Net Element Reports Second Quarter 2016 Results

The following excerpt is from the company's SEC filing.

Quarterly revenues increased by 98% over same period in 2015

MIAMI, FL – August 16, 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 second quarter ended June 30, 2016 and provided an update on recent strategic and operational initiatives.

For second quarter ended June 30, 2016, net revenues increased 98% to $13,692,848 as compared to $6,906,916 in the prior year. The $6,785,932 increase in net revenues is primarily due to growth in the Company’s three segments:

North America Transaction Solution segment:

Continued organic growth of SMB merchants in this segment with emphasis on value-added offerings. Revenues for this segment were $10.4 million, a 66% increase over the prior year.

Mobile Solutions segment:

As a result of a continued organic growth in branded content origination. Revenues for this segment were $1.8 million, a 435% increase over the prior year.

Online Solutions:

Revenues for this segment were $1.5 million, a 396% increase over the prior year (PayOnline acquired May 20, 2015).

Recent Highlights:

Announced intent to acquire a majority interest in PayStar and Nexcharge: proprietary integrated payment and remittance platforms that upon deal closure, will strengthen Net Element’s global offering

PayOnline recognized a leading payment gateway: independent analytical agency Tagline ranked PayOnline as a leading payment gateway

Digital Provider enabled mobile payments at Vnukovo Airport: proprietary, mobile transaction processing engine integrated into airports infrastructure to power essential components of mobility ecosystem

Announced reverse stock split as an important step in attracting a broader spectrum of investors and regaining compliance with NASDAQ

PayOnline recognized for its payment acceptance services in 2016: independent analytical agency Markswebb Rank & Report ranked PayOnline as Top 5 for its efficiency in service

Regained compliance with NASDAQ listing requirements

Appointed Howard Ash, an international business development professional to its board of directors

PayOnline introduced a new payment interface: new multi-channel payment interface is based on the user experience of more than 10 million online shoppers

“We are pleased with our continued growth. Our results are a reflection of our ability to implement our business objectives,” commented Oleg Firer, CEO of Net Element. “We are excited about our strategic initiatives for the remainder of the year.”

Conference Call:

The Company will host a conference call to discuss Second Quarter 2016 financial results and business highlights on August 16, 2016 at 4:30 PM 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 64494628. It is recommended that participants dial in approximately 10 minutes prior to the start of the 4:30PM Eastern call.

The call will also be webcast live from

http://edge.media-server.com/m/p/ouv4rbqf

. Following completion of the call, a recorded replay of the webcast will be available on the

www.netelement.com/en/ir

website.

Results of Operations for the Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015

Our combined businesses processed 41.6 million transactions for the three months ended June 30, 2016 as compared to 33.6 million transactions processed for the three months ended June 30, 2015. North America Transaction Solutions provided the majority of the increase going from 12.4 million transactions processed in the three months ended June 30, 2015 to 21.1 million transactions processed for the three months ended June 30, 2016. This was offset by a decrease of 0.9 million transactions processed from our Mobile Solutions segment.

We processed $474 million in payments for the three months ended June 30, 2016 as compared to $264 million on a constant dollar basis for the three months ended June 30, 2015. North America Transaction Solutions was responsible for $132 million of the $210 million increase and Online Solutions contributed an addition $74 million in payments processed.

We reported an adjusted net loss attributable to stockholders of $1,168,998, or $0.10 per share, for the three months ended June 30, 2016 as compared to an adjusted net loss attributable to stockholders of $3,184,950 or $0.64 per share, for the three months ended June 30, 2015. The adjusted net loss decrease of $2,015,952 was primarily due to reduced interest expense of $845,615, higher gross margin dollars ($765,958) from more volume and a $584,083 decrease in general and administrative expenses. These items are discussed further below.

Net revenues consist primarily of payment processing fees. Net revenues were $13,692,848 for the three months ended June 30, 2016 as compared to $6,906,916 for the three months ended June 30, 2015. Included in mobile solutions revenue for the three months ended June 30, 2016 is $1,575,140 of branded content revenue. The remaining $204,568 is part of service fees revenue.

The increase in net revenues is primarily a result of organic net increases in merchants. In addition, we consolidated online payment revenues for PayOnline effective May 20, 2015 and began reporting mobile commerce revenues for branded content in the fourth quarter of 2015.

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

Gross Margin Analysis

Source of Revenue

June 30, 2016

Revenue

June 30, 2015

Revenue

Increase / (Decrease)

10,403,932

6,271,735

4,132,197

1,779,708

331,038

1,448,670

1,509,208

304,143

1,205,065

  Total

Cost of Revenue

8,967,784

5,453,063

3,514,721

1,566,618

14,756

1,551,862

950,391

11,484,793

5,467,819

6,016,974

North America Transaction Services

1,436,148

818,672

617,476

213,090

316,282

(103,192

558,817

254,674

2,208,055

1,439,097

768,958

Since PayOnline was acquired May 20, 2015, revenues were reported net for the short quarter in 2015. 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 June 30, 2016 were $11,484,793 as compared to $5,467,819 for the three months ended June 30, 2015.

The year over year increase in cost of revenues of $6,016,974 is primarily a result of an increase in U.S. transaction volume. The $1,551,862 increase in mobile solution costs now include mobile operator fees and content provider fees when we provide branded content. There was no branded content in the three months ended June 30, 2015. In addition, we had $950,391 resulting from PayOnline operations (acquired May 20, 2015 / partial quarter). The mobile solutions cost of revenue for the three months ended June 30, 2016 includes $1,480,859 of branded content costs. The remaining $85,759 is included in the cost of service fees.

Gross Margin for the three months ended June 30, 2016 was $2,208,055, or 16% of net revenue, as compared to $1,439,097, or 21% of net revenue, for the three months ended June 30, 2015. Included in the mobile solutions gross margin for the three months ended June 30, 2016 is $94,281 (5.2% of total mobile revenues) for branded content.

Total adjusted operating expenses were $2,969,164 for the three months ended June 30, 2016, as compared to total adjusted operating expenses of $3,341,482 for the three months ended June 30, 2015. Total adjusted operating expenses for the three months ended June 30, 2016 consisted of general and administrative expenses of $1,999,391, provision for bad debts of $125,238 and depreciation and amortization of $844,535. For the three months ended June 30, 2015, total adjusted operating expenses consisted of general and administrative expenses of $2,583,474, provision for bad debts of $131,511 and depreciation and amortization of $626,497. The components of our general and administrative expenses are discussed below.

General and administrative expenses were $1,999,391 for the three months ended June 30, 2016 as compared to $2,583,474 for the three months ended June 30, 2015. General and administrative expenses for the three months ended June 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

Category

Solutions

Corporate

Expenses & Eliminations

Salaries, benefits, taxes and contractor payments

328,261

88,801

142,663

530,452

1,090,177

Professional fees

119,268

217,513

339,299

677,323

36,282

98,316

135,063

Business development

12,186

40,118

56,360

Travel expense

49,784

29,016

89,068

Filing fees

42,896

Transaction (gains) losses

(322,719

(23,658

12,543

(333,834

Other expenses

131,108

26,551

82,873

242,338

640,607

(227,184

446,517

1,139,451

Three months

ended June 30, 2015 

177,721

114,537

59,258

569,030

920,546

99,095

33,533

122,998

937,459

1,184,085

15,865

112,523

130,581

19,159

17,264

25,815

46,626

34,356

(42,049

(41,305

259,781

100,290

(79,263

289,426

549,437

268,944

201,538

1,563,555

Salaries, benefits, taxes and contractor payments were $1,090,177 for the three months ended June 30, 2016 as compared to $920,546 for the three months ended June 30, 2015, representing an increase of $169,631 as follows:

Segment

Salaries and benefits

for the three months

ended June 30, 2016

for the three months

ended June 30, 2015

150,540

(25,736

83,405

The primary reason for the increase was a $150,540 increase in salaries from North America Transaction Solutions due to higher headcount and additional sales incentives. Additionally, we have an increase of $83,405 from the acquisition of PayOnline (acquired May 20, 2015) offset by a $38,578 decrease to corporate salaries from reduced headcount and a $25,736 decrease to our mobile solutions division from changes in personnel and salaries.

Professional fees were $677,323 for the three months ended June 30, 2016 as compared to $1,184,085 for the three months ended June 30, 2015, representing a decrease of $506,762 as follows:

Professional Fees

General Legal

43,949

51,694

SEC Compliance Legal Fees

43,750

Accounting and Auditing

103,055

Tax Compliance and Planning

11,000

Consulting

84,042

215,006

167,545

467,824

89,268

369,299

15,165

171,185

190,184

13,749

157,482

74,930

119,164

588,693

816,320

90,095

Variance

(9,939

(1,327

(127,236

(138,490

30,001

(54,427

(32,302

95,842

(421,148

(348,496

(32,290

94,515

(568,160

(506,762

General legal expenses decreased $138,490 for the three months ended June 30, 2016 compared to the three months ended June 30, 2015 primarily due to decreased litigation activity at the corporate level and at our mobile solutions segment. This was offset by an increase in SEC compliance legal fees of $30,001 overall primarily due to an increased need for filings. Consulting fees decreased $348,496 primarily due to less consulting needs in corporate and our North American transaction solutions and mobile solutions offset by an increase in our Online Solutions due to PayOnline being acquired May 20, 2015.

Other general and administrative expenses were $242,338 (primarily consisting of performance bonuses of $86,874, communications of $55,062, office expenses of $66,756) for the three months ended June 30, 2016 as compared to $289,426 (primarily consisting of performance bonuses of $86,874, communications of $35,717, office expenses of $55,360 and taxes of $104,488) for the three months ended June 30, 2015, representing an increase of $47,088.

We recorded bad debt expense of $125,238 for the three months ended June 30, 2016 as compared to $131,511 for the three months ended June 30, 2015. For the three months ended June 30, 2016, we recorded a loss which was primarily comprised of $145,548 in ACH rejects offset by a $20,350 recovery from our Russian operations. For the six months ended June 30, 2015, we recorded a loss provision which was primarily comprised of $138,893 in ACH rejects offset by a $7,382 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 $844,535 for the three months ended June 30, 2016 as compared to $626,497 for the three months ended June 30, 2015. The $218,038 increase in depreciation and amortization expense was primarily due to PayOnline ($262,089 for IP Software, $24,999 for domain names, $37,417 for PCI Certification and $93,048 for portfolios and client lists), offset by $272,660 decrease in amortization in our North American Transaction Solutions segment.

Interest expense was $438,976 for the three months ended June 30, 2016 as compared to $1,284,591 for three months ended June 30, 2015, representing a decrease of $845,615 as follows:

Funding Source

Three months ended

Convertible Notes Payable

1,146,715

(1,146,715

MBF Note

28,450

RBL Note

110,342

137,173

(26,831

Crede CG III, LTD

297,435

(845,615

The net loss attributable to non-controlling interests amounted to $38,792 for three months ended June 30, 2016 as compared to $10,527 for the three months ended June 30, 2015.

During the three months ended June 30, 2016, no dividends were paid. We paid dividends to our preferred shareholders in the amount of $525,197 during the three months ended June 30, 2015.

Results of Operations for the Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015

Our combined businesses processed 84.7 million transactions for the six months ended June 30, 2016 as compared to 64.2 million transactions processed for the six months ended June 30, 2015. The increase of 20.5 million transactions processed was primarily due to a 17.1 increase from North America Transaction Solutions.

We processed $893 million in payments for the six months ended June 30, 2016 as compared to $506 million in payments, on a constant dollar basis, for the six months ended June 30, 2015.

We reported an adjusted net loss attributable to stockholders of $2,655,733 or $0.23 per share, for the six months ended June 30, 2016 as compared to an adjusted net loss attributable to stockholders of $4,822,787 or $1.01 per share, for the six months ended June 30, 2015. This resulted in an adjusted net loss decrease of $2,167,054. The primary reason for the decrease in the loss over last year’s comparable period is the $1,718,640 gross margin increase and a reduction in general and administrative expenses of $531,954. These items are discussed further below.

Net revenues consist primarily of payment processing fees. Net revenues were $24,953,907 for the six months ended June 30, 2016 as compared to $12,447,123 for the six months ended June 30, 2015. Included in mobile solutions revenue for the six months ended June 30, 2016 is $3,472,379 of branded content revenue. The remaining $300,832 is part of service fees revenue.

The increase in net revenues is primarily a result of organic net increases in merchants. In addition, we consolidated online payments revenue for PayOnline and began reporting mobile commerce revenues for branded content in the fourth quarter of 2015.

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

18,256,581

11,448,916

6,807,665

3,773,211

694,064

3,079,147

2,924,115

2,619,972

12,506,784

Cost of Revenues

15,620,817

10,053,495

5,567,322

3,381,206

28,395

3,352,811

1,868,011

20,870,034

10,081,890

10,788,144

2,635,764

1,395,421

1,240,343

392,005

665,669

(273,664

1,056,104

751,961

4,083,873

2,365,233

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 six months ended June 30, 2016 were $20,870,034 as compared to $10,081,890 for the six months ended June 30, 2015.

The year over year increase in cost of revenues of $10,788,144 is primarily a result of an increase in U.S. transaction volume, which resulted in a $5,567,322 increase North American transaction cost. Additionally, there was a $3,352,811 increase in mobile costs which now include mobile operator fees and content provider fees when we provide branded content. We also had $1,868,011 in new costs resulting from PayOnline operations (acquired May 20, 2015). Included in mobile solutions cost of revenue for the six months ended June 30, 2016 is $3,267,947 of the cost of branded content. The remaining $113,259 is included in the cost of service fees.

Gross Margin for the six months ended June 30, 2016 was $4,083,873 or 16% of net revenue, as compared to $2,365,233 or 19% of net revenue, for the three months ended June 30, 2015. North American gross margin increased 2%, and 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 three months ended June 30, 2016 is $204,432 (7.0% of total mobile revenues) for branded content.

Total adjusted operating expenses were $6,197,256 for the six months ended June 30, 2016, as compared to total adjusted operating expenses of $5,825,686 for the six months ended June 30, 2015. Total adjusted operating expenses for the six months ended June 30, 2016 consisted of general and administrative expenses of $4,087,624, provision for bad debts of $376,979 and depreciation and amortization of $1,732,653. For the six months ended June 30, 2015, total adjusted operating expenses consisted of general and administrative expenses of $4,619,578, provision of bad debts of $140,841 and depreciation and amortization of $1,065,267. The components of our general and administrative expenses are discussed below.

General and administrative expenses were $4,087,624 for the six months ended June 30, 2016 as compared to $4,619,578 for the six months ended June 30, 2015. General and administrative expenses for the six months ended June 30, 2016 and 2015 consisted of operating expenses not otherwise delineated in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss as follows:

Six months

634,833

196,726

255,436

1,095,256

2,182,251

282,507

201,255

615,598

1,201,710

11,551

68,374

191,382

271,307

20,956

64,791

90,395

91,095

37,902

146,078

59,395

(378,252

39,105

20,279

(318,868

267,742

42,029

141,232

455,356

1,297,133

(156,177

780,976

2,165,692

362,826

213,628

1,082,635

1,718,347

270,453

119,045

1,448,071

1,960,567

29,472

209,421

241,086

25,986

10,305

45,190

76,840

46,957

133,311

66,014

(90,507

(89,033

483,801

15,794

35,883

544,096

1,219,906

389,355

2,808,779

Salaries, benefits, taxes and contractor payments were $2,182,251 for the six months ended June 30, 2016 as compared to $1,718,347 for the six months ended June 30, 2015, representing an increase of $463,904 as follows: 

Salaries and benefits for the six months ended June 30, 2016

Salaries and benefits for the six months ended June 30, 2015

272,007

(16,902

196,178

Corporate Expenses & Eliminations

12,621

The primary reason for the increase was $272,007 in salaries from North America Transaction Solutions and $196,178 from the acquisition of PayOnline (acquired May 20, 2015) offset by a $16,902 decrease to our mobile solutions division salaries and benefits.

Professional fees were $1,201,710 for the six months ended June 30, 2016 as compared to $1,960,567 for the six months ended June 30, 2015, representing a decrease of $758,857 as follows:

33,397

68,860

105,489

87,500

224,399

224,977

189,109

297,658

283,839

772,744

222,506

301,256

675,598

Six months ended

52,400

268,274

324,543

89,285

307,832

16,275

170,749

119,010

813,709

1,222,632

223,149

1,495,375

(19,003

(199,414

(219,054

(1,785

(83,433

(82,855

(5,275

18,360

(116,872

178,494

(529,870

(449,888

(116,695

178,258

(819,777

(758,857

General legal expenses decreased $219,054 during for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 primarily due to decreased litigation activity at the corporate level and at our mobile solutions segment. Consulting fees decreased $449,888 primarily due to less consulting needs in corporate and mobile solutions offset by an increase in our Online Solutions due to PayOnline being acquired May 20, 2015.

Other general and administrative expenses were $455,356 (primarily consisting of performance bonuses of $173,748, communications of $113,020 and office expenses of $129,230) for the six months ended June 30, 2016 as compared to $544,096 (primarily consisting of performance bonuses of $173,748, communications of $84,347, office expenses of $121,765, taxes of $104,575 and insurance for $51,371) for the six months ended June 30, 2015, representing a decrease of $88,740.

We recorded bad debt expense of $376,979 for the six months ended June 30, 2016 as compared to $140,841 for the six months ended June 30, 2015. For the six months ended June 30, 2016, we recorded a loss which was primarily comprised of $409,276 in ACH rejects offset by a $32,397 recovery from our Russian operations. For the six months ended June 30, 2015, we recorded a loss provision which was primarily comprised of $235,635 in ACH rejects offset by a $94,769 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 $1,732,653 for the six months ended June 30, 2016 as compared to $1,065,267 for the six months ended June 30, 2015. The $667,388 increase in depreciation and amortization expense was primarily due to PayOnline ($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 an $166,717 decrease in portfolio amortization in our North American Transaction Solutions segment.

Interest expense was $589,414 for the six months ended June 30, 2016 as compared to $1,402,183 for three months ended June 30, 2015, representing a decrease of $812,769 as follows: 

Six months ended June 30, 2016

258,126

228,427

29,699

27,041

(21,638

(812,769

The net loss attributable to non-controlling interests amounted to $76,668 for six months ended June 30, 2016 as compared to $19,274 for the six months ended June 30, 2015.

During the six months ended June 30, 2016 no dividends were paid. We paid dividends to our preferred shareholders in the amount of $525,197 during the six months ended June 30, 2015.

Reconciliation of Non-GAAP Financial Measures and Regulation G Disclosure

To supplement its consolidated financial statements presented in accordance with United States generally accepted accounting principles ("GAAP"), the Company provides additional measures of its operating results by disclosing its adjusted net loss. Adjusted net loss is calculated as net loss excluding non-cash share based compensation and other one-time, non-recurring items not present in this year or last year results. Net Element discloses this amount on an aggregate and per share basis. These measures meet the definition of non-GAAP financial measures. The Company believes that application of these non-GAAP financial measures is appropriate to enhance the understanding of its historical performance through use of a metric that seeks to normalize period-to-period earnings.

This press release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Pursuant to Regulation G, a reconciliation of these non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP for the three and six months ended June 30, 2016 and 2015 is presented in the following Non-GAAP Financial Measures Table.

Reconciliation of Non-GAAP Financial Measures And Regulation G Disclosure

Non-Cash Share-

based Compensation

Derivative Activity,

Debt Extinguishment

and Restructure

Adjusted Non-GAAP

Three Months Ended June 30, 2016

Net (loss) income attributable to Net Element Inc stockholders

(5,346,448

2,014,589

2,162,861

(1,168,998

Basic and diluted earnings per share

Basic and diluted shares used in computing earnings per share

11,635,434

 GAAP 

 Non-Cash Share-

based Compensation 

 Derivative Activity,

and Restructure 

 Adjusted Non-GAAP 

(1,764,285

601,371

(2,022,036

(3,184,950

4,970,714

  GAAP  

  Adjusted Non-GAAP  

(7,194,167

2,375,573

(2,655,733

11,464,434

(4,003,493

1,202,742

(4,822,787

4,789,264

Additional information regarding Net Element’s results for its second quarter ended June 30, 2016 may be found in Net Element’s quarterly report on Form 10-Q, which was filed with the Security and Exchange Commission (SEC) on August 16, 2016 and may be obtained from the SEC’s Internet website at

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

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.

Contact:

media@netelement.com

+1 (786) 923-0502

NET ELEMENT, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2015

ASSETS

Current assets:

633,591

1,025,747

Accounts receivable, net

5,827,586

5,198,993

Prepaid expenses and other assets

806,202

1,106,016

Total current assets, net

7,267,379

7,330,756

Fixed assets, net

142,409

162,123

Intangible assets, net

4,513,823

5,423,880

Goodwill

9,643,752

Other long term assets

553,302

353,050

Total assets

22,120,665

22,913,561

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

6,075,259

5,858,837

Deferred revenue

326,023

743,910

Accrued expenses

4,205,599

2,975,066

Notes payable (current portion)

384,209

518,437

Due to related parties

329,921

329,881

Total current liabilities

11,321,011

10,426,131

Notes payable (net of current portion)

3,823,921

3,446,563

Total liabilities

15,144,932

13,872,694

Preferred stock  ($.0001 par value, 1,000,000 shares authorized,

no shares issued and outstanding at June 30, 2016 and December 31, 2015)

Common stock ($.0001 par value, 400,000,000 shares

authorized and 13,356,092 and 11,261,960 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively)

Paid in capital

160,092,967

154,361,694

Accumulated other comprehensive loss

(2,091,604

(1,565,822

Accumulated deficit

(151,149,215

(143,955,048

Noncontrolling interest

122,249

198,917

Total stockholders' equity

6,975,733

9,040,867

Total liabilities and stockholders' equity

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Three months ended June 30,

Service fees

12,117,708

21,481,528

Branded content

Total Revenues

6,909,916

Costs and expenses:

Cost of service fees

10,003,934

17,602,087

Cost of branded content

Non-cash compensation

Bad debt expense

Total costs and operating expenses

16,468,546

9,410,672

29,442,863

17,110,318

Loss from operations

(2,775,698

(2,503,756

(4,488,956

(4,663,195

Interest expense, net

(438,976

(1,284,591

(589,414

(1,402,183

Gain on change in fair value and settlement of beneficial conversion derivative

Loss from stock value guarantee

(2,162,861

Other income (expense)

(7,705

(8,501

(29,604

20,575

Net loss before income taxes

(5,385,240

(1,774,812

(7,270,835

(4,022,767

Income taxes

Net loss attributable to the noncontrolling interest

Net loss attributable to Net Element, Inc. stockholders

Dividends for the benefit of preferred stockholders

(525,197

Net loss attributable to common stock

(2,289,482

(4,528,690

Foreign currency translation

(496,041

(116,353

(525,782

(224,524

Comprehensive loss attributable to common stockholders

(5,842,489

(2,405,835

(7,719,949

(4,753,214

Loss per share - basic and diluted

Weighted average number of common shares outstanding - basic and diluted

CONSOLIDATED STATEMENT OF CASH FLOWS

Six Months Ended June 30, 

Cash flows from operating activities

Adjustments to reconcile net loss to net cash used in operating activities

Non controlling interest

(76,668

(12,145

Share based compensation

(417,887

(310,241

Gain on Change in fair value and settlement of beneficial conversion derivative

1,732,652

Non cash interest

297,434

349,146

Amortization of debt discount

983,715

Net recovery of loan losses

(94,770

Gain on disposal of fixed asset

(23,854

Changes in assets and liabilities

(331,566

266,529

Advances to aggregators

(92,017

270,932

173,598

220,990

507,737

Accrued expenses (includes $2.2M accrual for stock price guarantee)

1,655,971

(460,826

Net cash used in operating activities

(1,466,736

(2,470,648

Cash flows from investing activities

Purchase of portfolio and client acquistion costs

(741,514

(303,775

Acquistion of PayOnline asets, net of cash received

(3,195,452

Purchase of fixed and other assets

(214,046

(65,050

Net cash used in investing activities

(955,560

(3,564,277

Cash flows from financing activities

Proceeds from preferred stock

5,500,000

Proceeds from indebtedness

1,215,000

650,000

Related party advances

910,045

84,256

Net cash provided by financing activities

2,125,045

6,234,256

Effect of exchange rate changes on cash

(94,905

(27,443

Net (decrease) increase in cash

(392,156

171,888

Cash at beginning of period

503,343

Cash at end of period

675,231

Supplemental disclosure of cash flow information

Cash paid during the period for:

121,253

94,718

90,211

Non Cash activities:

Share issuance for settlement of unpaid compensation

1,042,509

Shares issued for redemption of indebtedness

971,871

Shares issued in settlement of advances from from board member

909,285

Notes payable (net of discount)

277,778

Funds in escrow from issuance of notes

5,000,000

Derivative Liability - warrants

3,623,182

Preferred dividends paid in common stock

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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Other recent filings from the company include the following:

Registration statement under Securities Act of 1933 - April 18, 2018
Net Element Reports Full-Year 2017 Financial Results And Provides Business Update - April 2, 2018
Net Element International Just Filed Its Annual Report: Net Loss per Sh... - April 2, 2018
Net Element International director just declared ownership of no shares of Net Element International - March 28, 2018
Net Element Appoints Seasoned Fintech Executive To Board Of Directors - March 26, 2018

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