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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 $-

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Source:Net Element, Inc.