SOURCE: Net Element, Inc.

Net Element, Inc.

November 14, 2016 10:57 ET

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

Quarterly revenues continue to increase year over year, net loss attributable to shareholders narrows by 23% ($1.04 million) over same period in 2015

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.

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