Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 20172018

OR

For the transition period from __________ to __________

Commission file number:001-34887

Net Element, Inc.

(Exact name of registrant as specified in its charter)

(305) 507-8808

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx  ☒  No¨  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx ☒ No¨ ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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.¨ ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ ☐ Nox ☒

The number of outstanding shares of common stock, $.0001 par value, of the registrant as of November 11, 201714, 2018 was 2,454,457 after giving effect to the registrant's one-for-ten reverse stock split effected October 5, 2017.3,863,019

Net Element, Inc.

Defined Terms

Net Element, Inc. is a corporation organized under the laws of the State of Delaware. As used in this Quarterly Report on Form 10-Q (this “Report”), unless the context otherwise requires, the terms “Company,” “we,” “us” and “our” refer to Net Element, Inc. and, as applicable, its majority-owned and consolidated subsidiaries. References in this Report to “PayOnline” refer, collectively, to PayOnline System LLC, Innovative Payment Technologies LLC, Polimore Capital Limited and Brosword Holding.

Forward-Looking Statements

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. Any statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Forward-looking statements generally are identified by the words “expects,” “anticipates,” “believes,” “intends,” “estimates,” “aims,” “plans,” “may,” “will,” “continue,” “seeks,” “should,” “believe,” “potential” or the negative of such terms and similar expressions. Forward-looking statements are based on current plans, estimates and projections, and therefore you should not place too much reliance on them. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement in light of new information or future events, except as expressly required by law. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and are generally beyond the Company’s control. The Company cautions you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. These factors include, among other factors:

If these or other risks and uncertainties (including those described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in Part II, Item 1A of this Report and the Company’s subsequent filings with the Commission) materialize, or if the assumptions underlying any of these statements prove incorrect, the Company’s actual results may be materially different from those expressed or implied by such statements. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Report to reflect the occurrence of unanticipated events. You should, however, review the factors and risks described in the reports we file from time-to-time with the Commission after the date of this Report.

World Wide Web addresses contained in this Report are for explanatory purposes only and they (and the content contained therein) do not form a part of and are not incorporated by reference into this Report.

Net Element, Inc.

Form 10-Q

For the Three and Nine Months Ended September 30, 20172018

Table of Contents

NOTE 4. REVENUES

We recognize revenue when all of the following criteria are met: (1) the parties to the contract have approved the contract and are committed to perform their respective obligations, (2) we believecan identify each party’s rights regarding the goods or services to be transferred (3) we can identify the payment terms for the goods or services to be transferred, (4) the contract has commercial substance, and (5) it is probable that we will collect substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer. The Company considers persuasive evidence of a portionsales arrangement to be the receipt of a billable transaction from aggregators, signed contract or the processing of a credit card transaction. Collectability is assessed based on a number of factors, including transaction history with the customer and the credit worthiness of the customer. If it is determined that the collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. We record cash received in advance of revenue recognition as deferred revenue. Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services and is recognized as revenue during the period the transactions are processed or when the related services are performed.

We work directly with payment card networks and banks so that our merchants do not need to manage the complex systems, rules, and requirements of the payments industry. We satisfy our performance obligations and therefore recognize the transactional processing service fees as revenue upon authorization of a transaction by the merchant’s customer’s bank.

We primarily report revenues gross as a principal versus net as an agent. Although some of the Company’s processing agreements vary with respect to specific terms, the transactional processing service fees collected from merchants generally are recognized as revenue on a gross basis as we are the principal in the delivery of the managed payments solutions to the sellers. The gross fees we collect are intended to cover the interchange, assessments and other processing and non-processing fees which are included and are part of our revenue recognized for branded content in our Mobile Solutions business segment may no longer meet the conditions for gross reporting upon adoption of this ASU in 2018.margin.

We have primary responsibility for providing end-to-end payment processing services for our clients. Our clients contract us for all credit card processing services, including transaction authorization, settlement, dispute resolution, data/transmission security, risk management, reporting, technical support and other value-added services. We have concluded that we are the principal because we control the services before delivery to the merchant, and are primarily responsible for the delivery of the services, have discretion in setting prices charged to merchants, and responsible for losses. We also have pricing latitude and can provide services using several different network options.

NOTE 2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATIONAdoption of ASC 606, Revenue from Contracts with Customers

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic revenue recognition methodology under ASC 605, Revenue Recognition.

The accompanying unauditedcumulative impact of adopting ASC 606 resulted in no changes to retained earnings at January 1, 2018. The impact of adoption of ASC 606 on the Company’s condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and reflect all adjustments, which are of a normal and recurring nature, that are, in the opinion of management, necessary for a fair presentation of our condensed consolidated financial position and resultsstatement of operations for the related periods. All significant intercompany transactions and balances have been eliminated in consolidation. The consolidated results of operations for any interim periods are not necessarily indicative of results to be expected for the full year. On May 25, 2016 and October 5, 2017, we effected one-for-ten reverse stock splits of our common stock. Our condensed consolidated financial statements and disclosures reflect these changes in capital structure for all periods presented. Following the consolidation principles promulgated by U.S. GAAP, these condensed consolidated financial statements include the assets, liabilities, results of operations, and cash flows of the following subsidiaries:was as follows:

(1) TOT Group, Inc., a 100% owned subsidiary formed in Delaware; (2) Netlab Systems, LLC, a wholly owned subsidiary formed in Florida; (3) NetLab Systems IP, LLC, a wholly owned subsidiary formed in Florida; (4) OOO Net Element Russia (“Net Element Russia”), a wholly owned subsidiary formed in Russia; and (5) Net Element Services, LLC, a wholly owned subsidiary formed in Florida.

The subsidiaries listed above are the parent companies of several other subsidiaries, which hold the Company’s underlying investments or operating entities.

TOT Group is the parent company of TOT Payments, LLC (“TOT Payments”) doing business as Unified Payments a wholly owned subsidiary formed in Florida, Aptito, LLC, a 80% owned subsidiary formed in Florida (acquired June 18, 2013), TOT Group Europe LTD, a wholly owned subsidiary formed in the United Kingdom, Unified Portfolios, LLC, a wholly owned subsidiary formed in Florida and OOO TOT Group Russia, a wholly owned subsidiary formed in Russia.

All material intercompany accounts and transactions have been eliminated in consolidation.

NOTE 3. LIQUIDITY AND GOING CONCERN CONSIDERATIONS

Our condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. For the three and nineThree months ended September 30, 2017, we sustained a net loss of $1.7 million and $5.9 million, respectively, and had an accumulated deficit of $163.3 million at September 30, 2017. Furthermore, we had $4.5 million of negative working capital at September 30, 2017. We sustained a net loss of $13.6 million for the year ended December 31, 2016 and had an accumulated deficit of $157.4 million and a negative working capital of $6.3 million at December 31, 2016. The conditions above plus the risk of our ability to secure sufficient financing in order to pay such obligations raise substantial doubt about our ability to continue as a going concern. The independent auditors’ report on our consolidated financial statements for the years ended December 31, 2016 and 2015 contain an emphasis paragraph expressing substantial doubt as to our ability to continue as a going concern.2018:

Failure to successfully continue developing our payment processing operations and maintain contracts with merchants, mobile phone carriers and content providers who use TOT Group’s services could harm our revenues and materially adversely affect our financial condition and results of operations.   We face all of the risks inherent in a new business, including the need for significant additional capital, management’s potential underestimation of initial and ongoing costs, and potential delays and other problems in connection with developing our technologies and operations.

We are continuing with our plan to further grow and expand our payment processing operations in the United States and emerging markets and seek sources of capital to expand and pay our contractual obligations as they come due. Management believes that its current operating strategy will provide the opportunity for us to continue as a going concern as long as we are able to obtain additional financing; however, there is no assurance this will occur. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

We are required to continually meet the listing requirements of The Nasdaq Capital Market (including a minimum bid price for our common stock of $1.00 per share and a $2.5 million minimum of stockholders’ equity) to maintain the listing of our common stock on The Nasdaq Capital Market. On October 20, 2017, the Company regained its compliance with Nasdaq as it evidenced compliance with the $1.00 bid price and stockholders’ equity requirements. See Note 17 for additional information.

NOTE 4. ACCOUNTS RECEIVABLE

Accounts receivable (net) consist of amounts due from processors and Russian mobile operator intermediaries. Total net accounts receivable amounted to $4,446,358 and $7,126,429 at September 30, 2017 and December 31, 2016, respectively. Net accounts receivable consisted primarily of $108,038 and $2,391,646 of amounts due from Russian mobile operators, $157,883 and $185,650 due to PayOnline online processing business and $4,180,437 and $4,549,133 of credit card processing receivables at September 30, 2017 and December 31, 2016, respectively.

Our allowance for doubtful accounts was $636,022 and $603,031 at September 30, 2017 and December 31, 2016, respectively. For the year ended December 31, 2016, we recorded a provision of $500,000 for potentially uncollectible accounts receivable in our mobile payments business. We recognized an increase in our provision for $32,991 for the nineNine months ended September 30, 2017 relating to our mobile payments business.

NOTE 5. FIXED ASSETS

Fixed assets are stated at cost less accumulated depreciation and amortization as follows:

Depreciation expense for fixed assets for the three and nine months ended September 30, 2017 was $7,901 and $25,419, respectively, and $20,215 and $39,737, respectively, for the three and nine months ended September 30, 2016.

NOTE 6.  INTANGIBLE ASSETS

Shown below are the details of intangible assets at September 30, 2017 and December 31, 2016:

Total depreciation and amortization expense for the three month and nine months period ended September 30, 2017 was $630,020 and $1,860,401, respectively, of which $579,886 and $1,702,884 relates to the above table. We incurred additional amortization of $42,233 and $132,098 for terminal inventory placed with merchant customers during the three months and nine months ended September 30, 2017 (this is not included in the above table). The remaining $7,901 and $25,419, for the three months and nine months ended September 30, 2017, respectively, not included in table above, was for fixed assets (See Note 5. Fixed Assets).

Total depreciation and amortization expense for the three month and nine months period ended September 30, 2016 was $744,670 and $2,457,800, respectively, of which $701,065 and $2,345,078 relates to the above table. Additionally, we incurred $43,605 and $112,722 for the amortization of terminal inventory placed with merchant customers during the three months and nine months ended September 30, 2016 and is not included in above the above table. The remaining $20,215 and $39,737, for the three months and nine months ended September 30, 2016, respectively, not included in table above, was for fixed assets (See Note 5. Fixed Assets).

The following table presents the estimated aggregate future amortization expense of other intangible assets:

Software

At times, capitalized software development costs that add value to or extend the useful of the related software it develops for internal use and licensing. Costs for routine software updates are expensed as incurred. Capitalized costs are amortized over 36 months on a straight-line basis. Impairment is reviewed quarterly to ensure only viable active costs are capitalized.

During the nine months and twelve months ended September 30, 2017 and December 31, 2016, respectively, we capitalized $55,759 and $81,428 of software development costs as follows:

For the three months and nine months ended September 30, 2017, amortization was $53,092 and $162,873, respectively. For the three months and nine months ended September 30, 2016, amortization was $246,727 and $950,206, respectively.

Merchant Portfolios

Merchant Portfolios consist of portfolios purchased by us that earn future streams of income. The remaining contract terms of these portfolios range from 15 to 36 months at the time of acquisition. The useful lives of merchant portfolios represent management’s best estimate over which we expect to recognize the economic benefits of these intangible assets. At September 30, 2017 and December 31, 2016, the net value of these portfolios was $391,555 and $784,991, respectively. For the three and nine months ended September 30, 2017, amortization of merchant portfolios was $117,501 and $393,436, respectively. For the three and nine months ended September 30, 2016, amortization of merchant portfolios was $176,046 and $528,138, respectively.

Trademarks and Domain Names

At September 30, 2017 and December 31, 2016, the net book value of trademarks was $151,184 and $327,708, respectively, and the net book value of the domain names were $85,883 and $193,960, respectively. For the three months and nine months ended September 30, 2017, amortization for trademarks was $59,004 and $176,524, respectively and for the three and nine months ended September 30, 2016, amortization was $41,667 and $125,001, respectively. For the nine and three months ended September 30, 2017, amortization for domain names was $35,829 and $108,077, respectively. For the three and nine months ended September 30, 2016, amortization for domain names was $24,999 and $74,997 respectively.

PCI Certification

At September 30, 2017 and December 31, 2016, the net book value of our PCI certification was $93,539 and $205,790, respectively. For the three and nine months ended September 30, 2017, amortization for this certification was $37,417 and $112,251, respectively. For the three and nine months ended September 30, 2016, amortization for this certification was $37,417 and $112,251, respectively.

NOTE 7. ACCRUED EXPENSES

At September 30, 2017 and December 31, 2016, accrued expenses amounted to $3,419,879 and $5,518,823, respectively. Accrued expenses represent expenses that are owed at the end of the period and have not been billed by the provider or are estimates of services provided. The following table details the items comprising the balances outstanding at September 30, 2017 and December 31, 2016:2018:

The accrual for PayOnline at September 30, 2017 consists of a $480,936 stock price guarantee obligation pursuant to a settlement agreement entered into in connection with the PayOnline acquisition. Additionally, the accrual includes a $1,152,335 obligation for refundable merchant reserves assumed pursuant to an amendment to the PayOnline acquisition agreement. See Note 11 and Note 17 for additional information.There was no impact on our condensed consolidated balance sheets.

NOTE 5. NOTES PAYABLE

The accrual for PayOnline at December 31, 2016 consistsNotes payable consist of a $199,000 earn-out accrual and a $2,075,687 stock price guarantee obligation pursuant to a settlement agreement entered into in connection with the PayOnline acquisition. Additionally, the accrual includes a $1,433,475 million obligation for refundable merchant reserves assumed pursuant to an amendment to the PayOnline acquisition agreement.following: 

Accrued bonuses are attributed to our TOT Group subsidiaries resulting from a discretionary bonus accrual for $1,253,577 and $774,485 at September 30, 2017 and December 31, 2016, respectively.

NOTE 8. SHORT TERM DEBT

At September 30, 2017 and December 31, 2016, short term debt consists of $503,041 and $808,976, respectively in principal repayments due to RBL Capital Group, LLC and Priority Payment Systems, LLC.

NOTE 9. LONG TERM DEBT

Long term debt consists of the following:

RBL Capital Group, LLC

Effective June 30, 2014, TOT Group, Inc. and its subsidiaries as co-borrowers, TOT Payments, LLC, TOT BPS, LLC, TOT FBS, LLC, Process Pink, LLC, TOT HPS, LLC and TOT New Edge, LLC (collectively, the “co-borrowers”), entered into a Loan and Security Agreement (“Credit Facility”) with RBL Capital Group, LLC (“RBL”), as lender (the “RBL Loan Agreement”). Pursuant to theThe original terms of the RBL Loan Agreement, we could borrow up to $10,000,000 from RBL during the 18 month period from the closing of this credit facility. Prior to maturity of the loan, the principal amount of the borrowings under theprovided us with an 18-month, $10 million credit facility will carry a fixedwith interest rate ofat the higher of 13.90% per annum or the prime rate plus 10.65%. After maturity of the loan, until all borrowings are paid in full, with respect to the advances under the credit facility,Interest on drawn amounts outstanding after November 30, 2015 carry interest at an additional three percent per annum would be added to such interest rate, and for anyuntil repaid in full, with other amounts, obligations or payments due to RBL,carrying an annual default rate not to exceed the lesser of (i) the prime rate plus 13% per annum and (ii) 18.635% per annum. As further described below, borrowings from the line of credit in the amounts of $3,315,000, $400,000 and $250,000 were converted into term loans. On May 2, 2016, we renewed our credit facilityCredit Facility with RBL, increasing the facility from $10 million to $15 million and extendedextending the term through February 2018.2019.  At September 30, 2017 and December 31, 2016,2018, we had $10,455,913 and $10,955,414approximately $10.5 million available under our RBL credit line. the Credit Facility.  This Credit Facility is for general working capital purposes or to support the growth of the co-borrowers, subject to the terms and conditions, as defined. We expect that this Credit Facility will be extended under similar terms and conditions.

The co-borrowers’ obligations to RBL pursuant to the RBL Loan Agreement are secured by a first priority security interest in all of the co-borrowers’ tangible and intangible assets, including but not limited to their merchants, merchant contracts and proceeds thereof, and all right title and interest in co-borrowers’ processing contracts, contract rights, and portfolio cash flows with all processors of the co-borrowers.

On July 17, 2014,Borrowings from the Credit Facility in the amounts of $3,315,000, $400,000 and $250,000 were previously converted into RBL term notes.  Effective March 20, 2018, we entered into a $3,315,000 termsingle note with RBL. Net proceeds from thea principal balance of $4,544,087 with RBL to effectively refinance all previously issued outstanding RBL notes, including certain additional term notes entered into with RBL through August 2017. The refinanced and combined note were used to repay a $3.0 million note previously due to MBF Merchant Capital, LLC (“MBF”) in addition to approximately $239,000provides for working capital. The term note required interest onlyfour (4) interest-only payments at 13.90% interest through January 2015 commencing on August 20, 2014 followed by14.19%, with monthly interest and principal payments of $90,421$85,634 from August 2018 through January 2019.June 2021, with a balloon payment of $3,170,967 in July 2021. The note balance reducedback-end fees from prior notes in the amount available under our RBL credit line. The note also provided for a 2% front end fee due at execution of the$133,600 have been rolled into this note and a 4% backend feealso are due at the final payment of the note. During 2016, Crede CG III, Ltd. (“Crede”) purchased $1,849,481 of the principal balance of this note in various tranches. We exchanged and extinguished these note tranches for 16,426 shares of common stock during the second quarter of 2016, 99,203 shares of our common stock during the third quarter of 2016, and 19,608 shares during the fourth quarter of 2016. See “—Crede CG III, Ltd.” At December 20, 2016, the remaining balance of the note was refinanced into another note and its balance was $0 at December 31, 2016.July 2021.

Effective February 10, 2015, we entered into a $400,000 term note with RBL based on a draw down from the line of credit. The term note provided for interest-only payments at 13.90% interest through July 20, 2015. From August 20, 2015 through July 20, 2019 (maturity date), we were obligated to make interest and principal payments of $10,911 per month. We paid $8,000 in costs related to this loan. This term note was purchased by Crede, which was exchanged and extinguished for an aggregate of 21,928 shares of our common stock on June 9, 2016, June 23, 2016, and June 30, 2016. The balance of this note was $0 at December 31, 2016.

Effective March 27, 2015, we entered into a $250,000 term note with RBL based on the draw down from the line of credit. The term note provided for interest-only payments at 13.90% interest through July 20, 2015. From August 20, 2015 through July 20, 2019 (the note maturity date), we were obligated to make interest and principal payments of $6,819 per month. We paid $5,000 in costs related to this term note. This term note was purchased by Crede, which was exchanged and extinguished for an aggregate of 9,174 shares of our common stock on May 9, 2016. The balance of this note was $0 at December 31, 2016.

On May 4, 2016, we entered into a $250,000 term note with RBL. The term note provided for interest-only payments at 14.15% interest through October 20, 2016. From November 20, 2016 through October 20, 2020 (the note maturity date), we were obligated to make interest and principal payments of $6,850 per month. The term note also provided for a 2% front end fee, due upon the execution of the term note and a 4% back end fee due at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was $0 at December 31, 2016.

On May 20, 2016, we entered into a $400,000 term note with RBL. The term note provided for interest-only payments at 14.15% interest through November 20, 2015. From December 20, 2016 through November 20, 2020 (the note maturity date), we were obligated to make interest and principal payments of $10,961 per month. The term note also provided for a 2% front end fee, due upon the execution of the term note and a 4% back end fee due at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was $0 at December 31, 2016.

On June 23, 2016, we entered into a $190,000 term note with RBL. The term note provided for interest-only payments at 14.15% interest through December 20, 2016. From January 20, 2017 through December 20, 2020 (the note maturity date), we were obligated to make interest and principal payments of $5,206 per month. The term note also provided for a 2% front end fee, due upon the execution of the term note and a 4% backend fee due at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was $0 at December 31, 2016.

On July 15, 2016, we entered into a $350,000 term note with RBL. The term note provided for interest-only payments at 14.15% through January 20, 2017. From February 20, 2017 through January 20, 2021, we were obligated to make interest and principal payments of $9,591. The term note also provided for a 2% front end fee, due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was $0 at December 31, 2016.

On August, 15, 2016, we entered into a $400,000 term note with RBL. The term note provided for interest only payments at 14.15% through February 20, 2017. From March 20, 2017 through February 20, 2021, we were obligated to make interest and principal payments of $10,961. The term note also provided for a 2% front end fee, due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was $0 at December 31, 2016.

On September 15, 2016, we entered into a $350,000 term note with RBL. The term note provided for interest only payments at 14.15% through March 20, 2017. From April 20, 2017 through March 20, 2021, we were obligated to make interest and principal payments of $9,591. The term note also provided for a 2% front end fee, due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was $0 at December 31, 2016. 

On November 7, 2016, we entered into a $350,000 term note with RBL. The term note provided for interest only payments at 14.15% through May 20, 2017. From June 20, 2017 through May 20, 2021, we were obligated to make interest and principal payments of $9,591. The term note also provided for a 2% front end fee due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was $0 at December 31, 2016.

On December 15, 2016, we entered into a $325,000 term note with RBL. The term note provided for interest only payments at 14.15% through June 20, 2017. From July 20, 2017 through June 20, 2021, we were obligated to make interest and principal payments of $8,906. The term note also provided for a 2% front end fee, due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was $0 at December 31, 2016.

On December 20, 2016, we entered into a $4,044,055 term note with RBL. This note effectively refinanced all RBL notes described above. The term note provides for interest only payments at 14.15% through May 20, 2017 of $47,686. From June 20, 2017 through May 20, 2021, we are obligated to make interest and principal payments of $110,814. The term note also required a $20,000 front end refinancing fee upon execution of the loan and a $104,600 back end fee due at the final payment on May 20, 2021. This note balance was $0 at September 30, 2017 as it was refinanced into the new refinancing note on June 1, 2017 as described below. 

On March 30, 2017, we entered into a $100,000 term note with RBL based on a draw down from the line of credit. The term note provides for interest-only payments at 14.4% interest rate through May 20, 2017. From June 20, 2017 through May 20, 2021 (maturity date), we are obligated to make interest and principal payments of $2,753 per month. We paid $2,000 in costs related to this term note at its inception and another $4,000 of costs is due at the maturity of the note. This note balance was $0 at September 30, 2017 as it was refinanced into the new refinancing note on June 1, 2017 as described below. 

On April 17, 2017, we entered into a $400,000 term note with RBL based on a draw down from the line of credit. The term note provides for interest-only payments at 14.4% through May 20, 2017 of $5,208. From June 20, 2017 through May 20, 2021 (maturity date), we are obligated to make interest and principal payments of $11,011 per month. We paid $8,000 in costs related to this loan at its inception and another $16,000 of costs is due at the maturity of the note. This note balance was $0 at September 30, 2017 as it was refinanced into the new refinancing note on June 1, 2017 as described below. 

On April 26, 2017, we exchanged 10,235 shares of our common stock for $75,000 of the original $3,315,000 RBL promissory note partially purchased by Crede, based on an average per share exchange price of $0.73. The exchange also settled current interest and loan fees of $4,500 and a non-cash exchange premium of $9,951.

On April 26, 2017, the $4,044,055 term note with RBL entered into on December 20, 2016 was revised to reflect the $75,000 exchange transaction mentioned above. As a result, the note was updated to reflect a principal payment and interest payment of $108,759 on June 20, 2017.

On May 19, 2017, we entered into a $75,000 term note with RBL based on a draw down from the line of credit. The term note provides for one interest only payment of $947 on May 20, 2017 at a 14.4% interest rate, then 48 equal monthly payments of principal and interest of $2,065. This note balance was zero at September 30, 2017 as it was refinanced into the new refinancing note on June 1, 2017 as described below.

On May 24, 2017, we exchanged 23,058 shares of our common stock for $150,000 of the original $3,315,000 RBL promissory note partially purchased by Crede, based on an average per share exchange price of $0.65. The exchange also settled current interest and loan fees of and a non-cash exchange premium of $23,156.

On May 26, 2017, we entered into a $150,000 term note with RBL based on a draw down from the line of credit. The term note provides for one interest only payment of $1,479 at a 14.4% interest rate, on June 20, 2017 then 48 equal monthly payments of principal and interest of $4,129. This note balance was zero at September 30, 2017 as it was refinanced into the new refinancing note on June 1, 2017 as described below. 

On June 1, 2017 the $4,044,055 refinance note dated December 20, 2016 was updated to roll the above $150,000, $75,000, $400,000 and $100,000 term notes. The note principal amount was $4,544,055 at September 30, 2017. The note provided for the interest rate of $14.19% per annum and interest only payments from June 20, 2017 through September 20, 2017. For the next 48 months thereafter until the maturity date on September 20, 2021, the note provides for $124,607 monthly payments of interest and principal.

On July 27, 2017, the $4,544,055 term note with RBL entered into on June 1, 2017 was revised to reflect the $105,969 exchange transaction described below, in the Crede CG III Ltd. Section. As a result, the note was updated to reflect a principal payment and interest payment of $105,969 on July 28, 2017. The monthly principal and interest payment was adjusted to $121,810. At September 30, 2017 the balance of the note was $4,438,087.

On August 1, 2017, we entered into a $106,000 term note with RBL based on our draw down from our line of credit. The term note provided for an interest only payments of $822 on August, 20, 2017 and $1,316 at 14.9% interest rate per annum afterwards through September 20, 2017. From October 20, 2017 through September 20, 2021 (maturity date), we are obligated to make interest and principal payments of $2,945. We paid $2,120 in costs related to this loan at its inception and another $4,240 of costs is due at the maturity of the note.

Also see Note 17 for activity subsequent to September 30, 2017.

MBF Merchant Capital, LLC

We issued the following notes payable to MBF, an entity owned by William Healy, a former member of our Board of Directors.

On March 28, 2016, we entered into a $75,000 promissory note with MBF. The promissory note provided for interest only payments at 14% through May 28, 2016. From June 28, 2016 through March 28, 2017, we were obligated to make interest and principal payments of $7,990. The promissory note also provided for a 6% backend fee due at the final payment of the promissory note. As of September 30, 2017, and December 31, 2016, the balance of the note was $0 and $23,420, respectively.

On April 19, 2016, we entered into a $300,000 promissory note with MBF. The promissory note provides for interest only payments at 15.5% through May 28, 2016. From June 28, 2016 through May 28, 2018, we are obligated to make interest and principal payments of $14,617. The promissory note also provides for a 6% back end fee due at the final payment of the promissory note. At September 30, 2017 and December 31, 2016, the balance of the note was $110,424 and $221,826, respectively.

On July 1, 2016, our subsidiary, TOT Group, Inc., entered into a $353,500 promissory note with MBF. The promissory note provides for interest only payments at 15.5% through June 28, 2016. From July 28, 2016 through June 28, 2018, we are obligated to make interest and principal payments of $17,224. The promissory note also provides for a 1% front end fee and for a 6.6% back end fee due at the final payment of the promissory note. At September 30, 2017 and December 31, 2016, the remaining balance of the note was $145,462 and $275,056, respectively.

On August 29, 2017, our subsidiary, TOT Group, Inc., entered into a $275,000 promissory note with MBF. The principal amount of the loan carries an interest rate 13.95% per annum. We are obligated to pay a $16,500 finance fee to MBF, of which $5,500 is due at funding and the remainder due at the final payment of the promissory note. The principal and interest under the note is repayable in 10 monthly installments of $29,288 each. At September 30, 2017 and December 31, 2016, the remaining balance of the note was $248,908 and $0, respectively.

Crede CG III, Ltd.

On May 2, 2016, we entered into a Master Exchange Agreement with Crede (the “Master Exchange Agreement”), an entity that purchased a portion our previously issued notes held by RBL described above. Pursuit to the Master Exchange Agreement, we have the right to request that Crede exchange up to $3,965,000 of the RBL promissory notes for shares of our common stock. On March 3, 2017, we entered into an Amendment to Master Exchange Agreement with Crede, which extended the expiration date of the Master Exchange Agreement from December 31, 2016 to August 31, 2017. Accordingly, this extends the time to which we have the right to request Crede to exchange RBL promissory notes for shares of the Company’s common stock on the terms and conditions set forth in the Master Exchange Agreement.

On July 27, 2017, we exchanged 26,772 shares of our common stock for $105,969 of the original $3,315,000 RBL promissory note partially purchased by Crede, based on an average per share exchange price of $4.00. The exchange included a non-cash exchange premium of $19,865. For the three months ended September 30, 2016, we did not exchange any shares of our common stock for RBL term notes.

For the year ended December 31, 2016, we exchanged 166,340 shares of our common stock with Crede for an aggregate of $2,499,481 of RBL promissory notes, including the full exchange of the $400,000 promissory note (originally entered into February 10, 2015) and $250,000 promissory note (originally entered into March 27, 2015), and the partial exchange for $1,849,481 of the $3,315,000 promissory note (originally entered July 17, 2014). These notes were purchased by Crede for an average per share exchange price of $16.80. The exchanges also settled current interest and loan fees of $302,294 and a non-cash exchange premium of $487,064.

Priority Payment Systems LLC

Effective as of May 18, 2017, we entered into a loan agreement and security agreement with Priority Payment Systems LLC (“PPS”) and issued a promissory note dated May 18, 2017. Pursuant to the loan agreement and the note, we borrowed $2,000,000. Prior to maturity of the loan, the principal amount of the loan will carry a floating interest rate of prime rate plus 6% per annum whichannum. The interest rate was 11% and 10.25% at September 30, 2017.2018 and December 31, 2017, respectively. We may prepay the loan in whole or in part at any time. The loan is repayable in monthly installments consisting of principal plus interest. The loan matures and becomes due and payable in full on May 20, 2019 to the extent not previously prepaid.repaid earlier.

Pursuant to the security agreement, the loan is secured by collateral consisting of accounts, cash or cash equivalents, residuals related to the merchants originated by us and processed by Priority Payments Systems LLC.PPS. The loan agreement, the note and the security agreement contain customary representations, warranties, events of default, remedies and affirmative and negative covenants, as well as the right of first refusal and the right related to the merchants.

Effective as of May 17, 2017, we entered into a corporate guaranty in favor of Priority Payments Systems LLC,PPS, pursuant to which we unconditionally guaranteed the full and prompt payment of each present and future liability, debt and obligation under the loan agreement, the note, the security agreement and other related documents.

On June 27, 2017, we entered into an amendment to the loan agreement with Priority Payment Systems LLCPPS pursuant to which:

During the quarter ended September 30, 2017, we borrowed a total of $284,000 from our $2,500,000 Priority Payments multi – draw loan and repaid $306,323. At September 30, 2017, the balance of this loan is $2,477,677.

Also see Note 17 for activity subsequent to September 30, 2017.

Scheduled DebtNotes Payable Principal Repayment

Scheduled principal maturities on indebtedness at September 30, 20172018 is as follows:

Also see Note 17 for activity subsequent to September 30, 2017.

NOTE 10.6. CONCENTRATIONS

The Company’s total revenue was $44,604,113 and $38,963,559 for the nine months ended September 30, 2017 and 2016, respectively.

Of the $44,604,113 in revenues for the nine months ended September 30, 2017, $43,263,217 was derived from processing of Visa®, MasterCard®, Discover® and American Express® card transactions and $1,340,896 was derived from providing mobile payment services branded content during the nine months ended September 30, 2017. 

Total revenue was $38,963,559 for the nine months ended September 30, 2016, of which $29,442,868 was derived from processing of Visa®, MasterCard®, Discover® and American Express® card transactions, and $5,000,137 that was derived from providing mobile payment services branded content during the nine months ended September 30, 2016.

The creditCredit card processing revenues wereare from merchant customer transactions, which were processed primarily by two third-party processors (greater than 5%) and our own dedicated bank identification number ("BIN")/Interbank Card Association ("ICA") number during the three and nine months ended September 30, 2018 and one third-party processors (greater than 5%) during the three and two nine months ended September 30, 2017. 

For the three months ended September 30, 2018, we processed 59% of our total revenue with PPS, 21% from our own dedicated BIN/ICA number, and 6% from First Data Corp. For the three months ended September 30, 2017, we processed 82% of our total revenue with PPS.

For the nine months ended September 30, 20172018, we processed 64% of our total revenue with PPS, 16% from our own dedicated BIN/ICA, and 2016.5% from First Data Corp. For the nine months ended September 30, 2017, and 2016, the Companywe processed 77% and 61%, respectively, of itsour total revenue with Priority Payment Systems, LLCPPS and 5% and 7%, respectively, of itsour total revenue with Vantiv, Inc. (f/k/a National Processing Company (NPC)).

Mobile electronic payment revenues were derived from merchant customer transactions processed by mobile operators. For the nine months ended September 30, 2017, no mobile operator processed transactions that generated more than 5% our revenues. For the nine months ended September 30, 2016, Beeline (OJSC Vimpelcom) processed transactions that generated 11%

NOTE 7. COMMITMENTS AND CONTINGENCIES

NOTE 11. COMMITMENTS AND CONTINGENCIES

Advance and Residual Purchase PayOnline Acquisition CommitmentsAgreement

On May 20, 2015,July 30, 2018, our subsidiaries TOT Group Europe, Ltd. and TOT Group Russiasubsidiary, Unified Portfolio Acquisitions, LLC (the “Purchaser”), entered into an agreementAdvance and Residual Purchase Agreement (the “Agreement”) with Maglenta Enterprises Inc.Universal Partners, LLC (“Universal”). Pursuant to the Agreement, the Purchaser acquired certain transactional services portfolios (“cash flow assets”) from Universal and Champfremont Holding Ltd.Payment Club, LLC (together with Universal, the “PayOnline Sellers”“Seller”) for $2,700,000 (the “Advance Amount”). The cash flow assets consist of residuals (the “Residuals”) that the Sellers are entitled to acquire all of the assets and liabilities that comprise PayOnline. PayOnline’s business includes the operation of a protected payment processing system to accept bank card payments for goods and services.

Purchase consideration consisted of a combination of $3.6 million in cash, and restricted common shares with a value of $3.6 million payable in five quarterly installments, and, if applicable, additional earn-out payments in cash and restricted common shares based on a multiple of EBITDA and subjectreceive pursuant to certain EBITDA target achievements in the applicable quarter. The PayOnline acquisition agreement set forth the determination of the value of such shares based on the closing stock price on the date before each applicable payment date. The agreement called for a guarantee, payable in cash, for decreases in the market value of the restricted common shares issued at 12 months from the date of the respective issuances. On May 19, 2016, we recognized a charge in the amount of $2,162,861 for decreases in the market value of the restricted common shares issued pursuant to the stock price guarantee.

On October 25, 2016, we entered into a settlement agreementagreements (the “Combined Marketing Agreements”) with the PayOnline Sellers relating to the stock price guarantee provision in the PayOnline acquisition agreementTOT Payments, LLC (doing business as Unified Payments), our subsidiary, or any other agreements pursuant to which wethe Seller is entitled to residuals.

The Advance Amount is to be repaid to the Purchaser whereby each and every month, commencing from July 1, 2018 (the “Effective Date”) and for a period of 24 months thereafter, terminating on June 30, 2020 (the “Advance Period”), the Purchaser is entitled to a certain amount of the Residuals. Such Residuals due to the Purchaser are secured by certain of the Seller’s property as collateral.

At the end of the Advance Period (the “Transfer Date”), the Purchaser and the Seller have agreed to paycreate a new static portfolio pool of mutually agreed residual income from Seller ISO codes comprising merchant accounts boarded by the PayOnline SellersSeller under the Combined Marketing Agreements that on the Transfer are generating at least $120,000- per month in net residual income (the “Portfolio Residuals”). From and after the Transfer Date, the Purchaser and Seller will share/split the Portfolio Residuals with the Purchaser owning an aggregate of $2,288,667 plus 10% per annum80% interest accrued from May 20, 2016 in installments pursuant to the payment schedule set forth in the settlement agreement.Portfolio Residuals and the Seller owning a 20% interest in the Portfolio Residuals.

On October 25, 2016, we entered into an amendment to the PayOnline acquisition agreement with the PayOnline Sellers, in which we agreed to assume $1,433,475 of certain refundable merchant deposit reserves. These reserves are expected to be paid in a mix of cash and stock beginning in 2017. On July 19, 2017, we issued 30,759 shares of our common stock in settlement of $252,223 of the reserve liability.Leases

On May 20, 2017, we entered into an amendment to the PayOnline settlement agreement, which reflected the new terms under which the Company agreed to pay to the PayOnline Sellers an aggregate of $1,792,071 plus $29,604 in interest in installments pursuant to a payment schedule set forth in the amendment. For the three months ended September 30, 2017, we paid $623,762 under this payment schedule and the remaining balance of $197,912 was paid on October 20, 2017. See Note 17 for events subsequent to September 30, 2017.North American Transaction Solutions

Leases

InDuring May 2013, we entered into a lease agreement, for approximately 4,0004,101 square feet of office space located at 3363 N.E. 163rd Street, Suites 705 through 707, North Miami Beach, Florida 33160. The term of the lease agreement was from May 1, 2013 through December 31, 2016, with monthly rent increasing from $16,800 per month at inception to $19,448 per month (or $233,377 per year) for the period from January 1, 2016 through December 31, 2016.

In September 2016, this  The lease was extended for a period of five years commencing JanuaryAugust 1, 2017 and expiring DecemberJuly 31, 20212022 with equal monthly base rent increasing each year from $20,421 per month beginning January 1, 2017 ($245,046 per year) to $24,821 per month beginning January 1, 2021 ($297,855 per year). This lease was terminated effective as of August 9, 2017 and superseded by a new lease we entered into on. On August 9, 2017, we executed a new five year lease for our office space in North Miami Beach, Florida through July 2022, which supersedes our previous lease for the premises. The lease provides for a monthly rentinstallments of $14,354 ($172,248 annually).per year) plus sales tax. 

Effective June 1, 2017, Netlab Systems, LLC, through its Russian representative office, executed a lease forNet Element Software, our subsidiary, currently leases 1,654 square feet of office space in Yekaterinburg, Russia, where we conduct softwaredevelop value added services, mobile applications, smart terminals applications, sales central ERP system development and marketing activities, at an annual rent of approximately $24,000 (utilities included).$24,300. The currentlease was renewed on same terms and the lease term expires inon June 1, 2018.2019.

International Transaction Solutions

PayOnline leasesSystems leased approximately 5,4354,675 square feet of office space in Moscow, Russia at an annual rent of $153,623. The current lease term for 5,268$84,457 which expired on September 30, 2018.  This space was reduced to 3,385 square feet of this office space expires on July 15, 2018 and this lease has an auto-renewal feature. The remaining 167 square feet in Moscow hasrenewed at an annual rent of $3,104 and the lease expires April 30, 2018. PayOnline also operates two regional offices. For the first regional office, PayOnline leases approximately 275 square feet of office space in Ekaterinburg, Russia at annual rent of $3,444. For the second regional office, PayOnline leases approximately 155 square feet of office space in Almaty, Russia at annual rent of $1,536.

On May 12, 2017, Digital Provider leased approximately 1,566 square feet of office space in Moscow, Russia at annual rent of $27,500. The lease term for the office space was set to expire$56,000 expiring on April 11, 2018. This lease was terminated in August 2017 as part of the consolidation of Digital Provider operations into the PayOnline Moscow office.31, 2019. 

We believe that our current facilities are suitable and adequate for our present purposes, and we anticipate that we will be able to extend our existing leases on terms satisfactory to us or acquiremove to new facilities on acceptable terms.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read and evaluated in conjunction with the condensed consolidatedfinancial statements and notes thereto contained in this Quarterly Report on Form 10-Q (this "Report") and the Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the "Annual Report") and in Part II, Item 1A of this Report.

CAUTIONARY NOTE 15. INCOME TAXESREGARDING FORWARD-LOOKING STATEMENTS

As used in this  Report, unless the context otherwise indicates, the references to “we”, “us,” “our” or the “Company” refers to Net Element, Inc.

This Report and other written or oral statements made from time to time by us may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can sometimes identify forward looking-statements by our use of the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “forecast,” “guidance” and similar expressions. Some of the statements we use in this report contain forward-looking statements concerning our business operations, economic performance and financial condition, including in particular: our business strategy and means to implement the strategy; measures of future results of operations, such as revenue, expenses, operating margins, and earnings per share; other operating metrics such as shares outstanding and capital expenditures; our success and timing in developing and introducing new products or services and expanding our business, including with respect to joint ventures; and the successful integration of future acquisitions.

Although we believe that the plans and expectations reflected in or suggested by our forward-looking statements are reasonable, those statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, many of which are beyond our control, cannot be foreseen and reflect future business decisions that are subject to change. Accordingly, we cannot guarantee you that our plans and expectations will be achieved. Our actual results, including actual revenues, revenue growth rates and margins, other results of operations and shareholder values, could differ materially from those anticipated in our forward-looking statements as a result of known and unknown factors, many of which are beyond our ability to predict or control. These factors include, but are not limited to, those set forth in Part II, Item 1A - Risk Factors of this Report and in our Annual Report, those set forth elsewhere in this report and those set forth in our press releases, reports and other filings made with the SEC. These cautionary statements qualify all of our forward-looking statements, and you are cautioned not to place undue reliance on these forward-looking statements.

Our net deferred tax assets primarily are comprised of net operating loss carryforwards (“NOLs”), and basis difference in goodwill and intangibles. These NOLs total approximately $53.8 million and $48.6 million for federal, and approximately $13.8 million and $13.2 million for foreign NOLsforward-looking statements speak only as of September 30, 2017the date they are made and September 30, 2016, respectively.should not be relied upon as representing our plans and expectations as of any subsequent date. While we may elect to update or revise forward-looking statements at some time in the future, we specifically disclaim any obligation to publicly release the results of any revisions to our forward-looking statements.

Overview

We are a financial technology-driven group specializing in payment acceptance and value-added solutions across multiple channels in the United States and selected international markets. We are differentiated by our proprietary technology which enables us to provide a broad suite of payment products, end-to-end transaction processing services and superior client support. We are able to deliver our services across multiple points of access, or “multi-channel,” including brick and mortar locations, software integration, e-commerce, mobile operator billing, mobile and tablet-based solutions. In the United States, via our U.S. based subsidiaries, we generate revenues from transactional services and value-added payment technologies for small and medium-sized businesses. Through TOT Group Russia, we provide transactional services, mobile payment transactions, online payment transactions and other payment technologies in selected international markets, the Russian Federation, Eurasian Economic Community (“EAEC”), Europe and Asia.

Our transactional services business enables merchants to accept credit cards as well as other forms of payment, including debit cards, checks, gift cards, loyalty programs and alternative payment methods in traditional card-present or swipe transactions, as well as card-not-present transactions, such as those conducted over the phone or through the Internet or a mobile device. We market and sell our services through both independent sales groups (“ISGs”), which are non-employee, external sales organizations and other third-party resellers of our products and services, and directly to merchants through electronic media, telemarketing and other programs, including utilizing partnerships with other companies that market products and services to local and international merchants. We have agreements with several banks that sponsor us for membership in the Visa ®, MasterCard ®, American Express ® and Discover ® card brands and settle card transactions for our merchants. These agreements allow us to use the banks’ identification numbers, referred to as Bank Identification Numbers (BIN) for Visa® transactions and Interbank Card Association (ICA) number for MasterCard® transactions. The principal sponsoring banks through which we process the majority of our transaction in the United States include Citizens Bank, Esquire Bank, N.A. and Wells Fargo Bank, N.A. From time to time, we may enter into agreements with additional banks. We perform core functions for merchants such as application processing, underwriting, number account set-up, risk management, fraud detection, merchant assistance and support, equipment deployment, chargeback services and offer our own dedicated BIN and ICA for various types of specialty merchants.

Our mobile payments business, previously provided through Digital Provider, has been combined with PayOnline to provide contracts with mobile operators that give us the ability to offer our clients in-app, premium SMS (short message services, which is a text messaging service), Wireless Application Protocol (WAP)-click, one click and other carrier billing services. We have substantially reorganized this business, and currently we are not generating revenues from new mobile content. We have not yet been able to find or solidify an acceptable joint venture partner or other arrangement that provides sufficient profit potential and operating benefit for our mobile payments operations.

PayOnline provides flexible, high-tech payment solutions to companies doing business on the Internet or in the mobile environment. PayOnline specializes in integration and customization of payment solutions for websites and mobile apps. In particular, PayOnline arranges payment on the website of any commercial organization, which increases the convenience of using the website and helps maximize the number of successful transactions. In addition, PayOnline is focused on providing online and mobile payment acceptance services to the travel industry through direct integration with leading Global Distribution Systems (“GDS”), which include Amadeus® and Sabre®. Key geographic regions that PayOnline serves include Eastern Europe, Central Asia, Western Europe, North America and Asia major sub regions. PayOnline offices are located in Moscow, Russia.

Aptito is a proprietary, cloud-based payments platform for the hospitality industry, which creates an online consumer experience in offline commerce environments via tablet, mobile and all other cloud-connected devices. Aptito’s easy to use point-of-sale (“POS”) system makes things easier by providing a comprehensive solution to the hospitality industry to help streamline management and operations. Orders placed tableside by customers directly speed up the ordering process and improve overall efficiency. Aptito’s mobile POS system provides portability to the staff while performing all the same functions as a traditional POS system, and more.

The timingCompany entered into a memorandum of understanding during the third quarter of 2018 with Bank Sputnik (“the Bank”), located in Russia, to launch a technology platform expected to provide a suite of frictionless payment acceptance services for financial institutions and mannervalue-added providers. This new payment processing center would integrate the Bank’s expertise in whichenabling secure globally inter-operable financial transactions with our expertise in developing frictionless value-added payment acceptance services. In addition, this payment processing center is expected to accelerate the delivery of payment acceptance services in this market, combining banking services and bill payments in a multi-channel environment. It is contemplated that we will be able to utilize our NOLs is limited by Section 382execute the deployment, launch and servicing of the Internal Revenue Codepayment processing center in exchange for 25% of 1986, as amended (IRC). IRC Section 382 imposes limitations on a corporation’s ability to use its NOLs when it undergoes an “ownership change.” Generally, an ownership change occurs if one or more shareholders, each of whom owns 5% or more in value of a corporation’s stock, increase their percentage ownership, in the aggregate, by more than 50% over the lowest percentage of stock owned by such shareholders at any time during the preceding three-year period. Because on June 10, 2014, we underwent an ownership change as defined by IRC Section 382, the limitation applies to us. The losses generated prior to the ownership change date (pre-change losses) are subject to the Section 382 limitation. The pre-change losses may only become available to be utilized by us at the rate of $2.4 million per year. Any unused losses can be carried forward, subject to their original carry forward limitation periods. In the year 2017, approximately $2.4 million in the pre-change losses was released from the Section 382 loss limitation. We can still fully utilize the NOLs generated after the changeissued and outstanding shares of the ownership, which was approximately $14.0 million. Thus, we expectBank. The Bank will provide the totalcapacity for the data center for deployment and subsequent use of approximately $18.1 million as of September 30, 2017 is available to offset future taxable income.

In order to fully utilizesoftware required for the net deferred tax assets, we will need to generate sufficient taxable income in future years to utilize its NOLs prior to their expiration. ASC Topic 740, “Income Taxes”, requires us to analyze all positive and negative evidence to determine if, based on the weight of available evidence, we are more likely than not to realize the benefitimplementation of the net deferred tax assets. The recognition of the net deferred tax assets and related tax benefits is based upon our conclusions regarding, among other considerations, estimates of future earnings based on information currently available, current and anticipated customers, contracts and product introductions,program, as well as historical operating resultsfinancial instruments for settlement of transactions and certain tax planning strategies.funding required for the development and implementation. This joint venture with the Bank is subject to approval of the shareholders of the Bank and their regulators. Currently, the parties, which include the Company, are still negotiating and anticipate entering into a definitive binding agreement that will contain the specific terms and conditions of the transaction in the near future.

We have evaluatedPrior to the available evidence and the likelihoodfourth quarter of realizing the benefit of our net deferred tax assets. From our evaluation, we have concluded that based on the weight of available evidence, it is more likely than not that we will not realize any of the benefit of its net deferred tax assets. Accordingly, at September 30, 2017, we maintain a full valuation allowance totaling approximately $24.9 million.

NOTE 16. SEGMENT INFORMATION

Ourhad three reportable segments include:business segments: (i) North American Transaction Solutions, for electronic commerce, (ii) Mobile Solutions (primarily servicing the Russian Federation and Eurasia) and (iii) Online Solutions. Management determines the reportable segments based on the internal reporting used by our Chief Operating Decision Makerinformation necessary to evaluate performance and to assess where to allocate resources.  DuringIn addition, management considers certain other factors, such as, the three months ended September 30, 2017increased growth in our North American Transactions Solutions segment and 2016, the principal revenue stream for allconsolidation of our mobile solutions business with our online solutions business, which has changed how management evaluates performance and allocates resources. We now have two reportable business segments came from services fees.

Factors management used to identify the entity’s reportable segments(i) North American Transaction Solutions and (ii) International Transaction Solutions.

The Company’s reportable segments are business units that offer different products and services in different geographies. The reportable segments are each managed separately because they offer distinct products, in distinct geographic locations, with different delivery and service processes.

North American Transaction Solutions

Our U.S. payment processingNorth American Transaction Solutions business segment consists of the former Unified Payments business and Aptito. This segment operates primarily in North America. In March 2013, we acquired all of the business assets of Unified Payments, a provider of comprehensive turnkey, payment processing solutions to small and medium size business owners (merchants) and independent sales organizations across the United States.

In April 2013, we purchased 80% of Aptito, a cloud basedcloud-based Software-as-a-Service (“SaaS”) restaurant management solution, which provides integrated POS, mPOS, Kiosk, Digital Menus functionality to drive consumer engagement via Apple® iPad®-based POS, kiosk and all other cloud-connected devices.

MobileInternational Transaction Solutions

Our Russian mobile and online payment processingInternational Transaction Solutions segment consists of Digital Provider,PayOnline, which operates primarily in the Russian Federation and Eurasia.

In June 2012, we formedalso now includes our mobile payment subsidiary that launched initialpayments operations, primarily located in Russia asRussia. PayOnline provides a payment facilitator using SMS (short message services, which is a text messaging service) and MMS (multimedia message services) for mobile phone subscribers. During 2015, we changed or business model, rebranded our name to Digital Provider and began to offer branded content to subscribers. 

The business model required significant working capital investment as payments were advanced and then collected from mobile operators 45 days later. During 2016, we began working to raise additional capital for this business and develop an alternative business model that did not require large amounts of working capital to advance the business. This process is on-going and in August 2017, we substantially reorganized this business, and consolidated its operations into PayOnline and TOT Group Russia.  We currently are not generating revenues from new content, and we continue to explore partnership opportunities that can monetize our relationships and contracts with mobile operators.  

Online Solutions

On May 20, 2015, we acquired the net assets that comprise PayOnline, which includes a protectedsecure online payment processing system to accept bank card payments for goods and services. PayOnline primarily operates in Russia and Eurasia.

The accounting policies of the individual transactions in the reportable segments are the same as those of the company, as described in Note 1. Transactions between reportable segments are primarily conducted at market rates, resulting in segment profits or expenses that are eliminated for reporting consolidated results.

Segment Summary Information

The following tables present financial information of the Company’s reportable segments at and for the three and nine months ended September 30, 20172018 and 2016.2017. The “Corporate Expenses & Eliminations”“corporate and eliminations” column includes all corporate expenses and intercompany eliminations for consolidated purposes.