ 12,756,627   86 %   $ 11,695,168   83 %   $ 1,061,459  
                       
    Three       Three          
    Months Ended       Months Ended          
    September 30,   % of    September 30,   % of    Increase /  
Gross Margin   2017   revenues    2016   revenues    (Decrease)  
                           
  North American Transaction Solutions   $ 1,844,106   14 %   $ 1,600,335   14 %   $ 243,771  
  Mobile Solutions     -   0 %     180,405   15 %     (180,405 )
  Online Solutions     300,398   17 %     533,744   33 %     (233,346 )
    Total   $ 2,144,504   14 %   $ 2,314,484   17 %   $ (169,980 )
                                   

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 September 30, 2017 were $12,756,627 as compared to $11,695,168 for the three months ended September 30, 2016. The $1,061,459 increase in cost of revenues was primarily due to a $1,693,145 increase in our North American Transaction Solutions segment due to the corresponding increase in sales volume. There also was a $414,149 increase in cost of revenues resulting from our Online Solutions segment operations primarily due the costs associated with onboarding additional merchants. This was partially offset by a $1,045,836 decrease in our Mobile Solutions segment cost of revenues, which resulted from the corresponding decrease in revenues for our Mobile Solutions segment for the three months ended September 30, 2017.

Gross margin or the three months ended September 30, 2017 was $2,144,504, or 14% of net revenue, as compared to $2,314,484, or 17% of net revenue, for the three months ended September 30, 2016. The $169,980 decrease in gross margin was primarily due to a decrease of $180,405 in Mobile Solutions margin caused by a decrease in business and a $233,346 decrease in Online Solutions offset by $243,771 increase in gross margin in North American Transaction Solutions caused by continued growth of merchants with emphasis on value-added offerings. 

Total operating expenses were $3,418,716 for the three months ended September 30, 2017, which consisted of general and administrative expenses of $2,357,729, non-cash compensation expenses of $111,277, provision for bad debts of $319,690, and depreciation and amortization of $630,020. Total operating expenses were $4,083,494 for the three months ended September 30, 2016, which consisted of general and administrative expenses of $2,284,737, non-cash compensation expenses of $732,701, provision for bad debts of $301,170, and depreciation and amortization of $764,886. 

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

General and administrative expenses for the three months ended September 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, business development, travel expense, filing fees, transaction gains or losses, office expenses, communication expenses, insurance expenses, and other expenses required to run our business, as follows:

 
Three Months Ended September 30, 2017             
Category   North
America
Transaction
Solutions
  Mobile
Solutions
 
  Online
Solutions
  Corporate
Expenses &
Eliminations
 
  Total  
Salaries, benefits, taxes and contractor payments   $ 459,412   $ 44,733     $ 213,351   $ 539,002     $ 1,256,498  
Professional fees     100,772     (46 )     233,836     326,876       661,438  
Rent     -     5,803       39,037     58,410       103,250  
Business development     6,572     (6 )     8,902     222       15,690  
Travel expense     21,753     2,897       1,142     20,634       46,426  
Filing fees     -     -       -     12,056       12,056  
Transaction (gains) losses     -     (13,327 )     54     (3 )     (13,276 )
Office expenses     67,140     566       21,319     13,005       102,030  
Communications expenses     5,507     1,173       29,416     20,211       56,307  
Insurance expense     -     -       -     34,853       34,853  
Other expenses     349     87       1,619     80,402       82,457  
  Total   $ 661,505   $ 41,880     $ 548,676   $ 1,105,668     $ 2,357,729  
                                       
Three Months Ended September 30, 2016  
Category   North
America
Transaction
Solutions
  Mobile
Solutions
 
  Online
Solutions
 
  Corporate
Expenses &
Eliminations
 
  Total  
Salaries, benefits, taxes and contractor payments   $ 414,659   $ 107,310     $ 167,802     $ 442,497     $ 1,132,268  
Professional fees     89,985     36,874       161,394       384,227       672,480  
Rent     -     942       35,682       116,703       153,327  
Business development     10,827     4,869       27,752       1,395       44,843  
Travel expense     61,700     2,563       5,978       50,466       120,707  
Filing fees     -     -       -       17,789       17,789  
Transaction (gains) losses     -     (11,068 )     (655 )     (141,639 )     (153,362 )
Office expenses     29,600     8,805       21,534       33,532       93,471  
Communications expenses     17,392     583       27,065       20,447       65,486  
Insurance expense     -     -       -       123,992       123,992  
Other expenses     9,755     6       1,350       2,624       13,736  
  Total   $ 633,918   $ 150,884     $ 447,902     $ 1,052,034     $ 2,284,737  
                                         
Variance                              
Category   North
America
Transaction
Solutions
 
  Mobile
Solutions
 
  Online
Solutions
 
  Corporate
Expenses &
Eliminations
 
  Total  
Salaries, benefits, taxes and contractor payments   $ 44,753     $ (62,577 )   $ 45,549     $ 96,505     $ 124,230  
Professional fees     10,787       (36,920 )     72,442       (57,351 )     (11,042 )
Rent     -       4,861       3,355       (58,293 )     (50,077 )
Business development     (4,255 )     (4,875 )     (18,850 )     (1,173 )     (29,153 )
Travel expense     (39,947 )     334       (4,836 )     (29,832 )     (74,281 )
Filing fees     -       -       -       (5,733 )     (5,733 )
Transaction (gains) losses     -       (2,259 )     709       141,636       140,086  
Office expenses     37,540       (8,239 )     (215 )     (20,527 )     8,559  
Communications expenses     (11,885 )     590       2,351       (236 )     (9,179 )
Insurance expense     -       -       -       (89,139 )     (89,139 )
Other expenses     (9,406 )     81       269       77,778       68,721  
  Total   $ 27,587     $ (109,004 )   $ 100,774     $ 53,634     $ 72,992  
                                           

Salaries, benefits, taxes and contractor payments were $1,256,498 for the three months ended September 30, 2017 as compared to $1,132,268 for the three months ended September 30, 2016.

               
Segment   Salaries and
benefits for the three months ended
September 30, 2017
  Salaries and
benefits for the three months ended September 30, 2016
  Increase /
(Decrease)
 
North America Transaction Solutions   $ 459,412   $ 414,659   $ 44,753  
Mobile Solutions     44,733     107,310     (62,577 )
Online Solutions     213,351     167,802     45,549  
Corporate Expenses & Eliminations     539,002     442,497     96,505  
    Total   $ 1,256,498   $ 1,132,268   $ 124,230  
                         

The increase in salaries of $124,230 was due to the North American Transaction Solutions segment and corporate salaries increasing $44,743 and $96,505, respectively, due to an increase in headcount and sales incentives for key employees as the business grows. In addition, an increase in our Online Solutions segment of $45,549 was primarily due to the Ruble exchange rate. These increases were offset by a decrease of $62,577 in our Mobile Solutions segment due to the elimination of headcount as we assigned the current workloads to existing employees of PayOnline and TOT Group Russia.

Professional fees were $661,438 for the three months ended September 30, 2017 as compared to $672,480 for the three months ended September 30, 2016.

 
Three Months Ended September 30, 2017      
Professional Fees   North
America
Transaction
Solutions
  Mobile
Solutions
 
  Online
Solutions
  Corporate
Expenses &
Eliminations
  Total
General Legal   $ 819   $ -     $ 185   $ 4,305   $ 5,309
SEC Compliance Legal Fees     -     -       -     88,564     88,564
Accounting and Auditing     -     -       1,000     97,500     98,500
Tax Compliance and Planning     -     -       -     -     -
Consulting     99,953     (46 )     232,651     136,507     469,065
    Total   $ 100,772   $ (46 )   $ 233,836   $ 326,876   $ 661,438
                                     
Three Months Ended September 30, 2016          
Professional Fees   North
America
Transaction
Solutions
  Mobile
Solutions
  Online
Solutions
  Corporate
Expenses &
Eliminations
  Total
General Legal   $ 5,818   $ 56   $ 847   $ 99,179   $ 105,900
SEC Compliance Legal Fees     -     -     -     43,750     43,750
Accounting and Auditing     -     -     -     101,732     101,732
Tax Compliance and Planning     -     -     -     33,200     33,200
Consulting     84,167     36,818     160,547     106,366     387,898
    Total   $ 89,985   $ 36,874   $ 161,394   $ 384,227   $ 672,480
Variance                              
Professional Fees   North
America
Transaction
Solutions
 
  Mobile
Solutions
 
  Online
Solutions
 
  Corporate
Expenses &
Eliminations
 
  Increase /
(Decrease)
 
General Legal   $ (4,999 )   $ (56 )   $ (662 )   $ (94,874 )   $ (100,591 )
SEC Compliance Legal Fees     -       -       -       44,814       44,814  
Accounting and Auditing     -       -       1,000       (4,232 )     (3,232 )
Tax Compliance and Planning     -       -       -       (33,200 )     (33,200 )
Consulting     15,786       (36,864 )     72,104       30,141       81,167  
    Total   $ 10,787     $ (36,920 )   $ 72,442     $ (57,351 )   $ (11,042 )
                                             

Professional fees decreased by $11,042 mainly due to a decrease in general legal fees because of decreases in litigation and tax compliance fees partially offset by an increases in SEC compliance and consulting fees due to increased public market transactions.

Non-cash compensation expense from share-based compensation was $111,277 for the three months ended September 30, 2017, compared to $732,701 for the three months ended September 30, 2016. The majority of these expenses were for employee and consultant equity incentives for both periods.

We recorded bad debt expense of $319,690 for the three months ended September 30, 2017 as compared to $301,170 for the three months ended September 30, 2016. For the three months ended September 30, 2017, we recorded a loss which was primarily comprised of $227,281 in ACH rejects and a $92,409 provision from our Russian operations. Of the $678,143 of gross ACH rejects, $111,174 were passed through to independent sales organizations via a reduction in commissions. For the three months ended September 30, 2016, we recorded a loss which was primarily comprised of $301,132 in net ACH rejects. Of the $301,132 of net ACH rejects, $117,794 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 $630,020 for the three months ended September 30, 2017 as compared to $764,886 for the three months ended September 30, 2016. The decrease was due to the full amortization of certain software and merchant portfolio assets during 2016.

Interest expense was $302,813 for the three months ended September 30, 2017 as compared to $608,716 for three months ended September 30, 2016, representing a decrease of $305,904 due to lower balances as follows:

               
Funding Source   Three months
ended
September 30,
2017
  Three months
ended
September 30,
2016
  Increase /
(Decrease)
 
MBF Notes   $ 15,277   $ 11,356   $ 3,921  
RBL Notes     195,736     510,655     (314,919 )
Priority Payments Note     65,630     -     65,630  
Other     26,170     86,705     (60,537 )
    Total   $ 302,813   $ 608,716   $ (305,904 )
                         

Other interest expense for the three months ended September 30, 2017 consisted of $10,407 resulting from the promissory note entered into on March 1, 2017 with Star Equities, LLC (See Note 12. Related Party Transactions) and $17,762 related to the PayOnline acquisition. During the three months ended September 30, 2016, other interest expense primarily consisted of $76,289 related to the PayOnline acquisition. The primary reason for the decrease was due to less Crede stock exchange paydowns on RBL debt during the three months ended September 30, 2017, which resulted in increased RBL interest expense during 2016.

Other expenses for the three months ended September 30, 2017 consists primarily of a $94,267 of expenses attributed to our Mobile Solutions division.

The net income attributable to non-controlling interests amounted to $32,607 for three months ended September 30, 2017 as compared to the net loss of $33,683 for the three months ended September 30, 2016. The $66,290 decrease was caused by an adjustment to commission expense for prior quarters recorded during the three months ended September 30, 2017.

Results of Operations for the Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016

We reported a net loss attributable to stockholders of $5,830,373, or $3.29 per share, for the nine months ended September 30, 2017 as compared to a net loss attributable to stockholders of $10,663,708, or $8.65 per share, for the nine months ended September 30, 2016. This resulted in a decrease in net loss attributable to stockholders of $4,833,335 primarily due to an increase in revenues and a decrease in the loss from stock value guarantee, a decrease in noncash compensation expense, and a decrease in other income offset by an increase in general and administrative expenses.

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 $4,994,154 or $2.82 per share for the nine months ended September 30, 2017 as compared to an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $5,392,573 or $4.73 per share for the nine months ended September 30, 2016.

Net revenues consist primarily of payment processing fees. Net revenues were $44,604,113 for the nine months ended September 30, 2017 as compared to $38,963,559 for the nine months ended September 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 $8,258,268 (or 28% increase) for the nine months ended September 30, 2017 versus the nine months ended September 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 $1,006,578 (or 22%), from $4,521,239 for the nine months ended September 30, 2016 to $5,527,817 for the nine months ended September 30, 2017, primarily due to the onboarding of additional merchants. The increases in North American Transaction Solutions and Online Solutions segments were offset by a $3,624,292 (or 72%) decrease in our Mobile Solutions segment, as we have eliminated staff and assigned current responsibilities to team members at PayOnline and TOT Group Russia.

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

 
Gross Margin Analysis
 
    Nine         Nine            
    Months Ended         Months Ended            
    September 30,         September 30,         Increase /  
Source of Revenues   2017   Mix     2016   Mix     (Decrease)  
                           
  North American Transaction Solutions   $ 37,701,136   85 %   $ 29,442,868   76 %   $ 8,258,268  
  Mobile Solutions     1,375,160   3 %     4,999,452   13 %     (3,624,292 )
  Online Solutions     5,527,817   12 %     4,521,239   12 %     1,006,578  
    Total   $ 44,604,113   100 %   $ 38,963,559   100 %   $ 5,640,554  
                       
    Nine       Nine          
    Months Ended       Months Ended          
    September 30,   % of    September 30,   % of    Increase /  
Cost of Revenues   2017   revenues    2016   revenues    (Decrease)  
                           
  North American Transaction Solutions   $ 32,213,056   85 %   $ 25,206,769   86 %   $ 7,006,287  
  Mobile Solutions     1,319,704   96 %     4,427,043   89 %     (3,107,339 )
  Online Solutions     4,002,251   72 %     2,931,390   65 %     1,070,861  
    Total   $ 37,535,011   84 %   $ 32,565,202   84 %   $ 4,969,809  
                       
    Nine       Nine          
    Months Ended       Months Ended          
    September 30,   % of    September 30,   % of    Increase /  
Gross Margin   2017   revenues    2016   revenues    (Decrease)  
                           
  North American Transaction Solutions   $ 5,488,080   15 %   $ 4,236,099   14 %   $ 1,251,981  
  Mobile Solutions     55,456   4 %     572,409   11 %     (516,953 )
  Online Solutions     1,525,566   28 %     1,589,849   35 %     (64,283 )
    Total   $ 7,069,102   16 %   $ 6,398,357   16 %   $ 670,745  
                                     

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 nine months ended September 30, 2017 were $37,535,011 as compared to $32,565,202 for the nine months ended September 30, 2016. The increase in cost of revenues was primarily due to a $7,006,287 increase in our North American Transaction Solutions segment due to the corresponding increase in sales volume. There was also a $1,070,861 increase in cost of revenues resulting from our Online Solutions segment operations also primarily due to with boarding additional merchants. This was offset by a $3,107,339 decrease in our Mobile Solutions segment cost of revenues, which resulted from the corresponding decrease in sales for our Mobile Solutions segment for the nine months ended September 30, 2017.

Gross margin for the nine months ended September 30, 2017 was $7,069,102, or 16% of net revenue, as compared to $6,398,357, or 16% of net revenue, for the nine months ended September 30, 2016. The $670,745 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 $516,953 in our Mobile Solutions margin caused from a decrease in business. 

Total operating expenses were $11,949,998 for the nine months ended September 30, 2017, which consisted of general and administrative expenses of $7,788,068, non-cash compensation expenses of $836,218, provision for bad debts of $1,465,311, and depreciation and amortization of $1,860,401. Total operating expenses were $12,656,323 for the nine months ended September 30, 2016, which consisted of general and administrative expenses of $6,372,361, non-cash compensation expenses of $3,108,274, provision for bad debts of $678,150, and depreciation and amortization of $2,497,538. 

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

General and administrative expenses for the nine months ended September 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, business development, travel expense, filing fees, transaction gains, office expenses, communication expense, insurance expense, and other expenses required to run our business, as follows:

   
Nine Months Ended September 30, 2017    
Category   North 
America 
Transaction
Solutions
  Mobile 
Solutions
    Online 
Solutions
    Corporate 
Expenses & 
Eliminations
  Total  
Salaries, benefits, taxes and contractor payments   $ 1,404,162   $ 295,068     $ 670,056     $ 1,927,741   $ 4,297,027  
Professional fees     351,736     44,793       717,713       881,613     1,995,855  
Rent     -     33,092       119,129       240,172     392,393  
Business development     9,381     971       26,689       2,718     39,759  
Travel expense     133,901     9,723       6,479       111,551     261,654  
Filing fees     -     -       -       26,990     26,990  
Transaction (gains) losses     742     (30,423 )     (6,138 )     3,031     (32,788 )
Office expenses     165,742     6,591       62,830       104,506     339,669  
Communications expenses     28,894     3,368       88,987       60,373     181,622  
Insurance expense     -     -       -       111,194     111,194  
Other expenses     3,563     87       4,895       166,148     174,693  
  Total   $ 2,098,121   $ 363,270     $ 1,690,640     $ 3,636,037   $ 7,788,068  
 
Nine Months Ended September 30, 2016             
Category   North 
America 
Transaction
Solutions
  Mobile 
Solutions
    Online 
Solutions
  Corporate 
Expenses & 
Eliminations
    Total  
Salaries, benefits, taxes and contractor payments   $ 1,223,240   $ 343,247     $ 423,238   $ 1,498,541     $ 3,488,266  
Professional fees     372,492     39,422       462,650     999,627       1,874,191  
Rent     -     3,260       104,056     317,317       424,633  
Business development     31,784     4,869       92,544     6,043       135,240  
Travel expense     152,795     9,657       15,964     88,368       266,784  
Filing fees     -     -       -     77,185       77,185  
Transaction (gains) losses     -     (394,880 )     38,449     (115,797 )     (472,228 )
Office expenses     76,347     13,779       47,619     84,971       222,716  
Communications expenses     64,369     1,639       42,742     69,756       178,506  
Insurance expense     -     87       -     129,776       129,863  
Other expenses     269     152       1,615     45,169       47,205  
  Total   $ 1,921,296   $ 21,232     $ 1,228,877   $ 3,200,956     $ 6,372,361  
                               
Variance                              
Category   North 
America 
Transaction
Solutions
 
  Mobile 
Solutions
 
  Online 
Solutions
 
  Corporate 
Expenses & 
Eliminations
 
  Total  
Salaries, benefits, taxes and contractor payments   $ 180,922     $ (48,179 )   $ 246,818     $ 429,200     $ 808,761  
Professional fees     (20,756 )     5,371       255,063       (118,014 )     121,664  
Rent     -       29,832       15,073       (77,145 )     (32,240 )
Business development     (22,403 )     (3,898 )     (65,855 )     (3,325 )     (95,481 )
Travel expense     (18,894 )     66       (9,485 )     23,183       (5,130 )
Filing fees     -       -       -       (50,195 )     (50,195 )
Transaction (gains) losses     742       364,457       (44,587 )     118,828       439,440  
Office expenses     89,395       (7,188 )     15,211       19,535       116,953  
Communications expenses     (35,475 )     1,729       46,245       (9,383 )     3,116  
Insurance expense     -       (87 )     -       (18,582 )     (18,669 )
Other expenses     3,294       (65 )     3,280       120,979       127,488  
  Total   $ 176,825     $ 342,038     $ 461,763     $ 435,081     $ 1,415,707  

Salaries, benefits, taxes and contractor payments were $4,297,027 for the nine months ended September 30, 2017 as compared to $3,488,266 for the nine months ended September 30, 2016.

               
Segment   Salaries and
benefits for the
nine months
ended
September
30, 2017
  Salaries and
benefits for the
nine months
ended
September
30, 2016
  Increase /
(Decrease)
 
North America Transaction Solutions   $ 1,404,162   $ 1,223,240   $ 180,922  
Mobile Solutions     295,068     343,247     (48,179 )
Online Solutions     670,056     423,238     246,818  
Corporate Expenses & Eliminations     1,927,741     1,498,541     429,200  
    Total   $ 4,297,027   $ 3,488,266   $ 808,761  
                         

The increase in salaries of $808,761 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 $180,922 due to an increase in headcount and sales incentives for key employees. There was also an increase of $246,818 in our Online Solutions segment which were primarily due to increasing payroll and consulting on PayOnline and the Ruble exchange rate. This was offset by a decrease in Mobile Solutions segment of $48,179 due to reducing headcount in response to the continued decrease in sales and reorganizing the business and responsibilities.

Professional fees were $1,995,855 for the nine months ended September 30, 2017 as compared to $1,874,191 for the nine months ended September 30, 2016.

 
Nine Months Ended September 30, 2017          
Professional Fees   North 
America
Transaction
Solutions
  Mobile 
Solutions
  Online 
Solutions
  Corporate 
Expenses &
Eliminations
  Total
General Legal   $ 23,418   $ -   $ 4,142   $ 62,533   $ 90,093
SEC Compliance Legal Fees     -     -     -     191,349     191,349
Accounting and Auditing     -     -     15,433     307,782     323,215
Tax Compliance and Planning     -     -     -     15,400     15,400
Consulting     328,318     44,793     698,138     304,549     1,375,798
    Total   $ 351,736   $ 44,793   $ 717,713   $ 881,613   $ 1,995,855
 
Nine Months Ended September 30, 2016
Professional Fees   North 
America
Transaction
Solutions
  Mobile 
Solutions
  Online 
Solutions
  Corporate 
Expenses &
Eliminations
  Total
General Legal   $ 39,215   $ 268   $ 3,867   $ 168,039   $ 211,389
SEC Compliance Legal Fees     -     -           131,250     131,250
Accounting and Auditing     -     -     578     326,132     326,710
Tax Compliance and Planning     -     -     -     44,200     44,200
Consulting     273,277     39,154     458,205     390,006     1,160,642
    Total   $ 312,492   $ 39,422   $ 462,650   $ 1,059,627   $ 1,874,191
                             
Variance                            
Professional Fees   North 
America
Transaction
Solutions
 
  Mobile 
Solutions
 
  Online 
Solutions
  Corporate 
Expenses &
Eliminations
 
  Increase /
(Decrease)
 
General Legal   $ (15,797 )   $ (268 )   $ 275   $ (105,506 )   $ (121,296 )
SEC Compliance Legal Fees     -       -       -     60,099       60,099  
Accounting and Auditing     -       -       14,855     (18,350 )     (3,495 )
Tax Compliance and Planning     -       -       -     (28,800 )     (28,800 )
Consulting     55,041       5,639       239,933     (85,457 )     215,156  
    Total   $ 39,244     $ 5,371     $ 255,063   $ (178,014 )   $ 121,664  
                                           

Professional fees increased by $121,664 primarily due to an increase in Online Solutions segment's consulting fees of $239,933 and $60,099 in corporate's SEC compliance fees primarily offset by a decrease in general legal corporate expenses of $105,506 and a $85,457 decrease in corporate consulting expenses.

Non-cash compensation expense from share-based compensation was $836,218 for the nine months ended September 30, 2017, compared to $3,108,274 for the nine months ended September 30, 2016. The majority of these expenses were for employee and consultant incentives in both periods.

We recorded bad debt expense of $1,465,311 for the nine months ended September 30, 2017 as compared to $678,150 for the nine months ended September 30, 2016. For the nine months ended September 30, 2017, we recorded a loss which was primarily comprised of $1,185,804 in net ACH rejects and a $279,508 provision from our Russian operations. Of the $1,185,804 of net ACH rejects, $781,923 were passed through to independent sales organizations that board their merchants with us. For the nine months ended September 30, 2016, we recorded a loss which was primarily comprised of $710,508 in net ACH rejects offset by a $32,358 recovery from our Russian operations. Of the $678,150 of net ACH rejects, $286,128 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 $1,860,401 for the nine months ended September 30, 2017 as compared to $2,497,538 for the nine months ended September 30, 2016.

Interest expense was $894,553 for the nine months ended September 30, 2017 as compared to $1,186,207 for nine months ended September 30, 2016, representing a decrease of $291,655 as follows:

               
Funding Source   Nine months ended
September 30, 2017
  Nine months ended
September 30, 2016
  Increase /
(Decrease)
 
MBF Notes   $ 49,606   $ 39,806   $ 9,800  
RBL Notes     572,231     1,066,227     (493,996 )
Priority Payments Note     90,378     -     90,378  
Other     182,338     80,174     102,164  
    Total   $ 894,552   $ 1,186,207   $ (291,655 )
                         

Other interest expense primarily consisted of $84,199 resulting from the promissory note entered into on March 1, 2017 with Star Equities, LLC (see Note 12. Related Party Transactions) and $98,139 related to the PayOnline acquisition. During the nine months ended September 30, 2016, other interest consisted primarily of $76,289 related to the PayOnline acquisition. The primary reason for the decrease was due to less Crede stock paydowns on RBL debt during nine months ended 2017, which resulted in increased RBL interest expense during 2016.

Other expenses for the nine months ended September 30, 2017, consisted of $98,721 attributed to our Mobile Solutions Division, by $48,481 in from our North American Transaction Solutions segment and $9,128 of expenses from corporate, offset by $5,359 in other income from our Online Solutions segment.

The net income attributable to non-controlling interests amounted to $93,175 for nine months ended September 30, 2017 as compared to $110,350 for the nine months ended September 30, 2016. The decrease was caused by an adjustment to commission expense for prior quarters recorded during the three months ended September 30, 2017.

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 non-operating, non-recurring items. 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 nine months ended September 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 September 30, 2017                    
  Net (loss) income attributable to Net Element Inc. stockholders   $ (1,702,536 )   $ 111,277   $ -   $ (1,591,259 )
  Basic and diluted earnings per share   $ (0.90 )   $ 0.06   $ -   $ (0.84 )
  Basic and diluted shares used in computing earnings per share     1,891,023                   1,891,023  
                     
    GAAP     Share-based
Compensation
  Loss
from Stock
Value
Guarantee
  Adjusted
Non-GAAP
 
Three Months Ended September 30, 2016                    
  Net (loss) income attributable to Net Element Inc. stockholders   $ (3,469,540 )   $ 732,701   $ -   $ (2,736,839 )
  Basic and diluted earnings per share   $ (2.47 )   $ 0.52   $ -   $ (1.95 )
  Basic and diluted shares used in computing earnings per share     1,403,020                   1,403,020  
                     
    GAAP     Share-based
Compensation
  Loss
from Stock
Value
Guarantee
  Adjusted
Non-GAAP
 
Nine Months Ended September 30, 2017                    
  Net (loss) income attributable to Net Element Inc. stockholders   $ (5,830,372 )   $ 836,218   $ -   $ (4,994,154 )
  Basic and diluted earnings per share   $ (3.29 )   $ 0.47   $ -   $ (2.82 )
  Basic and diluted shares used in computing earnings per share     1,770,947                   1,770,947  
                     
    GAAP     Non-Cash
Share-based Compensation
  Loss
from Stock
Value
Guarantee
  Adjusted
Non-GAAP
 
Nine Months Ended September 30, 2016                    
  Net (loss) income attributable to Net Element Inc. common stockholders   $ (10,663,708 )   $ 3,108,274   $ 2,162,861   $ (5,392,573 )
  Basic and diluted earnings per share   $ (8.65 )   $ 2.52   $ 1.75   $ (4.37 )
  Basic and diluted shares used in computing earnings per share     1,232,593                   1,232,593  
                               

Additional information regarding Net Element's results for its third quarter ended September 30, 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 November 14, 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. Net Element was ranked as one of the fastest growing companies in North America on Deloitte's 2017 Technology Fast 500™ and South Florida Business Journal's 2016 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
 
    September 30,
2017
    December 31,
2016
 
ASSETS            
Current assets:            
  Cash   $ 922,102     $ 621,635  
  Accounts receivable, net     4,446,358       7,126,429  
  Prepaid expenses and other assets     1,658,200       1,467,897  
    Total current assets, net     7,026,660       9,215,961  
Fixed assets, net     64,381       117,295  
Intangible assets, net     3,242,889       3,589,850  
Goodwill     9,643,752       9,643,752  
Other long term assets     456,948       603,209  
    Total assets     20,434,630       23,170,067  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
  Accounts payable     6,067,319       7,510,113  
  Accrued expenses     3,419,879       5,518,823  
  Deferred revenue     1,196,743       1,355,972  
  Notes payable (current portion)     503,041       808,976  
  Due to related parties     376,593       299,004  
    Total current liabilities     11,563,575       15,492,888  
  Notes payable (net of current portion)     6,887,382       3,615,782  
    Total liabilities     18,450,957       19,108,670  
                 
STOCKHOLDERS' EQUITY                
  Series A Convertible Preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at September 30, 2017 and December 31, 2016)     -       -  
  Common stock ($.0001 par value, 100,000,000 shares authorized and 2,141,208 and 1,535,349 shares issued and outstanding at September 30, 2017 and December 31, 2016     2,142       1,535  
  Paid in capital     167,805,711       163,918,685  
  Accumulated other comprehensive loss     (2,528,424 )     (2,486,616 )
  Accumulated deficit     (163,272,959 )     (157,442,585 )
  Noncontrolling interest     (22,797 )     70,378  
    Total stockholders' equity     1,983,673       4,061,397  
      Total liabilities and stockholders' equity   $ 20,434,630     $ 23,170,067  
                       
NET ELEMENT, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 
    Three Months Ended September 30     Nine Months Ended September 30  
    2017     2016     2017     2016  
                         
Net revenues                        
  Service fees   $ 14,901,131     $ 12,874,386     $ 43,263,217     $ 34,355,912  
  Branded content     -       1,135,266       1,340,896       4,607,647  
Total Revenues     14,901,131       14,009,652       44,604,113       38,963,559  
                                 
Costs and expenses:                                
  Cost of service fees     12,756,627       10,683,897       36,232,170       28,285,984  
  Cost of branded content     -       1,011,271       1,302,841       4,279,218  
  General and administrative     2,357,729       2,284,737       7,788,068       6,372,361  
  Non-cash compensation     111,277       732,701       836,218       3,108,274  
  Bad debt expense     319,690       301,170       1,465,311       678,150  
  Depreciation and amortization     630,020       764,886       1,860,401       2,497,538  
Total costs and operating expenses     16,175,343       15,778,662       49,485,009       45,221,525  
Loss from operations     (1,274,212 )     (1,769,010 )     (4,880,896 )     (6,257,966 )
  Interest expense, net     (302,813 )     (608,716 )     (894,553 )     (1,186,207 )
  Loss from stock value guarantee     -       (1,559,281 )     -       (3,722,142 )
  Other income (expense)     (92,904 )     433,784       (148,099 )     392,257  
Net loss before income taxes     (1,669,929 )     (3,503,223 )     (5,923,548 )     (10,774,058 )
  Income taxes     -       -       -       -  
Net loss     (1,669,929 )     (3,503,223 )     (5,923,548 )     (10,774,058 )
  Net (income) loss attributable to the noncontrolling interest     (32,607 )     33,683       93,175       110,350  
Net loss attributable to Net Element, Inc. stockholders     (1,702,536 )     (3,469,540 )     (5,830,373 )     (10,663,708 )
  Foreign currency translation gain (loss)     92,191       (96,786 )     (41,809 )     (622,568 )
Comprehensive loss attributable to common stockholders   $ (1,610,345 )   $ (3,566,326 )   $ (5,872,182 )   $ (11,286,276 )
                                 
Loss per share - basic and diluted   $ (0.90 )   $ (2.47 )   $ (3.29 )   $ (8.65 )
                                 
Weighted average number of common shares outstanding - basic and diluted     1,891,023       1,403,020       1,770,947       1,232,593  
 
NET ELEMENT, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
 
    Nine Months Ended September 30,  
    2017     2016  
Cash flows from operating activities            
Net loss   $ (5,923,548 )   $ (10,663,708 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities                
    Non controlling interest     (93,175 )     (110,350 )
    Share based compensation     836,218       3,108,274  
    Deferred revenue     (159,228 )     135,003  
    Depreciation and amortization     1,860,401       2,497,538  
    Non cash interest     98,774       741,857  
Changes in assets and liabilities                
    Accounts receivable     3,514,440       (610,384 )
    Prepaid expenses and other assets     (352,551 )     (331,498 )
    Accounts payable and accrued expenses     (2,390,495 )     4,165,778  
    Net cash used in operating activities     (2,609,164 )     (1,067,490 )
                 
Cash flows from investing activities                
                 
  Client acquisition costs     (1,380,661 )     (1,346,718 )
  Receipt of excess reserves and ( purchase) of fixed and other assets     77,430       -  
    Net cash used in investing activities     (1,303,231 )     (1,346,718 )
                 
  Proceeds from common stock     1,150,098       -  
  Proceeds from indebtedness     3,239,033       2,668,500  
  Repayment of indebtedness     (273,360 )     (110,434 )
  Related party advances     77,587       117,779  
  Net cash provided by financing activities     4,193,358       2,675,845  
                 
  Effect of exchange rate changes on cash     19,504       97,902  
  Net (decrease) increase in cash     300,467       359,539  
                 
  Cash at beginning of period     621,635       1,025,747  
  Cash at end of period   $ 922,102     $ 1,385,286  
                 
Supplemental disclosure of cash flow information                
  Cash paid during the period for:                
    Interest   $ 795,779     $ 461,673  
    Taxes   $ 86,942     $ 94,718  
  Share issuance for settlement of unpaid compensation   $ -     $ 1,042,509  
  Shares issued for redemption of indebtedness   $ 363,986     $ 2,328,351  
  Shares issued in settlement of advances from board member   $ -     $ 909,285  
                   

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