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Net Element Reports Full-Year 2016 Financial Results and Provides Business Update

MIAMI, FL--(Marketwired - Apr 1, 2017) - Net Element, Inc. ( NASDAQ : NETE ) ("Net Element" or the "Company"), a provider of global multi-channel payment technology solutions and value-added transactional services, today reported financial results for the fiscal year ended December 31, 2016 and provided an update on recent strategic and operational initiatives.

Conference Call:
The Company will host a conference call to discuss 2016 financial results and business highlights on April 3, 2017 at 8:30 AM ET. The conference call can be accessed live over the phone by dialing +1 (877) 303-9858, or for international callers +1 (408) 337-0139, and referencing conference code 1118558. It is recommended that participants dial in approximately 10 minutes prior to the start of the 8:30AM Eastern call.

The call will also be webcast live from http://edge.media-server.com/m/p/36p8bop3. Following completion of the call, a recorded replay of the webcast will be available on the www.netelement.com/en/ir website.

2016 Full Year Results:

  • Total US Dollar volume processed globally in 2016 exceeded $2.45 billion, an increase of 40% compared to $1.75 billion in 2015.
  • Total transactions processed for 2016 exceeded 187 million, an increase of 16% compared to 161 million in 2015.
  • Revenues increased to $54.3 million, an increase of 35% compared to $40.2 million in 2015.
  • United States accounted for 78% of our total revenues, while international revenues were 22% in 2016.

The $14.0 million increase in revenues is primarily due to organic revenue growth in North American Transaction Solutions. Online Solutions also posted a strong year over year increase (PayOnline acquired May 2015):

  • 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 this 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 $6.0 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.

"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 select international markets" commented Oleg Firer, CEO of Net Element.

2016 Significant Achievements:

Recognitions

  • Net Element named one of the fastest growing technology companies in South Florida Business Journal's 2016 Technology Awards
  • PayOnline was named the best processing gateway in 2016 by Tagline
  • PayOnline recognized for its payment services by Markswebb Rank & Report, ranked as a Top 5 payment acceptance company

New Partnerships

  • Esquire Bank (US) - this multi-year contract includes transaction clearing services and sponsorship to payment networks 
  • Merrick Bank (US) - On November 1, 2016, we moved all of our processing that utilized BMO Harris Bank for clearing to Merrick Bank
  • Mashreqbank (UAE) - this new partnership expands Net Element's processing capabilities in the region
  • Round Bank (RU) - under this collaboration agreement, we integrated the first 70 online merchants to the PayOnline platform

Geographical Expansion

  • Continued expansion into Central Asia
  • Launched payment processing and mobile payments in Azerbaijan

Product Launches

  • Launched 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's iOS
  • Launched fully integrated omni-channel gift and loyalty platform
  • Launched Aptito in Russia, aiming to lead in the underserved POS software market
  • Released Aptito POS solution for retail stores with inventory management and analytics
  • Launched SalesCentral On-the-Go to expedite merchant approval and boarding

Key New Relationships

  • Dunkin' Donuts became a client in Russia; PayOnline enabled online ordering and payments acceptance
  • 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 anti-virus software, became a client of PayOnline in 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

Capital

  • During 2016 we were successful in raising capital utilizing debt exchange and equity financing instruments

Results of Operations for the Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

We reported a net loss attributable to common stockholders of $13.5 million or $1.03 per share loss for the year ended December 31, 2016 as compared to a net loss attributable to common stockholders of $14.8 million or ($2.32) per share for the year ended December 31, 2015. Our net loss from operations for the years ended December 31, 2016 and 2015 are discussed further below.

Adjusting for non-cash compensation and other non-recurring items, we have a non-GAAP adjusted net loss attributable to common stockholders 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 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.

The following table sets forth our sources of revenues, cost of revenues and gross margins for the years ended December 31, 2016 and 2015.

                           
    Twelve         Twelve            
    Months Ended         Months Ended         Increase /  
Source of Revenues   December 31, 2016   Mix     December 31, 2015   Mix     (Decrease)  
                                 
  North American Transaction Solutions   $ 42,130,901   78 %   $ 27,388,598   68 %   $ 14,742,303  
  Mobile Solutions     5,933,281   11 %     9,043,705   22 %     (3,110,424 )
  Online Solutions     6,222,677   11 %     3,803,059   10 %     2,419,618  
    Total   $ 54,286,859   100 %   $ 40,235,362   100 %   $ 14,051,497  
                                 
    Twelve         Twelve              
    Months Ended   % of     Months Ended   % of     Increase /  
Cost of Revenues   December 31, 2016   revenues     December 31, 2015   revenues     (Decrease)  
                                 
  North American Transaction Solutions   $ 36,342,465   86 %   $ 23,497,808   86 %   $ 12,844,657  
  Mobile Solutions     5,287,960   89 %     8,124,763   90 %     (2,836,803 )
  Online Solutions     4,077,816   66 %     2,354,644   62 %     1,723,172  
    Total   $ 45,708,241   84 %   $ 33,977,215   84 %   $ 11,731,026  
                                 
    Twelve         Twelve              
    Months Ended   % of     Months Ended   % of     Increase /  
Gross Margin   December 31, 2016   revenues     December 31, 2015   revenues     (Decrease)  
                                 
  North American Transaction Solutions   $ 5,788,436   14 %   $ 3,890,790   14 %   $ 1,897,646  
  Mobile Solutions     645,321   11 %     918,942   10 %     (273,621 )
  Online Solutions     2,144,861   34 %     1,448,415   38 %     696,446  
    Total   $ 8,578,618   16 %   $ 6,258,147   16 %   $ 2,320,471  
                                 

Revenues consist primarily of service fees from transaction processing. Revenues were $54.3 million for the year ended December 31, 2016 as compared to $40.2 million for the year ended December 31, 2015. The increase in net revenues is primarily due to organic growth of merchants in our North America Transaction Solutions segment. This was partially offset by a $3.0 million decrease primarily from our Mobile Solutions branded content. During May of 2015, we acquired and began consolidating revenues from our Online Solutions segment consisting of PayOnline. Additionally, we began generating revenues for branded content in our Mobile Solutions segment during the quarter ending September 30, 2015. Branded content revenues are presented gross versus net fees recorded for all other mobile business.

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 twelve months ended December 31, 2016 were $45.7 million as compared to $34.0 million for the twelve months ended December 31, 2015. The year over year increase in cost of revenues of $11.7 million was due to a $12.8 million increase due to increased North American Transaction Solutions volume. There was also a $1.7 million increase in cost of revenues resulting from Online Solutions segment (PayOnline) as 2015 was only a partial year since business was acquired in May 20, 2015. This was offset by a $2.8 million decrease in Mobile Solutions costs of revenues.

Gross Margin for the twelve months ended December 31, 2016 was $8.6 million, or 16% of net revenue, as compared to $6.3 million or 16% of net revenue, for the twelve months ended December 31, 2015. The primary reasons margin percentages stayed the same was an increase in net revenue from our North American Transaction Solutions and Online Solutions segments. This was offset by a $0.3 million decrease in gross margin from our Mobile Solutions segment.

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

General and administrative expenses for the years ended December 31, 2016 and 2015 consisted of operating expenses not otherwise delineated in our Consolidated Statements of Operations and Comprehensive Loss, including non-cash compensation expense, salaries and benefits, professional fees, rent, filing fees and other expenses required to run our business, as follows:

                             
Twelve months ended December 31, 2016                            
                             
Category   North America
Transaction
Solutions
  Mobile Solutions     Online Solutions     Corporate
Expenses
& Eliminations
    Total  
Salaries, benefits, taxes and contractor payments   $ 1,302,547   $ 450,306     $ 637,181     $ 2,012,655     $ 4,402,689  
Professional fees     542,681     10,835       888,174       1,273,150       2,714,840  
Rent     -     3,996       140,789       421,548       566,333  
Business development     36,923     4,966       123,046       13,354       178,289  
Travel expense     191,848     11,435       23,606       119,904       346,793  
Filing fees     -     -       -       82,560       82,560  
Transaction (gains) losses     49     (408,425 )     44,738       (376,906 )     (740,544 )
Other expenses     529,281     (52,189 )     145,854       623,977       1,246,924  
  Total   $ 2,603,329   $ 20,924     $ 2,003,388     $ 4,170,242     $ 8,797,883  
                                       
                                       
Twelve months ended December 31, 2015                            
                             
Category   North America
Transaction
Solutions
  Mobile Solutions     Online Solutions     Corporate
Expenses
& Eliminations
    Total  
Salaries, benefits, taxes and contractor payments   $ 904,447   $ 405,910     $ 332,961     $ 2,172,923     $ 3,816,241  
Professional fees     465,680     12,326       789,197       2,296,682       3,563,885  
Rent     3,438     3,439       74,945       393,986       475,808  
Business development     31,661     780       77,074       -       109,515  
Travel expense     170,578     23,806       24,844       102,928       322,156  
Filing fees     -     -       -       100,001       100,001  
Transaction (gains) losses     -     68,713       (69,480 )     (76,327 )     (77,094 )
Other expenses     507,002     523,451       46,231       (76,719 )     999,965  
  Total   $ 2,082,806   $ 1,038,425     $ 1,275,772     $ 4,913,474     $ 9,310,477  
                                         

Transaction gains and losses represent changes in exchange rates between our functional currency and the foreign currency in which the transaction is denominated. Excluding transaction gains, our general and administrative expenses were relatively flat to the prior year despite large increases in revenues.

Non-cash compensation expense was $3.5 million for the year ended December 31, 2016 as compared to $4.3 million for the year ended December 31, 2015. Non-cash compensation for 2016 and 2015 was primarily due to incentive stock and options granted to our employees.

We recorded a provision for bad debt in the amount of $1.7 million for the year ended December 31, 2016, compared to provision for bad debts of $0.6 million for the year ended December 31, 2015. For the twelve months ended December 31, 2016 we recorded a loss provision which was primarily comprised of $1.3 million in net ACH rejects, attributable to the normal course of our North America Transaction Solutions segment, and a $0.4 million loss, which was to reserve for potential accounts receivable losses from our Mobile Solutions business. For the twelve months ended December 31, 2015 we recorded a loss provision which was primarily comprised of $0.8 million in ACH rejects, attributable to the normal course of our North America Transaction Solutions segment, offset by $0.1 million bad debt recovery from our Mobile Solutions segment.

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios, trademarks and domain names plus depreciation expense on fixed assets, client acquisition costs, capitalized software expenses and employee non-compete agreements. Depreciation and amortization expense was $3.5 million for the year ended December 31, 2016 as compared to $2.5 million for the year ended December 31, 2015. The primary reason for the $1.0 million increase is a $0.8 million increase attributed to Online Solutions segment, primarily because we took a full year's depreciation in 2016 versus a partial year in 2015. We purchased PayOnline in May of 2015. In addition, we had a $0.3 million increase in North American Transaction Solutions due to increased customer acquisition costs, offset by $0.1 million amortization decrease as many of our merchant portfolios became fully amortized during 2015.

Interest expense was $1.5 million for the year ended December 31, 2016 as compared to $3.6 million for the year ended December 31, 2015, representing a decrease of $2.1 million as follows:

               
Funding Source   Twelve months
ended
December 31,
2016
  Twelve months
ended
December 31,
2015
  Increase /
(Decrease)
 
Convertible Notes Payable   $ -   $ 3,027,354   $ (3,027,354 )
MBF Notes     61,325     -     61,325  
RBL Notes     1,282,439     513,994     768,445  
Other     120,069     34,350     85,719  
Total   $ 1,463,833   $ 3,575,698   $ (2,111,865 )
                     

Interest for 2016 was primarily attributed to RBL Notes. Of the $1.3 million in interest attributable to the RBL Notes, $0.8 million was non-cash and attributed to discounts off current value from common stock that was provided in exchange for debt. In addition, $0.5 million resulted from the payment of interest on the notes. Other interest consisted primarily of $0.1 million due to a third party relating to the PayOnline stock price guarantee obligation, offset by interest earned by our Mobile Solutions segment.

Interest for 2015 was primarily attributed to corporate of which $3.0 million was due to the accretion of interest on the debt discounts attributed to the convertible notes payable that were extinguished during the fourth quarter of 2015. Additionally, $0.5 million was for our RBL Notes.

During 2016, we recorded a $3.7 million loss from stock value guarantee and other charges from PayOnline acquisition, related to Online Solutions segment. This loss includes a stock price guarantee charge in the amount of $2.3 million, due to a make-whole provision arising from a decrease in the stock value purchase consideration paid and a reserve for merchant liabilities assumed in the amount of $1.4 million pursuant to an amendment to the PayOnline acquisition agreement. Included in other income was a gain of $0.5 million from the transfer and settlement of merchant reserves.

During 2015, we recorded a loss on the change in fair value on the beneficial conversion derivative related to convertible preferred stock and the related note payable in the amount of $27.0 million. During the fourth quarter, we extinguished the note payable and convertible preferred stock and recognized a $28.0 million gain on these extinguishments which were attributable to our corporate expenses.

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 non-GAAP measures of its operating results by disclosing its adjusted net loss. Adjusted net loss is calculated as net loss attributable to Net Element, Inc. common shareholders excluding non-cash share based compensation and other non-recurring items. Net Element discloses this amount on an aggregate and per share basis. Historically, we began this reconciliation calculation with Net Loss (for our 2015 annual results) and Net Loss attributable to Net Element, Inc. stockholders (for our 2016 quarterly results) but we now start with Net Loss Attributable to Net Element, Inc. common stockholders in order to present more comparable earnings per share numbers. Adjustments to the net loss presented remain the same under all scenarios. These measures meet the definition of non-GAAP financial measures. The Company believes that application of these non-GAAP financial measures is appropriate to enhance the understanding of its historical performance through use of a metric that seeks to normalize period-to-period earnings.

Pursuant to Regulation G promulgated by the Securities and Exchange Commission, a reconciliation of the non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP for the twelve months ended December 31, 2016 and 2015 is presented in the following Non-GAAP Financial Measures Table.

Reconciliation of Non-GAAP Financial Measures and Regulation G Disclosure

                       
    GAAP     Share-based Compensation   Fair Value Adjustment from PayOnline Acqusition     Adjusted Non-GAAP  
Twelve Months Ended December 31, 2016                              
  Net loss attributable to Net Element, Inc. common stockholders   $ (13,487,537 )   $ 3,463,435   $ 2,162,861     $ (7,861,241 )
  Basic and diluted (loss) earnings per share   $ (1.03 )   $ 0.27   $ 0.17     $ (0.60 )
  Basic and diluted shares used in computing earnings per share     13,058,009                     13,058,009  
                               
                               
    GAAP     Share-based Compensation   Derivative Activity and Debt Extinguishment     Adjusted Non-GAAP  
Twelve Months Ended December 31, 2015                              
  Net loss attributable to Net Element, Inc. common stockholders   $ (14,838,704 )   $ 4,306,304   $ (811,484 )   $ (11,343,884 )
  Basic and diluted (loss) earnings per share   $ (2.32 )   $ 0.67   $ (0.13 )   $ (1.77 )
  Basic and diluted shares used in computing earnings per share     6,391,120                     6,391,120  
                               
                               
   
NET ELEMENT, INC.  
   
CONSOLIDATED BALANCE SHEETS  
   
  December 31, 2016     December 31, 2015  
ASSETS              
Current assets:              
  Cash $ 621,635     $ 1,025,747  
  Accounts receivable, net   7,126,429       5,198,993  
  Prepaid expenses and other assets   1,467,897       1,106,016  
    Total current assets, net   9,215,961       7,330,756  
Fixed assets, net   117,295       162,123  
Intangible assets, net   3,589,850       5,423,880  
Goodwill   9,643,752       9,643,752  
Other long term assets   742,810       353,050  
    Total assets   23,309,668       22,913,561  
               
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities:              
  Accounts payable   7,510,113       5,858,837  
  Accrued expenses   5,518,823       2,975,066  
  Deferred revenue   1,355,972       743,910  
  Notes payable (current portion)   808,976       518,437  
  Due to related parties   299,004       329,881  
    Total current liabilities   15,492,888       10,426,131  
  Notes payable (net of current portion)   3,755,383       3,446,563  
    Total liabilities   19,248,271       13,872,694  
               
STOCKHOLDERS' EQUITY              
  Series A Convertible Preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at December 31, 2016 and December 31, 2015)   -       -  
  Common stock ($.0001 par value, 400,000,000 shares authorized and 15,353,494 and 11,261,959 shares issued and outstanding at December 31, 2016 and December 31, 2015   1,535       1,126  
  Paid in capital   163,918,685       154,361,694  
  Accumulated other comprehensive loss   (2,486,616 )     (1,565,822 )
  Accumulated deficit   (157,442,585 )     (143,955,048 )
  Noncontrolling interest   70,378       198,917  
    Total stockholders' equity   4,061,397       9,040,867  
      Total liabilities and stockholders' equity $ 23,309,668     $ 22,913,561  
                     
See accompanying notes to the consolidated financial statements
                     
                     
   
NET ELEMENT, INC.  
   
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS  
   
  Twelve months ended December 31,  
  2016     2015  
               
Net revenues              
  Service fees $ 48,784,855     $ 31,204,871  
  Branded content   5,502,004       9,030,491  
Total revenues   54,286,859       40,23null