Net Element Reports Second Quarter 2017 Results

MIAMI, FL--(Marketwired - Aug 14, 2017) - Net Element, Inc. (NASDAQ: NETE) ("Net Element" or the "Company"), a global financial technology and value-added solutions group that supports electronic payments acceptance in an omni-channel environment spanning across point-of-sale (POS), e-commerce and mobile devices, today reported financial results for the second quarter ended June 30, 2017 and provided an update on recent strategic and operational initiatives.

For the second quarter ended June 30, 2017, net revenues increased 18% to $16.1 million as compared to $13.7 million in the prior year. The increase in net revenues is primarily due to growth in the Company's North America Transaction Solutions and Online Solutions Segments:

• North America Transaction Solutions Segment: Continued organic growth of SMB merchants in this segment with emphasis on value-added offerings. Revenues for this segment were $13.9 million, a 31% increase over the prior year.
  
  
• Online Solutions Segment: Revenues for this segment were $2 million, a 33% increase over the prior year.
  
  
• Mobile Solutions Segment: As a result of a change in business model previously reported, revenues for this segment were $0.5 million vs $1.8 million, a 71% decrease over the prior year. We expect to maintain a smaller staff at Digital Provider and we have canceled our existing office lease and will consolidate Digital Provider's physical operations into PayOnline. We also are looking to develop a new business plan for Digital Provider that includes, but is not limited to, a model that requires less working capital than the current pre-pay model and provides for diversified, scalable business.
  
  
• Reduction of Corporate Overhead: The redundancies of our corporate staff at Net Element Russia were eliminated with responsibilities being absorbed by existing PayOnline staff. In addition, Net Element Russia's Moscow corporate office and apartment leases were cancelled with the consolidation into PayOnline.
  
  

Recent Highlights:

• Centralized international operations;
  
  
• Launched PayOnline platform, which supports electronic commerce in the United States;
  
  
• Launched support for iDeal, the leading payment system in The Netherlands;
  
  
• Expanded payment module to include InSales, a popular omni-channel commerce and CMS platform;
  
  
• Partnered with Payvision in Europe, expands to access to global currencies;
  
  
• Launched payment acceptance for international mobile network operator;
  
  
• Launched "Online Cashier" fiscal cloud-based point of sale solution for Russian merchants;
  
  
• Launched Apple Pay Support in Russia;
  
  
• Launched "Instant Credit" for online merchants
  
  

"We are pleased with our continued growth. Our results are a reflection of our ability to deliver growth," commented Oleg Firer, CEO of Net Element. "We are excited about our strategic initiatives for the remainder of the year as we continue to streamline international operations and reduce operating expenses while managing the strong U.S. growth and expansion."

Conference Call:
The Company will host a conference call to discuss Second Quarter 2017 financial results and business highlights on August 15, 2017 at 8:30 a.m. 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 67569957. It is recommended that participants dial in approximately 10 minutes prior to the start of the 8:30 a.m. Eastern call.

The call will also be webcast live from http://edge.media-server.com/m/p/kaa6hdp3. Following completion of the call, a recorded replay of the webcast will be available on the www.netelement.com/en/ir website.

Results of Operations for the Three Months Ended June 30, 2017 Compared to the Three Months Ended June 30, 2016

We reported a net loss attributable to stockholders of $1,640,340 or $0.09 per share, for the three months ended June 30, 2017 as compared to a net loss attributable to stockholders of $5,346,448, or $0.46 per share, for the three months ended June 30, 2016. This resulted in a decrease in net loss attributable to stockholders of $3,706,108 primarily due to an increase in revenues, decreases in loss from stock value guarantee, non-cash compensation and interest, partially offset by increased general and administrative expenses.

Eliminating the effects of non-cash compensation and a 2016 stock value guarantee, we reported an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $1,511,803 or $0.08 per share for the three months ended June 30, 2017 as compared to an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $1,168,998 or $0.10 per share for the three months ended June 30, 2016.

Net revenues consist primarily of payment processing fees. Net revenues were $16,141,041 for the three months ended June 30, 2017 as compared to $13,692,848 for the three months ended June 30, 2016. The increase in net revenue is primarily due to organic growth of merchants in our North American Transaction Solutions segment which resulted in an increase to North American Transaction Solutions segment revenue of $3,208,850 (or 31% increase) for the three months ended June 30, 2017 versus the three months ended June 30, 2016. Increases in our North American Transaction Solutions segment revenue were primarily due to continued growth of merchants with emphasis on value-added offerings. Our Online Solutions segment revenue increased $500,653 (or 33%), from $1,509,208 for the three months ended June 30, 2016 to $2,009,861 for the three months ended June 30, 2017 as we continue to board additional merchants. These improvements were tempered by a $1,261,310 (or 71%) decrease in our Mobile Solutions segment, as we continue to experience increased competition, decreased margins, and liquidity constraints arising from capital needed to prepay for content delivered through our platform.

The following table sets forth our sources of revenues, cost of revenues and gross margins for the three months ended June 30, 2017 and 2016:

Gross Margin Analysis
Source of Revenues			Three Months Ended June 30, 2017			Mix			Three Months Ended June 30, 2016			Mix			Increase / (Decrease)
North American Transaction Solutions			$	13,612,782		84	%		$	10,403,932		76	%		$	3,208,850
Mobile Solutions				518,398		3	%			1,779,708		13	%			(1,261,310	)
Online Solutions				2,009,861		13	%			1,509,208		11	%			500,653
	Total		$	16,141,041		100	%		$	13,692,848		100	%		$	2,448,193
Cost of Revenues			Three Months Ended June 30, 2017			% of revenues			Three Months Ended June 30, 2016			% of revenues			Increase / (Decrease)
North American Transaction Solutions			$	11,472,508		84	%		$	8,967,784		86	%		$	2,504,724
Mobile Solutions				502,742		97	%			1,566,618		88	%			(1,063,876	)
Online Solutions				1,343,142		67	%			950,391		63	%			392,751
	Total		$	13,318,392		83	%		$	11,484,793		84	%		$	1,833,599
Gross Margin			Three Months Ended June 30, 2017			% of revenues			Three Months Ended June 30, 2016			% of revenues			Increase / (Decrease)
North American Transaction Solutions			$	2,140,274		16	%		$	1,436,148		14	%		$	704,126
Mobile Solutions				15,656		3	%			213,090		12	%			(197,434	)
Online Solutions				666,719		33	%			558,817		37	%			107,902
	Total		$	2,822,649		17	%		$	2,208,055		16	%		$	614,594

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 three months ended June 30, 2017 were $13,318,392 as compared to $11,484,793 for the three months ended June 30, 2016. The $1,833,599 increase in cost of revenues was primarily due to a $2,504,724 increase in our North American Transaction Solutions segment due to an increase in sales volume. There was also a $392,751 increase in cost of revenues resulting from our Online Solutions segment operations also primarily due the costs associated with boarding additional merchants. This was offset by a $1,063,876 decrease in our Mobile Solutions segment cost of revenues, which resulted from the decrease in revenues for our Mobile Solutions segment for the three months ended June 30, 2017.

Gross Margin or the three months ended June 30, 2017 was $2,822,649, or 17% of net revenue, as compared to $2,208,055, or 16% of net revenue, for the three months ended June 30, 2016. The $614,594 increase in gross margin was primarily due to increased volume of processing in North American Transaction Solutions offset by a decrease of $197,434 in Mobile Solutions margin caused by a decrease in business.

Total operating expenses were $4,166,596 for the three months ended June 30, 2017, which consisted of general and administrative expenses of $2,599,178, non-cash compensation expenses of $128,537, provision for bad debts of $865,863, and depreciation and amortization of $573,018. Total operating expenses were $4,983,753 for the three months ended June 30, 2016, which consisted of general and administrative expenses of $1,999,391, non-cash compensation expenses of $2,014,589, provision for bad debts of $125,238, and depreciation and amortization of $844,535.

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

General and administrative expenses for the three months ended June 30, 2017 and 2016 consisted of operating expenses not otherwise delineated in our Condensed Consolidated Statements of Operations and Comprehensive Loss and include salaries and benefits, professional fees, rent, travel expense, filing fees, transaction gains, office expenses, communication expense, insurance expense, and other expenses required to run our business, as follows:

Three Months Ended June 30, 2017
Category			North America Transaction Solutions				Mobile Solutions				Online Solutions				Corporate Expenses & Eliminations				Total
Salaries, benefits, taxes and contractor payments			$	464,134			$	126,516			$	234,950			$	547,219			$	1,372,819
Professional fees				82,888				19,768				258,535				299,536				660,727
Rent				-				12,121				40,624				83,334				136,079
Business development				986				14				8,768				915				10,683
Travel expense				75,646				1,729				4,165				38,391				119,931
Filing fees				-				-				-				8,508				8,508
Transaction (gains) losses				742				32,228				(9,508	)			1,303				24,765
Office expenses				45,956				3,313				24,214				16,058				89,541
Communications expenses				9,864				1,497				29,484				19,743				60,588
Insurance expense				-				-				-				32,235				32,235
Other expenses				1,264				-				1,125				80,913				83,302
	Total		$	681,480			$	197,186			$	592,357			$	1,128,155			$	2,599,178
Three Months Ended June 30, 2016
Category			North America Transaction Solutions				Mobile Solutions				Online Solutions				Corporate Expenses & Eliminations				Total
Salaries, benefits, taxes and contractor payments			$	415,135			$	108,772			$	142,663			$	510,482			$	1,177,052
Professional fees				89,268				1,243				217,513				369,299				677,323
Rent				-				832				36,282				97,949				135,063
Business development				12,186				-				40,118				4,056				56,360
Travel expense				49,784				3,220				7,048				29,017				89,069
Filing fees				-				-				-				42,896				42,896
Transaction (gains) losses				-				(328,350	)			(23,658	)			18,174				(333,834	)
Office expenses				27,148				2,127				14,774				22,723				66,772
Communications expenses				16,817				484				11,586				26,175				55,062
Insurance expense				-				-				-				2,658				2,658
Other expenses				270				14				192				30,494				30,970
	Total		$	610,608			$	(211,658	)		$	446,518			$	1,153,923			$	1,999,391
Variance
Category			North America Transaction Solutions				Mobile Solutions				Online Solutions				Corporate Expenses & Eliminations				Total
Salaries, benefits, taxes and contractor payments			$	48,999			$	17,744			$	92,287			$	36,737			$	195,767
Professional fees				(6,380	)			18,525				41,022				(69,763	)			(16,596	)
Rent				-				11,289				4,342				(14,615	)			1,016
Business development				(11,200	)			14				(31,350	)			(3,141	)			(45,677	)
Travel expense				25,862				(1,491	)			(2,883	)			9,374				30,862
Filing fees				-				-				-				(34,388	)			(34,388	)
Transaction (gains) losses				742				360,578				14,150				(16,871	)			358,599
Office expenses				18,808				1,186				9,440				(6,665	)			22,769
Communications expenses				(6,953	)			1,013				17,898				(6,432	)			5,526
Insurance expense				-				-				-				29,577				29,577
Other expenses				994				(14	)			933				50,419				52,332
	Total		$	70,872			$	408,844			$	145,839			$	(25,768	)		$	599,787

Salaries, benefits, taxes and contractor payments were $1,372,819 for the three months ended June 30, 2017 as compared to $1,177,052 for the three months ended June 30, 2016.

Segment		Salaries and benefits for the three months ended June 30, 2017			Salaries and benefits for the three months ended June 30, 2016			Increase / (Decrease)
North America Transaction Solutions		$	464,134		$	415,135		$	48,999
Mobile Solutions			126,516			108,772			17,744
Online Solutions			234,950			142,663			92,287
Corporate Expenses & Eliminations			547,219			510,482			36,737
Total		$	1,372,819		$	1,177,052		$	195,767

The increase in salaries of $195,767 was due to the North American Transaction Solutions segment salaries increasing $48,999 due to an increase in headcount and sales incentives for key employees. In addition, there were increases of $92,287 and $17,744, respectively, in our Online Solutions and Mobile Solutions segments, which were primarily due to salary increases.

Professional fees were $660,727 for the three months ended June 30, 2017 as compared to $677,323 for the three months ended June 30, 2016.

Three Months Ended June 30, 2017
Professional Fees		North America Transaction Solutions				Mobile Solutions				Online Solutions			Corporate Expenses & Eliminations				Total
General Legal		$	(20,000	)		$	-			$	3,245		$	24,702			$	7,947
SEC Compliance Legal Fees			-				-				-			79,035				79,035
Accounting and Auditing			-				-				5,215			97,500				102,715
Tax Compliance and Planning			-				-				-			500				500
Consulting			102,888				19,768				250,075			97,799				470,530
Total		$	82,888			$	19,768			$	258,535		$	299,536			$	660,727
Three Months Ended June 30, 2016
Professional Fees		North America Transaction Solutions				Mobile Solutions				Online Solutions			Corporate Expenses & Eliminations				Total
General Legal		$	5,226			$	12			$	2,507		$	43,949			$	51,694
SEC Compliance Legal Fees			-				-				-			43,750				43,750
Accounting and Auditing			-				-				-			103,055				103,055
Tax Compliance and Planning			-				-				-			11,000				11,000
Consulting			84,042				1,231				215,006			167,545				467,824
Total		$	89,268			$	1,243			$	217,513		$	369,299			$	677,323
Variance
Professional Fees		North America Transaction Solutions				Mobile Solutions				Online Solutions			Corporate Expenses & Eliminations				Increase / (Decrease)
General Legal		$	(25,226	)		$	(12	)		$	738		$	(19,247	)		$	(43,747	)
SEC Compliance Legal Fees			-				-				-			35,285				35,285
Accounting and Auditing			-				-				5,215			(5,555	)			(340	)
Tax Compliance and Planning			-				-				-			(10,500	)			(10,500	)
Consulting			18,846				18,537				35,069			(69,746	)			2,706
Total		$	(6,380	)		$	18,525			$	41,022		$	(69,763	)		$	(16,596	)

Professional fees decreased by $16,596 mainly due to a decrease in general legal fees offset by an increase in SEC compliance fees.

Non-cash compensation expense from share-based compensation was $128,537 for the three months ended June 30, 2017, compared to $2,014,589 for the three months ended June 30, 2016. The majority of these expenses were for employee and consultant equity incentives for both periods.

We recorded bad debt expense of $865,863 for the three months ended June 30, 2017 as compared to $125,238 for the three months ended June 30, 2016. For the three months ended June 30, 2017, we recorded a loss which was primarily comprised of $671,580 in ACH rejects and a $194,283 provision from our Russian operations. Of the $671,580 of gross ACH rejects, $347,235 were passed through to independent sales organizations via a reduction in commissions.

For the three months ended June 30, 2016, we recorded a loss which was primarily comprised of $145,588 in ACH rejects offset by a $20,350 recovery from our Russian operations. Of the $145,588 of ACH rejects, $93,812 were passed through to independent sales organizations via a reduction in commissions.

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs, capitalized software expenses, trademarks, domain names and employee non-compete agreements. Depreciation and amortization expense was $573,018 for the three months ended June 30, 2017 as compared to $844,535 for the three months ended June 30, 2016. The decrease was due to the full amortization of certain software and merchant portfolio assets during 2016.

Interest expense was $322,052 for the three months ended June 30, 2017 as compared to $438,976 for three months ended June 30, 2016, representing a decrease of $116,924 as follows:

Funding Source		Three months ended June 30, 2017			Three months ended June 30, 2016			Increase / (Decrease)
MBF Notes		$	15,516		$	28,450		$	(12,934	)
RBL Notes			220,128			110,342			109,786
Priority Payments Note			24,747			-			24,747
Crede CG III, LTD			-			297,435			(297,435	)
Other			61,661			2,749			58,912
Total		$	322,052		$	438,976		$	(116,924	)

Other interest expense for the three months ended June 30, 2017 consisted primarily of $37,245 from the financing for the PayOnline Acquisition stock price guarantee and $10,443 resulting from the promissory note entered into on March 1, 2017 with Star Capital Management, LLC. (See Note 12. Related Party Transactions). Additionally, Crede charges in 2016 for imputed interest did not occur during 2017.

The net income attributable to non-controlling interests amounted to $75,081 for three months ended June 30, 2017 as compared to $38,792 for the three months ended June 30, 2016.

Results of Operations for the Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016

We reported a net loss attributable to stockholders of $4,127,837, or $0.24 per share, for the six months ended June 30, 2017 as compared to a net loss attributable to stockholders of $7,194,167, or $0.63 per share, for the six months ended June 30, 2016. This resulted in a decrease in net loss attributable to stockholders of $3,066,330 primarily due and increase in revenues and a decrease in the loss from stock value guarantee and a decrease in noncash compensation expense.

Eliminating the effects of non-cash compensation in both years and a 2016 stock value guarantee, we reported an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $3,402,896 or $0.19 per share for the six months ended June 30, 2017 as compared to an adjusted non-GAAP, Net loss attributable to Net Element, Inc. stockholders of $2,655,733 or $0.23 per share for the three months ended June 30, 2016.

Net revenues consist primarily of payment processing fees. Net revenues were $29,702,982 for the six months ended June 30, 2017 as compared to $24,953,907 for the six months ended June 30, 2016. The increase in net revenue is primarily due to organic growth of merchants in our North American Transaction Solutions segment which resulted in an increase to North American Transaction Solutions segment revenue of $6,321,120 (or 35% increase) for the six months ended June 30, 2017 versus the six months ended June 30, 2016. Our Online Solutions segment revenue increased $825,775 (or 28%), from $2,924,115 for the six months ended June 30, 2016 to $3,749,890 for the six months ended June 30, 2017, primarily due to the boarding of additional merchants. The increases in North American Transaction Solutions and Online Solutions segments were offset by a $2,397,820 (or 64%) decrease in our Mobile Solutions segment, as we continue to experience increased competition, decreased margins, and liquidity constraints arising from capital needed to prepay for content delivered through our platform.

The following table sets forth our sources of revenues, cost of revenues and gross margins for the six months ended June 30, 2017 and 2016:

Gross Margin Analysis
Source of Revenues			Six Months Ended June 30, 2017			Mix			Six Months Ended June 30, 2016			Mix			Increase / (Decrease)
North American Transaction Solutions			$	24,577,701		83	%		$	18,256,581		73	%		$	6,321,120
Mobile Solutions				1,375,391		5	%			3,773,211		15	%			(2,397,820	)
Online Solutions				3,749,890		12	%			2,924,115		12	%			825,775
	Total		$	29,702,982		100	%		$	24,953,907		100	%		$	4,749,075
Cost of Revenues			Six Months Ended June 30, 2017			% of revenues			Six Months Ended June 30, 2016			% of revenues			Increase / (Decrease)
North American Transaction Solutions			$	20,933,958		85	%		$	15,620,817		86	%		$	5,313,141
Mobile Solutions				1,319,704		96	%			3,381,206		90	%			(2,061,502	)
Online Solutions				2,524,722		67	%			1,868,011		64	%			656,711
	Total		$	24,778,384		83	%		$	20,870,034		84	%		$	3,908,350
Gross Margin			Six Months Ended June 30, 2017			% of revenues			Six Months Ended June 30, 2016			% of revenues			Increase / (Decrease)
North American Transaction Solutions			$	3,643,743		15	%		$	2,635,764		14	%		$	1,007,979
Mobile Solutions				55,687		4	%			392,005		10	%			(336,318	)
Online Solutions				1,225,168		33	%			1,056,104		36	%			169,064
	Total		$	4,924,598		17	%		$	4,083,873		16	%		$	840,725

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 six months ended June 30, 2017 were $24,778,384 as compared to $20,870,034 for the six months ended June 30, 2016. The increase in cost of revenues was primarily due to a $5,313,141 increase in our North American Transaction Solutions segment due to increased sales volume. There was also a $656,711 increase in cost of revenues resulting from our Online Solutions segment operations also primarily due to the boarding of more merchants. This was offset by a $2,061,502 decrease in our Mobile Solutions segment cost of revenues, which resulted from the decrease in sales for our Mobile Solutions segment for the six months ended June 30, 2017.

Gross Margin for the six months ended June 30, 2017 was $4,924,598, or 17% of net revenue, as compared to $4,083,873, or 16% of net revenue, for the six months ended June 30, 2016. The $840,725 increase in gross margin was primarily due to the increased sales volume of processing and business mix in our North American Transaction Solutions offset by a decrease of $336,318 in our Mobile Solutions margin caused from a decrease in business.

Total operating expenses were $8,531,281 for the six months ended June 30, 2017, which consisted of general and administrative expenses of $5,430,338, non-cash compensation expenses of $724,941, provision for bad debts of $1,145,621, and depreciation and amortization of $1,230,381. Total operating expenses were $8,572,829 for the six months ended June 30, 2016, which consisted of general and administrative expenses of $4,087,624, non-cash compensation expenses of $2,375,573, provision for bad debts of $376,979, and depreciation and amortization of $1,732,653.

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

General and administrative expenses for the six months ended June 30, 2017 and 2016 consisted of operating expenses not otherwise delineated in our Consolidated Statements of Operations and Comprehensive Loss and include salaries and benefits, professional fees, rent, travel expense, filing fees, transaction gains, office expenses, communication expense, insurance expense, and other expenses required to run our business, as follows:

Six Months Ended June 30, 2017
Category			North America Transaction Solutions				Mobile Solutions				Online Solutions				Corporate Expenses & Eliminations				Total
Salaries, benefits, taxes and contractor payments			$	944,750			$	250,334			$	456,705			$	1,388,739			$	3,040,528
Professional fees				250,964				44,839				483,877				554,737				1,334,417
Rent				-				27,288				80,092				181,763				289,143
Business development				2,809				977				17,788				2,496				24,070
Travel expense				112,148				6,826				5,336				90,918				215,228
Filing fees				-				-				-				14,934				14,934
Transaction (gains) losses				742				(17,096	)			(6,192	)			3,034				(19,512	)
Office expenses				98,602				6,025				41,511				91,501				237,639
Communications expenses				23,388				2,197				59,571				40,162				125,318
Insurance expense				-				-				-				76,341				76,341
Other expenses				3,213				-				3,276				85,743				92,232
	Total		$	1,436,616			$	321,390			$	1,141,964			$	2,530,368			$	5,430,338
Six Months Ended June 30, 2016
Category			North America Transaction Solutions				Mobile Solutions				Online Solutions				Corporate Expenses & Eliminations				Total
Salaries, benefits, taxes and contractor payments			$	808,581			$	235,937			$	255,436			$	1,056,044			$	2,355,998
Professional fees				222,506				2,548				301,255				675,401				1,201,710
Rent				-				2,318				68,374				200,615				271,307
Business development				20,956				-				64,791				4,648				90,395
Travel expense				91,095				7,095				9,986				37,902				146,078
Filing fees				-				-				-				59,395				59,395
Transaction (gains) losses				-				(383,813	)			39,105				25,840				(318,868	)
Office expenses				46,747				4,974				26,085				51,439				129,245
Communications expenses				46,978				1,056				15,677				49,309				113,020
Insurance expense				-				-				-				5,784				5,784
Other expenses				21,063				935				333				11,229				33,560
	Total		$	1,257,926			$	(128,950	)		$	781,042			$	2,177,606			$	4,087,624
Variance
Category			North America Transaction Solutions				Mobile Solutions				Online Solutions				Corporate Expenses & Eliminations				Total
Salaries, benefits, taxes and contractor payments			$	136,169			$	14,397			$	201,269			$	332,695			$	684,530
Professional fees				28,458				42,291				182,622				(120,664	)			132,707
Rent				-				24,970				11,718				(18,852	)			17,836
Business development				(18,147	)			977				(47,003	)			(2,152	)			(66,325	)
Travel expense				21,053				(269	)			(4,650	)			53,016				69,150
Filing fees				-				-				-				(44,461	)			(44,461	)
Transaction (gains) losses				742				366,717				(45,297	)			(22,806	)			299,356
Office expenses				51,855				1,051				15,426				40,062				108,394
Communications expenses				(23,590	)			1,141				43,894				(9,147	)			12,298
Insurance expense				-				-				-				70,557				70,557
Other expenses				(17,850	)			(935	)			2,943				74,514				58,672
	Total		$	178,690			$	450,340			$	360,922			$	352,762			$	1,342,714

Salaries, benefits, taxes and contractor payments were $3,040,528 for the six months ended June 30, 2017 as compared to $2,355,998 for the six months ended June 30, 2016.

Segment		Salaries and benefits for the six months ended June 30, 2017			Salaries and benefits for the six months ended June 30, 2016			Increase / (Decrease)
North America Transaction Solutions		$	944,750		$	808,581		$	136,169
Mobile Solutions			250,334			235,937			14,397
Online Solutions			456,705			255,436			201,269
Corporate Expenses & Eliminations			1,388,739			1,056,044			332,695
Total		$	3,040,528		$	2,355,998		$	684,530

The increase in salaries of $684,530 was due primarily to the increase of corporate expenses for a $300,000 discretionary bonus payable to our CEO and approved by the Board of directors. The bonus is payable when cash flow of the business can support the payment. Additionally, North American Transaction Solutions segment salaries increased $136,169 due to an increase in headcount and sales incentives for key employees. There was also an increase of $201,269 and $14,397, respectively in our Online Solutions and Mobile Solutions segments which were primarily due to increasing administrative payroll on PayOnline and unfavorable changes in foreign currency exchange rates.

Professional fees were $1,334,417 for the six months ended June 30, 2017 as compared to $1,201,710 for the six months ended June 30, 2016.

Six Months Ended June 30, 2017
Professional Fees		North America Transaction Solutions				Mobile Solutions				Online Solutions			Corporate Expenses & Eliminations				Total
General Legal		$	22,599			$	-			$	3,958		$	58,228			$	84,785
SEC Compliance Legal Fees			-				-				-			102,785				102,785
Accounting and Auditing			-				-				14,433			210,282				224,715
Tax Compliance and Planning			-				-				-			15,400				15,400
Consulting			228,365				44,839				465,486			168,042				906,732
Total		$	250,964			$	44,839			$	483,877		$	554,737			$	1,334,417
Six Months Ended June 30, 2016
Professional Fees		North America Transaction Solutions				Mobile Solutions				Online Solutions			Corporate Expenses & Eliminations				Total
General Legal		$	33,397			$	212			$	3,020		$	68,860			$	105,489
SEC Compliance Legal Fees			-				-				-			87,500				87,500
Accounting and Auditing			-				-				578			224,399				224,977
Tax Compliance and Planning			-				-				-			11,000				11,000
Consulting			189,109				2,336				297,657			283,642				772,744
Total		$	222,506			$	2,548			$	301,255		$	675,401			$	1,201,710
Variance
Professional Fees		North America Transaction Solutions				Mobile Solutions				Online Solutions			Corporate Expenses & Eliminations				Increase / (Decrease)
General Legal		$	(10,798	)		$	(212	)		$	938		$	(10,632	)		$	(20,704	)
SEC Compliance Legal Fees			-				-				-			15,285				15,285
Accounting and Auditing			-				-				13,855			(14,117	)			(262	)
Tax Compliance and Planning			-				-				-			4,400				4,400
Consulting			39,256				42,503				167,829			(115,600	)			133,988
Total		$	28,458			$	42,291			$	182,622		$	(120,664	)		$	132,707

Professional fees increased by $132,707 mainly due to an increase in Online Solutions segment's consulting fees of $167,828 offset by a decrease in general legal expenses.

Non-cash compensation expense from share-based compensation was $724,941 for the six months ended June 30, 2017, compared to $2,375,573 for the six months ended June 30, 2016. The majority of these expenses were for employee and consultant incentives in both periods.

We recorded bad debt expense of $1,145,621 for the six months ended June 30, 2017 as compared to $376,979 for the six months ended June 30, 2016. For the six months ended June 30, 2017, we recorded a loss which was primarily comprised of $958,523 in ACH rejects and a $196,551 provision from our Russian operations. Of the $958,523 of ACH rejects, $511,881 were passed through to independent sales organizations that board their merchants with us, offset by $9,453 of rejects obtained through collection procedures.

For the six months ended June 30, 2016, we recorded a loss which was primarily comprised of $409,276 in ACH rejects offset by a $32,397 recovery from our Russian operations. Of the $409,276 of ACH rejects, $168,333 were passed through as a reduction to commissions to independent sales organizations that board their merchants with us.

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs, capitalized software expenses, trademarks, domain names and employee non-compete agreements. Depreciation and amortization expense was $1,230,381 for the six months ended June 30, 2017 as compared to $1,732,653 for the six months ended June 30, 2016.

Interest expense was $591,740 for the six months ended June 30, 2017 as compared to $589,414 for six months ended June 30, 2016, representing an increase of $2,325 as follows:

Funding Source		Six months ended June 30, 2017			Six months ended June 30, 2016			Increase / (Decrease)
MBF Notes		$	34,329		$	28,450		$	5,879
RBL Notes			376,494			258,126			118,368
Priority Payments Note			24,747			-			24,747
Crede CG III, LTD			-			297,435			(297,435	)
Other			156,169			5,403			150,766
Total		$	591,740		$	589,414		$	2,325

Other interest costs primarily consisted of $82,377 resulting from the stock price guarantee related to the PayOnline acquisition and $67,602 resulting from the promissory note entered into on March 1, 2017 with Star Capital Management, LLC. See Note 12. Related Party Transactions.

The net income attributable to non-controlling interests amounted to $125,782 for six months ended June 30, 2017 as compared to $76,668 for the six months ended June 30, 2016.

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. Adjusted net loss is calculated as net loss excluding non-cash share based compensation and other one-time, non-recurring items not present in this year or last year results. 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 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 three and six months ended June 30, 2017 and 2016 is presented in the following Non-GAAP Financial Measures Table.

			GAAP				Share-based Compensation			Loss from Stock Value Guarantee			Adjusted Non-GAAP
Three Months Ended June 30, 2017
	Net (loss) income attributable to Net Element Inc stockholders		$	(1,640,340	)		$	128,537		$	-		$	(1,511,803	)
	Basic and diluted earnings per share		$	(0.09	)		$	0.01		$	-		$	(0.08	)
	Basic and diluted shares used in computing earnings per share			17,715,382										17,715,382
			GAAP				Share-based Compensation			Loss from Stock Value Guarantee			Adjusted Non-GAAP
Three Months Ended June 30, 2016
	Net (loss) income attributable to Net Element Inc stockholders		$	(5,346,448	)		$	2,014,589		$	2,162,861		$	(1,168,998	)
	Basic and diluted earnings per share		$	(0.46	)		$	0.17		$	0.19		$	(0.10	)
	Basic and diluted shares used in computing earnings per share			11,635,434										11,635,434
			GAAP				Share-based Compensation			Loss from Stock Value Guarantee			Adjusted Non-GAAP
Six Months Ended June 30, 2017
	Net (loss) income attributable to Net Element Inc stockholders		$	(4,127,837	)		$	724,941		$	-		$	(3,402,896	)
	Basic and diluted earnings per share		$	(0.24	)		$	0.04		$	-		$	(0.19	)
	Basic and diluted shares used in computing earnings per share			17,099,145										17,099,145
			GAAP				Share-based Compensation			Loss from Stock Value Guarantee			Adjusted Non-GAAP
Six Months Ended June 30, 2016
	Net (loss) income attributable to Net Element Inc stockholders		$	(7,194,167	)		$	2,375,573		$	2,162,861		$	(2,655,733	)
	Basic and diluted earnings per share		$	(0.63	)		$	0.21		$	0.19		$	(0.23	)
	Basic and diluted shares used in computing earnings per share			11,464,434										11,464,434

Additional information regarding Net Element's results for its second quarter ended June 2017 may be found in Net Element's quarterly report on Form 10-Q, which was filed with the Security and Exchange Commission (SEC) on August 11, 2017 and may be obtained from the SEC's Internet website at http://www.sec.gov.

About Net Element
Net Element, Inc. (NASDAQ: NETE) operates a payments-as-a-service transactional and value-added services platform for small to medium enterprise ("SME") in the U.S. and selected emerging markets. In the U.S. it aims to grow transactional revenue by innovating SME productivity services such as its cloud based, restaurant and retail 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, Kyrgyzstan and Azerbaijan where initiatives have been recently launched. Net Element was named in 2016 by South Florida Business Journal as one of the fastest growing technology companies.
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. 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, 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.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
					June 30, 2017		December 31, 2016
ASSETS
Current assets:
	Cash				$1,274,279		$621,635
	Accounts receivable, net				6,007,143		7,126,429
	Prepaid expenses and other assets				1,219,524		1,467,897
			Total current assets, net		8,500,946		9,215,961
Fixed assets, net					103,239		117,295
Intangible assets, net					3,308,229		3,589,850
Goodwill					9,643,752		9,643,752
Other long term assets					417,574		603,209
			Total assets		21,973,740		23,170,067
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable				7,516,761		7,510,113
	Accrued expenses				4,437,601		5,518,823
	Deferred revenue				439,074		1,355,972
	Notes payable (current portion)				984,720		808,976
	Due to related parties				366,636		299,004
			Total current liabilities		13,744,792		15,492,888
	Notes payable (net of current portion)				6,253,513		3,615,782
			Total liabilities		19,998,305		19,108,670
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
	Series A convertible preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at June 30, 2017 and December 31, 2016)				-		-
	Common stock ($.0001 par value, 400,000,000 shares authorized and 17,968,317 and 15,353,494 shares issued and outstanding at June 30, 2017 and December 31, 2016)				1,797		1,535
	Paid in capital				166,220,080		163,918,685
	Accumulated other comprehensive loss				(2,620,615)		(2,486,616)
	Accumulated deficit				(161,570,423)		(157,442,585)
	Noncontrolling interest				(55,404)		70,378
		Total stockholders' equity			1,975,435		4,061,397
			Total liabilities and stockholders' equity		$21,973,740		$23,170,067

NET ELEMENT, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
			Three Months Ended June 30								Six Months Ended June 30
			2017				2016				2017				2016
Net revenues
	Service fees		$	15,456,310			$	12,117,708			$	28,362,086			$	21,481,528
	Branded content			684,731				1,575,140				1,340,896				3,472,379
Total revenues				16,141,041				13,692,848				29,702,982				24,953,907
Costs and expenses:
	Cost of service fees			12,653,556				10,003,934				23,475,543				17,602,087
	Cost of branded content			664,836				1,480,859				1,302,841				3,267,947
	General and administrative			2,599,178				1,999,391				5,430,338				4,087,624
	Non-cash compensation			128,537				2,014,589				724,941				2,375,573
	Bad debt expense			865,863				125,238				1,145,621				376,979
	Depreciation and amortization			573,018				844,535				1,230,381				1,732,653
Total costs and operating expenses				17,484,988				16,468,546				33,309,665				29,442,863
Loss from operations				(1,343,947	)			(2,775,698	)			(3,606,683	)			(4,488,956	)
	Interest expense, net			(322,052	)			(438,976	)			(591,740	)			(589,414	)
	Loss from stock value guarantee			-				(2,162,861	)			-				(2,162,861	)
	Other income (expense)			(49,422	)			(7,705	)			(55,196	)			(29,604	)
Net (loss) income before income taxes				(1,715,421	)			(5,385,240	)			(4,253,619	)			(7,270,835	)
	Income taxes			-				-				-				-
Net loss				(1,715,421	)			(5,385,240	)			(4,253,619	)			(7,270,835	)
	Net loss attributable to the non controlling interest			75,081				38,792				125,782				76,668
Net loss attributable to Net Element, Inc. stockholders				(1,640,340	)			(5,346,448	)			(4,127,837	)			(7,194,167	)
	Foreign currency translation loss			(146,102	)			(496,041	)			(133,999	)			(525,782	)
Comprehensive loss attributable to common stockholders			$	(1,786,442	)		$	(5,842,489	)		$	(4,261,836	)		$	(7,719,949	)
Loss per share - basic and diluted			$	(0.09	)		$	(0.46	)		$	(0.24	)		$	(0.63	)
Weighted average number of common shares outstanding - basic and diluted				17,715,382				11,635,434				17,099,145				11,464,434

NET ELEMENT, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
				Six Months Ended June 30,
				2017				2016
Cash flows from operating activities
Net loss attributable to Net Element, Inc. stockholders				$	(4,127,837	)		$	(7,194,167	)
Adjustments to reconcile net loss to net cash used in operating activities
	Non controlling interest				(125,782	)			(76,668	)
	Share based compensation				596,404				2,375,573
	Deferred revenue				(916,898	)			(417,887	)
	Provision for bad debts				192,895				-
	Depreciation and amortization				1,230,381				1,732,652
	Non cash interest				94,248				297,434
Changes in assets and liabilities
	Accounts receivable				1,913,135				(331,566	)
	Prepaid expenses and other assets				284,661				270,932
	Accounts payable and accrued expenses				(1,845,161	)			1,876,961
	Net cash used in operating activities				(2,703,954	)			(1,466,736	)
Cash flows from investing activities
	Client acquisition costs				(966,147	)			(741,514	)
	Receipt of excess reserves and (purchase) of fixed and other assets				180,423				(214,046	)
		Net cash used in investing activities			(785,724	)			(955,560	)
Cash flows from financing activities
	Proceeds from common stock				1,437,132				-
	Proceeds from indebtedness				3,298,792				1,215,000
	Repayment of indebtedness				(624,918	)			-
	Related party advances				-				910,045
	Net cash provided by financing activities				4,111,006				2,125,045
	Effect of exchange rate changes on cash				31,316				(94,905	)
	Net increase (decrease) in cash				652,644				(392,156	)
	Cash at beginning of period				621,635				1,025,747
	Cash at end of period			$	1,274,279			$	633,591
Supplemental disclosure of cash flow information
	Cash paid during the period for:
		Interest		$	397,548			$	589,414
		Taxes		$	64,314			$	94,718
Non cash activities:
	Share issuance for settlement of unpaid compensation			$	-			$	1,042,509
	Shares issued for redemption of indebtedness			$	258,107			$	971,871
	Shares issued in settlement of advances from board member			$	-			$	909,285