8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of report (Date of earliest event reported) November 14, 2019

Net Element, Inc.

(Exact Name of Registrant as Specified in Charter)

Delaware		001-34887	90-1025599
(State or Other Jurisdiction of Incorporation)		(Commission File Number)	(IRS Employer Identification No.)
	3363 NE 163rd Street, Suite 705, North Miami Beach, FL 33160
	(Address of Principal Executive Offices)  (Zip Code)
	(305) 507-8808
	(Registrant’s telephone number, including area code)
	Not Applicable
	(Former Name or Former Address, if Changed Since Last Report)
	Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: ☐  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) ☐  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) ☐  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) ☐  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	NETE	The Nasdaq Stock Market, LLC (Nasdaq Capital Market)

Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Item 2.02 Results of Operations and Financial Condition.

On November 14, 2019, Net Element, Inc. issued a press release announcing its financial results for its fiscal quarter ended September 30, 2019. A copy of the press release is furnished as Exhibit 99.1 to this report.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits

99.1     Press Release dated November 14, 2019.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated: November 14, 2019

NET ELEMENT, INC.
By:	/s/ Jeffrey Ginsberg
Name:	Jeffrey Ginsberg
Title:	Chief Financial Officer

EXHIBIT INDEX

Exhibit No. Description

99.1 Press Release dated November 14, 2019.

EX-99.1

Exhibit 99.1

Net Element Reports Third Quarter 2019 Financial Results and Provides Business Update 

Revenue from value-added solutions increased over 58%

MIAMI, November 14, 2019 - 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 its financial results for the third quarter ended September 30, 2019, and provides a business update.

Conference Call:

The Company will host a conference call on November 15, 2019, at 8:30 a.m. EST to discuss third quarter 2019 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 3086210. It is recommended that participants dial in approximately 10 minutes prior to the start of the call.

The call will also be webcast live via https://edge.media-server.com/mmc/p/v4bn39j9. Following completion of the call, a recorded replay of the webcast will be available on the www.netelement.com/en/ir website.

Highlights for the third quarter 2019 financial results as compared with the third quarter of 2018 include: 

● Total transaction processing volume increased 14% to approximately $954 million, 20% of the total transaction volume is attributed to value-added solutions which increased 103% over the same comparable period last year

● Net revenues of approximately $16.82 million, a decrease of 2.4% as compared to $17.24 million for the same period last year

● North American Transactions Solutions revenue increased to $15.92 million a slight increase from $15.59 million for the same comparable period

● International Transaction Solutions revenue decreased to approximately $900,000 from $1.65 million for the same comparable period. Transaction processing revenues in this segment have shown an improvement of over 29% over the second quarter of this year

● Operating expenses were $3.6 million, an increase of approximately 5.9% as compared to $3.4 million for the same comparable period, primarily driven by an increase in depreciation and amortization expense from $500,000 to $800,000

● Gross margin of approximately $2.74 million or 16.3% of net revenue, a slight increase from $2.68 million or 15.6% of net revenue for the same comparable period

● Value-added solutions attributed $572,000 of net revenues for the quarter, up 58% over the same comparable period last year and $226,000 of gross margin or 39.5% of net revenues, an increase of 47% over the same comparable period

● Net loss per share increased to $0.24 from $0.23 for the same comparable period

"Our quarterly results demonstrate a demand for our suite of value-added payment acceptance solutions, fueled by the continued growth in transactions processed utilizing our proprietary Netevia platform,” commented Oleg Firer, CEO of Net Element. “Despite the challenges we have experienced as part of the industry changes and wind-down of certain merchant category codes we serviced, in addition to the loss of revenue in our International Transaction Solutions segment, we have demonstrated a continued increase in gross margin for our North America Transaction Solutions segment and our ability to replace lost business. We continue to execute our strategy with a focus on delivering long term value to our shareholders, as such we will be exploring strategic alternatives for certain markets in our International Transaction Solutions segment.”

Discussions of Third Quarter Results

The comparative revenue and gross margin for the third quarter was negatively affected by the wind-down of accounts with certain merchant category codes. The wind-down of merchants in this channel was due to industry-wide changes for enhanced card association compliance. This revenue, which is included entirely within the North American Transaction Solutions segment, was $211,052 and $560,279 in the third quarters of 2019 and 2018, respectively. The corresponding gross margin associated with this revenue was $28,097 and $122,988 in the third quarters of 2019 and 2018, respectively.

Outlook

Our 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, extensive market reach, strong product development and technology enablement.

Results of Operations for the Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018

We reported a net loss attributable to common stockholders of approximately $1 million or $0.24 per share loss for the three months ended September 30, 2019 a compared to a net loss of approximately $900,000 or $0.23 per share loss for the three months ended September 30, 2018. The increase in net loss attributable to stockholders of approximately $100,000 was primarily due to a decrease in service fees of approximately $423,000, a corresponding increase of approximately $362,000 in the amortization of client acquisition costs, and the reversal of an over accrued liability of approximately $153,000 reflected as other income.

The following tables set forth our sources of revenues, cost of revenues and the respective gross margins for the three months ended September 30, 2019 and 2018.

Source of Revenues	Three Months Ended September 30, 2019		Mix			Three Months Ended September 30, 2018		Mix			Increase / (Decrease)
North American Transaction Solutions	$	15,923,805		94.7	%	$	15,590,832		90.4	%	$	332,973
International Transaction Solutions		895,881		5.3	%		1,651,926		9.6	%		(756,045	)
Total	$	16,819,686		100.0	%	$	17,242,758		100.0	%	$	(423,072	)

Cost of Revenues	Three Months Ended September 30, 2019		% of revenues			Three Months Ended September 30, 2018		% of revenues			Increase / (Decrease)
North American Transaction Solutions	$	13,414,334		84.2	%	$	13,286,210		85.2	%	$	128,124
International Transaction Solutions		664,907		74.2	%		1,273,598		77.1	%		(608,691	)
Total	$	14,079,241		83.7	%	$	14,559,808		84.4	%	$	(480,567	)

Gross Margin	Three Months Ended September 30, 2019		% of revenues			Three Months Ended September 30, 2018		% of revenues			Increase / (Decrease)
North American Transaction Solutions	$	2,509,471		15.8	%	$	2,304,622		14.8	%	$	204,849
International Transaction Solutions		230,974		25.8	%		378,328		22.9	%		(147,354	)
Total	$	2,740,445		16.3	%	$	2,682,950		15.6	%	$	57,495

Net revenues consist primarily of service fees from transaction processing. Net revenues were approximately $16.8 million and approximately $17.2 million for the three months ended September 30, 2019 and 2018, respectively. The decrease in net revenues was primarily related to our International Transaction Solutions segment which experienced competition, certain economic challenges, and the loss of a major customer. In addition, growth in our North American Transaction Solutions segment was offset by the wind-down of certain merchant categories due to the industry-wide changes for enhanced card association and sponsoring compliance.

Cost of revenues represents direct costs of generating revenues, including commissions, mobile operator fees, interchange expenses, processing, and non-processing fees. Cost of revenues for the three months ended September 30, 2019 were approximately $14.1 million as compared to approximately $14.6 million for the three months ended September 30, 2018.

The gross margin for the three months ended September 30, 2019 was approximately $2.7 million, or 16.3% of net revenues, as compared to approximately $2.7 million, or 15.6% of net revenues, for the three months ended September 30, 2018. The primary reason for the increase in the overall gross margin percentage was the result of North American Transaction Solutions fees associated with the processing of transactions utilizing our self-designated BIN/ICA due to an increase in the dollar volume processed as compared to the prior comparable quarter.

Operating Expenses Analysis:

Operating expenses were approximately $3.6 million for the three months ended September 30, 2019, as compared to $3.4 million for three months ended September 30, 2018. Operating expenses for the three months ended September 30, 2019 primarily consisted of selling, general and administrative expenses of approximately $2.4 million, bad debt expense of approximately $400,000 and depreciation and amortization expense of approximately $800,000. Operating expenses for the three months ended September 30, 2018 primarily consisted of selling, general and administrative expenses of approximately $2.3 million, bad debt expense of approximately $600,000, and depreciation and amortization expense of approximately $500,000.

The components of our selling, general and administrative expenses are reflected in the tables below.

Selling, general and administrative expenses for the three months ended September 30, 2019 and 2018 consisted of operating expenses not otherwise delineated in our Condensed Consolidated Statements of Operations and Comprehensive Loss, as follows:

Three months ended September 30, 2019
Category	North American Transaction Solutions		International Transaction Solutions		Corporate Expenses & Eliminations		Total
Salaries, benefits, taxes and contractor payments	$	304,391	$	124,921	$	729,426	$	1,158,738
Professional fees		125,713		58,478		486,984		671,175
Rent		-		23,048		51,795		74,843
Business development		75,414		540		18,707		94,661
Travel expense		36,337		10,553		18,466		65,356
Filing fees		-		-		37,213		37,213
Transaction gains		-		7,169		-		7,169
Office expenses		91,051		4,460		12,093		107,604
Communications expenses		39,530		61,428		17,710		118,668
Insurance expense		-		-		42,418		42,418
Other expenses		15,073		1,672		4,196		20,941
Total	$	687,509	$	292,269	$	1,419,008	$	2,398,786

Three months ended September 30, 2018
Category	North American Transaction Solutions		International Transaction Solutions		Corporate Expenses & Eliminations		Total
Salaries, benefits, taxes and contractor payments	$	369,734	$	286,377	$	622,844	$	1,278,955
Professional fees		29,626		79,853		487,623		597,102
Rent		-		22,935		51,222		74,157
Business development		29,949		1,063		3,619		34,631
Travel expense		28,736		2,338		32,863		63,937
Filing fees		-		-		5,608		5,608
Transaction losses		-		18,021		-		18,021
Office expenses		54,924		7,035		10,510		72,469
Communications expenses		33,073		42,966		33,227		109,266
Insurance expense		-		-		38,587		38,587
Other expenses		1,354		4,948		47,774		54,076
Total	$	547,396	$	465,536	$	1,333,877	$	2,346,809

Variance
Category	North American Transaction Solutions			International Transaction Solutions			Corporate Expenses & Eliminations			Total
Salaries, benefits, taxes and contractor payments	$	(65,343	)	$	(161,456	)	$	106,582		$	(120,217	)
Professional fees		96,087			(21,375	)		(639	)		74,073
Rent		-			113			573			686
Business development		45,465			(523	)		15,088			60,030
Travel expense		7,601			8,215			(14,397	)		1,419
Filing fees		-			-			31,605			31,605
Transaction gains		-			(10,852	)		-			(10,852	)
Office expenses		36,127			(2,575	)		1,583			35,135
Communications expenses		6,457			18,462			(15,517	)		9,402
Insurance expense		-			-			3,831			3,831
Other (income) expenses		13,719			(3,276	)		(43,578	)		(33,135	)
Total	$	140,113		$	(173,267	)	$	85,131		$	51,977

Salaries, benefits, taxes and contractor payments remained relatively steady on a consolidated basis for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. This was primarily due to the Company’s continued monitoring of operations and labor costs necessary to maintain or increase revenues, the boarding of quality merchants, and the reduction of the labor force in our International Transaction Solutions segment.

Segment	Salaries and benefits for the three months ended September 30, 2019		Salaries and benefits for the three months ended September 30, 2018		Increase / (Decrease)
North American Transaction Solutions	$	304,391	$	369,734	$	(65,343	)
International Transaction Solutions		124,921		286,377		(161,456	)
Corporate Expenses & Eliminations		729,426		622,844		106,582
Total	$	1,158,738	$	1,278,955	$	(120,217	)

	GAAP			Share-based Compensation		Adjusted Non-GAAP
Three Months Ended September 30, 2019
Net loss attributable to Net Element Inc stockholders	$	(1,010,627	)	$	15,008	$	(995,619	)
Basic and diluted loss per share	$	(0.24	)	$	-	$	(0.24	)
Basic and diluted shares used in computing loss per share		4,152,433					4,152,433
Three Months Ended September 30, 2018
Net loss attributable to Net Element Inc stockholders	$	(910,414	)	$	22,500	$	(887,914	)
Basic and diluted loss per share	$	(0.23	)	$	-	$	(0.23	)
Basic and diluted shares used in computing loss per share		3,901,218					3,901,218

	GAAP			Share-based Compensation		Adjusted Non-GAAP
Nine Months Ended September 30, 2019
Net loss attributable to Net Element Inc stockholders	$	(3,668,921	)	$	2,035,855	$	(1,633,066	)
Basic and diluted loss per share	$	(0.91	)	$	0.51	$	(0.40	)
Basic and diluted shares used in computing loss per share		4,033,521					4,033,521
Nine Months Ended September 30, 2018
Net loss attributable to Net Element Inc stockholders	$	(3,424,989	)	$	127,011	$	(3,297,978	)
Basic and diluted loss per share	$	(0.88	)	$	0.03	$	(0.85	)
Basic and diluted shares used in computing loss per share		3,870,134					3,870,134

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 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's 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 whether the Company will achieve further growth or achieve its goals and when the Company will reach profitability. 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.

Contact:

Net Element, Inc.

Tel. +1 (786) 923-0502

Media@NetElement.com

www.netelement.com