Net Element Reports Second Quarter 2017 Results

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

North America Transaction Solutions Segment leads with a 31% increase

MIAMI, FL – (Marketwired) – 08/14/17 - Net Element, Inc. (NASDAQ: NETE)

(“Net Element” or the “Company”), a global financial technology and value-added solutions group that supports electronic payments acceptance in an omni-channel environment spanning across point-of-sale (POS), e-commerce and mobile devices, today reported financial results for the second quarter ended June 30, 2017 and provided an update on recent strategic and operational initiatives.

For the second quarter ended June 30, 2017, net revenues increased 1 8% to $16.1 million as compared to $13.7 million in the prior year. The increase in net revenues is primarily due to growth in the Company’s North America Transaction Solutions and Online Solutions segments:

North America Transaction Solutions Segment:

Continued organic growth of SMB merchants in this segment with emphasis on value-added offerings. Revenues for this segment were $13.9 million, a 31% increase over the prior year.

Online Solutions Segment:

Revenues for this segment were $2 million, a 33% increase over the prior year.

Mobile Solutions Segment:

As a result of a change in business model previously reported, revenues for this segment were $0.5 million vs $1.8 million, a 71% decrease over the prior year. We expect to maintain a smaller staff at Digital Provider and we have canceled our existing office lease and will consolidate Digital Provider’s physical operations into  PayOnline. We also are looking to develop a new business plan for Digital Provider that includes, but is not limited to, a model that requires less working capital than the current pre-pay model and provides for diversified, scalable business.

Reduction of Corporate Overhead:

The redundancies of our corporate staff at Net Element Russia were eliminated with responsibilities being absorbed by existing PayOnline staff. In addition, Net Element Russia’s Moscow corporate office and apartment leases were cancelled with the consolidation into PayOnline.

Recent Highlights:

Centralized international operations;

Launched PayOnline platform, which supports electronic commerce in the United States;

Launched support for iDeal, the leading payment system in The Netherlands;

Expanded payment module to include InSales, a popular omni-channel commerce and CMS platform;

Partnered with Payvision in Europe, expands to access to global currencies;

Launched payment acceptance for international mobile network operator;

Launched “Online Cashier” fiscal cloud-based point of sale solution for Russian merchants;

Launched Apple Pay Support in Russia;

Launched “Instant Credit” for online merchants

“We are pleased with our continued growth. Our results are a reflection of our ability to deliver growth,” commented Oleg Firer, CEO of Net Element. “We are excited about our strategic initiatives for the remainder of the year as we continue to streamline international operations and reduce operating expenses while managing the strong U.S. growth and expansion.”

Conference Call:

The Company will host a conference call to discuss Second Quarter 2017 financial results and business highlights on August 15, 2016 at 8:30 a.m. ET. The conference call can be accessed live over the phone by dialing +1 (877) 303-9858, or for international callers +1 (408) 337-0139, and referencing conference code 67569957. It is recommended that participants dial in approximately 10 minutes prior to the start of the 8:30 a.m Eastern call.

The call will also be webcast live from

http://edge.media-server.com/m/p/kaa6hdp3

. 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, 2017 Compared to the Three Months Ended June 30, 2016

We reported a net loss attributable to stockholders of $1,640,340 or $0.09 per share, for the three months ended June 30, 2017 as compared to a net loss attributable to stockholders of $5,346,448, or $0.46 per share, for the three months ended June 30, 2016. This resulted in a decrease in net loss attributable to stockholders of $3,706,108 primarily due to an increase in revenues, decreases in loss from stock value guarantee, non-cash compensation and interest, partially offset by increased general and administrative expenses.

Eliminating the effects of non-cash compensation and a 2016 stock value guarantee, we reported an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $1,511,803 or $0.08 per share for the three months ended June 30, 2017 as compared to an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $1,168,998 or $0.10 per share for the three months ended June 30, 2016.

Net revenues consist primarily of payment processing fees. Net revenues were $16,141,041 for the three months ended June 30, 2017 as compared to $13,692,848 for the three months ended June 30, 2016. The increase in net revenue is primarily due to organic growth of merchants in our North American Transaction Solutions segment which resulted in an increase to North American Transaction Solutions segment revenue of $3,208,850 (or 31% increase) for the three months ended June 30, 2017 versus the three months ended June 30, 2016. Increases in our North American Transaction Solutions segment revenue were primarily due to continued growth of merchants with emphasis on value-added offerings. Our Online Solutions segment revenue increased $500,653 (or 33%), from $1,509,208 for the three months ended June 30, 2016 to $2,009,861 for the three months ended June 30, 2017 as we continue to board additional merchants. These improvements were tempered by a $1,261,310 (or 71%) decrease in our Mobile Solutions segment, as we continue to experience increased competition, decreased margins, and liquidity constraints arising from capital needed to prepay for content delivered through our platform.  

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

Gross Margin Analysis

Increase /

Source of Revenues

June 30, 2017

June 30, 2016

(Decrease)

North American Transaction Solutions

13,612,782

10,403,932

518,398

1,779,708

(1,261,310

2,448,193

Cost of Revenues

11,472,508

8,967,784

2,504,724

502,742

1,566,618

(1,063,876

1,343,142

950,391

392,751

13,318,392

11,484,793

1,833,599

Gross Margin

2,140,274

1,436,148

704,126

15,656

213,090

(197,434

666,719

558,817

107,902

2,822,649

2,208,055

614,594

Cost of revenues represents direct costs of generating revenues, including commissions, mobile operator fees, purchases of short numbers, interchange expense and processing fees. Cost of revenues for the three months ended June 30, 2017 were $13,318,392 as compared to $11,484,793 for the three months ended June 30, 2016. The $1,833,599 increase in cost of revenues was primarily due to a $2,504,724 increase in our North American Transaction Solutions segment due to an increase in sales volume. There was also a $392,751 increase in cost of revenues resulting from our Online Solutions segment operations also primarily due the costs associated with boarding additional merchants. This was offset by a $1,063,876 decrease in our Mobile Solutions segment cost of revenues, which resulted from the decrease in revenues for our Mobile Solutions segment for the three months ended June 30, 2017.

Gross Margin or the three months ended June 30, 2017 was $2,822,649, or 17% of net revenue, as compared to $2,208,055, or 16% of net revenue, for the three months ended June 30, 2016. The $614,594 increase in gross margin was primarily due to increased volume of processing in North American Transaction Solutions offset by a decrease of $197,434 in Mobile Solutions margin caused by a decrease in business.  

Total operating expenses were $4,166,596 for the three months ended June 30, 2017, which consisted of general and administrative expenses of $2,599,178, non-cash compensation expenses of $128,537, provision for bad debts of $865,863, and depreciation and amortization of $573,018. Total operating expenses were $4,983,753 for the three months ended June 30, 2016, which consisted of general and administrative expenses of $1,999,391, non-cash compensation expenses of $2,014,589, provision for bad debts of $125,238, and depreciation and amortization of $844,535.

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

General and administrative expenses for the three months ended June 30, 2017 and 2016 consisted of operating expenses not otherwise delineated in our Condensed Consolidated Statements of Operations and Comprehensive Loss and include salaries and benefits, professional fees, rent, travel expense, filing fees, transaction gains, office expenses, communication expense, insurance expense, and other expenses required to run our business, as follows:

Three Months Ended June 30, 2017

Category

North America

Mobile

Online

Corporate

Expenses &

Eliminations

Salaries, benefits, taxes and contractor payments

464,134

126,516

234,950

547,219

1,372,819

Professional fees

82,888

19,768

258,535

299,536

660,727

12,121

40,624

83,334

136,079

Business development

10,683

Travel expense

75,646

38,391

119,931

Filing fees

Transaction (gains) losses

32,228

(9,508

24,765

Office expenses

45,956

24,214

16,058

89,541

Communications expenses

29,484

19,743

60,588

Insurance expense

32,235

Other expenses

80,913

83,302

   Total

681,480

197,186

592,357

1,128,155

Three Months Ended June 30, 2016

415,135

108,772

142,663

510,482

1,177,052

89,268

217,513

369,299

677,323

36,282

97,949

135,063

12,186

40,118

56,360

49,784

29,017

89,069

42,896

(328,350

(23,658

18,174

(333,834

27,148

14,774

22,723

66,772

16,817

11,586

26,175

55,062

30,494

30,970

610,608

(211,658

446,518

1,153,923

Variance

Salaries, benefits, taxes and contractor payments

48,999

17,744

92,287

36,737

195,767

(6,380

18,525

41,022

(69,763

(16,596

11,289

(14,615

(11,200

(31,350

(3,141

(45,677

25,862

(1,491

(2,883

30,862

(34,388

360,578

14,150

(16,871

358,599

18,808

(6,665

22,769

(6,953

17,898

(6,432

29,577

50,419

52,332

70,872

408,844

145,839

(25,768

599,787

Salaries, benefits, taxes and contractor payments were $1,372,819 for the three months ended June 30, 2017 as compared to $1,177,052 for the three months ended June 30, 2016.

Salaries and

benefits for the

Salaries and

Increase /

North America Transaction Solutions

Mobile Solutions

Online Solutions

Corporate Expenses & Eliminations

The increase in salaries of $195,767 was due to the North American Transaction Solutions segment salaries increasing $48,999 due to an increase in headcount and sales incentives for key employees. In addition, there were increases of $92,287 and $17,744, respectively, in our Online Solutions and Mobile Solutions segments, which were primarily due to salary increases.

Professional fees were $660,727 for the three months ended June 30, 2017 as compared to $677,323 for the three months ended June 30, 2016.

Professional Fees

General Legal

(20,000

24,702

SEC Compliance Legal Fees

79,035

Accounting and Auditing

97,500

102,715

Tax Compliance and Planning

Consulting

102,888

250,075

97,799

470,530

    Total

43,949

51,694

43,750

103,055

11,000

84,042

215,006

167,545

467,824

Increase /

(25,226

(19,247

(43,747

35,285

(5,555

(10,500

18,846

18,537

35,069

(69,746

Professional fees decreased by $16,596 mainly due to a decrease in general legal fees offset by an increase in SEC compliance fees.

Non-cash compensation expense from share-based compensation was $128,537 for the three months ended June 30, 2017, compared to $2,014,589 for the three months ended June 30, 2016. The majority of these expenses were for employee and consultant equity incentives for both periods.

We recorded bad debt expense of $865,863 for the three months ended June 30, 2017 as compared to $125,238 for the three months ended June 30, 2016. For the three months ended June 30, 2017, we recorded a loss which was primarily comprised of $671,580 in ACH rejects and a $194,283 provision from our Russian operations. Of the $671,580 of gross ACH rejects, $347,235 were passed through to independent sales organizations via a reduction in commissions.

For the three months ended June 30, 2016, we recorded a loss which was primarily comprised of $145,588 in ACH rejects offset by a $20,350 recovery from our Russian operations. Of the $145,588 of ACH rejects, $93,812 were passed through to independent sales organizations via a reduction in commissions.

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs, capitalized software expenses, trademarks, domain names and employee non-compete agreements.  Depreciation and amortization expense was $573,018 for the three months ended June 30, 2017 as compared to $844,535 for the three months ended June 30, 2016. The decrease was due to the full amortization of certain software and merchant portfolio assets during 2016.

Interest expense was $322,052 for the three months ended June 30, 2017 as compared to $438,976 for three months ended June 30, 2016, representing a decrease of $116,924 as follows: 

Funding Source

Three months

MBF Notes

15,516

28,450

(12,934

RBL Notes

220,128

110,342

109,786

Priority Payments Note

24,747

Crede CG III, LTD

297,435

(297,435

61,661

58,912

(116,924

Other interest expense for the three months ended June 30, 2017 consisted primarily of $37,245 from the financing for the PayOnline Acquisition stock price guarantee and $10,443 resulting from the promissory note entered into on March 1, 2017 with Star Capital Management, LLC. (See Note 12. Related Party Transactions). Additionally, Crede charges in 2016 for imputed interest did not occur during 2017.

The net income attributable to non-controlling interests amounted to $75,081 for three months ended June 30, 2017 as compared to $38,792 for the three months ended June 30, 2016.

Results of Operations for the Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016

We reported a net loss attributable to stockholders of $4,127,837, or $0.24 per share, for the six months ended June 30, 2017 as compared to a net loss attributable to stockholders of $7,194,167, or $0.63 per share, for the six months ended June 30, 2016. This resulted in a decrease in net loss attributable to stockholders of $3,066,330 primarily due and increase in revenues and a decrease in the loss from stock value guarantee and a decrease in noncash compensation expense.

Eliminating the effects of non-cash compensation in both years and a 2016 stock value guarantee, we reported an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $3,402,896 or $0.19 per share for the six months ended June 30, 2017 as compared to an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $2,655,733 or $0.23 per share for the three months ended June 30, 2016.

Net revenues consist primarily of payment processing fees. Net revenues were $29,702,982 for the six months ended June 30, 2017 as compared to $24,953,907 for the six months ended June 30, 2016. The increase in net revenue is primarily due to organic growth of merchants in our North American Transaction Solutions segment which resulted in an increase to North American Transaction Solutions segment revenue of $6,321,120 (or 35% increase) for the six months ended June 30, 2017 versus the six months ended June 30, 2016. Our Online Solutions segment revenue increased $825,775 (or 28%), from $2,924,115 for the six months ended June 30, 2016 to $3,749,890 for the six months ended June 30, 2017, primarily due to the boarding of additional merchants. The increases in North American Transaction Solutions and Online Solutions segments were offset by a $2,397,820 (or 64%) decrease in our Mobile Solutions segment, as we continue to

experience increased competition, decreased margins, and liquidity constraints arising from capital needed to prepay for content delivered through our platform.

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

Gross Margin Analysis

Six Months

Source of Revenues

North American Transaction Solutions

24,577,701

18,256,581

1,375,391

3,773,211

(2,397,820

4,749,075

% of

Cost of Revenues

20,933,958

15,620,817

5,313,141

1,319,704

3,381,206

(2,061,502

2,524,722

1,868,011

656,711

24,778,384

20,870,034

3,908,350

Gross Margin

3,643,743

2,635,764

1,007,979

55,687

392,005

(336,318

1,225,168

1,056,104

169,064

4,924,598

4,083,873

840,725

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 six months ended June 30, 2017 were $24,778,384 as compared to $20,870,034 for the six months ended June 30, 2016. The increase in cost of revenues was primarily due to a $5,313,141 increase in our North American Transaction Solutions segment due to increased sales volume. There was also a $656,711 increase in cost of revenues resulting from our Online Solutions segment operations also primarily due to the boarding of more merchants. This was offset by a $2,061,502 decrease in our Mobile Solutions segment cost of revenues, which resulted from the decrease in sales for our Mobile Solutions segment for the six months ended June 30, 2017.

Gross Margin for the six months ended June 30, 2017 was $4,924,598, or 17% of net revenue, as compared to $4,083,873, or 16% of net revenue, for the six months ended June 30, 2016. The $840,725 increase in gross margin was primarily due to the increased sales volume of processing and business mix in our North American Transaction Solutions offset by a decrease of $336,318 in our Mobile Solutions margin caused from a decrease in business.  

Total operating expenses were $8,531,281 for the six months ended June 30, 2017, which consisted of general and administrative expenses of $5,430,338, non-cash compensation expenses of $724,941, provision for bad debts of $1,145,621, and depreciation and amortization of $1,230,381. Total operating expenses were $8,572,829 for the six months ended June 30, 2016, which consisted of general and administrative expenses of $4,087,624, non-cash compensation expenses of $2,375,573, provision for bad debts of $376,979, and depreciation and amortization of $1,732,653.  

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

General and administrative expenses for the six months ended June 30, 2017 and 2016 consisted of operating expenses not otherwise delineated in our Consolidated Statements of Operations and Comprehensive Loss and include salaries and benefits, professional fees, rent, travel expense, filing fees, transaction gains, office expenses, communication expense, insurance expense, and other expenses required to run our business, as follows:

Six Months Ended June 30, 2017

944,750

250,334

456,705

1,388,739

3,040,528

250,964

44,839

483,877

554,737

1,334,417

27,288

80,092

181,763

289,143

17,788

24,070

112,148

90,918

215,228

14,934

(17,096

(6,192

(19,512

98,602

41,511

91,501

237,639

23,388

59,571

40,162

125,318

76,341

85,743

92,232

1,436,616

321,390

1,141,964

2,530,368

Six Months Ended June 30, 2016

808,581

235,937

255,436

1,056,044

2,355,998

222,506

301,255

675,401

1,201,710

68,374

200,615

271,307

20,956

64,791

90,395

91,095

37,902

146,078

59,395

(383,813

39,105

25,840

(318,868

46,747

26,085

51,439

129,245

46,978

15,677

49,309

113,020

21,063

11,229

33,560

1,257,926

(128,950

781,042

2,177,606

136,169

14,397

201,269

332,695

684,530

28,458

42,291

182,622

(120,664

132,707

24,970

11,718

(18,852

17,836

(18,147

(47,003

(2,152

(66,325

21,053

(4,650

53,016

69,150

(44,461

366,717

(45,297

(22,806

299,356

51,855

15,426

40,062

108,394

(23,590

43,894

(9,147

12,298

70,557

(17,850

74,514

58,672

178,690

450,340

360,922

352,762

1,342,714

Salaries, benefits, taxes and contractor payments were $3,040,528 for the six months ended June 30, 2017 as compared to $2,355,998 for the six months ended June 30, 2016.

 North America Transaction Solutions

 Mobile Solutions

 Online Solutions

 Corporate Expenses & Eliminations

The increase in salaries of $684,530 was due primarily to the increase of corporate expenses for a $300,000 discretionary bonus payable to our CEO and approved by the Board of directors. The bonus is payable when cash flow of the business can support the payment. Additionally, North American Transaction Solutions segment salaries increased $136,169 due to an increase in headcount and sales incentives for key employees. There was also an increase of $201,269 and $14,397, respectively in our Online Solutions and Mobile Solutions segments which were primarily due to increasing administrative payroll on PayOnline and unfavorable changes in foreign currency exchange rates.

Professional fees were $1,334,417 for the six months ended June 30, 2017 as compared to $1,201,710 for the six months ended June 30, 2016.

22,599

58,228

84,785

102,785

14,433

210,282

224,715

15,400

228,365

465,486

168,042

906,732

33,397

68,860

105,489

87,500

224,399

224,977

189,109

297,657

283,642

772,744

(10,798

(10,632

(20,704

15,285

13,855

(14,117

39,256

42,503

167,829

(115,600

133,988

Professional fees increased by $132,707 mainly due to an increase in Online Solutions segment’s consulting fees of $167,828 offset by a decrease in general legal expenses.

Non-cash compensation expense from share-based compensation was $724,941 for the six months ended June 30, 2017, compared to $2,375,573 for the six months ended June 30, 2016. The majority of these expenses were for employee and consultant incentives in both periods.

We recorded bad debt expense of $1,145,621 for the six months ended June 30, 2017 as compared to $376,979 for the six months ended June 30, 2016. For the six months ended June 30, 2017, we recorded a loss which was primarily comprised of $958,523 in ACH rejects and a $196,551 provision from our Russian operations. Of the $958,523 of ACH rejects, $511,881 were passed through to independent sales organizations that board their merchants with us, offset by $9,453 of rejects obtained through collection procedures.

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. Of the $409,276 of ACH rejects, $168,333 were passed through as a reduction to commissions to independent sales organizations that board their merchants with us.

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs, capitalized software expenses, trademarks, domain names and employee non-compete agreements.  Depreciation and amortization expense was $1,230,381 for the six months ended June 30, 2017 as compared to $1,732,653 for the six months ended June 30, 2016.

Interest expense was $591,740 for the six months ended June 30, 2017 as compared to $589,414 for six months ended June 30, 2016, representing an increase of $2,325 as follows: 

Six months

ended

June 30 , 2017

Six months

34,329

376,494

258,126

118,368

156,169

150,766

Other interest costs primarily consisted of $82,377 resulting from the stock price guarantee related to the PayOnline acquisition and $67,602 resulting from the promissory note entered into on March 1, 2017 with Star Capital Management, LLC. See Note 12. Related Party Transactions.

The net income attributable to non-controlling interests amounted to $125,782 for six months ended June 30, 2017 as compared to $76,668 for the six months ended June 30, 2016.

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, 2017 and 2016 is presented in the following Non-GAAP Financial Measures Table.

Share-based

Compensation

Loss from Stock

Value Guarantee

Adjusted Non-GAAP

Net (loss) income attributable to Net Element Inc stockholders

(1,640,340

(1,511,803

Basic and diluted earnings per share

Basic and diluted shares used in computing earnings per share

17,715,382

(5,346,448

2,162,861

(1,168,998

11,635,434

(4,127,837

(3,402,896

17,099,145

(7,194,167

(2,655,733

11,464,434

Additional information regarding Net Element’s results for its second quarter ended June 2017 may be found in Net Element’s quarterly report on Form 10-Q, which was filed with the Security and Exchange Commission (SEC) on August 11, 2017 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 U.S. and selected emerging markets. In the U.S. it aims to grow transactional revenue by innovating SME productivity services such as its cloud based, restaurant and retail point-of-sale solution Aptito. Internationally, Net Element's strategy is to leverage its omni-channel platform to deliver flexible offerings to emerging markets with diverse banking, regulatory and demographic conditions such as UAE, Kazakhstan, Kyrgyzstan and Azerbaijan where initiatives have been recently launched. Net Element was named in 2016 by South Florida Business Journal as one of the fastest growing technology companies.

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.

NET ELEMENT, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

December 31,

ASSETS

Current assets:

1,274,279

621,635

Accounts receivable, net

6,007,143

7,126,429

Prepaid expenses and other assets

1,219,524

1,467,897

Total current assets, net

8,500,946

9,215,961

Fixed assets, net

103,239

117,295

Intangible assets, net

3,308,229

3,589,850

Goodwill

9,643,752

Other long term assets

417,574

603,209

Total assets

21,973,740

23,170,067

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

7,516,761

7,510,113

Accrued expenses

4,437,601

5,518,823

Deferred revenue

439,074

1,355,972

Notes payable (current portion)

984,720

808,976

Due to related parties

366,636

299,004

Total current liabilities

13,744,792

15,492,888

Notes payable (net of current portion)

6,253,513

3,615,782

Total liabilities

19,998,305

19,108,670

COMMITMENTS AND CONTINGENCIES

Series A convertible preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at June 30, 2017 and December 31, 2016)

Common stock ($.0001 par value, 400,000,000 shares authorized and 17,968,317 and 15,353,494 shares issued and outstanding at June 30, 2017 and December 31, 2016)

Paid in capital

166,220,080

163,918,685

Accumulated other comprehensive loss

(2,620,615

(2,486,616

Accumulated deficit

(161,570,423

(157,442,585

Noncontrolling interest

(55,404

70,378

Total stockholders' equity

1,975,435

4,061,397

Total liabilities and stockholders' equity

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Three Months Ended

June 30

Six Months Ended 

June 30

Service fees

15,456,310

12,117,708

28,362,086

21,481,528

Branded content

684,731

1,575,140

1,340,896

3,472,379

Total revenues

Costs and expenses:

Cost of service fees

12,653,556

10,003,934

23,475,543

17,602,087

Cost of branded content

664,836

1,480,859

1,302,841

3,267,947

General and administrative

Non-cash compensation

Bad debt expense

Depreciation and amortization

Total costs and operating expenses

17,484,988

16,468,546

33,309,665

29,442,863

Loss from operations

(1,343,947

(2,775,698

(3,606,683

(4,488,956

Interest expense, net

(322,052

(438,976

(591,740

(589,414

Loss from stock value guarantee

(2,162,861

Other income (expense)

(49,422

(7,705

(55,196

(29,604

Net (loss) income before income taxes

(1,715,421

(5,385,240

(4,253,619

(7,270,835

Income taxes

Net loss attributable to the noncontrolling interest

Foreign currency translation loss

(146,102

(496,041

(133,999

(525,782

Comprehensive loss attributable to common stockholders

(1,786,442

(5,842,489

(4,261,836

(7,719,949

Loss per share - basic and diluted

Weighted average number of common shares outstanding - basic and diluted

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

Six Months Ended June 30,

Cash flows from operating activities

Net loss attributable to Net Element, Inc. stockholders

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

Non controlling interest

(125,782

(76,668

Share based compensation

596,404

(916,898

(417,887

Provision for bad debts

192,895

1,732,652

Non cash interest

94,248

297,434

Changes in assets and liabilities

1,913,135

(331,566

284,661

270,932

Accounts payable and accrued expenses

(1,845,161

1,876,961

Net cash used in operating activities

(2,703,954

(1,466,736

Cash flows from investing activities

Client acquisition costs

(966,147

(741,514

Receipt of excess reserves and (purchase) of fixed and other assets

180,423

(214,046

Net cash used in investing activities

(785,724

(955,560

Cash flows from financing activities

Proceeds from common stock

1,437,132

Proceeds from indebtedness

3,298,792

1,215,000

Repayment of indebtedness

(624,918

Related party advances

910,045

Net cash provided by financing activities

4,111,006

2,125,045

Effect of exchange rate changes on cash

31,316

(94,905

Net  increase (decrease) in cash

652,644

(392,156

Cash at beginning of period

1,025,747

Cash at end of period

633,591

Supplemental disclosure of cash flow information

Cash paid during the period for:

397,548

64,314

94,718

Non cash activities:

Share issuance for settlement of unpaid compensation

1,042,509

Shares issued for redemption of indebtedness

258,107

971,871

Shares issued in settlement of advances from board member

909,285

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.

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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

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