EX-99.1 2 v452968_ex99-1.htm EXHIBIT 99.1

 

Exhibit 99.1

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Recent Highlights

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

 

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

 

Conference Call:

The Company will host a conference call to discuss Third Quarter 2016 financial results and business highlights on November 15, 2016 at 8:30 AM ET. The conference call can be accessed live over the phone by dialing +1 (877) 303-9858, or for international callers +1 (408) 337-0139, and referencing password 18929736. It is recommended that participants dial in approximately 10 minutes prior to the start of the 8:30 am Eastern call.

 

The call will also be webcast live from http://edge.media-server.com/m/p/y4vbhvpa. Following completion of the call, a recorded replay of the webcast will be available on the www.netelement.com/en/ir website.

 

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

 

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

 

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

 

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

 

   Three Months Ended   % of   Three Months Ended   % of   Increase / 
Cost of Revenues  September 30, 2016   revenues   September 30, 2015   revenues   (Decrease) 
                     
North America Transaction Solutions  $9,585,952    86%  $6,489,695    83%  $3,096,257 
Mobile Solutions   1,045,836    85%   2,758,590    99%   (1,712,754)
Online Solutions   1,063,380    67%   1,457,042    71%   (393,662)
Total  $11,695,168    83%  $10,705,327    84%  $989,841 

 

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

 

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

 

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

 

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

 

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

 

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

 

Three months ended September 30, 2016                    
                     
Category  North America Transaction Solutions   Mobile Solutions   Online Solutions   Corporate Expenses & Eliminations   Total 
Salaries, benefits, taxes and contractor payments  $327,785   $107,310   $167,802   $442,497   $1,045,394 
Professional fees   89,985    36,874    161,394    384,227    672,480 
Rent   -    942    35,682    116,703    153,327 
Business development   10,827    4,869    27,752    -    43,448 
Travel expense   61,700    2,563    5,978    50,466    120,707 
Filing fees   -    -    -    17,789    17,789 
Transaction (gains) losses   -    (11,068)   (655)   (141,639)   (153,362)
Other expenses   143,621    9,394    49,949    181,990    384,954 
   Total  $633,918   $150,884   $447,902   $1,052,033   $2,284,737 

 

 

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

 

 

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

 

Segment  Salaries and
benefits for the
three months ended
September 30, 2016		   Salaries and
benefits for the
three months ended
September 30, 2015		   Increase / (Decrease) 
North America Transaction Solutions  $327,785   $207,229   $120,556 
Mobile Solutions   107,310    84,527    22,783 
Online Solutions   167,802    120,763    47,039 
Corporate Expenses & Eliminations   442,497    596,922    (154,425)
Total  $1,045,394   $1,009,441   $35,953 

 

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

 

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

 

Three months ended September 30, 2016                    
                     
Professional Fees  North
America
Transaction
Solutions		   Mobile
Solutions		   Online
Solutions		   Corporate
Expenses &
Eliminations		   Total 
General Legal  $5,818   $56   $847   $99,179   $105,900 
SEC Compliance Legal Fees   -    -    -    43,750    43,750 
Accounting and Auditing   -    -    -    101,732    101,732 
Tax Compliance and Planning   -    -    -    33,200    33,200 
Consulting   84,167    36,818    160,547    106,366    387,898 
Total  $89,985   $36,874   $161,394   $384,227   $672,480 

 

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

 

Variance                    
                     
Professional Fees  North
America
Transaction
Solutions		   Mobile
Solutions		   Online
Solutions		   Corporate
Expenses &
Eliminations		   Increase /
(Decrease)		 
General Legal  $1,120   $(358)  $(89,491)  $(106,667)  $(195,396)
SEC Compliance Legal Fees   -    -    -    1    1 
Accounting and Auditing   (850)   (1,995)   (14,798)   (36,721)   (54,364)
Tax Compliance and Planning   -    -    -    14,750    14,750 
Consulting   12,541    (27,900)   (15,762)   262,079    230,958 
Total  $12,811   $(30,253)  $(120,051)  $133,442   $(4,051)

 

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

 

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

 

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

 

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs, capitalized software expenses, trademarks, domain names and employee non-compete agreements. Depreciation and amortization expense was $764,886 for the three months ended September 30, 2016 as compared to $851,636 for the three months ended September 30, 2015. The $86,751 decrease in depreciation and amortization expense was primarily due to a reduction in portfolio amortization.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

  

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

 

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Nine months ended September 30, 2016                    
                     
Category  North America Transaction Solutions   Mobile Solutions   Online Solutions   Corporate Expenses & Eliminations   Total 
Salaries, benefits, taxes and contractor payments  $962,618   $343,247   $423,238   $1,498,541   $3,227,644 
Professional fees   372,492    39,422    462,650    999,627    1,874,191 
Rent   -    3,260    104,056    317,317    424,633 
Business development   31,784    4,869    92,544    -    129,197 
Travel expense   152,795    9,657    15,964    88,368    266,784 
Filing fees   -    -    -    77,185    77,185 
Transaction (gains) losses   -    (394,880)   38,449    (115,797)   (472,228)
Other expenses   401,607    15,657    91,976    335,715    844,955 
Total  $1,921,296   $21,232   $1,228,877   $3,200,956   $6,372,361 

 

 

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

 

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

 

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

 

 

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

 

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

  

Nine months ended September 30, 2016                    
                     
Professional Fees  North
America
Transaction
Solutions		   Mobile
Solutions		   Online
Solutions		   Corporate
Expenses &
Eliminations		   Total 
General Legal  $39,215   $268   $3,867   $168,039   $211,389 
SEC Compliance Legal Fees   60,000    -    -    71,250    131,250 
Accounting and Auditing   -    -    578    326,132    326,710 
Tax Compliance and Planning   -    -    -    44,200    44,200 
Consulting   273,277    39,154    458,205    390,006    1,160,642 
Total  $372,492   $39,422   $462,650   $999,627   $1,874,191 

 

 

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

 

 

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

 

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

 

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

 

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs, capitalized software expenses, trademarks, domain names and employee non-compete agreements. Depreciation and amortization expense was $2,497,538 for the nine months ended September 30, 2016 as compared to $1,916,901 for the nine months ended September 30, 2015. The $580,637 increase in depreciation and amortization expense was primarily related to the PayOnline acquisition ($703,479 for IP Software, $49,998 for domain names, $74,834 for PCI Certification and $186,096 for portfolios and client lists), offset by a $600,068 decrease in portfolio amortization in our North American Transaction Solutions segment as legacy portfolios fully amortized.

 

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

 

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

 

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

 

Reconciliation of Non-GAAP Financial Measures and Regulation G Disclosure

 

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

 

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

 

Reconciliation of Non-GAAP Financial Measures and Regulation G Disclosure

 

   GAAP   Non-Cash Share-
based Compensation		   Derivative Activity,
Debt Extinguishment
and Restructure		   Adjusted
Non-GAAP		 
Three Months Ended September 30, 2016                    
Net (loss) income attributable to Net Element Inc stockholders  $(3,469,540)  $732,701   $-   $(2,736,839)
Basic and diluted earnings per share  $(0.25)  $0.05   $-   $(0.20)
Basic and diluted shares used in computing earnings per share   14,030,204              14,030,204 

 

   GAAP   Share-based
Compensation		   Derivative Activity,
Debt Extinguishment
and Restructure		   Adjusted
Non-GAAP		 
Three Months Ended September 30, 2015                    
Net (loss) income attributable to Net Element Inc stockholders  $(4,513,201)  $601,371   $1,003,703   $(2,908,127)
Basic and diluted loss per share  $(0.66)  $0.09   $0.15   $(0.42)
Basic and diluted shares used in computing loss per share   6,850,442              6,850,442 

 

   GAAP   Non-Cash Share-
based Compensation		   Derivative Activity,
Debt Extinguishment
and Restructure		   Adjusted
Non-GAAP		 
Nine Months Ended September 30, 2016                    
Net (loss) income attributable to Net Element Inc stockholders  $(10,663,708)  $3,108,274   $-   $(7,555,434)
Basic and diluted earnings per share  $(0.87)  $0.25   $-   $(0.61)
Basic and diluted shares used in computing earnings per share   12,325,926              12,325,926 

 

   GAAP   Share-based
Compensation		   Derivative Activity,
Debt Extinguishment
and Restructure		   Adjusted
Non-GAAP		 
Nine Months Ended September 30, 2015                    
Net (loss) income attributable to Net Element Inc stockholders  $(8,516,695)  $1,804,113   $(1,018,333)  $(7,730,915)
Basic and diluted loss per share  $(1.58)  $0.33   $(0.19)  $(1.43)
Basic and diluted shares used in computing loss per share   5,396,960              5,396,960 

 

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NET ELEMENT, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30, 2016   December 31, 2015 
ASSETS          
Current assets:          
Cash  $1,385,286   $1,025,747 
Accounts receivable, net   5,866,714    5,198,993 
Prepaid expenses and other assets   1,425,685    1,106,016 
Total current assets, net   8,677,685    7,330,756 
Fixed assets, net   128,470    162,123 
Intangible assets, net   4,153,065    5,423,880 
Goodwill   9,643,752    9,643,752 
Other long term assets   792,834    353,050 
Total assets   23,395,806    22,913,561 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable   5,650,932    5,858,837 
Accrued expenses   5,654,994    2,975,066 
Deferred revenue   878,913    743,910 
Notes payable (current portion)   147,577    518,437 
Due to related parties   447,660    329,881 
Total current liabilities   12,780,076    10,426,131 
Notes payable (net of current portion)   4,047,140    3,446,563 
Total liabilities   16,827,216    13,872,694 
            
STOCKHOLDERS' EQUITY          
Series A Convertible Preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at September 30, 2016 and December 31, 2015)   -    - 
Common stock ($.0001 par value, 400,000,000 shares authorized and 15,099,845 and 11,261,959 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively)   1,510    1,126 
Paid in capital   163,285,658    154,361,694 
Accumulated other comprehensive loss   (2,188,390)   (1,565,822)
Accumulated deficit   (154,618,755)   (143,955,048)
Noncontrolling interest   88,567    198,917 
Total stockholders' equity   6,568,590    9,040,867 
Total liabilities and stockholders' equity  $23,395,806   $22,913,561 

 

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NET ELEMENT, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

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

 

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NET ELEMENT, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

  

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

 

15 

 

 

About Net Element

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

 

Forward-Looking Statements

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

 

Contact:

Net Element, Inc.

media@netelement.com

+1 (786) 923-0502

 

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