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Edited Transcript of NETE earnings conference call or presentation 3-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Net Element Inc Earnings Call

MIAMI Apr 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Net Element Inc earnings conference call or presentation Monday, April 3, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Oleg Firer

Net Element, Inc. - CEO

* Jonathan New

Net Element, Inc. - CFO

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Conference Call Participants

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* Lisa Thompson

Zacks Investment Research - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Net Element 2016 annual financial results and business update conference call. (Operator Instructions) I would like to remind listeners that during the call, management's prepared remarks may contain forward-looking statements which are subject to risk and uncertainty. Management may make additional forward-looking statements in response to your questions today. Therefore, the Company claims protection under Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from results discussed today and, therefore, we refer you to a more detailed discussion of these risks and uncertainties in the Company's filings with the SEC. Any projections as to the Company's future performance represented by management include estimates today as of March 31, 2017, and the Company assumes no obligation to update these projections in the future as market conditions change.

The recording and certain financial information provided during the call is available at www.netelement.com on the Investor Relations page.

At this time, I would like to turn the call over to Oleg Firer, CEO. Oleg, please go ahead.

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Oleg Firer, Net Element, Inc. - CEO [2]

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Good morning, everyone. Happy Monday. Thank you and thanks to everyone joining in our call to discuss 2016 operational and financial results, as well as give an opportunity for those of you listening in to ask questions during the Q&A session. I am pleased to say that 2016 was a successful year for Net Element. Our achievements provided growth and positioned us for continued success as we continue to expand our global transaction services in the United States and selected international markets.

I would like to begin today's conference call by acknowledging our accomplishments in 2016. We processed $2.450 billion transactions globally in 2016, an increase of 40% compared to $1.75 billion in 2015. Transactions processed for 2016 exceeded 187 million, an increase of 16% compared to 161 million in 2015. Our net revenues have increased 35% to $54.3 million for 2016, compared to $40.2 million for 2015. A $14 million increase in net revenue is primarily due to growth in the Company's three segments: North American Transaction Solutions segment, continued organic growth of SMB merchants with emphasis on value-added offerings. Revenues for this segment were $42.1 million, a 54% increase over the prior year.

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

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

In 2016, Net Element was named one of the fastest technology companies in South Florida Business Journal's 2016 technology awards. PayOnline was named the best processing gateway by Tagline, as well as recognized for its payment services by Markswebb Rank & Report and ranked as a top-5 payments acceptance company in 2016.

During 2016, we have expanded our service offerings to several markets, which include continued expansion into Central Asia and launch of payment processing and mobile payments in Azerbaijan, a growing new market in Southwestern Asia. As a result of our entry into these markets, we have signed new key partnerships as well as secured key clients to use our transaction services platform.

In 2016, we forged new key partnerships with clearing banks, which include Esquire Bank in the United States. This multiyear contract includes transaction clearing services and sponsorship to payment network. Merrick Bank in the United States on November 1, 2016, we moved all of our processing that utilized our BMO Harris Bank for clearing to Merrick Bank. Mashreqbank in UAE, this new partnership expands Net Element's processing capabilities in the region. Round Bank in Russia, under this collaboration agreement we integrated the first 70 online merchants to the PayOnline platform.

2016 was a busy year for key new client relationships. Dunkin' Donuts became a client in Russia. PayOnline enabled online ordering and payments acceptance for this growing chain.

ExLine Became a client in Kazakhstan. PayOnline enabled secure online payments for Kazakhstan's market-leading courier service.

ESET NOD32, one of the world's leaders in the field of antivirus software, became a client of PayOnline Kazakhstan. Digital Provider enabled mobile payments at Vnukovo Airport; full integration with the airport's infrastructure. Sony Brand stores became a client of PayOnline in Russia.

2016 was also a year of new product launches. During the year we have launched a payment acceptance module for Telegram instant messenger application, launched proprietary gift card software application for smart payment terminals. PayOnline payments module became available for popular e-commerce and CMS platforms. PayOnline introduced a new multi-channel payment interface based on the user experience of more than 10 million shoppers.

Unified Payments launched Mobile Point-of-Sale for Apple iOS. Launched fully integrated omnichannel gift and loyalty platform. Launched Aptito in Russia, aiming to lead in the underserved POS market. And released Aptito POS solution for retail stores with inventory management and analytics. Launched SalesCentral On-the-Go to expedite merchant approvals and boarding.

During 2016, we were successful in raising capital utilizing debt exchange and equity financing instruments, and have appointed Howard Ash as an international business development professional to our Board of Directors and as the Chairman of the Audit Committee.

We are very pleased with our strong finish to the year, with positive momentum across all channels. Our results are a reflection of our ability to continue to deliver organic growth. In 2017, we already hit the ground running and are confident that we can deliver continued growth throughout the year.

Now I would like to introduce Jonathan New, Net Element's Chief Financial Officer, who will provide comments on our financials. Jon, please proceed.

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Jonathan New, Net Element, Inc. - CFO [3]

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Thank you, Oleg. Good morning, everybody, and thank you for attending our call today. We reported a net loss attributable to common stockholders of $13.5 million or $1.03 loss per share for the year ended December 31, 2016, as compared to last year where we lost $14.8 million or $2.32 per share for the year ended December 31, 2015.

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

In terms of margin, we had very big growth in North America and in our Online Solutions group. And as Oleg explained, we are doing some work in our mobile group and we have a decrease there as we move our capital to the higher-margin business and look to raise additional debt capital in mobile in Russia; and also look to move to other geographies where we don't have to advance payments.

On the margin, we have 16% gross margin for the year and 16% last year. North America was flat, and we had a slight increase in mobile and slight decrease in online. But overall, our margin remained flat year on year and we are expecting increases in North America margin as we move forward with more value-added services and additional equipment, sticky relationships, higher margins, a little more capital expenditure to go into that development.

Transaction on the expense side. Transaction gains and losses represent a change in exchange rates between our functional currency and the foreign currency in which the transaction is dominated. If you exclude those transaction gains, our general and administrative expenses were relatively flat to that of prior year, despite large increases in revenues. So we're able to grow our business rapidly and at scale as well.

Non-cash compensation expense was $3.5 million for the year ended December 31, 2016, as opposed to $4.3 million for last year. And the majority of non-cash compensation was due to incentive stock and options granted to our employees.

We recorded a provision for bad debts in the amount of $1.7 million for the year ended December 31, 2016, compared to $700,000 for 2015. It was primarily composed -- the 2016 charge of $1.7 million was primarily comprised of $1.3 million in net ACH rejects and that's attributable to a normal course of our North American business, and a $0.5 million loss provision which was to reserve for potential losses on accounts receivable from our Mobile Solutions business. For 2015, we recorded a loss provision of $800,000 which was primarily ACH rejects, and mobile had a $100,000 recovery.

Depreciation and amortization expense consists primarily of amortization of merchant portfolios, trademarks and domain names, plus our depreciation on fixed assets, client acquisition costs, capitalized software and noncompete agreements. Depreciation and amortization was $3.5 million for the year ended December 31, 2016, as compared to $2.5 million for last year, December 31, 2015.

The primary reason for the increase was the Online Solutions group. Because we had a full year in 2016, that business was acquired in May of 2015.

In addition, we had a $300,000 increase in North America Transaction Solutions due to increased customer acquisition costs, offset by $100,000 amortization decrease in the same group as much of our merchant portfolios became fully amortized during 2015, and there were no charges resulting from that amortization in 2016.

Interest expense was $1.5 million as compared to $3.6 million for the year ended December 31, 2015, so that represents a decrease of $2.5 million. Interest for 2016 was primarily attributable to our RBL notes; $800,000 represented non-cash charges attributable to discounts from the market value of our common stock that was issued in exchange for debt.

In addition, $0.5 million resulted from payment of interest on notes. Other interest consisted of $100,000 due to third party relating to payment installments on PayOnline stock price guarantee obligation, offset by some interest income earned in Mobile Solutions.

For 2015, interest was primarily attributable to corporate which amounted to $3 million, due to the accretion of interest on debt discount from our convertible notes that were extinguished during the fourth quarter of 2015. Additionally, $0.5 million of interest was attributable to RBL notes in 2015.

So in 2016, we've been able to finance our business in a better way. Our interest is up on a cash basis, but we don't have any of the convertible preferred notes. During 2016, we recorded a $3.7 million loss from the stock value guarantee and other charges from PayOnline acquisition related to the Online Solutions segment. This includes a stock price guarantee of $2.2 million plus accrued interest, and we also have $1.4 million pursuant to an amendment where we assumed some additional liabilities. And we also had other income of $0.5 million from the transfer and settlement of merchant reserves.

During 2015, we recorded a loss on the charge of the convertible notes. There was a gain and a loss, and it netted to $818,000. That was non-cash.

That concludes my remarks on the income statement. I would like to turn it back over to Oleg.

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Oleg Firer, Net Element, Inc. - CEO [4]

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Well, we'd like to open up the call for questions.

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Questions and Answers

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Operator [1]

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Thank you. (Operator Instructions) [Nario Rodriguez], Private Investor.

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Unidentified Shareholder [2]

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Amazing job growing revenues last year. Really, really great growth. My question is in regards to fourth quarter of 2015 versus 2016. I notice that you guys grew revenues and transaction value extremely, extremely quickly, but it did not translate into revenue growth for fourth quarter. Comparing numbers, I see that $15.1 million was generated in 2015 versus $15.3 million for 2016.

Can you guys explain why the revenue growth did not translate? (multiple speakers)

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Jonathan New, Net Element, Inc. - CFO [3]

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As part of this press release, we didn't really get into quarter-on-quarter revenues, but I think our revenues should have been increased. We did have a decrease in mobile, but the rest of our businesses were generally up. So maybe we can take that offline and we can come back to you and have a further discussion on that post close if you want to send us an email.

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Unidentified Shareholder [4]

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Okay, great. Do you guys give Q1 guidance?

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Jonathan New, Net Element, Inc. - CFO [5]

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We are not giving any guidance, but you can look to Zacks and to SeeThruEquity reports in terms of some guidance from them.

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Unidentified Shareholder [6]

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Okay, great. Thank you.

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Operator [7]

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Lisa Thompson, Zacks Investment.

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Lisa Thompson, Zacks Investment Research - Analyst [8]

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So I guess to follow up on the first question, your revenues were up slightly for the quarter, but mobile payments fell off a cliff because it was $5.6 million last year and only $0.9 million. Can you explain what happened in that business and what to expect going forward?

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Oleg Firer, Net Element, Inc. - CEO [9]

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Yes, sure. The Mobile Payments segment in CIS, which is a Russian region particularly, we changed our business model as you can remember in 2015, where we shifted towards the branded content. The reason why we did that was to have more predictable business. However, we were still required to advance funds to content providers on a weekly and biweekly basis, whereby we get paid only from mobile operators 60 to 90 days after the content is generated and paid for by the consumer.

Therefore, it requires us to tie up significant capital in that business. Historically, we have credit facilities in Russia to finance that business which worked very well and allowed us to scale the business. However, at this point with the change in market conditions, we no longer have credit lines in Russia. Therefore, it requires us to put up equity capital and tie up that equity capital in the business.

So we decided that we should take a pause in that business and look for proper debt structures inside Russia and outside of Russia, which we are exploring right now. In addition, we have expanded our business into other regions where it does not require us to advance content providers on a weekly and biweekly basis; and such regions include Poland, Turkey, and we are exploring some others where the business practice is such that we pay content providers and we get paid from mobile operators. And in that case scenario, the business works very well.

The business also works very well if we have proper debt financing in place. The business is still going. We still have money in the float of that business, which is our paid-in capital. We do not have any debt outstanding in Russia as of today, but we are exploring new facilities to replace the facilities that have expired in Russia. And as I said, we are looking to expand to markets where we are not required to advance content providers.

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Lisa Thompson, Zacks Investment Research - Analyst [10]

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Okay. And exactly what does that business do again?

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Oleg Firer, Net Element, Inc. - CEO [11]

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It's a direct-carrier billing business where we bill mobile operators. Giving you an example, if you are a mobile user and you have prepaid value on your phone -- for instance, you have $100 on your phone -- we allow you to use that value in commerce. So we allow you to use that value to purchase content, to purchase games, and make other digital goods purchases.

It's predominantly online and smart television purchases and such, but it is really allowing users of mobile devices to use their mobile value instead of going to Visa/MasterCard.

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Lisa Thompson, Zacks Investment Research - Analyst [12]

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Okay. One thing you said, you talked about -- you said Aptito is moving into Russia and other countries. Where would that revenue show up on your -- in which group?

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Oleg Firer, Net Element, Inc. - CEO [13]

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We just launched it, so you would attribute to Unified Payments growth. We are not separating the segment yet, so any value-added services such as Aptito licensing and such, we'll attribute it to Unified Payments cost because we have -- and when we go into other regions, it's predominantly going to be software as a service. So there's not going to be processing revenues that touch Aptito. And we are making great strides with it, domestically and internationally.

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Lisa Thompson, Zacks Investment Research - Analyst [14]

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Okay. That should be interesting.

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Oleg Firer, Net Element, Inc. - CEO [15]

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Hence, that's the reason why Jon mentioned that our margins will be improving, because the fact that we will have more value-added services as part of our business.

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Lisa Thompson, Zacks Investment Research - Analyst [16]

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When do you think that we will see that; which quarter should it start ticking up?

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Oleg Firer, Net Element, Inc. - CEO [17]

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Over the course of the year. We already started seeing improvements, but you will see it through the course of the year that the margins will increase.

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Lisa Thompson, Zacks Investment Research - Analyst [18]

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Okay, but Q1 is typically down, right, so it's probably not going to be that quarter?

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Oleg Firer, Net Element, Inc. - CEO [19]

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The middle of the year, I would say.

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Lisa Thompson, Zacks Investment Research - Analyst [20]

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Okay. And just I guess to update on PayOnline, what's going on there and what to expect from that?

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Oleg Firer, Net Element, Inc. - CEO [21]

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PayOnline is still a business that we are very bullish on. We are expanding PayOnline into other regions also, outside of CIS market. We are growing in Europe. We are growing in Asia. So we are actually expanding it and looking to bring -- and we are actually in the process of bringing it to the United States. We are in the final stages of certification in the United States, so we believe that PayOnline will also be very successful in the domestic market as well.

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Lisa Thompson, Zacks Investment Research - Analyst [22]

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And how will we see that in the US? What sort of products is that going to be?

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Oleg Firer, Net Element, Inc. - CEO [23]

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It's going to be online and value-added services. So it's going to be online and smart payment terminals. So it's going to be anything that's online and IP-based terminals. We are not going to go into dial-up terminals and such, but anything that is IP driven. So instead of using third-party gateways for Aptito, we will be using PayOnline gateway. Instead of using third-party gateways for our smart payment terminals, we are going to be using PayOnline gateway.

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Lisa Thompson, Zacks Investment Research - Analyst [24]

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Okay. So that should help margins too, right, if you're brining that in-house?

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Oleg Firer, Net Element, Inc. - CEO [25]

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Yes, of course. All of that combined will hopefully drive our margins up where we are not going to be using third-party gateways. We are going to be developing more value-added services on the centralized platform. So all that stuff will improve our margins down the road.

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Lisa Thompson, Zacks Investment Research - Analyst [26]

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All right. And I guess the main concern possibly in the Company -- I look at you -- this last year you grew revenues 35%, but the share count went up 83%. So at what point are you going to get to be a little bit more self-funding where you can invest in your business from your own profitability?

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Oleg Firer, Net Element, Inc. - CEO [27]

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Jon is going to answer that.

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Jonathan New, Net Element, Inc. - CFO [28]

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Sorry, Lisa, I was on mute. So what we are working towards is balancing out the growth of the business and the need for additional capital. We have much more efficient equity financing in place now than we had previously, and we will continue to do that and grow the business quickly.

We also have some additional debt financing in place. As you look at our subsequent events in our 10-K, we had another $0.5 million from RBL. But to answer your question directly, as we move towards the end of this year, our portfolio size is going to be expanding to the point that it will start to cover our overhead.

So even with rapid growth as we approach the end of this year, we hope to be coming to more of a self-financing position.

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Lisa Thompson, Zacks Investment Research - Analyst [29]

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Great, looking forward to it. Okay, thank you so much. That's all my questions.

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Operator [30]

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Chris (inaudible).

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Unidentified Analyst [31]

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I was wondering, just to piggyback on the last question, are you looking for any type of mergers or buyouts so you can become self-financing?

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Oleg Firer, Net Element, Inc. - CEO [32]

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Well, we are always exploring opportunities; we're very opportunistic. And if an opportunity presents us, we will always take a look at it. And obviously, if it helps us get to the finish line quicker and get to profitability quicker and have scale faster, obviously our business is such where if we are to merge or to acquire or to do a transaction with a company that's in the same business as ours, we don't need to expand our G&A. We could piggyback and centralize operations, so it allows for profitability much quicker. We will obviously explore those options.

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Unidentified Analyst [33]

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Okay. And then I guess my last question is just a general question. For the stock market price, what do you contribute to the continuing downward spiral of the stock?

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Oleg Firer, Net Element, Inc. - CEO [34]

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Well, your guess is as good as mine. I'm a believer. I have acquired shares over time. I have not sold a single share. Senior executive management have not sold any shares. So it's really speculative coming in and out of this stock. We have a lot of retail shareholders, so I guess the next phase of our evolution would be to attract institutional investors that could hold onto stock longer.

Otherwise, it's just day traders that come in and out of the market without looking at the fundamentals and understanding the Company.

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Unidentified Analyst [35]

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Okay, all right. Well, thank you so much for the time.

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Operator [36]

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(Operator Instructions) I'm showing no further questions at this time. I would now like to turn the call back over to management for closing remarks.

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Oleg Firer, Net Element, Inc. - CEO [37]

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Again, I would like to thank everyone for participating in our call this morning. Please do not hesitate to contact myself or Jon with any questions that you might have. We are always available to answer any questions that you might have. Thank you.

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Operator [38]

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Ladies and gentlemen, that does conclude the Net Element 2016 financial results conference call. Thank you for your participation. You may now disconnect.