Net Element Reports Third Quarter and Nine Months Ended September 30, 2016 Results

MIAMI, FL--(Marketwired - Nov 14, 2016) - Net Element, Inc. (NASDAQ: NETE) ("Net Element" or the "Company"), a provider of global mobile payment technology solutions and value-added transactional services, today reported financial results for the third quarter and nine months ended September 30, 2016 and provided an update on recent strategic and operational initiatives.

For third quarter ended September 30, 2016, net revenues increased 11% to $14,009,652 as compared to $12,675,123 in the prior year. The $1,334,529 increase in net revenues is primarily due to organic growth in North America Transaction Solutions:

• North America Transaction Solution segment: Continued organic growth of SMB merchants in this segment with emphasis on value-added offerings. Revenues for this segment for the third quarter 2016 were $3.4 million, a 43% increase over the prior year.
• Mobile Solutions segment: Net revenues dropped by 36% over the prior year to $1.2 million and gross margin increased by 389% over the prior year due to shift into branded content business.
• Online Solutions: Net revenues for this segment for the third quarter 2016 were $1.6 million, a 22% drop over the prior year. Drop in net revenue is a result of discontinuance of payment processing for foreign currency dealers.

For nine months ended September 30, 2016, net revenues increased 55% to $38,963,559 as compared to $25,122,250 in the prior year. The $13,841,309 increase in net revenues is primarily due to organic growth in the Company's three segments:

• North America Transaction Solution segment: Continued organic growth of SMB merchants in this segment with emphasis on value-added offerings. Revenues for this segment for nine months ended September 30, 2016 were $29.4 million, a 53% increase over the prior year.
• Mobile Solutions segment: Net revenues increased by 43% over the prior year to $5.0 million over the prior year due to shift into branded content business.
• Online Solutions: Processed volume for nine months ended September 30, 2016 for this segment was $336 million, a 30% increase over the prior year, while net revenues for this segment for nine months ended September 30, 2016 were $4.5 million, a 92% increase over the prior year.

Recent Highlights

• Entered into settlement agreement with sellers over PayOnline acquisition
• Entered into $10 million stock purchase agreement with ESOUSA Holdings, LLC
• Dunkin' Donuts became a client of Net Element's PayOnline in Russia. PayOnline enables online ordering and payments for one of the world's largest coffee and baked goods chain
• Named one of the fastest-growing technology companies in South Florida Business Journal's 2016 Technology Awards
• PayOnline payments module became available for most popular e-commerce and CMS platforms. Fully-integrated payment acceptance is now available on 19 most popular e-commerce and CMS platforms
• PayOnline continued expansion into Central Asia. Dynamic organic growth during the last twelve months lead to office opening in Kazakhstan
• PayOnline partnered with Round Bank. Integrated first 70 online merchants to its platform under new collaboration agreement with Round Bank

"We are pleased with our continued improvement as we narrow our losses for the quarter. Our results are a reflection of our ability to implement our business objectives in a dynamic environment," commented Oleg Firer, CEO of Net Element. "We continue to be excited about our strategic initiatives for the remainder of the year."

Conference Call:
The Company will host a conference call to discuss Third Quarter 2016 financial results and business highlights on November 15, 2016 at 8:30 AM 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 password 18929736. It is recommended that participants dial in approximately 10 minutes prior to the start of the 8:30 am Eastern call.

The call will also be webcast live from http://edge.media-server.com/m/p/y4vbhvpa. 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, 2016 Compared to the Three Months Ended September 30, 2015

We reported an adjusted, non-GAAP, net loss attributable to Net Element, Inc. stockholders of $2,736,839, or $0.20 per share, for the three months ended September 30, 2016 as compared to an adjusted, non-GAAP, net loss attributable to Net Element, Inc. stockholders of $2,908,127, or $0.42 per share, for the three months ended September 30, 2015. The decrease in net loss of $171,288 was primarily due to a higher gross margin and lower interest expense offset by increased other expenses for stock value guarantee payment accrual.

Net revenues consist primarily of payment processing fees. Net revenues were $14,009,652 for the three months ended September 30, 2016 as compared to $12,675,123 for the three months ended September 30, 2015. The increase in net revenue is primarily a result of an increase in revenue from our North America Transaction Solutions segment, amounting to $3,359,320, offset by decreases in revenue from our Mobile Solutions and Online Solutions segments of $1,569,243 and $455,548, respectively. Increases in our North America Transaction Solutions segment revenue were primarily due to a net increase in merchants processing with us. The following table sets forth our sources of revenues, cost of revenues and gross margins for the three months ended September 30, 2016 and 2015.

Gross Margin Analysis

Source of Revenues			Three Months Ended September 30, 2016			Mix			Three Months Ended September 30, 2015			Mix			Increase / (Decrease)
North America Transaction Solutions			$	11,186,287		80	%		$	7,826,967		62	%		$	3,359,320
Mobile Solutions				1,226,241		9	%			2,795,484		22	%			(1,569,243	)
Online Solutions				1,597,124		11	%			2,052,672		16	%			(455,548	)
	Total		$	14,009,652		100	%		$	12,675,123		100	%		$	1,334,529

Cost of Revenues			Three Months Ended September 30, 2016			% of revenues			Three Months Ended September 30, 2015			% of revenues			Increase / (Decrease)
North America Transaction Solutions			$	9,585,952		86	%		$	6,489,695		83	%		$	3,096,257
Mobile Solutions				1,045,836		85	%			2,785,590		99	%			(1,712,754	)
Online Solutions				1,063,380		67	%			1,457,042		71	%			(393,662	)
	Total		$	11,695,168		83	%		$	10,705,327		84	%		$	989,841

Gross Margin			Three Months Ended September 30, 2016			% of revenues			Three Months Ended September 30, 2015			% of revenues			Increase / (Decrease)
North America Transaction Solutions			$	1,600,335		14	%		$	1,337,272		17	%		$	263,063
Mobile Solutions				180,405		15	%			36,894		1	%			143,511
Online Solutions				533,744		33	%			595,630		29	%			(61,886	)
	Total		$	2,314,484		17	%		$	1,969,796		16	%		$	344,688

Cost of revenues represents direct costs of generating revenues, including commissions, mobile operator fees, content provider fees, purchases of short numbers, interchange expense and processing fees. Cost of revenues for the three months ended September 30, 2016 were $11,695,168 as compared to $10,705,327 for the three months ended September 30, 2015.

The $989,841 increase in cost of revenue was primarily a result of an increase in U.S. transaction volume. The decreases in cost of revenue in each of our Mobile Solutions and Online Solutions segments coincided with the decreases in sales for the period in such segments.

Gross Margin for the three months ended September 30, 2016 was $2,314,484, or 17% of net revenue, as compared to $1,969,796, or 16% of net revenue, for the three months ended September 30, 2015.

Total operating expenses, excluding share based compensation, were $3,350,792 for the three months ended September 30, 2016, as compared to total operating expenses, excluding share based compensation of $3,295,190 for the three months ended September 30, 2015. Total operating expenses for the three months ended September 30, 2016 consisted of general and administrative expenses of $2,284,737, provision for bad debts of $301,170 and depreciation and amortization of $764,886. For the three months ended September 30, 2015, total operating expenses, excluding share based compensation, consisted of general and administrative expenses of $2,159,170, provision for bad debts of $284,384 and depreciation and amortization of $851,636. The components of our general and administrative expenses are discussed below.

General and administrative expenses were $2,284,737 for the three months ended September 30, 2016 as compared to $2,159,170 for the three months ended September 30, 2015. General and administrative expenses for the three months ended September 30, 2016 and 2015 consisted of operating expenses not otherwise delineated in our unaudited condensed consolidated statements of operations and comprehensive loss as follows:

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			$	327,785		$	107,310			$	167,802			$	442,497			$	1,045,394
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				-				43,448
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	)
Other expenses				143,621			9,394				49,949				181,990				384,954
	Total		$	633,918		$	150,884			$	447,902			$	1,052,033			$	2,284,737

Three months ended September 30, 2015
Category			North America Transaction Solutions			Mobile Solutions				Online Solutions			Corporate Expenses & Eliminations			Total
Salaries, benefits, taxes and contractor payments			$	207,229		$	84,527			$	120,763		$	596,922		$	1,009,441
Professional fees				77,174			67,127				281,445			250,785			676,531
Rent				-			12,455				37,169			47,542			97,166
Business development				2,893			375				10,876			-			14,144
Travel expense				14,425			8,525				8,762			25,962			57,674
Filing fees				-			-				-			1,258			1,258
Transaction (gains) losses				-			39				158			2,490			2,687
Other expenses				122,689			(26,676	)			98,921			105,335			300,269
	Total		$	424,410		$	146,372			$	558,094		$	1,030,294		$	2,159,170

Salaries, benefits, taxes and contractor payments were $1,045,394 for the three months ended September 30, 2016 as compared to $1,009,441 for the three months ended September 30, 2015, representing an increase of $35,953 as follows:

Segment			Salaries and benefits for the three months ended September 30, 2016			Salaries and benefits for the three months ended September 30, 2015			Increase / (Decrease)
North America Transaction Solutions			$	327,785		$	207,229		$	120,556
Mobile Solutions				107,310			84,527			22,783
Online Solutions				167,802			120,763			47,039
Corporate Expenses & Eliminations				442,497			569,922			(154,425	)
	Total		$	1,045,394		$	1,009,441		$	35,953

The primary reason for the increase was a $120,556 increase in salaries from North America Transaction Solutions due to higher headcount and additional sales incentives for retention and portfolio performance. Additionally, we had an increase of $47,039 from the acquisition of PayOnline (acquired May 20, 2015) and a $22,783 increase to Mobile Solutions from changes in personnel and compensation that was offset by a $154,425 decrease to corporate salaries from reduced headcount.

Professional fees were $672,480 for the three months ended September 30, 2016 as compared to $676,531 for the three months ended September 30, 2015, representing a decrease of $4,051 as follows:

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		$	384,272		$	672,480

Three months ended September 30, 2015
Professional Fees			North America Transaction Solutions			Mobile Solutions			Online Solutions			Corporate Expenses & Eliminations				Total
General Legal			$	4,698		$	414		$	90,338		$	205,846			$	301,296
SEC Compliance Legal Fees				-			-			-			43,749				43,749
Accounting and Auditing				850			1,995			14,798			138,453				156,096
Tax Compliance and Planning				-			-			-			18,450				18,450
Consulting				71,626			64,718			176,309			(155,713	)			156,940
	Total		$	77,174		$	67,127		$	281,445		$	250,785			$	676,531

Variance
Professional Fees			North America Transaction Solutions				Mobile Solutions				Online Solutions				Corporate Expenses & Eliminations				Total
General Legal			$	1,120			$	(358	)		$	(89,419	)		$	(106,667	)		$	(195,396	)
SEC Compliance Legal Fees				-				-				-				1				1
Accounting and Auditing				(850	)			(1,995	)			(14,798	)			(36,721	)			(54,364	)
Tax Compliance and Planning				-				-				-				14,750				14,750
Consulting				12,541				(27,900	)			(15,762	)			262,079				230,958
	Total		$	12,811			$	(30,253	)		$	(120,051	)		$	133,442			$	(4,051	)

General legal expenses decreased $195,396 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 primarily due to decreased litigation activity due to the settlement of certain litigation matters. Offsetting the decrease was an increase in consulting fees of $230,958 primarily due to a non-cash, one-time accounting adjustment. This was offset by a decrease in consulting fees for outside sales support and outsourced operations for our Mobile Solutions and Online Solutions segments.

Other general and administrative expenses were $384,954 for the three months ended September 30, 2016 as compared to $300,269 for the three months ended September 30, 2015, representing an increase of $84,685. This increase is primarily caused by an increase in insurance expense of $121,232 and office expenses of $34,990, which were partially offset by decreases in utilities of $40,243 and taxes of $41,017.

We recorded bad debt expense of $301,170 for the three months ended September 30, 2016 as compared to $284,384 for the three months ended September 30, 2015. For the three months ended September 30, 2016, we recorded a loss provision which was primarily comprised of $301,132 in ACH rejects. For the three months ended September 30, 2015, we recorded a $284,384 loss provision which was comprised of $307,154 in ACH rejects partially offset by a $22,811 recovery from our Russian operations.

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 $764,886 for the three months ended September 30, 2016 as compared to $851,636 for the three months ended September 30, 2015. The $86,751 decrease in depreciation and amortization expense was primarily due to a reduction in portfolio amortization.

Interest expense was $608,716 for the three months ended September 30, 2016 as compared to $1,605,034 for three months ended September 30, 2015, representing a decrease of $996,318. The decrease in interest expense was due to conversion of convertible notes payable during 2015 resulting in lower interest costs as remaining note balances have lower interest carrying costs.

The net loss attributable to non-controlling interests amounted to $33,683 for three months ended September 30, 2016 as compared to $23,577 for the three months ended September 30, 2015.

During the three months ended September 30, 2016, we recognized a charge of $1,433,475 relating to an amendment to the PayOnline acquisition agreement, which we entered into on October 25, 2016. Such amendment calls for our assumption of certain merchant reserve liabilities equal to the charge taken.

Results of Operations for the Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

We reported an adjusted, non-GAAP, net loss attributable to Net Element, Inc. stockholders of $7,555,434, or $0.61 per share, for the nine months ended September 30, 2016 as compared to an adjusted, non-GAAP, net loss attributable to common stock of $7,730,915, or $1.43 per share, for the nine months ended September 30, 2015. This resulted in an decrease in adjusted, non-GAAP, net loss attributable to Net Element, Inc. stockholders of $175,481, which was primarily due to a $3,722,142 loss from the stock price guarantee in connection with the PayOnline acquisition and an increase in depreciation and amortization of $580,637 offset by an $1,821,009 decrease in interest expense, $2,063,323 increase in gross margin, and a $441,749 increase in other income. These items are discussed further below.

Net revenues consist primarily of payment processing fees. Net revenues were $38,963,559 for the nine months ended September 30, 2016 as compared to $25,122,250 for the nine months ended September 30, 2015.

The increase in net revenue is primarily a result of an increase in revenue from our North American Transaction Solutions segment, amounting to $10,166,983, and increases in revenue from our Mobile Solutions and Online Solutions segments of $1,509,902 and $2,164,424, respectively. Increases in our North American Transaction Solutions revenue were primarily due to organic net increases in merchants.

The following table sets forth our sources of revenues, cost of revenues and gross margins for the nine months ended September 30, 2016 and 2015.

Gross Margin Analysis
Source of Revenues			Nine Months Ended September 30, 2016			Mix			Nine Months Ended September 30, 2015			Mix			Increase / (Decrease)
North America Transaction Solutions			$	29,442,868		76	%		$	19,275,885		77	%		$	10,166,983
Mobile Solutions				4,999,452		13	%			3,489,550		14	%			1,509,902
Online Solutions				4,521,239		12	%			2,356,815		9	%			2,164,424
	Total		$	38,963,559		100	%		$	25,122,250		100	%		$	13,841,309

Cost of Revenues			Nine Months Ended September 30, 2016			% of revenues			Nine Months Ended September 30, 2015			% of revenues			Increase / (Decrease)
North America Transaction Solutions			$	25,206,769		86	%		$	16,543,190		86	%		$	8,663,579
Mobile Solutions				4,427,043		89	%			2,786,984		80	%			1,640,059
Online Solutions				2,931,390		65	%			1,457,042		62	%			1,474,348
	Total		$	32,565,202		84	%		$	20,787,216		83	%		$	11,777,986

Gross Margin			Nine Months Ended September 30, 2016			% of revenues			Nine Months Ended September 30, 2015			% of revenues			Increase / (Decrease)
North America Transaction Solutions			$	4,236,099		14	%		$	2,732,695		14	%		$	1,503,404
Mobile Solutions				572,409		11	%			702,566		20	%			(130,157	)
Online Solutions				1,589,849		35	%			899,773		38	%			690,076
	Total		$	6,398,357		16	%		$	4,335,034		17	%		$	2,063,323

Cost of revenues represents direct costs of generating revenues, including commissions, mobile operator fees, content provider fees, purchases of short numbers, interchange expense and processing fees. Cost of revenues for the nine months ended September 30, 2016 were $32,565,202 as compared to $20,787,216 for the nine months ended September 30, 2015.

The year over year increase in cost of revenue of $11,777,986 was primarily a result of an increase in U.S. transaction volume, which resulted in an $8,663,579 increase in cost of revenue in our North American Transaction Solutions segment. Additionally, there was a $1,640,059 increase in cost of revenue in our Mobile Solutions segment, which now includes mobile operator fees and content provider fees when we provide branded content. We also had $1,474,348 in new costs resulting from PayOnline operations (acquired May 20, 2015).

Gross Margin for the nine months ended September 30, 2016 was $6,398,357 or 16% of net revenue, as compared to $4,335,034 or 17% of net revenue, for the nine months ended September 30, 2015. There were increased margins from our Russian online transaction processing offset by lower margins from our branded content provided by Mobile Solutions. Included in the Mobile Solutions gross margin for the nine months ended September 30, 2016 is $328,428 of branded content.

Total operating expenses, excluding non-cash compensation, were $9,548,047 for the nine months ended September 30, 2016, as compared to total operating expenses, excluding non-cash compensation of $9,120,877 for the nine months ended September 30, 2015. Total operating expenses, excluding share based compensation, for the nine months ended September 30, 2016 consisted of general and administrative expenses of $6,372,361, provision for bad debts of $678,150 and depreciation and amortization of $2,497,538. For the nine months ended September 30, 2015, total operating expenses, excluding share based compensation, consisted of general and administrative expenses of $6,778,751, provision of bad debts of $425,225 and depreciation and amortization of $1,916,901. The components of our general and administrative expenses are discussed below.

General and administrative expenses for the nine months ended September 30, 2016 and 2015 consisted of operating expenses not otherwise delineated in our unaudited condensed consolidated statements of operations and comprehensive loss as follows.

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			$	962,618		$	343,247			$	423,238		$	1,498,541			$	3,227,644
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			-				129,197
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	)
Other expenses				401,607			15,657				91,976			335,715				844,955
	Total		$	1,921,296		$	21,232			$	1,228,877		$	3,200,956			$	6,372,361

Nine months ended September 30, 2015
Category			North America Transaction Solutions			Mobile Solutions			Online Solutions			Corporate Expenses & Eliminations				Total
Salaries, benefits, taxes and contractor payments			$	570,054		$	298,154		$	180,021		$	1,679,556			$	2,727,785
Professional fees				347,628			186,171			404,444			1,681,439				2,619,682
Rent				-			41,927			39,362			256,963				338,252
Business development				28,879			802			19,347			-				49,028
Travel expense				91,265			18,039			8,762			72,921				190,987
Filing fees				-			-			-			84,690				84,690
Transaction (gains) losses				-			1,513			159			(88,018	)			(86,346	)
Other expenses				371,399			83,075			107,539			292,660				854,673
	Total		$	1,409,225		$	629,681		$	759,634		$	3,980,211			$	6,778,751

Salaries, benefits, taxes and contractor payments were $3,227,644 for the nine months ended September 30, 2016 as compared to $2,727,785 for the nine months ended September 30, 2015, representing an increase of $499,859 as follows:

Segment			Salaries and benefits for the nine months ended September 30, 2016			Salaries and benefits for the nine months ended September 30, 2015			Increase / (Decrease)
North America Transaction Solutions			$	962,618		$	570,054		$	392,564
Mobile Solutions				343,247			298,154			45,093
Online Solutions				423,238			180,021			243,217
Corporate Expenses & Eliminations				1,498,541			1,679,556			(181,015	)
	Total		$	3,227,644		$	2,727,785		$	499,859

The primary reason for the increase was a $392,564 in salaries from North America Transaction Solutions and $243,217 from the acquisition of PayOnline (acquired May 20, 2015) offset by an $181,015 decrease to our corporate division salaries and benefits. North America Transaction Solutions increase is due to increased management headcount, increased risk management headcount and additional incentives for portfolio performance.

Professional fees were $1,874,191 for the nine months ended September 30, 2016 as compared to $2,619,682 for the nine months ended September 30, 2015, representing a decrease of $745,491 as follows:

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				60,000			-			-			71,250			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		$	372,492		$	39,422		$	462,650		$	999,627		$	1,874,191

Nine months ended September 30, 2015
Professional Fees			North America Transaction Solutions			Mobile Solutions			Online Solutions			Corporate Expenses & Eliminations			Total
General Legal			$	57,099		$	449		$	94,172		$	504,192		$	655,912
SEC Compliance Legal Fees				47,304			-			-			65,001			112,305
Accounting and Auditing				850			1,995			14,798			438,202			455,845
Tax Compliance and Planning				-			-			-			34,725			34,725
Consulting				242,375			183,727			295,474			639,319			1,360,895
	Total		$	347,628		$	186,171		$	404,444		$	1,681,439		$	2,619,682

Variance
Professional Fees			North America Transaction Solutions				Mobile Solutions				Online Solutions				Corporate Expenses & Eliminations				Increase / (Decrease)
General Legal			$	(17,884	)		$	(181	)		$	(90,305	)		$	(336,153	)		$	(444,523	)
SEC Compliance Legal Fees				12,696				-				-				6,249				18,945
Accounting and Auditing				(850	)			(1,995	)			(14,220	)			(112,070	)			(129,135	)
Tax Compliance and Planning				-				-				-				9,475				9,475
Consulting				30,902				(144,573	)			162,731				(249,313	)			(200,253	)
	Total		$	24,864			$	(146,749	)		$	58,206			$	(681,812	)		$	(745,491	)

Total professional fees decreased $745,491 during for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 primarily due to decreased litigation activity at the corporate level and at our Mobile Solutions segment. Consulting fees decreased $200,253 primarily due a transition of consultants into permanent positions in corporate.

We recorded bad debt expense of $678,150 for the nine months ended September 30, 2016 as compared to $425,225 for the nine months ended September 30, 2015. For the nine months ended September 30, 2016, we recorded a loss which was primarily comprised of $710,508 in ACH rejects offset by a $32,358 recovery from our Russian operations. For the nine months ended September 30, 2015, we recorded a loss provision which was primarily comprised of $542,763 in ACH rejects offset by an $117,569 recovery from our mobile payments business.

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 $2,497,538 for the nine months ended September 30, 2016 as compared to $1,916,901 for the nine months ended September 30, 2015. The $580,637 increase in depreciation and amortization expense was primarily related to the PayOnline acquisition ($703,479 for IP Software, $49,998 for domain names, $74,834 for PCI Certification and $186,096 for portfolios and client lists), offset by a $600,068 decrease in portfolio amortization in our North American Transaction Solutions segment as legacy portfolios fully amortized.

Interest expense was $1,605,034 for the nine months ended September 30, 2016 as compared to $3,007,216 for nine months ended September 30, 2015, representing a decrease of $1,402,182. The decrease in interest expense was due to conversion of convertible notes payable during 2015 resulting in lower interest costs as remaining note balances have lower interest carrying costs.

The net loss attributable to non-controlling interests amounted to $110,350 for nine months ended September 30, 2016 as compared to $42,850 for the nine months ended September 30, 2015 due to increased losses at Aptito.

During the nine months ended September 30, 2016, we recognized a charge of $3,722,142 relating to the PayOnline acquisition agreement entered into on May 20, 2015. The PayOnline acquisition agreement calls for a guarantee payment in cash for decreases in the market value of certain restricted common shares issued in accordance with the acquisition agreement at 12 months from the date of the respective issuances. In addition, this includes a charge of $1,433,475 in connection with an amendment to the PayOnline acquisition agreement entered into on October 25, 2016, which calls for our assumption of certain merchant reserve liabilities equal to the charge taken.

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-cash, 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 nine months ended September 30, 2016 and 2015 is presented in the following Non-GAAP Financial Measures Table.

			GAAP				Non-Cash Share-based Compensation			Derivative Activity, Debt Extinguishment and Restructure				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		$	(0.25	)		$	0.05		$	-			$	(0.20	)
	Basic and diluted shares used in computing earnings per share			14,030,204											14,030,204
			GAAP				Share-based Compensation			Derivative Activity, Debt Extinguishment and Restructure				Adjusted Non-GAAP
Three Months Ended September 30, 2015
	Net (loss) income attributable to Net Element Inc stockholders		$	(4,513,201	)		$	601,371		$	1,003,703			$	(2,908,127	)
	Basic and diluted loss per share		$	(0.66	)		$	0.09		$	0.15			$	(0.42	)
	Basic and diluted shares used in computing loss per share			6,850,442											6,850,442
			GAAP				Non-Cash Share-based Compensation			Derivative Activity, Debt Extinguishment and Restructure				Adjusted Non-GAAP
Nine Months Ended September 30, 2016
	Net (loss) income attributable to Net Element Inc stockholders		$	(10,663,708	)		$	3,108,274		$	-			$	(7,555,434	)
	Basic and diluted earnings per share		$	(0.87	)		$	0.25		$	-			$	(0.61	)
	Basic and diluted shares used in computing earnings per share			12,325,926											12,325,926
			GAAP				Share-based Compensation			Derivative Activity, Debt Extinguishment and Restructure				Adjusted Non-GAAP
Nine Months Ended September 30, 2015
	Net (loss) income attributable to Net Element Inc stockholders		$	(8,516,695	)		$	1,804,113		$	(1,018,333	)		$	(7,730,915	)
	Basic and diluted loss per share		$	(1.58	)		$	0.33		$	(0.19	)		$	(1.43	)
	Basic and diluted shares used in computing loss per share			5,396,960											5,396,960

NET ELEMENT, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
				September 30, 2016			December 31, 2016
ASSETS
Current assets:
	Cash			$	1,385,286		$	1,025,747
	Accounts receivable, net				5,866,714			5,198,993
	Prepaid expenses and other assets				1,425,685			1,106,016
		Total current assets, nets			8,677,685			7,330,756
Fixed assets, net					128,470			162,123
Intangible assets, net					4,153,065			5,423,880
Goodwill					9,643,752			9,643,752
Other long term assets					792,834			353,050
		Total assets		$	23,395,806		$	22,913,561

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			5,650,932			5,858,837
	Accrued expenses			5,654,994			2,975,066
	Deferred revenue			878,913			743,910
	Notes payable (current portion)			147,577			518,437
	Due to related parties			447,660			329,881
		Total current liabilities		12,780,076			10,426,131
	Notes payable (net of current portion)			4,047,140			3,446,563
		Total liabilities		16,827,216			13,872,694
STOCKHOLDERS' EQUITY
Series A Convertible Preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at September 30, 2016 and December 31, 2015)				-			-
Common stock ($.0001 par value, 400,000,000 shares authorized and 15,099,845 and 11,261,959 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively)				1,510			1,126
Paid in capital				163,285,658			154,361,694
Accumulated other comprehensive loss				(2,188,390	)		(1,565,822	)
Accumulated deficit				(154,618,755	)		(143,955,048	)
Non-controlling interest				88,567			198,917
	Total stockholders' equity			6,568,590			9,040,867
		Total liabilities and stockholders' equity		23,395,806			22,913,561

NET ELEMENT, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
			Three months ended September 30,								Nine months ended September 30,
			2016				2015				2016				2015
Net Revenues
	Service fees		$	12,874,386			$	12,675,123			$	34,355,912			$	25,122,250
	Branded content			1,135,266				-				4,607,647				-
Total Revenues				14,009,652				12,675,123				38,963,559				25,122,250
Costs and expenses:
	Cost of service fees			10,683,897				10,705,327				28,285,984				20,787,216
	Cost of branded content			1,011,271				-				4,279,218				-
	General and administrative			2,284,737				2,159,170				6,372,361				6,778,751
	Non-cash compensation			732,701				601,371				3,108,274				1,804,113
	Bad debt expense			301,170				284,384				678,150				425,225
	Depreciation and amortization			764,886				851,636				2,497,538				1,916,901
Total costs and operating expenses				15,778,662				14,601,888				45,221,525				31,712,206
Loss from operations				(1,769,010	)			(1,926,765	)			(6,257,966	)			(6,589,956	)
	Interest expense, net			(608,716	)			(1,605,034	)			(1,186,207	)			(3,007,216	)
	(Loss) gain on change in fair value and settlement of beneficial conversion derivative			-				(1,083,028	)			-				939,008
	Loss from stock value guarantee			(1,559,281	)			-				(3,722,142	)			-
	Gain on debt extinguishment			-				79,325				-				79,325
	Gain on asset disposal			-				44,928				-				68,786
	Other income (expense)			433,784				(46,204	)			392,257				(49,492	)
Net loss before income taxes				(3,503,223	)			(4,536,778	)			(10,774,058	)			(8,559,545	)
	Income taxes			-				-				-				-
Net loss				(3,503,223	)			(4,536,778	)			(10,774,058	)			(8,559,545	)
	Net loss attributable to the non-controlling interest			33,683				23,577				110,350				42,850
Net loss attributable to Net Element, Inc. stockholders				(3,469,540	)			(4,513,201	)			(10,663,708	)			(8,516,695	)
Dividends for the benefit of preferred stockholders				-				(621,273	)			-				(1,146,470	)
Net loss attributable to common stockholders				(3,469,540	)			(5,134,474	)			(10,663,708	)			(9,663,165	)
	Foreign currency translation			(96,786	)			(189,644	)			(622,568	)			(414,168	)
Comprehensive loss attributable to common stockholders			$	(3,566,326	)		$	(5,324,118	)		$	(11,286,276	)		$	(10,077,333	)
Loss per share - basic and diluted			$	(0.25	)		$	(0.75	)		$	(0.87	)		$	(1.79	)
Weighted average number of common shares outstanding - basic and diluted				14,030,204				6,850,442				12,325,926				5,396,960

NET ELEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
				Nine months ended September 30,
				2016				2015
Cash flows from operating activities
Net loss				$	(10,663,708	)		$	(8,516,695	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
	Non controlling interest				(110,350	)			(42,850	)
	Share based compensation				3,108,274				1,804,113
	Deferred revenue				135,003				(36,764	)
	Gain on Change in fair value and settlement of beneficial conversion derivative				-				(939,008	)
	Depreciation and amortization				2,497,538				1,916,901
	Non cash interest				741,857				-
	Amortization of debt discount				-				2,610,030
	Gain on disposal of fixed asset				-				(68,786	)
	Gain on debt extinguishment				-				(79,325	)
Changes in assets and liabilities
	Accounts receivable				(610,384	)			(1,236,319	)
	Prepaid expenses and other assets				(331,498	)			(89,835	)
	Accounts payable and accrued expenses				4,165,778				1,172,979
	Net cash (used in) provided by operating activities				(1,067,490	)			(3,505,559	)
Cash flows from investing activities
	Purchase of portfolio and client acquisition costs				-				(423,250	)
	Sale of Portfolio				-				300,000
	Note Receivable				-				(26,795	)
	Acquisition of PayOnline assets, net of cash received				-				(3,195,452	)
	Purchase of fixed, intangible and other assets				(1,346,718	)			(484,137	)
		Net cash used in investing activities			(1,346,718	)			(3,829,634	)
Cash flows from financing activities
	Proceeds from Preferred stock				-				5,500,000
	Proceeds from indebtedness				2,668,500				650,000
	Repayment of indebtedness				(110,434	)			-
	Related party advances				117,779				650,000
	Net cash provided by (used in) financing activities				2,675,845				6,800,000
	Effect of exchange rate changes on cash				97,902				347,578
	Net (decrease) increase in cash				359,539				(187,615	)
	Cash at beginning of period				1,025,747				503,343
	Cash at end of period			$	1,385,286			$	315,728
Supplemental disclosure of cash flow information
	Cash paid during the period for:
		Interest		$	461,673			$	397,186
		Taxes		$	94,718			$	74,417
Non Cash activities:
	Notes payable (net of discount)			$	-			$	694,445
	Funds in escrow from issuance of notes			$	-			$	5,000,000
	Derivative Liability - warrants			$	-			$	3,978,495
	Preferred dividends paid in common stock			$	-			$	1,146,470
	Share issuance for settlement of unpaid compensation			$	1,042,509			$	-
	Shares issued for redemption of indebtedness			$	2,328,351			$	-
	Shares issued in settlement of advances from board member			$	909,285			$	-

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

Forward-Looking Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Any statements contained in this press release that are not statements of historical fact may be deemed forward-looking statements. Words such as "continue," "will," "may," "could," "should," "expect," "expected," "plans," "intend," "anticipate," "believe," "estimate," "predict," "potential," and similar expressions are intended to identify such forward-looking statements. All forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, many of which are generally outside the control of Net Element and are difficult to predict. Examples of such risks and uncertainties include, but are not limited to: (i) Net Element's ability (or inability) to obtain additional financing in sufficient amounts or on acceptable terms when needed; (ii) Net Element's ability to maintain existing, and secure additional, contracts with users of its payment processing services; (iii) Net Element's ability to successfully expand in existing markets and enter new markets; (iv) Net Element's ability to successfully manage and integrate any acquisitions of businesses, solutions or technologies; (v) unanticipated operating costs, transaction costs and actual or contingent liabilities; (vi) the ability to attract and retain qualified employees and key personnel; (vii) adverse effects of increased competition on Net Element's business; (viii) changes in government licensing and regulation that may adversely affect Net Element's business; (ix) the risk that changes in consumer behavior could adversely affect Net Element's business; (x) Net Element's ability to protect its intellectual property; (xi) local, industry and general business and economic conditions; (xii) adverse effects of potentially deteriorating U.S.-Russia relations, including, without limitation, over a conflict related to Ukraine, including a risk of further U.S. government sanctions or other legal restrictions on U.S. businesses doing business in Russia. Additional factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements can be found in the most recent annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed by Net Element with the Securities and Exchange Commission. Net Element anticipates that subsequent events and developments may cause its plans, intentions and expectations to change. Net Element assumes no obligation, and it specifically disclaims any intention or obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as expressly required by law.