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Net Element Reports Full-Year 2017 Financial Results and Provides Business Update
[April 02, 2018]

Net Element Reports Full-Year 2017 Financial Results and Provides Business Update


MIAMI, Fla., April 02, 2018 (GLOBE NEWSWIRE) -- Net Element, Inc. (NASDAQ:NETE) (“Net Element” or the “Company”), a global technology and value-added solutions group that supports electronic payments acceptance in a multi-channel environment including point-of-sale (“POS”), e-commerce and mobile devices, today reported financial results for the fiscal year ended December 31, 2017, and provided an update on recent strategic and operational initiatives.

Conference Call:
On April 3, 2018, at 8:30 a.m. EST the Company will host a conference call to discuss 2017 financial results and business highlights. 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 6266947. It is recommended that participants dial in approximately 10 minutes prior to the start of the call.

The call will also be webcast live from https://edge.media-server.com/m6/p/hmbnnrhw. Following completion of the call, a recorded replay of the webcast will be available on the www.netelement.com/en/ir website.

2017 Full Year Results:

  • Total transactions dollars processed globally in 2017 exceeded $2.8 billion, an increase of 14% compared to $2.45 billion in 2016
  • Total transactions dollars processed geographically in North America in 2017 were $2.3 billion, an increase of 18% compared to $1.9 billion in 2016
  • Total transactions dollars processed in international markets in 2017 were $530 million, no change as compared to $530 million in 2016
  • Total transactions processed for 2017 exceeded 154 million compared to 187 million in 2016, a decline of 21% during 2017 due to reorganization and consolidation of the mobile solutions business, as well as an increased average transaction size at the point of sale in the United States during 2017
  • Revenues increased to $60.1 million, an increase of 11% compared to $54.3 million in 2016

United States accounted for 85% of our total revenues, while international revenues were 15% in 2017. Growth across all categories was organic:

  • North American Transaction Solutions segment: Continued organic growth of small and medium-sized business (“SMB”) merchants with emphasis on value-added offerings. Revenues for this segment were $51.1 million, an increase of 21% over the prior year
  • International Transaction Solutions segment: As a result of the consolidation of Online Solutions and Mobile Solutions segments during 2017, revenues for the International Transaction Solutions segment were $8.9 million, a decrease of 27% over the prior year

“We are very pleased with our 2017 progress and the strong balance sheet position as of December 31, 2017, which we believe positions the company for future growth and opportunities,” commented Oleg Firer, CEO of Net Element.

2017 Significant Achievements:

  • Received a $7.55 million institutional investment to support continued organic growth and blockchain-focused developments
  • Ensured continued compliance with NASDAQ listing requirements
  • Ranked as one of the fastest growing companies in North America on Deloitte’s 2017 Technology Fast 500™
  • Supported Florida SMB merchants affected by Hurricane Irma with free mobile point-of-sale credit card readers

Recent Partnerships:

  • Joined the Enterprise Ethereum Alliance ("EEA"), the world's largest open-source blockchain initiative with over 250-member companies. Membership to the alliance is complementary to the Company's recently announced decentralized blockchain technology solution, Netevia, that will enable a vast number of value-added services ("VAS") and support the adoption of Ethereum in the enterprise
  • Partnered with Elo to provide a modern best-in-class point of sale solution. Combined Aptito POS software with Elo’s all-in-one touchscreen device delivering stylish and reliable POS solution
  • Partnered with Payvision in Europe, extended access to global currencies. Expanded payment acceptance to 120+ currencies globally
  • Partnered with Planet Payment for multi-currency pricing solution in the United States. Introduced multi-currency payment acceptance to online merchants in the United States

Recent Product Launches and Updates:

  • Launched multi-channel payments platform, Netevia. Connecting and simplifying payments across sales channels through a single integration point, Netevia delivers end-to-end payment processing through easy-to-use APIs. This model complements Net Element's ability to perform in a multi-channel environment, including POS, e-commerce, mobile devices and will enable the company to perform in blockchain technology solutions when fully developed
  • Launched web-based, integrated same-day ACH and eCheck payment processing solution in the United States
  • Launched Zero-Fee processing program for SMB merchants in the United States
  • Launched loyalty program for international online merchants utilizing a PayOnline platform
  • Launched PayOnline's support for electronic commerce in the United States
  • Launched Apple Pay support in Russia
  • Launched payment acceptance module for Telegram, Viber, Facebook and VK instant messenger apps
  • Expanded payments module to include Prominent InSales platform. InSales platform provides access to over 4,000 merchants
  • Launched comprehensive point-of-sale program during Unified Payments' "2017 Launch Series" at Northeast Acquirers Association event
  • Launched ISO incubator program for certified resellers of Unified Payments to help them grow their business, compete and achieve success in today's evolving marketplace
  • Launched fully integrated payment acceptance for V-Tell, international mobile network operator
  • Launched fully integrated payment acceptance for Azimuth Airlines
  • Added support for iDEAL payment system, the most popular payment system in Netherlands

Outlook

Our strategy is to ensure that our business remains successful in a rapidly changing market, creating sustainable value for all our stakeholders, including our clients, distribution partners and shareholders.  We aim to achieve superior results for our clients by having a deep understanding of their payment acceptance needs, extensive market reach, strong product development and technology enablement.

Planned for 2018:

We will continue to focus on understanding our clients and addressing their payment acceptance needs in core market segments.

  • Continue growth in all key segments
  • Drive client retention
  • Expand our client base in selected markets
  • Deliver value-added products to our clients to increase efficiencies and payment acceptance
  • Continue to develop Netvia, our next generation payments platform, enabling intelligent routing of payments for the application development community
  • Launch new tools to reach our clients, such as digital channels, and deepening partner relations

The global payments industry continued to deliver healthy growth during 2017, with underlying transaction volumes demonstrating even greater strength.  We believe that new and disruptive technologies will provide us the opportunity to differentiate ourselves from our competition and continue developing and delivering innovative payment solutions in 2018 and beyond. 

  • Continue to scale and enhance new product launches that will add value to our clients
  • Extend our capabilities in next-generation POS hardware and software, and deepening our partner proposition
  • Commence trials of advanced technologies around business intelligence and mobile based payments acceptance
  • Target further developments in blockchain technologies, payments enablement for Internet of Things and biometrics payment acceptance
  • Continue investment in future emerging payment technologies

Realize the full potential of our business model

  • Deliver stronger organic growth
  • Develop additional payment network relationships to integrate with our technologies
  • Seek acquisition or investment opportunities to deepen our technological and distribution capabilities

Results of Operations for the Year Ended December 31, 2017, compared to the Year Ended December 31, 2016

We reported a net loss attributable to Net Element, Inc. stockholders of $9,913,485 or ($5.04) per share for the year ended December 31, 2017 as compared to a net loss of $13,487,537 or ($10.33) per share for the year ended December 31, 2016. This resulted in a decrease in net loss attributable to Net Element, Inc.  stockholders of $3,574,052 primarily due to an increase in revenues, decreases in depreciation, amortization and interest expenses, partially offset by an increase in general and administrative expenses. Net loss attributable to Net Element, Inc. stockholders for the year ended December 31, 2016 was also negatively affected by an expense for loss from stock value guarantee related to the PayOnline acquisition.

Eliminating the effects of non-cash compensation and the 2016 PayOnline stock value guarantee payment, we reported an adjusted non-GAAP, net loss attributable to Net Element, Inc. stockholders of $6,973,061 or ($3.54) loss per share for the year ended December 31, 2017 as compared to an adjusted non-GAAP, net loss attributable to Net Element, Inc. stockholders of $7,861,241 or ($6..02) loss per share for the year ended December 31, 2016.

The following table sets forth our sources of revenues, cost of revenues and gross margins for the years ended December 31, 2017 and 2016.

                   
Gross Margin Analysis                  
   Twelve      Twelve        
   Months Ended      Months Ended      Increase / 
Source of Revenues  December 31, 2017  Mix   December 31, 2016  Mix   (Decrease) 
                   
North American
Transaction Solutions
 $51,138,327  85.1% $42,130,902  77.6% $9,007,425 
International
Transaction Solutions
  8,926,497  14.9%  12,155,957  22.4%  (3,229,460)
Total $60,064,824  100.0% $54,286,859  100.0% $5,777,965 


              
  Twelve    Twelve      
  Months Ended  % of Months Ended  % of Increase 
Cost of Revenues December 31, 2017  revenues December 31, 2016  revenues (Decrease) 
                
North American Transaction Solutions $44,265,264   

86.6
% $36,342,465   

86.3
% $7,922,799 
International Transaction Solutions  6,971,948   

78.1
%  9,365,776   

77.0
%  (2,393,828)
Total $51,237,212  85.3% $45,708,241  84.2% $5,528,971 


              
  Twelve    Twelve      
  Months Ended  % of Months Ended  % of Increase 
Gross Margin December 31, 2017  revenues December 31, 2016  revenues (Decrease) 
                
North American Transaction Solutions $6,873,063  13.4% $5,788,437  13.7% $1,084,626 
International Transaction Solutions  1,954,549  21.9%  2,790,181  23.0%  (835,632)
Total $8,827,612  14.7% $8,578,618  15.8% $248,994 
                   

Net revenues consist primarily of service fees from transaction processing. Net revenues were $60,064,824 for the year ended December 31, 2017 as compared to $54,286,859 for the year ended December 31, 2016. The increase in net revenues is primarily due to continued organic growth of North American merchants with emphasis on value-added offerings partially offset by a $3,229,460 decrease in net revenues from our International Transaction Solutions segment as we experience increased competition, decreased margins and reorganizing assignments from our International Transaction Solutions segment.

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 year ended December 31, 2017 were $ 51,237,212 as compared to $45,708,241 for the year ended December 31, 2016. The year over year increase in cost of revenues of $5,528,971 was driven by a $7,922,799 increase due to increased North American Transaction Solutions sales for the year ended December 31, 2017. This was partially offset by a $2,393,828 decrease in the International Transaction Solutions segment cost of revenues due to the decrease in International Transaction Solutions revenues from Digital Provider.

Gross Margin for the year ended December 31, 2017 was $8,827,613, or 14.7% of net revenue, as compared to $8,578,618, or 15.8% of net revenue, for the year ended December 31, 2016. The primary reason gross margin percentages decreased was due to increased (lower margin) business mix from North American Transaction Solutions and a decrease in Digital Provider business that had higher margins.

Total operating expenses were $17,425,030 for the year ended December 31, 2017, as compared to total operating expenses of $17,416,066 for the year ended December 31, 2016. Total operating expenses for the year ended December 31, 2017 consisted of general and administrative expenses of $10,629,773, non-cash compensation of $2,940,424, a bad debt provision of $1,320,848 and depreciation and amortization of $2,533,985. For the year ended December 31, 2016, operating expenses consisted of general and administrative expenses of $8,797,883, non-cash compensation of $3,463,435, a bad debt provision of $1,688,237, and depreciation and amortization of $3,466,511.

General and administrative expenses for the years ended December 31, 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, business development, travel expense, filing fees, transaction gains or losses, office expenses, communication expenses, insurance expenses, and other expenses required to run our business, as follows:

                 
Twelve months ended
December 31, 2017
                
                 
Category  North American
Transaction
Solutions
   International
Transaction
Solutions
   Corporate
Expenses &
Eliminations
   Total 
Salaries, benefits, taxes and contractor payments $1,970,860  $1,696,245  $2,082,294  $5,749,399 
Professional fees  505,383   819,184   1,312,271   2,636,838 
Rent  -   245,539   245,186   490,725 
Business development  53,011   32,072   3,569   88,652 
Travel expense  331,299   32,397   130,198   493,894 
Filing fees  -   -   72,035   72,035 
Transaction (gains) losses  742   (41,200)  1,642   (38,816)
Office expenses  303,586   98,961   120,103   522,650 
Communications expenses  47,878   130,046   79,288   257,212 
Insurance expense  -   5,401   135,386   140,787 
Other expenses  38,788   14,716   162,893   216,397 
Total $3,251,547  $3,033,361  $4,344,865  $10,629,773 


                 
Twelve months ended
December 31, 2016
                
                 
Category  North American
Transaction
Solutions
   International
Transaction
Solutions
   Corporate
Expenses &
Eliminations
   Total 
Salaries, benefits, taxes and contractor payments $1,650,043  $1,593,390  $1,506,752  $4,750,185 
Professional fees  422,681   901,861   1,390,297   2,714,839 
Rent  -   282,099   284,234   566,333 
Business development  36,923   129,525   11,841   178,289 
Travel expense  191,848   43,436   111,510   346,794 
Filing fees  -   -   82,560   82,560 
Transaction (gains) losses  49   (327,122)  (413,470)  (740,543)
Office expenses  103,616   110,897   107,237   321,750 
Communications expenses  77,897   93,152   73,104   244,153 
Insurance expense  -   9,855   163,506   173,361 
Other expenses  270   (68,976)  228,868   160,162 
Total $2,483,327  $2,768,117  $3,546,439  $8,797,883 


                 
Variance                
                 
Category  North American
Transaction
Solutions
   International
Transaction
Solutions
   Corporate
Expenses &
Eliminations
   Total 
Salaries, benefits, taxes and contractor payments $320,817  $102,855  $575,542  $999,214 
Professional fees  82,702   (82,677)  (78,026)  (78,001)
Rent  -   (36,560)  (39,048)  (75,608)
Business development  16,088   (97,453)  (8,272)  (89,637)
Travel expense  139,451   (11,039)  18,688   147,100 
Filing fees  -   -   (10,525)  (10,525)
Transaction (gains) losses  693   285,922   415,112   701,727 
Office expenses  199,970   (11,936)  12,866   200,900 
Communications expenses  (30,019)  36,894   6,184   13,059 
Insurance expense  -   (4,454)  (28,120)  (32,574)
Other expenses  38,518   83,692   (65,975)  56,235 
Total $768,220  $265,244  $798,426  $1,831,890 
                 

Salaries, benefits, taxes and contractor payments were $5,749,399 for the year ended December 31, 2017 as compared to $4,750,185 for the year ended December 31, 2016, representing an increase of $999,214. The increase in salaries of $999,214 was due primarily to the increase of corporate salaries of $575,542, resulting primarily from a $300,000 increase in discretionary bonus granted to our CEO by the Board of Directors and to a lesser extent increases in executive salaries. The $320,817 increase in the North American Transaction Solutions segment was primarily due to increases in headcount and sales incentives for key employees as the business grew. The $102,855 increase in the International Transaction Solutions segment was primarily due to fluctuations in the Ruble exchange rate.

Professional fees were $2,636,838 for the year ended December 31, 2017 as compared to $2,714,839 for the year ended December 31, 2016, representing a decrease of $78,001 as follows:

                 
Twelve months ended
December 31, 2017
                
                 
Professional Fees  North American
Transaction
Solutions
   International
Transaction
Solutions
   Corporate
Expenses &
Eliminations
   Total 
 General Legal $33,480  $38,386  $80,724  $152,590 
 SEC Compliance Legal Fees  -   -   275,112   275,112 
 Accounting and Auditing  -   15,433   412,943   428,376 
 Tax Compliance and Planning  -   -   55,400   55,400 
 Consulting  471,903   765,365   488,092   1,725,360 
Total $505,383  $819,184  $1,312,271  $2,636,838 


                 
Twelve months ended
December 31, 2016
                
                 
Professional Fees  North American
Transaction
Solutions
   International
Transaction
Solutions
   Corporate
Expenses &
Eliminations
   Total 
 General Legal $43,257  $5,539  $193,952  $242,748 
 SEC Compliance Legal Fees  -   -   175,000   175,000 
 Accounting and Auditing  -   578   420,686   421,264 
 Tax Compliance and Planning  -   -   44,200   44,200 
 Consulting  379,424   895,744   556,459   1,831,627 
Total $422,681  $901,861  $1,390,297  $2,714,839 


                 
Variance                
                 
Professional Fees  North American
Transaction
Solutions
   International
Transaction
Solutions
   Corporate
Expenses &
Eliminations
   Total 
 General Legal $(9,777) $32,847  $(113,228) $(90,158)
 SEC Compliance Legal Fees  -   -   100,112   100,112 
 Accounting and Auditing  -   14,855   (7,743)  7,112 
 Tax Compliance and Planning  -   -   11,200   11,200 
 Consulting  92,479   (130,379)  (68,367)  (106,267)
Total $82,702  $(82,677) $(78,026) $(78,001)
                 

Professional fees decreased by $78,001 primarily due to a decrease in general legal fees because of decreases in litigation and consulting fees partially offset by an increase in SEC compliance due to increased public market transactions.

Transaction gains and losses represent changes in exchange rates between our functional currency and the foreign currency in which the transaction is denominated. During the years ended December 31, 2017 and 2016, respectively, we incurred $38,816 and $740,543 of foreign currency transaction losses.

Other general and administrative expenses were $216,397 for the year ended December 31, 2017 as compared to $160,162 for the year ended December 31, 2016, representing an increase of $56,235. The increase was caused primarily by a $43,272 increase in taxes due to a 2016 tax refund in the International Transaction Solutions segment that was not present in 2017.

Non-cash compensation expense was $2,940,424 for the year ended December 31, 2017 as compared to $3,463,435 for the year ended December 31, 2016. A summary of 2017 and 2016 non-cash compensation activity follows:

             
2017 Non-Cash Compensation Activity            
   $ Amount   # of Shares
Issued
   # of Options
Issued
 
Board of Directors & Employee stock and Options $2,827,200   242,324   45,106 
Stock issued for consulting  7,258   896   - 
Stock issued for acquisitions  105,966   13,082   - 
Total for 2017 $2,940,424   256,302   45,106 


             
2016 Non-Cash Compensation Activity            
   $ Amount   # of Shares
Issued
   # of Options
Issued
 
Board of Directors & Employee stock and Options $3,184,608   1,166,610   182,408 
Stock issued for consulting  78,827   -   466,428 
Stock issued for acquisitions  200,000   95,694   - 
Total for 2017 $3,463,435   1,262,304   648,836 
             

We recorded a provision for bad debt in the amount of $1,320,848 for the year ended December 31, 2017, compared to provision for bad debts of $1,688,237 for the year ended December 31, 2016. For the year ended December 31, 2017 we recorded a loss which was primarily comprised of $1,408,908 ACH rejects and an $89,545 reduction in provision from our International Transaction Solutions operations. Of the $1,408,908 of net ACH rejects, $603,257 were passed through to independent sales organizations via a reduction in commissions. For the year ended December 31, 2016 we recorded a loss provision which was primarily comprised of $1,173,815 in ACH rejects, attributable to the normal course of our North American Transaction Solutions segment, in addition, there was a $511,772 bad debt recovery from our mobile payments business in Russia. During the year ended December 31, 2016, of the $1,173,815 of net ACH rejects, $394,134 were passed through to independent sales organizations via a reduction in commissions.

During the years ended December 31, 2017 and 2016, we did not recognize any goodwill impairment.

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 $2,533,985 for the year ended December 31, 2017 as compared to $3,466,511 for the year ended December 31, 2016. The decrease was due to the full amortization of certain software and merchant portfolio assets during 2017.

Interest expense was $1,189,622 for the year ended December 31, 2017 as compared to $1,463,833 for the year ended December 31, 2016, representing a decrease of $ 274,211 due to lower RBL notes payable balance as follows:

             
 Funding Source  Twelve
Months Ended
December 31, 2017
   Twelve
Months Ended
December 31, 2016
   Increase /
(Decrease)
 
MBF Notes $76,591   61,325   15,266 
RBL Notes  772,777   1,282,439   (509,662)
Priority Payments Notes  168,233   -   168,233 
Other  172,021   120,069   51,952 
Total $1,189,622   1,463,833   (274,211)
             

Other interest expense for the year ended December 31, 2017 consisted of $80,291 resulting from the promissory note entered into on March 1, 2017 with Star Capital Management, LLC. (See Note 12 to our Consolidated Financial Statements) and $85,578 related to the PayOnline acquisition. During the year ended December 31, 2016, other interest expense primarily consisted of $120,069 related to the PayOnline acquisition.

Other expenses for the year ended December 31, 2017 consisted primarily of $117,013 of foreign taxes and other expenses attributed to our International Transaction Solutions segment, as well as, approximately $48,000 in miscellaneous other expenses in the North American Transaction Solutions segment.

The net income attributable to non-controlling interests amounted to $109,564 and $128,539 for 2017 and 2016, respectively. The income was attributed to our North American Transaction Solutions segment represents 10% non-controlling interest in Aptito. The non-controlling interest reflects the results of operations of subsidiaries that are allocable to minority equity owners.

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 attributable to Net Element, Inc. stockholders. Adjusted net loss attributable to Net Element, Inc. stockholders is calculated as net loss attributable to Net Element, Inc. stockholders excluding non-cash share-based compensation and other non-operating, non-recurring items. 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 by the Company’s investors 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 twelve months ended December 31, 2017 and 2016 is presented in the following Non-GAAP Financial Measures Table.

     
  GAAP  Share-based
Compensation
 Loss from Stock
Value Guarantee
 Adjusted
Non-GAAP
Twelve Months Ended December 31, 2017    
Net (loss) income attributable to Net Element, Inc. stockholders$ (9,913,485)$ 2,940,424 $ -  $ (6,973,061)
Basic and diluted earnings per share$ (5.04)$ 1.49 $ -  $ (3.54)
Basic and diluted shares used in computing earnings per share  1,967,676      1,967,676  
     
     
  GAAP  Share-based
Compensation
 Loss from Stock
Value Guarantee
 Adjusted
Non-GAAP
Twelve Months Ended December 31, 2016    
Net (loss) income attributable to Net Element, Inc. stockholders$ (13,487,537)$ 3,463,435 $ 2,162,861 $ (7,861,241)
Basic and diluted earnings per share$ (10.33)$ 2.65 $ 1.66 $ (6.02)
Basic and diluted shares used in computing earnings per share  1,305,801      1,305,801  
         

Additional information regarding Net Element’s results for its year ended December 31, 2017 may be found in Net Element’s annual report on Form 10-K, which was filed with the Security and Exchange Commission (SEC) on April 2, 2018 and may be obtained from the SEC’s Internet website at http://www.sec.gov.

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 using blockchain technology solutions and Aptito, our cloud-based, restaurant and retail point-of-sale solution. 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. Net Element was ranked as one of the fastest growing companies in North America on Deloitte's 2017 Technology Fast 500™.  In 2017 we were recognized by South Florida Business Journal's as one of 2016's fastest growing technology companies. Further information is available at www.NetElement.com.

Forward-Looking Statements
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 whether  blockchain technologies will in fact play a key role in future commerce in the payments industry; and whether the blockchain technologies will result in the creation  of value-added services for merchants and their customers; whether the Company will be successful  in the development of a decentralized crypto-based ecosystem to act as a framework for a number of value-added services that can connect merchants and consumers directly utilizing blockchain technology whether through its platform called Netevia or otherwise. Additional 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; and (xii) geopolitical instability and other conditions that may adversely affect trends in consumer business and government spending. 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 in any other of the Company’s subsequent filings, 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.
CONSOLIDATED BALANCE SHEETS
 
  December 31, 2017  December 31, 2016 
ASSETS        
Current assets:        
Cash $11,285,669  $621,635 
Accounts receivable, net  5,472,856   7,126,429 
Prepaid expenses and other assets  2,282,614   1,467,897 
Total current assets, net  19,041,139   9,215,961 
Fixed assets, net  58,268   117,295 
Intangible assets, net  3,127,760   3,589,850 
Goodwill  9,643,752   9,643,752 
Other long term assets  460,511   603,209 
Total assets $32,331,430  $23,170,067 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Accounts payable $6,785,459  $7,510,113 
Accrued expenses  3,674,430   5,518,823 
Deferred revenue  1,712,591   1,355,972 
Notes payable (current portion)  2,493,973   808,976 
Due to related parties  -   299,004 
Total current liabilities  14,666,453   15,492,888 
Notes payable (net of current portion)  4,521,449   3,615,782 
Total liabilities  19,187,902   19,108,670 
         
STOCKHOLDERS' EQUITY        
Series A Convertible Preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at December 31, 2017 and December 31, 2016)  -   - 
Common stock ($.0001 par value, 100,000,000 shares authorized and 3,853,100 and 1,535,350 shares issued and outstanding at December 31, 2017 and December 31, 2016  385   154 
Additional paid in capital  183,119,222   163,920,066 
Accumulated other comprehensive loss  (2,530,238)  (2,486,616)
Accumulated deficit  (167,356,070)  (157,442,585)
Stock subscriptions receivable  (50,585)  - 
Noncontrolling interest  (39,186)  70,378 
Total stockholders' equity  13,143,528   4,061,397 
 Total liabilities and stockholders' equity $32,331,430  $23,170,067 


 
NET ELEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 
  Twelve Months Ended December 31 
  2017  2016 
       
Net revenues        
Service fees $58,723,928  $48,784,855 
Branded content  1,340,896   5,502,004 
Total Revenues  60,064,824   54,286,859 
         
Costs and expenses:        
Cost of service fees  49,934,371   40,521,236 
Cost of branded content  1,302,841   5,187,005 
General and administrative  10,629,773   8,797,883 
Non-cash compensation  2,940,424   3,463,435 
Bad debt expense  1,320,848   1,688,237 
Depreciation and amortization  2,533,985   3,466,511 
Total costs and operating expenses  68,662,242   63,124,307 
Loss from operations  (8,597,418)  (8,837,448)
Interest expense, net  (1,189,622)  (1,463,833)
Loss from stock value guarantee  -   (3,722,142)
Other income (expense)  (236,009)  407,347 
Net loss before income taxes  (10,023,049)  (13,616,076)
Income taxes  -   - 
Net loss  (10,023,049)  (13,616,076)
Net loss attributable to the noncontrolling interest  109,564   128,539 
Net loss attributable to Net Element, Inc. stockholders  (9,913,485)  (13,487,537)
Foreign currency translation  (43,623)  (920,794)
Comprehensive loss attributable to common stockholders $(9,957,108) $(14,408,331)
         
Loss per share - basic and diluted $(5.04) $(10.33)
         
Weighted average number of common shares outstanding - basic and diluted  1,967,676   1,305,801 


 
NET ELEMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 
  Preferred Stock  Common Stock  Paid in  Stock  Comprehensive  Non-controlling  Accumulated  Equity (Deficiency) 
  Shares  Amount  Shares  Amount  Capital  Subscription  Income  interest  Deficit  in Assets 
Balance December 31, 2015  -   -   1,126,376  $113  $154,362,707      $(1,565,822) $198,917  $(143,955,048) $9,040,867 
Share based compensation  -   -   121,442   12   4,427,105   -   -   -   -   4,427,117 
Shares issued and issuable for acquisitions  -   -   6,543   1   134,094           -   -   134,095 
Shares issued for insider financing  -   -   46,643   5   988,823   -   -   -   -   988,828 
Shares issued in connection with debt restructuring  -   -   166,340   16   3,288,820   -   -   -   -   3,288,836 
Shares issued under ESOUSA agreement  -   -   68,006   7   718,517   -   -   -   -   718,524 
Net loss  -   -   -   -   -   -   -   (128,539)  (13,487,537)  (13,616,076)
Comprehensive loss - foreign currency translation  -   -   -   -   -   -   (920,794)  -   -   (920,794)
Balance December 31, 2016  -   -   1,535,350  $154  $163,920,066  $-  $(2,486,616) $70,378  $(157,442,585) $4,061,397 
Shares issued in connection with reverse stock split  -   -   3,117   0   1   -   -   -   -   1 
Share based compensation  -   -   242,324   24   2,850,155   -   -   -   -   2,850,179 
Shares issued for acquisitions  -   -   13,082   1   105,965   -   -   -   -   105,966 
Shares issued to settle merchant liabilities  -   -   30,759   3   252,220   -   -   -   -   252,223 
Shares issued for consulting services  -   -   19,896   2   228,416   (50,585)  -   -   -   177,833 
Shares issued in connection with debt restructuring  -   -   127,406   13   758,181   -   -   -   -   758,194 
Shares issued under ESOUSA/Cobblestone agreements  -   -   1,881,165   188   15,004,217   -   -   -   -   15,004,405 
Net loss  -   -   -   -   -   -   -   (109,564)  (9,913,485)  (10,023,049)
Comprehensive loss - foreign currency translation  -   -   -   -   -   -   (43,622)  -   -   (43,622)
Balance December 31, 2017  -   -   3,853,100  $385  $183,119,222  $(50,585) $(2,530,238) $(39,186) $(167,356,070) $13,143,528 


 
NET ELEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
  Twelve Months Ended December 31, 
  2017  2016 
Cash flows from operating activities        
Net loss attributable to Net Element, Inc. stockholders $(9,913,485) $(13,487,537)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities      - 
Non controlling interest  (109,564)  (128,539)
Share based compensation  2,940,424   3,463,435 
Provision for bad debts  -   500,000 
Amortization of prepaid costs      967,313 
Depreciation and amortization  2,533,985   3,466,510 
Non cash interest  114,802   852,408 
Changes in assets and liabilities        
Accounts receivable  3,002,425   (2,751,144)
Deferred revenue  356,619   612,062 
Prepaid expenses and other assets  (1,022,985)  (570,582)
Accounts payable and accrued expenses  (2,943,154)  3,797,753 
Net cash used in operating activities  (5,040,933)  (3,278,321)
         
Cash flows from investing activities        
         
Client acquisition costs  (1,885,098)  (1,319,820)
Receipt of excess deposits  149,826     
Purchase of fixed and other assets  (103,341)  (187,089)
Net cash used in investing activities  (1,838,613)  (1,506,909)
         
Cash flows from financing activities        
Proceeds from common stock  14,884,435   - 
Proceeds from indebtedness  3,678,824   3,170,540 
Cash received for issuance of warrants      300,000 
Repayment of indebtedness  (998,780)  (71,700)
Related party advances  -   1,027,874 
Net cash provided by financing activities  17,564,479   4,426,714 
         
Effect of exchange rate changes on cash  (20,899)  (45,596)
Net increase (decrease) in cash  10,664,034   (404,112)
         
Cash at beginning of period  621,635   1,025,747 
Cash at end of period $11,285,669  $621,635 
         
Supplemental disclosure of cash flow information        
Cash paid during the period for:        
Interest $1,074,820  $611,625 
Taxes $86,942  $94,718 
Share issuance for settlement of unpaid compensation $-  $1,042,509 
Shares issued for redemption of indebtedness $379,874  $2,499,481 
Shares issued in settlement of advances from board member $-  $909,285 
         
Shares issued in settlement of related party debt $378,253  $- 
         

Contact:
Net Element, Inc.
Media@NetElement.com
+1 (786) 923-0502

Corporate Communications Contact:
NetworkNewsWire (NNW) 
New York, New York 
www.NetworkNewsWire.com
Editor@NetworkNewsWire.com
+1 (212) 418-1217

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