Apr 01, 2019

Net Element Reports Full-Year 2018 Financial Results and Provides Business Update

Current Investor Presentation

Consistent revenue growth and improved financial performance achieved during 2018

MIAMI, April 01, 2019 (GLOBE NEWSWIRE) -- Net Element, Inc. (NASDAQ: NETE) (“Net Element” or the “Company”), a global technology and value-added solutions group that supports electronic payments acceptance in a multi-channel environment, including point-of-sale (“POS”), e-commerce and mobile devices, today reports financial results for the fiscal year ended Dec. 31, 2018, and provides an update on recent strategic and operational initiatives.

Conference Call

On April 2, 2019, at 8:30 a.m. EST, the Company will host a conference call to discuss 2018 financial results and business highlights. The conference call can be accessed live over the phone by dialing +1 (877) 303-9858, or for international callers +1 (408) 337-0139, and referencing conference code 8437549. It is recommended that participants dial in approximately 10 minutes prior to the start of the call.

The call will also be webcast live from https://edge.media-server.com/m6/p/faqumxh9.  Following completion of the call, a recorded replay of the webcast will be available on the www.netelement.com/en/ir website.

2018 Full-Year Financial Highlights

  • Total processing volume of $3.3 billion, an increase of 18% compared to $2.8 billion in 2017
  • Net revenue of $65.8 million, an increase of 10% compared to $60.1 million in 2017
  • Gross margin of $10.2 million, an increase of 15% compared to $8.8 million in 2017
  • Operating expenses were $14.5 million, a decrease of 17% compared to $17.4 million in 2017
  • Net loss per share decreased to ($1.28) in 2018 compared to net loss per share of ($5.04) in 2017, a decrease of 75%

2018 Significant Achievements

  • Acquired recurring cash flow portfolios projected to add over $9 million in gross profits over the next four years
  • Ranked as one of the fastest growing companies in North America on Deloitte’s 2018 Technology Fast 500TM
  • Ranked in the top 10 retail payment consulting/services companies of 2018 by Retail CIO Outlook magazine
  • Jon Najarian of CNBC "Halftime Report" and "Fast Money," and Jonathan Fichman, a fintech and startup executive, joined Net Element’s board of directors
  • Net Element subsidiary Unified Payments is among the first companies to achieve self-regulatory certification from the Electronics Transactions Association

“Successful execution of our strategy in 2018 has created a predictable and resilient business model for the company entering 2019,” said Net Element CEO Oleg Firer. “We believe our technology-centered service offerings built around payment ecosystems will continue to differentiate our company as we continue to provide value-added payment solutions to our clients.”

Outlook

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

Planned for 2019

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

  • Continue growth in all key segments and expand our network of referral partners
  • Drive and improve client retention
  • Expand our client base in selected markets
  • Deliver value-added products to our clients to increase efficiencies and payment acceptance
  • Launch new tools to reach our clients, such as digital channels, and deepen partner relations

The global payments industry continued to deliver healthy growth during 2018, with underlying transaction volumes demonstrating even greater strength. We believe that new and disruptive technologies will provide us with the opportunity to differentiate ourselves from our competition and to continue developing and delivering innovative payment solutions in 2019 and beyond. 

  • Continue to scale and enhance Netevia, our future-ready multi-channel payments platform, enabling intelligent routing of payments for the application development community
  • Continue to scale and enhance new product launches that will add value for our clients
  • Extend our capabilities in next-generation POS hardware and software and deepen our partner proposition
  • Continue trials of advanced technologies centered on business intelligence and mobile-based payments acceptance
  • Continue the further development of disruptive emerging technologies such as blockchain technologies, enablement of Internet of Things (“IoT”), biometrics payment acceptance and artificial intelligence
  • Continue research and investments in future emerging payment technologies

Realize the full potential of our business model.

  • Deliver stronger organic growth
  • Monetize on acquisitions completed in 2018
  • Develop additional payment network relationships to integrate with our technologies
  • Seek acquisition or investment opportunities to deepen our technological and distribution capabilities

We continue to believe that disruptive technologies such as blockchain, IoT, biometrics payments and artificial intelligence will play key roles in future commerce. These technologies will encourage innovation through development of value-added services and cater to both merchants and their customers.

We believe Netevia, our future-ready payments platform, will act as a framework and core for a number of value-added services that can connect merchants and consumers directly, utilizing these disruptive technologies while increasing the economic efficiency of all transactions being made within the ecosystem. Specifically, Netevia Payments Platform delivers end-to-end payment processing through easy-to-use APIs and complements the Company’s ability to perform in a multi-channel environment including point-of-sale (POS), e-commerce and mobile devices. Netevia will enable the Company to perform as a hub for disruptive emerging technology solutions.

Results of Operations for the Year Ended Dec. 31, 2018, compared to the Year Ended Dec. 31, 2017

We reported a net loss attributable to common stockholders of approximately $4.9 million or ($1.28) loss per share for the year ended Dec. 31, 2018, as compared to a net loss of approximately $9.9 million or ($5.04) loss per share for the year ended Dec. 31, 2017. This resulted in a decrease in net loss attributable to stockholders of approximately 50%, primarily due to an increase in revenues and other income, decreases in costs related to branded content, combined with selling, general and administrative expenses, and non-cash compensation. This decrease in net loss was partially offset by an increase in bad debt expense.

The following table sets forth our sources of revenues, cost of revenues and gross margins for the years ended Dec. 31, 2018 and Dec. 31, 2017.

Gross Margin Analysis:

    Twelve             Twelve                  
    Months Ended             Months Ended             Increase /  
Source of Revenues   December 31, 2018     Mix     December 31, 2017     Mix     (Decrease)  
North American Transaction Solutions   $ 59,138,552       89.9 %   $ 51,138,327       85.1 %   $ 8,000,225  
International Transaction Solutions     6,648,265       10.1 %     8,926,497       14.9 %     (2,278,232 )
Total   $ 65,786,817       100.0 %   $ 60,064,824       100.0 %   $ 5,721,993  


    Twelve             Twelve                  
    Months Ended     % of     Months Ended     % of     Increase /  
Cost of Revenues   December 31, 2018     revenues     December 31, 2017     revenues     (Decrease)  
North American Transaction Solutions   $ 50,545,759       85.5 %   $ 44,265,264       86.6 %   $ 6,280,495  
International Transaction Solutions     5,071,412       76.3 %     6,971,948       78.1 %     (1,900,536 )
Total   $ 55,617,171       84.5 %   $ 51,237,212       85.3 %   $ 4,379,959  


    Twelve             Twelve                  
    Months Ended     % of     Months Ended     % of     Increase /  
Gross Margin   December 31, 2018     revenues     December 31, 2017     revenues     (Decrease)  
North American Transaction Solutions   $ 8,592,793       14.5 %   $ 6,873,063       13.4 %   $ 1,719,730  
International Transaction Solutions     1,576,853       23.7 %     1,954,549       21.9 %     (377,696 )
Total   $ 10,169,646       15.5 %   $ 8,827,612       14.7 %   $ 1,342,034  

Net revenues consist primarily of service fees from transaction processing. Net revenues were approximately $65.8 million for the year ended Dec. 31, 2018, as compared to approximately $60.1 million for the year ended Dec. 31, 2017. The increase in net revenues is primarily due to continued organic growth of North American merchants with emphasis on value-added offerings, and the acquisition of a recurring cash flow portfolio in July 2018.  The net increase also is reflective of the following factors which consisted of: A $2 million decrease in net revenues from our International Transaction Solutions segment as we experienced increased competition; reorganized assignments from our International Transaction Solutions segment; and an approximate $1.9 million reduction in gross revenues due to the adoption of ASC 606. For the year ended Dec. 31, 2017, approximately $2.2 million was included in gross revenues that would have been excluded under ASC 606.

Cost of revenues represents direct costs of generating revenues including commissions, mobile operator fees, interchange expense, processing and non-processing fees. Cost of revenues for the year ended Dec. 31, 2018, was approximately $55.6 million as compared to approximately $51.2 million for the year ended Dec. 31, 2017. The increase of approximately $4.4 million in cost of revenues in 2018 as compared to 2017 was primarily driven by the increase in North American Transaction Solutions revenues and expenses associated with new sponsoring bank relationships. An approximate $1.9 million reduction in cost of revenues was due to the adoption of ASC 606 for the year ended Dec. 31, 2018. For the year ended Dec. 31, 2017, approximately $2.2 million was included in costs of revenues that would have been excluded under ASC 606.

Gross margin for the year ended Dec. 31, 2018, was approximately $10.2 million or 15.5% of net revenue, as compared to approximately $8.8 million or 14.7% of net revenue, for the year ended Dec. 31, 2017. This increase in the gross margin percentage was primarily the result of North American Transaction Solutions segment processing of transactions utilizing our self-designated BIN/ICA and further acceptance of value-added services by the merchants. 

Total operating expenses were approximately $14.5 million for the year ended Dec. 31, 2018, as compared to total operating expenses of approximately $17.4 million for the year ended Dec. 31, 2017. Total operating expenses for the year ended Dec. 31, 2018, consisted of selling, general and administrative costs of approximately $9.8 million, non-cash compensation of approximately $142,000, bad debt expense of approximately $2.1 million, and depreciation and amortization expense of approximately $2.5 million. For the year ended Dec. 31, 2017, total operating expenses consisted of general and administrative costs of approximately $10.6 million, non-cash compensation of approximately $2.9 million, bad debt expense of approximately $1.3 million, and depreciation and amortization expense of approximately $2.5 million.

Selling, general and administrative expenses for the years ended Dec. 31, 2018, and Dec. 31, 2017, consisted of operating expenses not otherwise delineated in the accompanying audited consolidated statements of operations and comprehensive loss, as follows:

Twelve months ended December 31, 2018                                
                                 
Category   North
American
Transaction
Solutions
    International
Transaction
Solutions
    Corporate
Expenses

&
Eliminations
    Total  
Salaries, benefits, taxes and contractor payments   $ 1,431,806     $ 1,205,885     $ 2,760,334     $ 5,398,025  
Professional fees     350,100       346,084       1,556,497       2,252,681  
Rent     -       90,456       204,143       294,599  
Business development     134,862       4,636       14,961       154,459  
Travel expense     151,098       12,789       138,316       302,203  
Filing fees     -       -       49,339       49,339  
Transaction (gains) losses     -       94,573       -       94,573  
Office expenses     307,593       35,646       51,997       395,236  
Communications expenses     112,510       162,444       107,475       382,429  
Insurance expense     -       -       136,643       136,643  
Other expenses     2,842       18,244       277,415       298,501  
Total   $ 2,490,811     $ 1,970,757     $ 5,297,120     $ 9,758,688  


Twelve months ended December 31, 2017                                
                                 
Category   North
American
Transaction
Solutions
    International
Transaction
Solutions
    Corporate
Expenses

&
Eliminations
    Total  
Salaries, benefits, taxes and contractor payments   $ 1,970,860     $ 1,696,245     $ 2,082,294     $ 5,749,399  
Professional fees     505,383       819,184       1,312,271       2,636,838  
Rent     -       245,539       245,186       490,725  
Business development     53,011       32,072       3,569       88,652  
Travel expense     331,299       32,397       130,198       493,894  
Filing fees     -       -       72,035       72,035  
Transaction (gains) losses     742       (41,200 )     1,642       (38,816 )
Office expenses     303,586       98,961       120,103       522,650  
Communications expenses     47,878       130,046       79,288       257,212  
Insurance expense     -       5,401       135,386       140,787  
Other expenses     38,788       14,715       162,894       216,397  
Total   $ 3,251,547     $ 3,033,360     $ 4,344,866     $ 10,629,773  


Variance                                
                                 
Category   North
American
Transaction
Solutions
    International
Transaction
Solutions
    Corporate
Expenses

&
Eliminations
    Total  
Salaries, benefits, taxes and contractor payments   $ (539,054 )   $ (490,360 )   $ 678,040     $ (351,374 )
Professional fees     (155,283 )     (473,100 )     244,226       (384,157 )
Rent     -       (155,083 )     (41,043 )     (196,126 )
Business development     81,851       (27,436 )     11,392       65,807  
Travel expense     (180,201 )     (19,608 )     8,118       (191,691 )
Filing fees     -       -       (22,696 )     (22,696 )
Transaction (gains) losses     (742 )     135,773       (1,642 )     133,389  
Office expenses     4,007       (63,315 )     (68,106 )     (127,414 )
Communications expenses     64,632       32,398       28,187       125,217  
Insurance expense     -       (5,401 )     1,257       (4,144 )
Other expenses     (35,946 )     3,529       114,521       82,104  
Total   $ (760,736 )   $ (1,062,603 )   $ 952,254     $ (871,085 )

The total decrease of approximately $0.9 million in selling, general and administrative expenses for the year ended Dec. 31, 2018, as compared to the prior year was primarily due to the Company’s continued monitoring of operations and the labor costs necessary to maintain or increase revenues, along with the reorganization of assignments in the International Transaction Solutions segment, which resulted in a decrease of approximately $351,000. These objectives were also responsible for the decrease of approximately $384,000 in professional fees associated with operations.

Professional fees were $2,252,681 for the year ended Dec. 31, 2018, as compared to $2,636,838 for the year ended Dec. 31, 2017, representing a decrease of $384,157 as follows:

Twelve months ended December 31, 2018                                
                                 
Professional Fees   North
American
Transaction
Solutions
    International
Transaction
Solutions
    Corporate
Expenses

&
Eliminations
    Total  
General Legal   $ 12,553     $ 39,503     $ 206,684     $ 258,740  
SEC Compliance Legal Fees     -       -       152,168       152,168  
Accounting and Auditing     -       7,815       390,000       397,815  
Tax Compliance and Planning     -       -       25,500       25,500  
Consulting     337,547       298,766       782,145       1,418,458  
Total   $ 350,100     $ 346,084     $ 1,556,497     $ 2,252,681  


Twelve months ended December 31, 2017                                
                                 
Professional Fees   North
American

Transaction
Solutions
    International
Transaction
Solutions
    Corporate
Expenses

&
Eliminations
    Total  
General Legal   $ 33,480     $ 38,386     $ 80,724     $ 152,590  
SEC Compliance Legal Fees     -       -       275,112       275,112  
Accounting and Auditing     -       15,433       412,943       428,376  
Tax Compliance and Planning     -       -       55,400       55,400  
Consulting     471,903       765,365       488,092       1,725,360  
Total   $ 505,383     $ 819,184     $ 1,312,271     $ 2,636,838  


Variance                                
                                 
Professional Fees   North
American

Transaction
Solutions
    International
Transaction
Solutions
    Corporate
Expenses

&
Eliminations
    Increase /
(Decrease)
 
General Legal   $ (20,927 )   $ 1,117     $ 125,960     $ 106,150  
SEC Compliance Legal Fees     -       -       (122,944 )     (122,944 )
Accounting and Auditing     -       (7,618 )     (22,943 )     (30,561 )
Tax Compliance and Planning     -       -       (29,900 )     (29,900 )
Consulting     (134,356 )     (466,599 )     294,053       (306,902 )
Total   $ (155,283 )   $ (473,100 )   $ 244,226     $ (384,157 )

Non-cash compensation expense was $142,000 for the year ended Dec. 31, 2018, as compared to approximately $2.9 million for the year ended Dec. 31, 2017. A summary of 2018 and 2017 non-cash compensation activity follows:

2018 Non-Cash Compensation Activity:

            # of Shares     # of Options  
    Amount     Issued     Issued  
Board of Directors & Employee stock and Options   $ 142,017       9,919       -  
Stock issued for consulting     -       -       -  
Stock issued for acquisitions     -       -       -  
Total for 2018   $ 142,017       9,919       -  

2017 Non-Cash Compensation Activity:

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

Bad Debt Expense:

We reflected a bad debt expense on the accompanying consolidated statements of operations, which represents uncollected fees of approximately $2.1 million for the year ended Dec. 31, 2018, compared to bad debt expense representing uncollected fees of approximately $1.3 million for the year ended Dec. 31, 2017. The increase of approximately $800,000 from the prior year primarily resulted from an increase of approximately 15.6% in gross revenues from our North American Transaction Solutions segment, which in the normal course of business resulted in an increase in net ACH rejects and uncollectible non-processing fees. For the year ended Dec. 31, 2018, total gross ACH rejects equaled approximately $4 million, of which $1.9 million was subsequently collected. We were able to pass through to independent sales organizations (“ISO’s), via a reduction in commissions, $949,000 from the total gross ACH rejects.

For the year ended Dec. 31, 2017, total gross ACH rejects equaled approximately $3.7 million, of which $2.4 million was subsequently collected. We were able to pass through to independent sales organizations, via a reduction in commissions, $603,000 from the total gross ACH rejects. 

During the year ended Dec. 31, 2018, approximately $300,000 of the $4 million in gross ACH rejects was attributable to merchant processing losses, while the remaining $3.7 million was related to non- processing fees billed to merchants.  Approximately $200,000 of the merchant processing losses was passed on to ISOs.   This resulted in net processing losses of $100,000 or .004% of total volume. 

During the year ended Dec. 31, 2017, approximately $400,000 of the $3.7 million in gross ACH rejects is attributable to merchant processing losses, while the remaining $3.3 million was related to non- processing fees billed to merchants.  Approximately $323,000 of merchant processing losses were passed on to ISOs.   This resulted in net processing losses of $101,000 or 0.004% of total volume.

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios in connection with residual buyout arrangements, depreciation expense on equipment, client acquisition costs, capitalized software expenses, trademarks, domain names and employee non-compete agreements. Depreciation and amortization expense was approximately $2.5 million for the years ended Dec. 31, 2018, and Dec. 31, 2017. 

Interest expense was approximately $847,000 million for the year ended Dec. 31, 2018, as compared to approximately $1.2 million for the year ended Dec. 31, 2017, representing a decrease of approximately $340,000, primarily due to payoffs of the MBF and RBL notes in the normal course of business.

Funding Source   Twelve months
ended

December 31,
2018
    Twelve months
ended

December 31,
2017
    Increase /
(Decrease)
 
MBF Notes   $ 10,359     $ 76,591     $ (66,232 )
RBL Notes     597,440       772,777       (175,337 )
PPS Note     169,501       168,233       1,268  
Other     69,879       172,021       (102,142 )
Total   $ 847,179     $ 1,189,622     $ (342,443 )

Other income for the year ended Dec. 31, 2018, of approximately $792,000 consisted primarily of a gain recorded on the transfer of Digital Provider's net assets to PayOnline (approximately $198,000), net gain in connection with the review and analysis of accounts receivable and accounts payable aging (approximately $856,000), gain on the write-off of TOT Group Russia (approximately $312,000), gain on the reversal of stock price guarantees in connection with the purchase of PayOnline that expired (approximately $313,000), partially offset by costs associated with common stock purchase agreement with ESOUSA Holdings, LLC (approximately $(227,000)), and approximately ($332,000) in miscellaneous other expenses.

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

The net loss attributable to non-controlling interests amounted to approximately $87,000 and $110,000 for the years ended Dec. 31, 2018, and Dec. 31, 2017, respectively. The loss was attributed to our North American Transaction Solutions segment. representing its 20% non-controlling interest in Aptito. The non-controlling interest reflects the results of operations of subsidiaries that are allocable to minority equity owners.

Reconciliation of Non-GAAP Financial Measures and Regulation G Disclosure

To supplement its consolidated financial statements presented in accordance with United States generally accepted accounting principles ("GAAP"), the Company provides additional measures of its operating results by disclosing its adjusted net loss attributable to Net Element, Inc. stockholders. Adjusted net loss attributable to Net Element, Inc. stockholders is calculated as net loss attributable to Net Element, Inc. stockholders excluding non-cash share-based compensation and other non-operating, non-recurring items. Net Element discloses this amount on an aggregate and per share basis. These measures meet the definition of non-GAAP financial measures. The Company believes that application of these non-GAAP financial measures is appropriate to enhance the understanding by the Company’s investors of its historical performance through use of a metric that seeks to normalize period-to-period earnings.

This press release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Pursuant to Regulation G, a reconciliation of these non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP for the 12 months ended Dec. 31, 2018, and Dec. 31, 2017, is presented in the following Non-GAAP Financial Measures Table.

Twelve Months Ended December 31, 2018   GAAP     Share-based
Compensation
    Impairment
Charge
Relating to
Goodwill
    Total  
Net (loss) income attributable to Net Element Inc. stockholders   $ (4,936,182   $ 142,017     $ 636,000     $ (4,794,165 )
Basic and diluted loss per share   $ (1.28 )   0.04     $ 0.16     $ (1.08 )
Basic and diluted shares used in computing earnings per share     3,868,324                       3,868,324  


Twelve Months Ended December 31, 2017   GAAP     Share-based
Compensation
    Impairment
Charge
Relating to
Goodwill
    Total  
Net (loss) income attributable to Net Element Inc. stockholders   $ (9,913,485   $ 2,940,424     $ -     $ (6,973,061 )
Basic and diluted loss per share   $ (5.04 )   1.49     $ -     $ (3.55 )
Basic and diluted shares used in computing earnings per share     1,967,676                       1,967,676  

Additional information regarding Net Element’s results for its year ended Dec. 31, 2018, may be found in Net Element’s annual report on Form 10-K, which was filed with the Security and Exchange Commission (SEC) on April 1, 2019, and may be obtained from the SEC’s Internet website at http://www.sec.gov.

About Net Element
Net Element, Inc. (NASDAQ: NETE) operates a payments-as-a-service transactional and value-added services platform for small to medium enterprise ("SME") in the U.S. and selected emerging markets. In the U.S., the Company aims to grow transactional revenue by innovating SME productivity services using blockchain technology solutions and Aptito, our cloud-based, restaurant and retail point-of-sale solution. Internationally, Net Element's strategy is to leverage its omni-channel platform to deliver flexible offerings to emerging markets with diverse banking, regulatory and demographic conditions. Net Element was ranked as one of the fastest growing companies in North America on Deloitte's 2017 Technology Fast 500™.  In 2017 we were recognized by South Florida Business Journal as one of 2016's fastest-growing technology companies. Further information is available at www.NetElement.com.

Forward-Looking Statements
Securities Exchange Act of 1934, as amended. Any statements contained in this press release that are not statements of historical fact may be deemed forward-looking statements. Words such as "continue," "will," "may," "could," "should," "expect," "expected," "plans," "intend," "anticipate," "believe," "estimate," "predict," "potential," and similar expressions are intended to identify such forward-looking statements. All forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, many of which are generally outside the control of Net Element and are difficult to predict. Examples of such risks and uncertainties include, but are not limited to the predictability and resilience of the Company’s business model and whether the Company will be successful in achieving further growth and financial improvement. Additional examples of such risks and uncertainties include, but are not limited to (i) Net Element's ability (or inability) to obtain additional financing in sufficient amounts or on acceptable terms when needed; (ii) Net Element's ability to maintain existing, and secure additional, contracts with users of its payment processing services; (iii) Net Element's ability to successfully expand in existing markets and enter new markets; (iv) Net Element's ability to successfully manage and integrate any acquisitions of businesses, solutions or technologies; (v) unanticipated operating costs, transaction costs and actual or contingent liabilities; (vi) the ability to attract and retain qualified employees and key personnel; (vii) adverse effects of increased competition on Net Element's business; (viii) changes in government licensing and regulation that may adversely affect Net Element's business; (ix) the risk that changes in consumer behavior could adversely affect Net Element's business; (x) Net Element's ability to protect its intellectual property; (xi) local, industry and general business and economic conditions; and (xii) 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, quarterly reports on Form 10-Q and current reports on Form 8-K filed by Net Element with the Securities and Exchange Commission. Net Element anticipates that subsequent events and developments may cause its plans, intentions and expectations to change. Net Element assumes no obligation, and it specifically disclaims any intention or obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as expressly required by law.


NET ELEMENT, INC. 
CONSOLIDATED BALANCE SHEETS

    December 31, 2018     December 31, 2017  
ASSETS                
Current assets:                
Cash   $ 1,645,481     $ 11,285,669  
Accounts receivable, net     6,290,412       5,472,856  
Prepaid expenses and other assets     1,749,221       2,282,614  
Total current assets, net     9,685,114       19,041,139  
Equipment, net     25,335       58,268  
Intangible assets, net     6,441,743       3,127,760  
Goodwill     9,007,752       9,643,752  
Other long-term assets     604,070       460,511  
Total assets   $ 25,764,014     $ 32,331,430  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
Accounts payable   $ 6,368,444     $ 6,785,459  
Accrued expenses     2,535,947       3,212,438  
Deferred revenue     1,495,849       1,712,591  
Notes payable (current portion)     433,448       2,493,973  
Due to related party     387,814       461,992  
Total current liabilities     11,221,502       14,666,453  
Notes payable (net of current portion)     5,946,046       4,521,449  
Total liabilities     17,167,548       19,187,902  
                 
STOCKHOLDERS' EQUITY                
Series A Convertible Preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at December 31, 2018 and December 31, 2017)     -       -  
Common stock ($.0001 par value, 100,000,000 shares authorized and 3,863,019 and 3,853,100 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively)     386       385  
Paid in capital     183,246,232       183,119,222  
Accumulated other comprehensive loss     (2,332,163 )     (2,530,238 )
Accumulated deficit     (172,292,252 )     (167,356,070 )
Stock subscriptions receivable     -       (50,585 )
Non-controlling interest     (125,737 )     (39,186 )
Total stockholders' equity     8,596,466       13,143,528  
Total liabilities and stockholders' equity   $ 25,764,014     $ 32,331,430  



NET ELEMENT, INC. 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

    Twelve Months Ended
December 31,
 
    2018     2017  
Net revenues                
Service fees   $ 65,786,817     $ 58,723,928  
Branded content     -       1,340,896  
Total Revenues     65,786,817       60,064,824  
                 
Costs and expenses:                
Cost of service fees     55,617,171       49,934,371  
Cost of branded content     -       1,302,841  
Selling, general and administrative     9,758,688       10,629,773  
Non-cash compensation     142,017       2,940,424  
Bad debt expense     2,145,425       1,320,848  
Depreciation and amortization     2,454,637       2,533,985  
Total costs and operating expenses     70,117,938       68,662,242  
Loss from operations     (4,331,121 )     (8,597,418 )
Interest expense     (847,179 )     (1,189,622 )
Other income (expense)     791,567       (236,009 )
Impairment charge relating to goodwill     (636,000 )     -  
Net loss from continuing operations before income taxes     (5,022,733 )     (10,023,049 )
Income taxes     -       -  
Net loss from continuing operations     (5,022,733 )     (10,023,049 )
Net loss attributable to the non-controlling interest     86,551       109,564  
Net loss attributable to Net Element, Inc. stockholders     (4,936,182 )     (9,913,485 )
Foreign currency translation     298,075       (43,623 )
Comprehensive loss attributable to common stockholders   $ (4,638,107 )   $ (9,957,108 )
                 
Loss per share - basic and diluted   $ (1.28 )   $ (5.04 )
                 
Weighted average number of common shares outstanding - basic and diluted     3,868,324       1,967,676  



NET ELEMENT, INC. 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

    Common Stock     Paid in     Stock     Comprehensive     Non-controlling     Accumulated     Equity (Deficiency)  
    Shares     Amount     Capital     Subscription     Income     interest     Deficit     in Assets  
Balance December 31, 2016     1,535,350     $ 154.00     $ 163,920,066     $ -     $ (2,486,616 )   $ 70,378     $ (157,442,585 )   $ 4,061,397  
Shares issued in connection with reverse stock split     3,117       0.31       1       -       -       -       -       1  
Share based compensation     242,324       24.00       2,850,155       -       -       -       -       2,850,179  
Shares issued for acquisitions     13,082       1.00       105,965       -       -       -       -       105,966  
Shares issued to settle merchant liabilities     30,759       3.00       252,220       -       -       -       -       252,223  
Shares issued for consulting services     19,896       2.00       228,416       (50,585 )     -       -       -       177,833  
Shares issued in connection with debt restructuring     127,406       13.00       758,181       -       -       -       -       758,194  
Shares issued under ESOUSA/Cobblestone agreements     1,881,165       188.00       15,004,217       -       -       -       -       15,004,405  
Net loss     -       -       -       -       -       (109,564 )     (9,913,485 )     (10,023,049 )
Comprehensive loss - foreign currency translation     -       -       -       -       (43,622 )     -       -       (43,622 )
Balance December 31, 2017     3,853,100     $ 385.31     $ 183,119,222     $ (50,585 )   $ (2,530,238 )   $ (39,186 )   $ (167,356,070 )   $ 13,143,528  
Share based compensation     9,919       0.99       127,010       -       -       -       -       127,011  
Shares issued for consulting services     -       -       -       50,585       -       -       -       50,585  
Net loss     -       -       -       -       -       (86,551 )     (4,936,182 )     (5,022,733 )
Comprehensive loss - foreign currency translation     -       -       -       -       298,075       -       -       298,075  
Balance December 31, 2018     3,863,019     $ 386.30     $ 183,246,232     $ -     $ (2,232,163 )   $ (125,737 )   $ (172,292,252 )   $ 8,596,466  



NET ELEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

    Twelve Months Ended
December 31,
 
    2018     2017  
Cash flows from operating activities                
Net loss attributable to Net Element, Inc. stockholders   $ (4,936,182 )   $ (9,913,485 )
Adjustments to reconcile net loss to net cash used in operating activities                
Non-controlling interest     (86,551 )     (109,564 )
Share based compensation     142,017       2,940,424  
Deferred revenue     (216,742 )     356,619  
Net Non-cash items in other income     (1,202,201 )        
Impairment for Goodwill     636,000          
Provision for bad debt     16,238          
Depreciation and amortization     2,454,637       2,533,985  
Non-cash interest     73,442       114,802  
Changes in assets and liabilities                
Accounts receivable     (1,503,755 )     3,002,425  
Prepaid expenses and other assets     384,403       (1,047,811 )
Accounts payable and accrued expenses     971,202       (2,943,154 )
Net cash used in operating activities     (3,267,492 )     (5,065,759 )
                 
Cash flows from investing activities                
                 
Purchase of portfolios and client acquisition costs     (5,413,264 )     (1,885,098 )
Receipt of excess deposits     -       149,826  
Purchase of equipment and changes in other assets     (114,931 )     (103,341 )
Net cash used in investing activities     (5,528,195 )     (1,838,613 )
                 
Cash flows from financing activities                
Proceeds from sale of common stock     -       14,884,435  
Proceeds from indebtedness     2,131,500       3,678,824  
Repayment of indebtedness     (2,785,134 )     (998,780 )
Related party advances     -       -  
Contributed capital     -       -  
Net cash (used in) provided by financing activities     (653,634 )     17,564,479  
                 
Effect of exchange rate changes on cash     (34,399 )     (20,899 )
Net (decrease) increase in cash     (9,483,720 )     10,639,208  
                 
Cash and restricted cash at beginning of year     11,733,271       1,094,063  
Cash and restricted cash at end of year   $ 2,249,551     $ 11,733,271  
                 
Supplemental disclosure of cash flow information                
Cash paid during the period for:                
Interest   $ 773,737     $ 1,074,820  
Taxes   $ 261,871     $ 86,942  
Shares issued for redemption of indebtedness   $ -     $ 379,874  
Shares issued in settlement of related party debt   $ -     $ 378,253  

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

Corporate Communications:
NetworkWire (NW)
New York, New York
www.NetworkNewsWire.com
212.418.1217 Office
Editor@NetworkWire.com

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Source: Net Element, Inc.

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