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Net Element Inc$4.32($.02)(.46%)

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 Net Element Reports Full-Year 2016 Financial Results and Provides Business Update
   Saturday, April 01, 2017 4:55:41 PM ET

Annual revenue increased 35% to $54.3 million for 2016 from $40.2 million in 2015

MIAMI, FL--(Marketwired - Apr 1, 2017) - Net Element, Inc. (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      Mobile Solutions       Online Solutions       Corporate             Total             
                                                         Transaction                                                                               Expenses
                                                         Solutions                                                                                 & Eliminations
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      Mobile Solutions       Online Solutions       Corporate             Total             
                                                         Transaction                                                                               Expenses
                                                         Solutions                                                                                 & Eliminations
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      Twelve months      Increase /         
                                 ended                   ended                   (Decrease)
                                 December 31,            December 31,
                                 2016                    2015
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              40,235,362   
                                                                                                                                               
Costs and expenses:                                                                                                                                 
                                Cost of service fees                                                                40,521,236              25,858,098   
                                Cost of branded content                                                             5,187,005               8,119,117    
                                General and administrative                                                          8,797,883               9,310,477    
                                Non-cash compensation                                                               3,463,435               4,306,304    
                                Bad debt expense                                                                    1,688,237               649,571      
                                Depreciation and amortization                                                       3,466,511               2,513,162    
Total costs and operating expenses                                                                                       63,124,307              50,756,729   
Loss from operations                                                                                                     (8,837,448  )                (10,521,367 )
                                Interest expense, net                                                               (1,463,833  )                (3,575,698  )
                                Loss on change in fair value and settlement of beneficial conversion derivative     -                       (26,932,496 )
                                Loss from stock value guarantee and other charges from PayOnline acquisition        (3,722,142  )                -            
                                Gain on debt extinguishment                                                         -                       27,743,980   
                                Gain on asset disposal                                                              -                       40,369       
                                Other income (expense), net                                                         407,347                 (82,714     )
Net loss before income taxes                                                                                             (13,616,076 )                (13,327,926 )
Income taxes                                                                                                             -                       -            
Net loss                                                                                                                 (13,616,076 )                (13,327,926 )
                                Net loss attributable to the non-controlling interest                               128,539                 74,314       
Net loss attributable to Net Element, Inc. stockholders                                                                  (13,487,537 )                (13,253,612 )
                                                                                                                                               
Dividends for the benefit of preferred stockholders                                                                      -                       (1,585,092  )
                                                                                                                                               
Net loss attributable to Net Element, Inc. common stockholders                                                           (13,487,537 )                (14,838,704 )
                                                                                                                                               
                                Foreign currency translation                                                        (920,794    )                (314,361    )
Comprehensive loss attributable to common stockholders                                                               $        (14,408,331 )            $        (15,153,065 )
                                                                                                                                               
Loss per share - basic and diluted                                                                                   $        (1.03       )            $        (2.32       )
                                                                                                                                               
Weighted average number of common shares outstanding - basic and diluted                                                 13,058,009              6,391,120    
                                                                                                                                               
See accompanying notes to the consolidated financial statements
                                                                                                                                               
                                                                                                                                               
 
 
NET ELEMENT, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
                                                                                                                                                                                                                                       
                                                  Preferred Stock                     Common Stock                     Paid in                Stock                 Comprehensive         Non-controlling      Accumulated             Equity              
                                                  Shares     Amount         Shares       Amount         Capital                Subscription          Income                interest             Deficit                 in Assets           
Balance December 31, 2014                              -          -              4,588,152    $      459     $      136,693,759     $      (1,111,130 )        $      (1,251,461 )        $       269,762      $      (129,116,344 )        $      5,485,045    
Share based compensation                               -          -              401,532        39        4,306,264         -                -                 -              -                  4,306,303    
Preferred shares issued                                5,500      5,287,082      -              -         -                 -                -                 -              -                  -            
Preferred shares converted to common shares            (5,500 )        (5,287,082 )        3,376,045      338       9,035,746         -                -                 -              -                  9,036,084    
Preferred share dividends paid                         -          -              612,891        61        1,585,031                                                          1,585,092    
Shares issued in connection with debt restructuring    -          -              420,805        42        1,346,606         -                -                 -              -                  1,346,648    
Shares issued in exchange for warrants                 -          -              250,000        25        (2,679,885  )                                                           (2,679,861  )
Shares issued and issuable for acquisitions            -          -              476,821        48        3,599,952         -                -                 -              -                  3,600,000    
Repurchase of non-controlling interest                 -          -              -              -         (3,489      )          -                -                 3,469          -                  (20         )
Shares issued for insider financing                    -          -              1,135,713      114       1,588,840         -                -                 -              -                  1,588,954    
Write-off of stock subscription receivable             -          -              -              -         (1,111,130  )          1,111,130        -                 -              -                  -            
Net loss                                               -          -              -              -         -                 -                -                 (74,314  )          (14,838,704  )          (14,913,018 )
Comprehensive loss - foreign currency translation      -          -              -              -         -                 -                (314,361   )           -              -                  (314,361    )
Balance December 31, 2015                              -          -              11,261,959   $      1,126   $      154,361,694     $      -              $      (1,565,822 )        $       198,917      $      (143,955,048 )        $      9,040,867    
Share based compensation                               -          -              1,214,418      121       4,426,996         -                -                 -              -                  4,427,117    
Shares issued and issuable for acquisitions            -          -              65,430         7         134,088                       -                 -              -                  134,095      
Shares issued in connection with reverse stock split   -          -              1,801          0         -                             -                 -              -                  0            
Shares issued for insider financing                    -          -              466,428        47        988,781           -                -                 -              -                  988,828      
Shares issued in connection with debt restructuring    -          -              1,663,401      166       3,288,670         -                -                 -              -                  3,288,836    
Shares issued under ESOUSA agreement                   -          -              680,057        68        718,456           -                -                 -              -                  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                              -          -              15,353,494   $      1,535   $      163,918,685     $      -              $      (2,486,616 )        $       70,378       $      (157,442,585 )        $      4,061,397    
 
See accompanying notes to the consolidated financial statements
 
 
                                                                                                                                                                          
NET ELEMENT, INC.                                                                                                                                                              
                                                                                                                                                                          
CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                                                                          
                                                                                                                                                                          
                                                                                                                 Year Ended December 31,                                  
                                                                                                                 2016                      2015                 
Cash flows from operating activities                                                                                                             
Net loss attributable to Net Element, Inc. stockholders                                                               $       (13,487,537 )          $       (13,253,612 )
Adjustments to reconcile net loss to net cash used in operating activities                                                                       
                                 Noncontrolling interest                                                            (128,539    )             (74,309     )
                                 Share based compensation                                                           3,463,435            4,306,304    
                                 Gain on change in fair value and settlement of beneficial conversion derivative    -                    26,932,495   
                                 Depreciation and amortization                                                      3,466,510            2,513,162    
                                 Non-cash interest                                                                  852,408              -            
                                 Amortization of deferred revenue                                                   (1,221,177  )             -            
                                 Amortization of debt discount                                                      -                    3,027,354    
                                 Provision bad debt expense                                                         500,000              -            
                                 Amortization of prepaid costs                                                      967,313                      
                                 Gain on disposal of fixed asset                                                    -                    (40,369     )
                                 Gain on debt extinguishment                                                        -                    (27,743,980 )
                                 Changes in assets and liabilities                                                                          
                                 Accounts receivable                                                                (2,751,144  )             (1,492,183  )
                                 Deferred revenue                                                                   1,833,239            271,428      
                                 Prepaid expenses and other assets                                                  (570,582    )             291,631      
                                 Accounts payable and accrued expenses                                              3,797,753            3,571,307    
                                 Net cash used in operating activities                                              (3,278,321  )             (1,690,772  )
                                                                                                                                            
Cash flows from investing activities                                                                                                             
                                                                                                                                            
                                 Purchase of portfolio and client acquisition costs                                 (1,319,820  )             (878,085    )
                                 Sale of portfolio                                                                  -                    300,000      
                                 Acquisition of PayOnline assets, net of cash received                              -                    (3,195,452  )
                                 Purchase of fixed and other assets                                                 (187,089    )             (579,209    )
Net cash used in investing activities                                                                                    (1,506,909  )             (4,352,746  )
                                                                                                                                            
Cash flows from financing activities                                                                                                             
                                                                                                                                            
                                 Proceeds from issuance of preferred stock                                          -                    5,500,000    
                                 Proceeds from indebtedness                                                         3,170,540            650,000      
                                 Repayment of indebtedness                                                          (71,700     )             -            
                                 Cash received for issuance of shares and warrants                                  300,000                      
                                 Related party advances                                                             1,027,874            331,273      
                                 Net cash provided by financing activities                                          4,426,714            6,481,273    
                                                                                                                                            
                                 Effect of exchange rate changes on cash                                            (45,596     )             84,649       
                                 Net (decrease) increase in cash                                                    (404,112    )             522,404      
                                                                                                                                            
Cash at beginning of year                                                                                                1,025,747            503,343      
Cash at end of year                                                                                                   $       621,635           $       1,025,747    
                                                                                                                                            
Supplemental disclosure of cash flow information                                                                                                 
Cash paid during the year for:                                                                                                                   
                                 Interest                                                                        $       611,625           $       548,344      
                                 Taxes                                                                           $       94,718            $       74,563       
                                                                                                                                            
Non-cash activities:                                                                                                                             
                                 Stock issued in exchange for warrants                                           $       -                 $       2,679,861    
                                 Preferred dividends paid in common stock                                        $       -                 $       1,585,092    
                                 Common share issuance for settlement of unpaid compensation                     $       1,042,509         $       -            
                                 Common shares issued for redemption of indebtedness                             $       2,499,481         $       1,346,648    
                                 Common shares issued in settlement of advances from board member                $       909,285           $       -            
                                 Common shares issued for acquisition                                            $       -                 $       3,600,000    
                                 Common shares issued upon redemption of preferred shares                        $       -                 $       9,036,084    
                                                                                                                                       
See accompanying notes to the consolidated financial statements
                                                                                                                                       
                                                                                                                                       

About Net Element Net Element, Inc. (NETE ) operates a payments-as-a-service transactional and value-added services platform for small to medium enterprise ("SME") in the US, Russian Federation and other international markets. In the US it aims to grow transactional revenue by innovating SME productivity services such as its cloud based, restaurant point-of-sale solution Aptito. Internationally, Net Element’s strategy is to leverage its omni-channel platform to deliver flexible offerings to emerging markets with diverse banking, regulatory and demographic conditions such as UAE, Kazakhstan, India and Latin America where initiatives have been recently launched. It maintains offices in Miami, FL and in Russia. Further information is available at www.netelement.com.

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

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



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