Net Element Reports Full-Year 2016 Financial Results And Provides Business Update

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

Annual revenue increased 35% to $54.3 million for 2016 from $40.2 million in 2015.

MIAMI, FL – April 1, 2017 - Net Element, Inc. (NASDAQ: NETE)

(“Net Element” or the “Company”), a provider of global multi-channel payment technology solutions and value-added transactional services, today reported financial results for the fiscal year ended December 31, 2016 and provided an update on recent strategic and operational initiatives.

Conference Call:

The Company will host a conference call to discuss 2016 financial results and business highlights on April 3, 2017 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 conference code 1118558. It is recommended that participants dial in approximately 10 minutes prior to the start of the 8:30AM Eastern call.

The call will also be webcast live from

http://edge.media-server.com/m/p/36p8bop3

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

www.netelement.com/en/ir

website.

2016 Full Year Results:

Total US Dollar volume processed globally in 2016 exceeded $2.45 billion, an increase of 40% compared to $1.75 billion in 2015.

Total transactions processed for 2016 exceeded 187 million, an increase of 16% compared to 161 million in 2015.

Revenues increased to $54.3 million, an increase of 35% compared to $40.2 million in 2015.

United States accounted for 78% of our total revenue, while international revenues were 22% of our total revenues.

The $14.0 million increase in revenues is primarily due to organic revenue growth in North American Transaction Solutions. Online Solutions also posted a strong year over year increase (PayOnline acquired May 2015):

North American Transaction Solutions segment:

Continued organic growth of SMB merchants with emphasis on value-added offerings. Revenues for this segment were $42.1 million, a 54% increase over the prior year.

Online Solutions.

Continued organic growth of international merchants in this segment with expansion to international growth markets. Revenues for this segment were $6.2 million, a 63% increase over the prior year.

Mobile Solutions segment:

Revenues for this segment were $6 million, a 34% decrease over the prior year. We continue to explore financing options for this business as well as expansion to markets that do not require us to advance capital to content providers prior to getting paid from mobile network operators.

“I am pleased to say 2016 was a successful year for Net Element. Our achievements provided growth, and positioned us for continued success as we continue to expand our global transaction services in the United States and select international markets” commented Oleg Firer, CEO of Net Element.

2016 Significant Achievements

Recognitions

Net Element named one of the fastest growing technology companies in South Florida Business Journal’s 2016 Technology Awards

PayOnline was named the best processing gateway in 2016 by Tagline

PayOnline recognized for its payment services by Markswebb Rank & Report, ranked as a Top 5 payment acceptance company

New Partnerships

Esquire Bank (US) - this multi-year contract includes transaction clearing services and sponsorship to payment networks

Merrick Bank (US) - On November 1, 2016, we moved all of our processing that utilized BMO Harris Bank for clearing to Merrick Bank

Mashreqbank (UAE) - this new partnership expands Net Element’s processing capabilities in the region

Round Bank (RU) - under this collaboration agreement, we integrated the first 70 online merchants to the PayOnline platform

Geographical Expansion

Continued expansion into Central Asia

Launched payment processing and mobile payments in Azerbaijan

Product Launches

Launched payment acceptance module for Telegram instant messenger application

Launched proprietary gift card software application for Smart Payment Terminals

PayOnline payments module became available for popular e-commerce and CMS platforms

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

Unified Payments launched Mobile Point of Sale for Apple’s iOS

Launched fully integrated omni-channel gift and loyalty platform

Launched Aptito in Russia, aiming to lead in the underserved POS software market

Released Aptito POS solution for retail stores with inventory management and analytics

Launched SalesCentral On-the-Go to expedite merchant approval and boarding

Key New Relationships

Dunkin’ Donuts became a client in Russia; PayOnline enabled online ordering and payments acceptance

ExLine became a client in Kazakhstan; PayOnline enabled secure online payments for Kazakhstan’s market-leading courier service

ESET NOD32, one of the world’s leaders in the field of anti-virus software, became a client of PayOnline in Kazakhstan

Digital Provider enabled mobile payments at Vnukovo Airport; full integration with the airport’s infrastructure

Sony Brand Stores became a client of PayOnline in Russia

Capital

During 2016, we were successful in raising capital utilizing debt exchange and equity financing instruments

Results of Operations for the Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

We reported a net loss attributable to common stockholders of $13.5 million, or $1.03 loss per share, for the year ended December 31, 2016 as compared to a net loss attributable to common stockholders of $14.8 million, or $2.32 per share, for the year ended December 31, 2015. Our net loss from operations for the years ended December 31, 2016 and 2015 are discussed further below.

Adjusting for non-cash compensation and other non-recurring items, we have a non-GAAP adjusted net loss attributable to common stockholders of $7.9 million or $0.60 loss per share, for the year ended December 31, 2016 as compared to a non-GAAP adjusted net loss attributable to common stockholders of $11.3 million or $1.77 loss per share, for the year ended December 31, 2015. The net loss attributable to common stockholders for 2015 includes preferred stock dividends paid in the amount of $1.6 million.

The following table sets forth our sources of revenues, cost of revenues and gross margins for the years ended December 31, 2016 and 2015.

Twelve

Months Ended

Increase/

Source of Revenues

(Decrease)

42,130,901

27,388,598

14,742,303

5,933,281

9,043,705

(3,110,424

6,222,677

3,803,059

2,419,618

54,286,859

40,235,362

14,051,497

Increase /

Cost of Revenues

36,342,465

23,497,808

12,844,657

5,287,960

8,124,763

(2,836,803

4,077,816

2,354,644

1,723,172

45,708,241

33,977,215

11,731,026

Gross Margin

5,788,436

3,890,790

1,897,646

645,321

918,942

(273,621

2,144,861

1,448,415

696,446

8,578,618

6,258,147

2,320,471

Revenues consist primarily of service fees from transaction processing. Revenues were $54.3 million for the year ended December 31, 2016 as compared to $40.2 million for the year ended December 31, 2015. The increase in revenues is primarily due to organic growth of merchants in our North America Transaction Solutions segment. This was partially offset by a $3.1 million decrease primarily from our Mobile Solutions branded content. During May of 2015, we acquired and began consolidating revenues from our Online Solutions segment, consisting of PayOnline. Additionally, we began generating revenues for branded content in our Mobile Solutions segment during the quarter ending September 30, 2015. Branded content revenues are presented gross versus net fees recorded for all other mobile business.

Cost of revenues represents direct costs of generating revenues, including commissions, mobile operator fees, purchases of short numbers, interchange expense and processing fees. Cost of revenues for the twelve months ended December 31, 2016 were

$45.7 million as compared to $34.0 million for the twelve months ended December 31, 2015. The year over year increase in cost of revenues of $11.7 million was due to a $12.8 million increase due to increased North American Transaction Solutions volume. There was also a $

1.7 million increase in cost of revenues resulting from Online Solutions segment (PayOnline) as 2015 was only a partial year since business was acquired in May 20, 2015. This was offset by a $

2.8 million decrease in Mobile Solutions costs of revenues.

Gross Margin for the twelve months ended December 31, 2016 was $8.6 million or 16% of net revenue, as compared to $6.3 million or 16% of net revenue, for the twelve months ended December 31, 2015. The primary reasons margin percentages stayed the same was an increase in net revenue from our North American Transaction Solutions and Online Solutions segments. This was offset by a $0.3 million decrease in gross margin from our Mobile Solutions segment.

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

General and administrative expenses for the years ended December 31, 2016 and 2015 consisted of operating expenses not otherwise delineated in our Consolidated Statements of Operations and Comprehensive Loss, including non-cash compensation expense, salaries and benefits, professional fees, rent, filing fees and other expenses required to run our business, as follows:

Twelve months ended December 31, 2016

Category

Corporate

Expenses

& Eliminations

Salaries, benefits, taxes and contractor payments

1,302,547

450,306

637,181

2,012,655

4,402,689

Professional fees

542,681

10,835

888,174

1,273,150

2,714,840

140,789

421,548

566,333

Business development

36,923

123,046

13,354

178,289

Travel expense

191,848

11,435

23,606

119,904

346,793

Filing fees

82,560

Transaction (gains) losses

(408,425

44,738

(376,906

(740,544

Other expenses

529,281

(52,189

145,854

623,977

1,246,924

2,603,329

20,924

2,003,388

4,170,242

8,797,883

Twelve months ended December 31, 2015

904,447

405,910

332,961

2,172,923

3,816,241

465,680

12,326

789,197

2,296,682

3,563,885

74,945

393,986

475,808

31,661

77,074

109,515

170,578

23,806

24,844

102,928

322,156

100,001

68,713

(69,480

(76,327

(77,094

507,002

523,451

46,231

(76,719

999,965

2,082,806

1,038,425

1,275,772

4,913,474

9,310,477

Transaction gains and losses represent changes in exchange rates between our functional currency and the foreign currency in which the transaction is denominated. Excluding transaction gains, our general and administrative expenses were relatively flat to that of prior year despite large increases in revenues.

Non-cash compensation expense was $3.5 million for the year ended December 31, 2016 as compared to $4.3 million for the year ended December 31, 2015. Non-cash compensation for 2016 and 2015 was primarily due to incentive stock and options granted to our employees.

We recorded a provision for bad debts in the amount of $

1.7 million for the year ended December 31, 2016, compared to provision for bad debts of $0.7 million for the year ended December 31, 2015. For the twelve months ended December 31, 2016 we recorded a loss provision which was primarily comprised of $1.3 million in net ACH rejects, attributable to the normal course of our North America Transaction Solutions segment, and a $0.4 million loss provision, which was to reserve for potential losses on accounts receivable from our Mobile Solutions business. For the twelve months ended December 31, 2015 we recorded a loss provision which was primarily comprised of $0.8 million in ACH rejects, attributable to the normal course of our North America Transaction Solutions segment, offset by a $0.1 million net bad debt recovery from our Mobile Solutions segment.

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios, trademarks and domain names plus depreciation expense on fixed assets, client acquisition costs, capitalized software expenses and employee non-compete agreements. Depreciation and amortization expense was $

3.5 million for the year ended December 31, 2016 as compared to $2.5 million for the year ended December 31, 2015. The primary reason for the $1.0 million increase is $0.8 million increase attributed to Online Solutions segment, primarily because we took a full year’s depreciation in 2016 versus a partial year in 2015. We purchased PayOnline in May of 2015. In addition, we had a $0.3 million increase in North American Transaction Solutions due to increased customer acquisition costs, offset by $0.1 million amortization decrease as many of our merchant portfolios became fully amortized during 2015.

Interest expense was $

1.5 million for the year ended December 31, 2016 as compared to $3.6 million for the year ended December 31, 2015, representing a decrease of $

2.1 million as follows:

Funding Source

 December 31, 2016

Increase /

(Decrease)

Convertible Notes Payable

3,027,354

(3,027,354

MBF Notes

61,325

RBL Notes

1,282,439

513,994

768,445

120,069

34,350

85,719

1,463,833

3,575,698

(2,111,865

Interest for 2016 was primarily attributed to RBL Notes. Of the $

1.3 million in interest attributable to the RBL Notes, $0.8 million represented non-cash charges attributed to discounts from the market value of our common stock that was issued in exchange for the debt. In addition, $0.5 million resulted from the payment of interest on the notes. Other interest consisted primarily of $0.1 million due to a third party relating to payment installments on the PayOnline stock price guarantee obligation, offset by interest earned by our Mobile Solutions segment.

Interest for 2015 was primarily attributed to corporate indebtedness, of which $

3 million was due to the accretion of interest on the debt discounts attributed to the convertible notes that were extinguished during the fourth quarter of 2015. Additionally, $0.5 million of interest was attributable to our RBL Notes.

During 2016, we recorded a $ 3.7 million loss from stock value guarantee and other charges from PayOnline acquisition, related to Online Solutions segment. This loss includes a stock price guarantee charge in the amount of $ 2.2 million plus accrued interest, from the PayOnline acquisition agreement make-whole provision (arising from a decrease in the stock value purchase consideration paid) and a reserve for merchant liabilities assumed in the amount of $ 1.4 million pursuant to an amendment to the PayOnline acquisition agreement. Included in other income was a gain of $0.5 million from the transfer and settlement of merchant reserves.

During 2015, we recorded a loss on the change in fair value on the beneficial conversion derivative related to convertible preferred stock and the related note payable in the amount of $27.0 million. During the fourth quarter, we extinguished the note payable and convertible preferred stock and recognized a $28.0 million gain on these extinguishments which were attributable to our corporate expenses.

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 non-GAAP measures of its operating results by disclosing its adjusted net loss. Adjusted net loss is calculated as net loss attributable to Net Element, Inc. common shareholders excluding non-cash share based compensation and other non-recurring items. Net Element discloses this amount on an aggregate and per share basis. Historically, we began this reconciliation calculation with Net Loss (for our 2015 annual results) and Net Loss attributable to Net Element, Inc. stockholders (for our 2016 quarterly results) but we now start with Net Loss Attributable to Net Element, Inc. common stockholders in order to present more comparable earnings per share numbers. Adjustments to the net loss presented remain the same under all scenarios. 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.

Pursuant to Regulation G promulgated by the Securities and Exchange Commission, a reconciliation of the non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP for the twelve months ended December 31, 2016 and 2015 is presented in the following Non-GAAP Financial Measures Table.

Share-based Compensation

Fair Value Adjustment from PayOnline Acquisition

Adjusted Non-GAAP

Twelve Months Ended December 31, 2016

Net loss attributable to Net Element, Inc. common stockholders

(13,487,537

3,463,435

2,162,861

(7,861,241

Basic and diluted (loss) earnings per share

Basic and diluted shares used in computing earnings per share

13,058,009

Derivative Activity and Debt Extinguishment

Twelve  Months Ended December 31, 2015

(14,838,704

4,306,304

(811,484

(11,343,884

6,391,120

NET ELEMENT, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

Current assets:

621,635

1,025,747

Accounts receivable, net

7,126,429

5,198,993

Prepaid expenses and other assets

1,467,897

1,106,016

Total current assets, net

9,215,961

7,330,756

Fixed assets, net

117,295

162,123

Intangible assets, net

3,589,850

5,423,880

Goodwill

9,643,752

Other long term assets

742,810

353,050

Total assets

23,309,668

22,913,561

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

7,510,113

5,858,837

Accrued expenses

5,518,823

2,975,066

Deferred revenue

1,355,972

743,910

Notes payable (current portion)

808,976

518,437

Due to related parties

299,004

329,881

Total current liabilities

15,492,888

10,426,131

Notes payable (net of current portion)

3,755,383

3,446,563

Total liabilities

19,248,271

13,872,694

Series A Convertible Preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at December 31, 2016 and December 31, 2015)

Common stock ($.0001 par value, 400,000,000 shares authorized and 15,353,494 and 11,261,959 shares issued and outstanding at December 31, 2016 and December 31, 2015

Paid in capital

163,918,685

154,361,694

Accumulated other comprehensive loss

(2,486,616

(1,565,822

Accumulated deficit

(157,442,585

(143,955,048

Noncontrolling interest

70,378

198,917

Total stockholders' equity

4,061,397

9,040,867

Total liabilities and stockholders' equity

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Net revenues

Service fees

48,784,855

31,204,871

5,502,004

9,030,491

Total revenues

Costs and expenses:

Cost of service fees

40,521,236

25,858,098

Cost of branded content

5,187,005

8,119,117

Bad debt expense

1,688,237

649,571

3,466,511

2,513,162

Total costs and operating expenses

63,124,307

50,756,729

Loss from operations

(8,837,448

(10,521,367

Interest expense, net

(1,463,833

(3,575,698

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

(26,932,496

Loss from stock value guarantee and other charges from PayOnline acquisition

(3,722,142

Gain on debt extinguishment

27,743,980

Gain on asset disposal

40,369

Other income (expense), net

407,347

(82,714

Net loss before income taxes

(13,616,076

(13,327,926

Income taxes

Net loss attributable to the noncontrolling interest

128,539

74,314

Net loss attributable to Net Element, Inc. stockholders

(13,253,612

Dividends for the benefit of preferred stockholders

(1,585,092

Foreign currency translation

(920,794

(314,361

Comprehensive loss attributable to common stockholders

(14,408,331

(15,153,065

Loss per share - basic and diluted

Weighted average number of common shares outstanding - basic and diluted

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Preferred Stock

Common Stock

Paid in

Non-controlling

Equity

Shares

Amount

Subscription

Deficit

in Assets

Balance December 31, 2014

4,588,152

136,693,759

(1,111,130

(1,251,461

269,762

(129,116,344

5,485,045

Share based compensation

401,532

4,306,264

4,306,303

Preferred shares issued

5,287,082

Preferred shares converted to common shares

(5,500

(5,287,082

3,376,045

9,035,746

9,036,084

Preferred share dividends paid

612,891

1,585,031

Shares issued in connection with debt restructuring

420,805

1,346,606

1,346,648

Shares issued in exchange for warrants

250,000

(2,679,885

(2,679,861

Shares issued and issuable for acquisitions

476,821

3,599,952

3,600,000

Repurchase of non-controlling interest

(3,489

Shares issued for insider financing

1,135,713

1,588,840

1,588,954

Write-off of stock subscription receivable

(74,314

(14,913,018

Comprehensive loss - foreign currency translation

Balance December 31, 2015

1,214,418

4,426,996

4,427,117

65,430

134,088

134,095

Shares issued in connection with reverse stock split

466,428

988,781

988,828

1,663,401

3,288,670

3,288,836

Shares issued under ESOUSA agreement

680,057

718,456

718,524

(128,539

Balance December 31, 2016

CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash flows from operating activities

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

(74,309

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

26,932,495

3,466,510

Non-cash interest

852,408

Amortization of deferred revenue

(1,221,177

Amortization of debt discount

Provision bad debt expense

500,000

Amortization of prepaid costs

967,313

Gain on disposal of fixed asset

(40,369

(27,743,980

Changes in assets and liabilities

(2,751,144

(1,492,183

1,833,239

271,428

(570,582

291,631

Accounts payable and accrued expenses

3,797,753

3,571,307

Net cash used in operating activities

(3,278,321

(1,690,772

Cash flows from investing activities

Purchase of portfolio and client acquisition costs

(1,319,820

(878,085

Sale of portfolio

300,000

Acquisition of PayOnline assets, net of cash received

(3,195,452

Purchase of fixed and other assets

(187,089

(579,209

Net cash used in investing activities

(1,506,909

(4,352,746

Cash flows from financing activities

Proceeds from issuance of preferred stock

5,500,000

Proceeds from indebtedness

3,170,540

650,000

Repayment of indebtedness

(71,700

Cash received for issuance of shares and warrants

Related party advances

1,027,874

331,273

Net cash provided by financing activities

4,426,714

6,481,273

Effect of exchange rate changes on cash

(45,596

84,649

Net (decrease) increase in cash

(404,112

522,404

Cash at beginning of year

503,343

Cash at end of year

Supplemental disclosure of cash flow information

Cash paid during the year for:

611,625

548,344

94,718

74,563

Non-cash activities:

Stock issued in exchange for warrants

Preferred dividends paid in common stock

Common share issuance for settlement of unpaid compensation

1,042,509

Common shares issued for redemption of indebtedness

2,499,481

Common shares issued in settlement of advances from board member

909,285

Common shares issued for acquisition

Common shares issued upon redemption of preferred shares

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, Russian Federation and other international 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, India and Latin America where initiatives have been recently launched. It maintains offices in Miami, FL and in Russia. 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. These forward-looking statements include, without limitation, whether Net Element can secure any additional financing, if such additional financing will be adequate to meet the Company's objectives and whether the company will be successful in its endeavors in expanding its global transaction services in the United States and international markets. 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 and the subsequently filed 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

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

To receive a free e-mail notification whenever Net Element International makes a similar move, sign up!

Other recent filings from the company include the following:

Major owner of Net Element International just disposed of 28,572 shares - June 12, 2018
Registration statement under Securities Act of 1933 - June 1, 2018

Auto Refresh

Feedback