Item 15. Exhibits and Financial Statement
Schedules.
Documents filed as part of this Report.
|
1.
|
The following consolidated financial statements of Net Element, Inc.
and subsidiaries and notes thereto and the reports of the independent registered public accounting firms thereon are set forth
on pages F-2 through F-31 and are filed as part of this Report:
|
|
|
|
|
|
Reports of Independent Registered Public Accounting Firms
|
|
|
|
|
|
Audited Consolidated Balance Sheets as of December 31, 2016 and 2015
|
|
|
|
|
|
Audited Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 2016 and 2015
|
|
|
|
|
|
Audited Consolidated Statements of Changes in Stockholders’ Equity for the years ended
December 31, 2016 and 2015
|
|
|
|
|
|
Audited Consolidated Statements of Cash Flows for the years ended December 31, 2016 and
2015
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
2.
|
Exhibits.
|
|
|
|
|
|
A list of the exhibits filed as a part of this Report is set forth on the Exhibit Index
that follows page F-31 of this Report and is incorporated herein by reference.
|
Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
Net Element, Inc.
|
|
|
|
March 31, 2017
|
By:
|
/s/ Oleg Firer
|
|
|
Oleg Firer
|
|
|
Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
March 31, 2017
|
By:
|
/s/ Oleg Firer
|
|
|
Oleg Firer
|
|
|
Chief Executive Officer and Director (Principal Executive Officer)
|
|
|
|
March 31, 2017
|
By:
|
/s/ Jonathan New
|
|
|
Jonathan New
|
|
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|
|
|
|
March 31, 2017
|
By:
|
/s/ Kenges Rakishev
|
|
|
Kenges Rakishev
|
|
|
Director
|
|
|
|
March 31, 2017
|
By:
|
/s/ Drew Freeman
|
|
|
Drew Freeman
|
|
|
Director
|
|
|
|
March 31, 2017
|
By:
|
/s/ Howard Ash
|
|
|
Howard Ash
|
|
|
Director
|
|
|
|
March 31, 2017
|
By:
|
/s/ James Caan
|
|
|
James Caan
|
|
|
Director
|
|
|
|
March 31, 2017
|
By:
|
/s/ William Healy
|
|
|
William Healy
|
|
|
Director
|
NET ELEMENT, INC.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Net Element, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheets
of Net Element, Inc. (the “Company”) at December 31, 2016 and 2015, and the related consolidated statements of operations
and comprehensive loss, changes in stockholders’ equity and cash flows for the years then ended. The Company’s management
is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of Net Element, Inc. at December 31, 2016 and 2015,
and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As described in Note 3 to the consolidated financial statements,
the Company has sustained recurring losses from operations and has working capital and accumulated deficits that raise substantial
doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note
3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our opinion is not modified with respect to this matter.
/s/ Daszkal Bolton LLP
Fort Lauderdale, Florida
March 31, 2017
NET ELEMENT, INC.
CONSOLIDATED BALANCE SHEETS
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
621,635
|
|
|
$
|
1,025,747
|
|
Accounts receivable, net
|
|
|
7,126,429
|
|
|
|
5,198,993
|
|
Prepaid expenses and other assets
|
|
|
1,467,897
|
|
|
|
1,106,016
|
|
Total current assets, net
|
|
|
9,215,961
|
|
|
|
7,330,756
|
|
Fixed assets, net
|
|
|
117,295
|
|
|
|
162,123
|
|
Intangible assets, net
|
|
|
3,589,850
|
|
|
|
5,423,880
|
|
Goodwill
|
|
|
9,643,752
|
|
|
|
9,643,752
|
|
Other long term assets
|
|
|
742,810
|
|
|
|
353,050
|
|
Total assets
|
|
|
23,309,668
|
|
|
|
22,913,561
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
7,510,113
|
|
|
|
5,858,837
|
|
Accrued expenses
|
|
|
5,518,823
|
|
|
|
2,975,066
|
|
Deferred revenue
|
|
|
1,355,972
|
|
|
|
743,910
|
|
Notes payable (current portion)
|
|
|
808,976
|
|
|
|
518,437
|
|
Due to related parties
|
|
|
299,004
|
|
|
|
329,881
|
|
Total current liabilities
|
|
|
15,492,888
|
|
|
|
10,426,131
|
|
Notes payable (net of current
portion)
|
|
|
3,755,383
|
|
|
|
3,446,563
|
|
Total liabilities
|
|
|
19,248,271
|
|
|
|
13,872,694
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred stock ($.0001 par value,
1,000,000 shares authorized, no shares issued and outstanding at December 31, 2016 and December 31, 2015)
|
|
|
-
|
|
|
|
-
|
|
Common stock ($.0001 par value, 400,000,000 shares
authorized and 15,353,494 and 11,261,959 shares issued and outstanding at December 31, 2016 and December 31, 2015
|
|
|
1,535
|
|
|
|
1,126
|
|
Paid in capital
|
|
|
163,918,685
|
|
|
|
154,361,694
|
|
Accumulated other comprehensive loss
|
|
|
(2,486,616
|
)
|
|
|
(1,565,822
|
)
|
Accumulated deficit
|
|
|
(157,442,585
|
)
|
|
|
(143,955,048
|
)
|
Noncontrolling interest
|
|
|
70,378
|
|
|
|
198,917
|
|
Total stockholders' equity
|
|
|
4,061,397
|
|
|
|
9,040,867
|
|
Total liabilities and stockholders'
equity
|
|
$
|
23,309,668
|
|
|
$
|
22,913,561
|
|
See accompanying
notes to the consolidated financial statements
NET ELEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
|
|
Twelve months ended December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
Service fees
|
|
$
|
48,784,855
|
|
|
$
|
31,204,871
|
|
Branded content
|
|
|
5,502,004
|
|
|
|
9,030,491
|
|
Total revenues
|
|
|
54,286,859
|
|
|
|
40,235,362
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of service fees
|
|
|
40,521,236
|
|
|
|
25,858,098
|
|
Cost of branded content
|
|
|
5,187,005
|
|
|
|
8,119,117
|
|
General and administrative
|
|
|
8,797,883
|
|
|
|
9,310,477
|
|
Non-cash compensation
|
|
|
3,463,435
|
|
|
|
4,306,304
|
|
Bad debt expense
|
|
|
1,688,237
|
|
|
|
649,571
|
|
Depreciation and amortization
|
|
|
3,466,511
|
|
|
|
2,513,162
|
|
Total costs and operating expenses
|
|
|
63,124,307
|
|
|
|
50,756,729
|
|
Loss from operations
|
|
|
(8,837,448
|
)
|
|
|
(10,521,367
|
)
|
Interest expense, net
|
|
|
(1,463,833
|
)
|
|
|
(3,575,698
|
)
|
Loss on change in fair value and settlement of beneficial conversion derivative
|
|
|
-
|
|
|
|
(26,932,496
|
)
|
Loss from stock value guarantee and other charges from PayOnline acquisition
|
|
|
(3,722,142
|
)
|
|
|
-
|
|
Gain on debt extinguishment
|
|
|
-
|
|
|
|
27,743,980
|
|
Gain on asset disposal
|
|
|
-
|
|
|
|
40,369
|
|
Other income (expense), net
|
|
|
407,347
|
|
|
|
(82,714
|
)
|
Net loss before income taxes
|
|
|
(13,616,076
|
)
|
|
|
(13,327,926
|
)
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
(13,616,076
|
)
|
|
|
(13,327,926
|
)
|
Net loss attributable to the noncontrolling interest
|
|
|
128,539
|
|
|
|
74,314
|
|
Net loss attributable to Net Element, Inc. stockholders
|
|
|
(13,487,537
|
)
|
|
|
(13,253,612
|
)
|
|
|
|
|
|
|
|
|
|
Dividends for the benefit of preferred stockholders
|
|
|
-
|
|
|
|
(1,585,092
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Net Element, Inc. common stockholders
|
|
|
(13,487,537
|
)
|
|
|
(14,838,704
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(920,794
|
)
|
|
|
(314,361
|
)
|
Comprehensive loss attributable to common stockholders
|
|
$
|
(14,408,331
|
)
|
|
$
|
(15,153,065
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
|
$
|
(1.03
|
)
|
|
$
|
(2.32
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic and diluted
|
|
|
13,058,009
|
|
|
|
6,391,120
|
|
See accompanying
notes to the consolidated financial statements
NET ELEMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Stock
|
|
|
Comprehensive
|
|
|
Non-controlling
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Subscription
|
|
|
Income
|
|
|
interest
|
|
|
Deficit
|
|
|
in
Assets
|
|
Balance December 31, 2014
|
|
|
-
|
|
|
|
-
|
|
|
|
4,588,152
|
|
|
$
|
459
|
|
|
$
|
136,693,759
|
|
|
$
|
(1,111,130
|
)
|
|
$
|
(1,251,461
|
)
|
|
$
|
269,762
|
|
|
$
|
(129,116,344
|
)
|
|
$
|
5,485,045
|
|
Share based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
401,532
|
|
|
|
39
|
|
|
|
4,306,264
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,306,303
|
|
Preferred shares issued
|
|
|
5,500
|
|
|
|
5,287,082
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Preferred shares converted to common shares
|
|
|
(5,500
|
)
|
|
|
(5,287,082
|
)
|
|
|
3,376,045
|
|
|
|
338
|
|
|
|
9,035,746
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,036,084
|
|
Preferred share dividends paid
|
|
|
-
|
|
|
|
-
|
|
|
|
612,891
|
|
|
|
61
|
|
|
|
1,585,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,585,092
|
|
Shares issued in connection with debt restructuring
|
|
|
-
|
|
|
|
-
|
|
|
|
420,805
|
|
|
|
42
|
|
|
|
1,346,606
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,346,648
|
|
Shares issued in exchange for warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
250,000
|
|
|
|
25
|
|
|
|
(2,679,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,679,861
|
)
|
Shares issued and issuable for acquisitions
|
|
|
-
|
|
|
|
-
|
|
|
|
476,821
|
|
|
|
48
|
|
|
|
3,599,952
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,600,000
|
|
Repurchase of non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,489
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,469
|
|
|
|
-
|
|
|
|
(20
|
)
|
Shares issued for insider financing
|
|
|
-
|
|
|
|
-
|
|
|
|
1,135,713
|
|
|
|
114
|
|
|
|
1,588,840
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,588,954
|
|
Write-off of stock subscription receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,111,130
|
)
|
|
|
1,111,130
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(74,314
|
)
|
|
|
(14,838,704
|
)
|
|
|
(14,913,018
|
)
|
Comprehensive loss - foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(314,361
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(314,361
|
)
|
Balance December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
11,261,959
|
|
|
$
|
1,126
|
|
|
$
|
154,361,694
|
|
|
$
|
-
|
|
|
$
|
(1,565,822
|
)
|
|
$
|
198,917
|
|
|
$
|
(143,955,048
|
)
|
|
$
|
9,040,867
|
|
Share based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,214,418
|
|
|
|
121
|
|
|
|
4,426,996
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,427,117
|
|
Shares issued and issuable for acquisitions
|
|
|
-
|
|
|
|
-
|
|
|
|
65,430
|
|
|
|
7
|
|
|
|
134,088
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
134,095
|
|
Shares issued in connection with reverse stock split
|
|
|
-
|
|
|
|
-
|
|
|
|
1,801
|
|
|
|
0
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Shares issued for insider financing
|
|
|
-
|
|
|
|
-
|
|
|
|
466,428
|
|
|
|
47
|
|
|
|
988,781
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
988,828
|
|
Shares issued in connection with debt restructuring
|
|
|
-
|
|
|
|
-
|
|
|
|
1,663,401
|
|
|
|
166
|
|
|
|
3,288,670
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,288,836
|
|
Shares issued under ESOUSA agreement
|
|
|
-
|
|
|
|
-
|
|
|
|
680,057
|
|
|
|
68
|
|
|
|
718,456
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
718,524
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(128,539
|
)
|
|
|
(13,487,537
|
)
|
|
|
(13,616,076
|
)
|
Comprehensive loss - foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(920,794
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(920,794
|
)
|
Balance December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
15,353,494
|
|
|
$
|
1,535
|
|
|
$
|
163,918,685
|
|
|
$
|
-
|
|
|
$
|
(2,486,616
|
)
|
|
$
|
70,378
|
|
|
$
|
(157,442,585
|
)
|
|
$
|
4,061,397
|
|
See accompanying
notes to the consolidated financial statements
NET ELEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year
Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss attributable to Net Element, Inc.
stockholders
|
|
$
|
(13,487,537
|
)
|
|
$
|
(13,253,612
|
)
|
Adjustments to reconcile net loss to net cash used
in operating activities
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
(128,539
|
)
|
|
|
(74,309
|
)
|
Share based compensation
|
|
|
3,463,435
|
|
|
|
4,306,304
|
|
Gain on change in fair value and settlement of beneficial
conversion derivative
|
|
|
-
|
|
|
|
26,932,495
|
|
Depreciation and amortization
|
|
|
3,466,510
|
|
|
|
2,513,162
|
|
Non-cash interest
|
|
|
852,408
|
|
|
|
-
|
|
Amortization of deferred revenue
|
|
|
(1,221,177
|
)
|
|
|
-
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
3,027,354
|
|
Provision bad debt expense
|
|
|
500,000
|
|
|
|
-
|
|
Amortization of prepaid costs
|
|
|
967,313
|
|
|
|
|
|
Gain on disposal of fixed asset
|
|
|
-
|
|
|
|
(40,369
|
)
|
Gain on debt extinguishment
|
|
|
-
|
|
|
|
(27,743,980
|
)
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,751,144
|
)
|
|
|
(1,492,183
|
)
|
Deferred revenue
|
|
|
1,833,239
|
|
|
|
271,428
|
|
Prepaid expenses and other assets
|
|
|
(570,582
|
)
|
|
|
291,631
|
|
Accounts payable and accrued expenses
|
|
|
3,797,753
|
|
|
|
3,571,307
|
|
Net cash used in operating activities
|
|
|
(3,278,321
|
)
|
|
|
(1,690,772
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of portfolio and client acquisition costs
|
|
|
(1,319,820
|
)
|
|
|
(878,085
|
)
|
Sale of portfolio
|
|
|
-
|
|
|
|
300,000
|
|
Acquisition of PayOnline assets, net of cash received
|
|
|
-
|
|
|
|
(3,195,452
|
)
|
Purchase of fixed and other assets
|
|
|
(187,089
|
)
|
|
|
(579,209
|
)
|
Net cash used in investing activities
|
|
|
(1,506,909
|
)
|
|
|
(4,352,746
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preferred stock
|
|
|
-
|
|
|
|
5,500,000
|
|
Proceeds from indebtedness
|
|
|
3,170,540
|
|
|
|
650,000
|
|
Repayment of indebtedness
|
|
|
(71,700
|
)
|
|
|
-
|
|
Cash received for issuance of shares and warrants
|
|
|
300,000
|
|
|
|
|
|
Related party advances
|
|
|
1,027,874
|
|
|
|
331,273
|
|
Net cash provided by financing activities
|
|
|
4,426,714
|
|
|
|
6,481,273
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(45,596
|
)
|
|
|
84,649
|
|
Net (decrease) increase in cash
|
|
|
(404,112
|
)
|
|
|
522,404
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of year
|
|
|
1,025,747
|
|
|
|
503,343
|
|
Cash at end of year
|
|
$
|
621,635
|
|
|
$
|
1,025,747
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
611,625
|
|
|
$
|
548,344
|
|
Taxes
|
|
$
|
94,718
|
|
|
$
|
74,563
|
|
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
Stock issued in exchange for warrants
|
|
$
|
-
|
|
|
$
|
2,679,861
|
|
Preferred dividends paid in common stock
|
|
$
|
-
|
|
|
$
|
1,585,092
|
|
Common share issuance for settlement of unpaid compensation
|
|
$
|
1,042,509
|
|
|
$
|
-
|
|
Common shares issued for redemption of indebtedness
|
|
$
|
2,499,481
|
|
|
$
|
1,346,648
|
|
Common shares issued in settlement of advances from
board member
|
|
$
|
909,285
|
|
|
$
|
-
|
|
Common shares issued for acquisition
|
|
$
|
-
|
|
|
$
|
3,600,000
|
|
Common shares issued upon redemption of preferred
shares
|
|
$
|
-
|
|
|
$
|
9,036,084
|
|
See accompanying
notes to the consolidated financial statements
NET ELEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Basis of Presentation
Organization
Net Element, Inc. (“We”, “us”, “our”
or the “Company”) is a financial technology-driven group specializing in mobile payments and other transactional services
in emerging countries and in the United States. We have three reportable segments: (i) North America Transaction Solutions for
electronic commerce, (ii) Mobile Solutions which primarily serves the Russian Federation and Commonwealth of Independent States
(“CIS”) and (iii) Online Solutions. 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
these 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 other payment technologies for small and medium-sized businesses.
Through TOT Group Russia and Net Element Russia, we provide transactional services, mobile payment transactions, online payment
transactions and other payment technologies in emerging countries in the Russian Federation, CIS, Europe and Asia.
Business
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 associations and settle card transactions for our merchants.
The principal
Sponsoring Bank
through which we processed the majority of our transaction in the United States during 2016
was BMO Harris Bank, N.A. On November 1, 2016, we moved all of our processing from BMO Harris Bank, N.A. to Merrick Bank, N.A.
In addition, in February 2016, we entered into a bank identification (“BIN”) sponsorship agreement with Esquire Bank,
N.A. As a result of our settlement with First Data, in 2016, we entered into a sponsoring agreement with 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, account set-up, risk management, fraud detection, merchant assistance and support, equipment deployment
and chargeback services.
Our Mobile Solutions business, Digital Provider, LLC (f/k/a
Tot Money, LLC) (“Digital Provider”) provides carrier-integrated mobile payments solutions. Our relationships with
mobile operators give us substantial geographic coverage, a strong capacity for innovation in mobile payments and messaging, and
the ability to offer our clients in-app, premium SMS, wap click, one click and other carrier billing services. We also market
our own branded content as a separate line of business for our mobile commerce business.
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, which includes Amadeus® and Sabre®. Key regions of PayOnline are
the CIS, Eastern Europe, Central Asia, Western Europe, North America and Asia major sub regions. PayOnline offices are located
in Russia, Kazakhstan and in the Republic of Cyprus. We included the results of PayOnline starting in May 20, 2015.
Aptito is a proprietary, next-generation, 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 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.
Basis of Presentation
Use of Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance
sheet date and the reported amounts of expenses for the period presented. Actual results could differ from those estimates.
Significant estimates include (i) the valuation of acquired
merchant portfolios, (ii) the collectability of accounts receivable (iii) the recoverability of indeterminate-lived assets, (iv)
the remaining useful lives of long-lived assets, and (v) the sufficiency of merchant, aggregator, legal, and other reserves. On
an ongoing basis, we evaluate the sufficiency and accuracy of our estimates. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the comparative
period amounts to conform to our current period presentation. These reclassifications had no impact on previously presented financial
condition or results of operations.
Cash and Cash Equivalents
We maintain our U.S. dollar-denominated cash in several non-interest
bearing bank deposit accounts. All U.S. non-interest bearing transaction accounts are insured up to a maximum of $250,000 at FDIC
insured institutions. The bank balances did not exceed FDIC limits at December 31, 2016 and 2015.
We maintain $498,308 and $922,062 in uninsured bank accounts
in Russia and the Cayman Islands at December 31, 2016 and 2015 respectively.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated net of allowance for doubtful
accounts. We estimate an allowance based on experience with our service providers and judgment as to the likelihood of their ultimate
payment. We also consider collection experience and make estimates regarding collectability based on payout trends of the customers.
In Russia, the service providers are subsidiaries of large telecommunication companies and we do not reserve for these receivables
given their financial backing and our historical experience with such companies. The allowance for doubtful accounts was $603,031
at December 31, 2016 and $103,031 December 31, 2015, respectively.
Other Current Assets
We maintain an inventory of POS terminals which we use to service
both merchants and independent sales agents. If the terminals are sold for a fee, we expense the cost of these terminals, plus
any setup fees at the time of the sale. Often, we will provide the terminals as an incentive for merchants and independent sales
agents to enter into a merchant contracts with us. The term of these contracts have an average length of three years and the cost
of the terminal plus any setup fees will be amortized over the contract period. If the merchants early terminate their contract
with us, they are obligated to either return the terminal or pay for the terminal. The Company has $311,206 and $345,459 in terminals,
iPads ® and related equipment as of December 31, 2016 and 2015, respectively, of which $308,582 and $268,501 has been placed
with merchants during 2016 and 2015, respectively. Amortization of these terminals amounted to $126,643 and $110,182 for the years
ended December 31, 2016 and 2015, respectively.
Fixed Assets
We depreciate our furniture and equipment over a term of three
to ten years. Computers and software are depreciated over terms between two and five years. Leasehold improvements are depreciated
over the shorter of the economic life or term of each lease. All of our assets are depreciated on a straight-line basis for financial
statement purposes.
Expenditures for repairs and maintenance are charged to operating
expense as incurred. Expenditures that increase the value or productive capacity of assets are capitalized. At the time of retirements,
sales, or other dispositions of property and equipment, the original cost and related accumulated depreciation are removed from
the respective accounts, and the gains or losses are presented as other expenses.
Intangible Assets
Included in our intangible assets are merchant portfolios,
which represent the net book value of an acquired merchant customer base, and are amortized on a straight-line basis over their
respective useful lives, generally three to five years. Merchant portfolios are assessed for impairment if events or circumstances
indicate that their respective carrying values are not recoverable from the future anticipated undiscounted net cash flows attributable
to such assets. In such cases, the amount of any potential impairment would be measured as the excess, if any, of carrying value
over the fair value of such assets.
We capitalize direct expenses associated with filing of patents
and patent applications and amortize the capitalized intellectual property costs over five years beginning when the patent is
approved.
Additionally, we capitalize the fair value of intangible assets
acquired in business combinations. We perform valuations of assets acquired and liabilities assumed on each acquisition accounted
for as a business combination and allocates the purchase price of each acquired business to its respective net tangible and intangible
assets. Acquired intangible assets include: merchant portfolios, trade names, non-compete agreements, customer relationships and
technology.
Impairment of Long-Lived Assets
We review our long-lived assets for impairment whenever events
or changes indicate that the carrying amount of an asset or group of assets may not be recoverable. During the twelve months ended
December 31, 2016 and 2015, we did not recognize any charges for impairment of goodwill or intangible assets.
Capitalized Customer Acquisition Costs, Net
Capitalized customer acquisition costs consist of up-front
cash payments made to Independent Sales Groups (“ISG’s”) for the establishment of new merchant relationships.
Capitalized customer acquisition costs represent incremental, direct customer acquisition costs that are recoverable through gross
margins associated with merchant contracts. The up-front cash payment to the ISG is based on the estimated gross margin for the
first year of the merchant contract. The deferred customer acquisition cost asset is recorded at the time of payment and the capitalized
acquisition costs are primarily amortized on a straight-line basis over a period of three years.
Management evaluates the capitalized customer acquisition cost
for impairment at each balance sheet date by comparing, on a pooled basis by vintage month of origination, the expected future
net undiscounted cash flows from underlying merchant relationships to the carrying amount of capitalized customer acquisition
costs. If the estimated future net cash flows are lower than the recorded carrying amount, indicating an impairment of the carrying
value of the capitalized customer acquisition costs, the impairment loss is charged to operations.
During the years ended December 31, 2016 and 2015, we recorded
$1,319,820 and $878,085, respectively, in additional capitalized customer acquisition costs, and $670,543 and $356,757, respectively,
in related additional amortization. The balance of customer acquisition costs was $1,697,337 and $1,048,060 at December 31, 2016
and 2015, respectively, and is reflected in intangible assets in the accompanying consolidated balance sheets.
Accrued Residual Commissions
We report commission payments as a cost of revenues in the
accompanying consolidated statement of operations and comprehensive loss. We pay agent commissions to ISGs and independent sales
agents based on the processing volume of the merchants enrolled. The commission payments are based on varying percentages of the
volume processed by us on behalf of the merchants. Percentages vary based on the program type and transaction volume of each merchant.
We report commission payments as a cost of revenues in the accompanying consolidated statement of operations and comprehensive
loss.
At December 31, 2016 and 2015 the residual commissions payable
to ISGs and independent sales agents were $1,347,352 and $1,205,751, respectively.
We pay agent commission on annual fees between January and
April of each year. We amortize the annual fees paid in equal monthly amounts from date of payment to end of year. We pay our
agent commissions for annual fees in advance of recognizing the associated revenue. We deferred $863,604 and $483,090 of agent
commissions paid for annual fees at December 31, 2016 and 2015, respectively. Prepaid agent commissions for annual fees are included
in prepaid expenses and other assets, and commissions payable are included in accounts payable in the accompanying condensed consolidated
balance sheets.
Financial Instruments
Convertible securities containing detachable warrants where
the conversion price of the security and/or the exercise price of the warrants are affected by the current market price of our
common stock are accounted for as derivative financial instruments when the exercise and conversion prices are not considered
to be indexed to our stock.
For such issuances of convertible securities with detachable
warrants, we initially record both the warrant and the beneficial conversion feature (“BCF”) at fair value, using
option pricing models commonly used by the financial services industry (Black-Scholes-Merton options pricing model) using inputs
generally observable in the financial services industry. These derivative financial instruments are marked-to-market each reporting
period, with unrealized changes in value reflected in earnings as a gain or loss on change in fair value and settlement of beneficial
conversion derivative.
For discounts arising from issuances of instruments embedded
in a debt security, the discount is presented on the consolidated balance sheets as a discount to the principal amount of the
related note payable. For discounts arising from issuances of instruments embedded in an equity security, the discount is presented
as a reduction to additional paid-in-capital.
The resulting discounts arising from the initial recording
of the warrants and BCF are amortized over the term of the host security. The classification of the amortization is based on the
nature of the host instrument. In this respect, amortization of discounts associated with debt issuances are classified as interest
expense, whereas amortization of discounts associated with preferred stock issuances are classified as preferred stock dividends.
At the time a warrant or BCF is exercised or cancelled, the
fair value of the derivative financial instrument at the time of exercise/cancellation is calculated, and a realized gain or loss
on conversion is determined and reported as a gain or loss on change in fair value and settlement of beneficial conversion derivative
on the Statement of Operations and Comprehensive Loss.
Fair Value Measurements
Our financial instruments consist primarily of cash, accounts
receivables, merchant portfolios, notes receivable, trade payables and debt instruments. The carrying values of cash and cash
equivalents, accounts receivable and trade payables are considered to be representative of their respective fair values due to
the short-term nature of these instruments. The carrying amount of the long-term debt of $4.6 million at December 31, 2016 approximates
fair value because current borrowing rate does not materially differ from market rates for similar bank borrowings. The long-term
debt is classified as a Level 2 item within the fair value hierarchy.
We measure certain nonfinancial assets and liabilities at fair
value on a nonrecurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants at the measurement date. We use a three-level fair value hierarchy to prioritize the inputs used to
measure fair value and maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of
inputs used to measure fair value are as follows:
Level 1 — Quoted market prices in active markets for
identical assets or liabilities as of the reporting date
Level 2 — Observable market based inputs or unobservable
inputs that are corroborated by market data
Level 3 — Unobservable inputs that are not corroborated
by market data
These non-financial assets and liabilities include intangible
assets and liabilities acquired in a business combination as well as impairment calculations, when necessary. The fair value of
the assets acquired and liabilities assumed in connection with the PayOnline acquisition, as discussed in Note 4, were measured
at fair value by us at the acquisition date. The fair values of our merchant portfolios are primarily based on Level 3 inputs
and are generally estimated based upon independent appraisals that include discounted cash flow analyses based on our most recent
cash flow projections, and, for years beyond the projection period, estimates based on assumed growth rates. Assumptions are also
made regarding appropriate discount rates, perpetual growth rates, and capital expenditures, among others. In certain circumstances,
the discounted cash flow analyses are corroborated by a market-based approach that utilizes comparable company public trading
values, and, where available, values observed in private market transactions. The inputs used by management for the fair value
measurements include significant unobservable inputs, and therefore, the fair value measurements employed are classified as Level
3. The goodwill impairment was primarily based on observable inputs using company specific information and is classified as Level
3.
Concentrations
See Note 11 for full concentration disclosure.
Foreign Currency Transactions
We are subject to exchange rate risk in our foreign operations
in Russia, the functional currency of which is Russian Ruble, where we generate service fee revenues and interest income and incurs
product development, engineering, website development, and general and administrative costs and expenses. The Russian engineering
operations pay a majority of their operating expenses in their local currencies, exposing us to exchange rate risk.
We do not engage in any currency hedging activities.
Revenue Recognition
We recognize revenue when the following four basic criteria
have been met: (1) persuasive evidence of a sales arrangement exists; (2) performance of services has occurred, (3) the sales
price is fixed or determinable, and (4) collectability is reasonably assured. We consider persuasive evidence of a sales 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.
Our revenues for the years ended December 31, 2016 and 2015
are principally derived from the following sources:
Transactional Processing Fees:
Transactional processing
fees are generated primarily from TOT Payments doing business as Unified Payments, which is our North America Transaction Solutions
segment, PayOnline, which is our Russian online transaction processing company, consolidated effective May 20, 2015 when we obtained
control of PayOnline. See “PayOnline” in Note 4 for additional more information and Aptito our point of sale solution
for restaurants.
Our transactional processing companies derive revenues primarily
from the electronic processing of services including: credit, debit, electronic benefits transfer and alternative payment methods
card processing authorized and captured through proprietary and third party networks, electronic gift certificate processing,
and equipment sales. These revenues are recorded as bankcard and other processing transactions when processed. In addition to
generating service fees, Aptito earns monthly license fees for use of its platform.
Typically, fees charged to merchants for these processing services
are based on a variable percentage of the dollar amount of each transaction and in some instances, additional fees are charged
for each transaction. Merchant customers also may be charged miscellaneous fees, including statement fees, annual fees, monthly
minimum fees, fees for handling chargebacks, gateway fees, and fees for other miscellaneous services.
Generally, we (i) are the primary obligor in our arrangements
with our merchant customers, (ii) have latitude in establishing the price of our services, (iii) have the ability to
change the product and perform parts of the services, (iv) have discretion in supplier selection, (v) have latitude
in determining the product and service specifications to meet the needs of our merchant customers, and (vi) assume credit
risk. In such cases, we report revenues as gross of fees deducted by our sponsoring member banks, as well as fees deducted from
card-issuing member banks and card associations (Visa® and MasterCard®) on behalf of our sponsoring member banks for interchange
and assessments. These fees charged by the card associations to process the credit card transactions are recorded separately as
cost of revenue and interchange fees in the accompanying condensed consolidated statement of operations and comprehensive loss.
Service Fees:
Service fees are generated primarily
from mobile payment processing services provided to third party content aggregators by Digital Provider. Service fees for services
provided for content providers were recorded net of mobile operator fees during 2014 and the first half of 2015. In July of 2015,
TOT Money began to offer its branded content to customers and changed its name to “Digital Provider”. Digital Provider’s
revenues for the access of branded content are recorded at the amounts charged to the mobile subscriber. A corresponding charge
to cost of sales for mobile operator and content fees is recorded for branded content. Revenues for access to branded content
are recorded on the income statement as branded content revenues.
Mobile payment processing revenues for third party content
providers continue to be accounted for as service fees and presented net of aggregator and mobile operator payments on the consolidated
financial statements as these revenues are considered to be agency fees.
Cost of revenues for Digital Provider is comprised primarily
of mobile operator fees, content provider fees and fees for short numbers paid to mobile operators. Additionally, penalties and
penalty recoveries are recorded as cost of sales. Service revenues for mobile payment processing services are presented net as
these revenues are considered to be agency fees.
Subscription revenues for our branded content are recognized
when a content subscriber initiates the purchase of our access to content using WAP-click, Internet-click, or a SMS-to-short number
registered to us.
Digital Provider’s subscription revenues are recorded
at the amounts charged to the third party customer. Cost of revenues for Digital Provider branded content includes fees due to
mobile operators and marketing partners, as well as short number fees.
Cost of revenues for TOT Payments, Aptito and PayOnline is
comprised primarily of processing fees paid to third parties attributable to providing transaction processing and service fees
for POS system usage by our merchant customers. Interchange fees and cost of services are recognized as incurred, which generally
occurs in the same period in which the corresponding revenue is recognized. Interchange fees are set by the card networks, and
are paid to the card-issuing bank. Interchange fees are calculated as a percentage of the dollar volume processed plus a per transaction
fee. We also pay Visa® and MasterCard® network dues.
We have multiple element arrangements that include bundled
transactions with merchants encompassing annual PCI (payment card industry) fees, annual membership fees, and monthly processing
fees.
We adopted Accounting Standard Update No 2009-13, “Multiple–Deliverable
Revenue Arrangements” (ASU 2009-13). ASU 2009-13 requires the use of the relative selling price method of allocating total
consideration to units of accounting in a multiple element arrangement and eliminates the residual method. This accounting principle
requires an entity to allocate revenue in an arrangement using estimated selling price deliverables if it does not have vendor
specific objective evidence (VSOE) or third party evidence (TPE) of selling price.
VSOE is the price charged when the same or similar product
or service is sold separately. We define VSOE as a median price of recent stand-alone transactions that are priced within a narrow
range. TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately.
We evaluate each deliverable in its arrangements to determine
whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone
value to our customers. Our products (i.e., terminals) and services qualify as separate units of accounting under ASU 2009-13.
Our payment processing division derives revenues primarily
from the electronic processing of services including credit, debit and electronic benefits transfer card processing authorized
and captured through third party networks, check conversion and guarantee, electronic gift certificate processing, and equipment
leasing and sales. These revenues are recorded as bankcard and other processing transactions when processed.
Typically, fees charged to merchants for these processing services
are based on a variable percentage of the dollar amount of each transaction and in some instances, additional fees are charged
for each transaction. Merchant customers may also be charged miscellaneous fees, including statement fees, annual fees, monthly
minimum fees, fees for handling chargebacks, gateway fees, and fees for other miscellaneous services.
The fair value for annual fees is based on the annual contract
renewal price and is deemed to represent stand-alone selling price based upon VSOE. The fair value for processing is based on
prices charged by our competitors for similar deliverables when sold separately and is deemed to represent stand-alone selling
price based upon TPE.
Deferred revenue represents primarily amounts received in advance
for annual fee billings and are recognized on a pro rata basis over the service period.
Generally, we (i) are the primary obligor in its arrangements
with its merchant customers, (ii) have latitude in establishing the price of its services, (iii) have the ability to
change the product and perform parts of the services, (iv) have discretion in supplier selection, (v) have latitude
in determining the product and service specifications to meet the needs of its merchant customers, and (vi) assume credit
risk. In such cases, we report revenues as gross of fees deducted by its sponsoring member banks, as well as fees deducted from
card-issuing member banks and card associations (Visa/MasterCard) on behalf of its sponsoring member banks for interchange and
assessments. These fees charged by the card associations to process the credit card transactions are recorded separately as cost
of sales and interchange fees in the accompanying consolidated statement of operations.
Net Loss per Share
Basic net loss per common share is computed by dividing net
loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted
net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted
for the dilutive effect of common stock equivalents, consisting of shares issuable upon exercise of common stock options or warrants.
In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents
because their inclusion would have an anti-dilutive effect. At both December 31, 2015 and 2016, respectively, we had warrants
outstanding to purchase 893,890 shares of common stock, and we had 1,464,369 and 1,936,099 stock options issued and outstanding
that are anti-dilutive in effect.
Impairment of Long-Lived Assets
We review our long-lived assets for impairment whenever events
or changes indicate that the carrying amount of an asset or group of assets may not be recoverable. During the year ended December
31, 2016 and 2015, there was no impairment of goodwill and intangible assets.
Income Taxes
We account for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis
of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment date.
We recognize net deferred tax assets to the extent that we
believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive
and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income,
tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets
in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance,
which would reduce the provision for income taxes.
We account for uncertainty in income taxes using a two-step
approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition
by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained
on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit
as the largest amount that is more than 50% likely of being realized upon settlement. We classify the liability for unrecognized
tax benefits as current to the extent we anticipate payment (or receipt) of cash within one year. Interest and penalties related
to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. Our evaluation of uncertain
tax positions was performed for the tax years ended December 31, 2012 and forward, the tax years which remain subject to examination
at December 31, 2016. Please see Note 16 for discussion of our uncertain tax positions.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which supersedes
the revenue recognition requirements in Topic 605, “Revenue Recognition” and requires entities to recognize revenue
in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14,
which defers by one year the effective date of ASU 2014-09. Accordingly, this guidance is effective for interim and annual periods
beginning after December 15, 2017 with early adoption permitted for interim and annual periods beginning after December 15,
2016. We are evaluating the effects that the adoption of ASU 2014-9 will have on our consolidated financial statements, and do
not expect a material impact on our financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, “Balance
Sheet Classification of Deferred Taxes,” which requires entities to present deferred tax assets and deferred tax liabilities
as noncurrent in a classified balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax
asset or liability. This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim
periods within that reporting period, and early adoption is permitted. We adopted this ASU, which had no impact on our financial
position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, “Leases”
which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at
the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease
cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is
effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. Early adoption is permitted. We are currently evaluating the effects that the adoption of ASU 2016-02 will have on our
consolidated financial statements, and expect an increase in Assets and Liabilities associated with the recognition of right-of-use
office leases.
In March 2016, the FASB issued Accounting Standards Update
2016-08 Revenue from Contracts with Customers (Topic 606) to clarify implementation guidance on principal versus agent considerations
(for reporting revenue on a gross or net basis). The ASU is an amendment to Topic 606, clarifies the implementation guidance,
and requires an entity to account for revenue as an agent when another entity controls the specified good or service before that
good or service is transferred to the customer. This ASU is effective for annual periods beginning after December 15, 2017. We
currently are preparing analyses, across all business lines and customers, to determine the effect of the new revenue recognition
standard. While our study is not yet complete, we believe that a portion 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.
NOTE 2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
On May 25, 2016, we completed a one-for-ten reverse stock split
of our common stock. Our condensed consolidated financial statements give retrospective effect for this change in capital structure.
Following the consolidation principles promulgated by U.S.
GAAP, our consolidated financial statements include the assets, liabilities, results of operations, and cash flows of the following
subsidiaries:
(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 our 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, an 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.
|
·
|
TOT Payments,
LLC is the parent company of:
|
|
o
|
Process
Pink, LLC, a wholly owned subsidiary formed in Florida;
|
|
o
|
TOT
HPS, LLC, a wholly owned subsidiary formed in Florida;
|
|
o
|
TOT
FBS, LLC, a wholly owned subsidiary formed in Florida;
|
|
o
|
TOT
New Edge, LLC, a wholly owned subsidiary formed in Florida;
|
|
o
|
TOT
BPS, LLC, a wholly owned subsidiary formed in Florida;
|
|
·
|
OOO TOT Group
Russia is the parent company of its wholly owned subsidiary, OOO Digital Provider (a
company formed in Russia), PayOnline Systems, LLC (a wholly-owned company formed in Russia),
Innovative Payment Technologies, LLC (a wholly-owned company formed in Russia) and TOT
Group Kazakhstan, a wholly owned subsidiary formed in Kazakhstan.
|
|
·
|
Net Element
Russia is the parent company of 100% owned OOO TOT Group. OOO TOT Group is inactive and
in the process of being liquidated.
|
|
·
|
Netlab Systems,
LLC is the parent company of Tech Solutions LTD (Cayman Islands).
|
|
·
|
TOT Group Europe
LTD is 100% owner of Polimore Capital Limited (Cyprus) and Brosword Holding Limited (Cyprus).
|
All material intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 3. LIQUIDITY AND GOING CONCERN CONSIDERATIONS
Our 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. We sustained a net loss of $13.6 million for the year ended December 31, 2016 and have an accumulated deficit
of $157 million and a negative working capital of $6.3 million at December 31, 2016. In addition, we have a payment obligation
of approximately $1.8 million due on May 20, 2017 associated with our PayOnline acquisition. These conditions raise substantial
doubt about our ability to continue as a going concern.
Failure to successfully continue developing our payment processing
operations and maintain contracts with merchants, mobile phone carriers and content providers to 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.
Our company is continuing with its plan to further grow and
expand our payment processing operations in emerging markets, particularly in Russia and surrounding countries, 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 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) to maintain the listing of
our common stock on The NASDAQ Capital Market. On November 14, 2016, the bid price of our common stock fell below $1.00 and stayed
below $1.00 for 30 consecutive business days. On December 28, 2016, we received a letter from NASDAQ providing us 180 days (until
June 26, 2017) to regain compliance. To regain compliance, our stock closing bid price must remain above $1.00 for 10 consecutive
trading days. If we do not regain compliance with the minimum closing bid price requirement, the NASDAQ Capital Market will provide
written notice that our securities are subject to delisting. At such time, we would be entitled to appeal the delisting determination
to a NASDAQ Listing Qualifications Panel. We cannot provide any assurance that our stock price will recover within the permitted
grace period.
Any delisting of our common stock from The NASDAQ Capital Market
could adversely affect our ability to attract new investors, reduce the liquidity of our outstanding shares of common stock, reduce
our flexibility to raise additional capital, reduce the price at which our common stock trades and increase the transaction costs
inherent in trading such shares with overall negative effects for our stockholders. In addition, delisting of our common stock
could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock, and might
deter certain institutions and persons from investing in our securities at all. For these reasons and others, delisting could
adversely affect our business, financial condition and results of operations.
The independent auditors’ reports on our consolidated
financial statements for the years ended December 31, 2016 and 2015 contain explanatory paragraphs expressing substantial doubt
as to our ability to continue as a going concern.
NOTE 4. ACQUISITION OF PAYONLINE
On May 20, 2015, our subsidiaries TOT Group Europe, Ltd. and
TOT Group Russia LLC, entered into an agreement with Maglenta Enterprises Inc. and Champfremont Holding Ltd. (together, the “Sellers”)
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 subject to certain EBITDA
target achievement 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 agreement
which incorporated the above charge of $2,162,861 and an additional charge of $125,806 to adjust the accrual relating to the stock
price guarantee obligation to the agreed upon amount of $2,288,667 plus 10% per annum interest accrued from May 20, 2016, payable
in installments with a balloon payment of $1.8 million due in May 2017. As a result, for the year ended December 31, 2016, we
recognized $125,887 for the related interest.
On October 25, 2016, we entered into an amendment to the PayOnline
acquisition agreement with the Sellers, in which we agreed to assume $1,433,475 of certain refundable merchant deposit reserves.
These reserves are expected to be repaid during the first half of 2017 and we have recorded a charge in this amount for the year
ended December 31, 2016.
The following table summarizes the fair value
of consideration paid and the allocation of purchase price to the fair value of tangible and intangible assets acquired and liabilities
assumed:
|
|
Purchase
|
|
|
|
price allocation
|
|
|
|
(in Millions)
|
|
Purchase Consideration:
|
|
|
|
|
Cash
|
|
$
|
3.6
|
|
Fair Value of Earnout
|
|
|
0.6
|
|
Issuance of Net Element Stock
|
|
|
3.6
|
|
Total Consideration Transferred
|
|
$
|
7.8
|
|
|
|
|
|
|
Purchase Price Allocation to Identifiable assets
acquired and liabilities assumed (Preliminary)
|
|
|
|
|
Current Assets
|
|
$
|
0.8
|
|
Merchant Portfolios and Client lists
|
|
|
1.4
|
|
Other Intangible Assets
|
|
|
2.9
|
|
Goodwill
|
|
|
3.0
|
|
Fixed Assets
|
|
|
0.1
|
|
Current Liabilities
|
|
|
(0.4
|
)
|
Total Identifiable Net Assets
|
|
|
7.8
|
|
Total Purchase Price Allocation
|
|
$
|
7.8
|
|
Assuming the acquisition of PayOnline occurred on January 1,
2015, Net Revenues and Net Loss from operations for the year ended December 31, 2015 would have been $42,725,207 and $12,240,344,
respectively.
NOTE 5. ACCOUNTS RECEIVABLE
Accounts receivable (net) consist of amounts due from processors
and Russian mobile operator intermediaries. Total net accounts receivable amounted to $7,126,429 and $5,198,993 at December 31,
2016 and 2015, respectively. Net accounts receivable consisted primarily of $2,391,646 and $1,764,087 of amounts due from Russian
mobile operators, $185,650 and $211,019 due to PayOnline business and $4,549,133 and $3,223,287 of credit card processing receivables
at December 31, 2016 and 2015 respectively.
Total allowance for doubtful accounts was $603,031 and $103,031
at December 31, 2016 and 2015, 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.
NOTE 6. FIXED ASSETS
Fixed assets are stated at acquired cost less accumulated depreciation
and amortization as follows:
|
|
Useful life
(in years)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Furniture and equipment
|
|
3 - 10
|
|
$
|
185,301
|
|
|
$
|
174,133
|
|
Computers
|
|
2 - 5
|
|
|
168,942
|
|
|
|
141,692
|
|
Total
|
|
|
|
|
354,243
|
|
|
|
315,825
|
|
Less: Accumulated depreciation
|
|
|
|
|
(236,948
|
)
|
|
|
(153,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets, net
|
|
|
|
$
|
117,295
|
|
|
$
|
162,123
|
|
Depreciation expense for the years ended December 31, 2016
and 2015 was $83,245 and $129,343, respectively.
NOTE 7. INTANGIBLE ASSETS
The Company had $3,589,850 and $5,423,880 in intangible assets
at December 31, 2016 and 2015, respectively. Shown below are the details at December 31, 2016 and 2015:
|
|
IP Software
|
|
|
Portfolios
and
Client Lists
|
|
|
Client Acquisition
Costs
|
|
|
PCI
Certification
|
|
|
Trademarks
|
|
|
Domain Names
|
|
|
Covenant Not
to
Compete
|
|
|
Total
|
|
Balance at December 31, 2014
|
|
$
|
520,924
|
|
|
$
|
1,082,731
|
|
|
$
|
526,728
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
361,667
|
|
|
$
|
2,492,050
|
|
Additions due to Payonline purchase
|
|
|
1,328,000
|
|
|
|
1,410,000
|
|
|
|
-
|
|
|
|
449,000
|
|
|
|
708,062
|
|
|
|
429,939
|
|
|
|
-
|
|
|
|
4,325,001
|
|
Other additions
|
|
|
163,129
|
|
|
|
|
|
|
|
878,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,041,214
|
|
Amortization
|
|
|
(463,452
|
)
|
|
|
(842,806
|
)
|
|
|
(356,753
|
)
|
|
|
(93,542
|
)
|
|
|
(146,290
|
)
|
|
|
(90,793
|
)
|
|
|
(280,000
|
)
|
|
|
(2,273,636
|
)
|
Divested
|
|
|
-
|
|
|
|
(160,750
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(160,750
|
)
|
Balance at December 31, 2015
|
|
$
|
1,548,601
|
|
|
$
|
1,489,175
|
|
|
$
|
1,048,060
|
|
|
$
|
355,458
|
|
|
$
|
561,772
|
|
|
$
|
339,146
|
|
|
$
|
81,667
|
|
|
$
|
5,423,880
|
|
Additions
|
|
|
102,689
|
|
|
|
-
|
|
|
|
1,319,820
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
1,422,592
|
|
Amortization
|
|
|
(1,271,226
|
)
|
|
$
|
(704,184
|
)
|
|
|
(670,543
|
)
|
|
|
(149,668
|
)
|
|
|
(234,064
|
)
|
|
|
(145,270
|
)
|
|
|
(81,667
|
)
|
|
|
(3,256,622
|
)
|
Balance at December 31, 2016
|
|
$
|
380,064
|
|
|
$
|
784,991
|
|
|
$
|
1,697,337
|
|
|
$
|
205,790
|
|
|
$
|
327,708
|
|
|
$
|
193,959
|
|
|
$
|
-
|
|
|
$
|
3,589,850
|
|
Amortization expense for the year ended December 31, 2016 was
$3,383,265 of which $3,256,622 is described in the table above and $126,643 was for the amortization of terminal inventory placed
for free. The inventory and its associated amortization are included in prepaid and other expenses, and is not included in the
table above.
Amortization expense for the year ended December 31, 2015 was
$2,383,818 of which $2,273,636 is described in the table above and $110,182 was for the amortization of terminal inventory placed
with merchants without charge. The inventory and its associated amortization are included in prepaid and other expenses, and is
not included in the table above.
The following table presents the estimated aggregate future
amortization expense of other intangible assets:
Year
|
|
Amortization Expense
|
|
|
|
|
|
2017
|
|
$
|
1,196,616
|
|
2018
|
|
|
1,196,617
|
|
2019
|
|
|
1,196,617
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
Total
|
|
$
|
3,589,850
|
|
As a result of the PayOnline acquisition in 2015, we recognized
certain intangible assets with a fair market value of $4,325,001. This consisted of software ($1,328,000), client lists ($1,410,000),
PCI certification ($449,000), trademarks ($708,062) and Domain names ($429,939). Amounts are included in table above and amortized
accordingly.
Software
We 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 twelve months ended December 31, 2016 and 2015,
we capitalized $102,689 and $163,129 of development costs as follows:
|
·
|
point of sale
software ($1,469 and $107,619)
|
|
·
|
payment processing
software ($89,101 and $46,868)
|
|
·
|
mobile payments
billing software ($12,119 and $8,642)
|
For the twelve months ended December 31, 2016, amortization
was $1,271,226. For twelve months ended December 31, 2015, amortization was $463,452.
Merchant Portfolios
Merchant Portfolios consisted of purchased portfolios that
earn future streams of income for the foreseeable future. The remaining useful lives of these portfolios range from 15 months
to 36 months at the time of acquisition. At December 31, 2016 and 2015 the net value of these portfolios was $784,991 and $1,489,175
respectively.
The useful lives of merchant portfolios represent management’s
best estimate over which the Company will recognize the economic benefits of these intangible assets.
Trademarks and Domain Names
During 2015, we acquired certain trademarks
with a $708,062 fair market value and domain names with a $429,939 fair market value at the date of acquisition. At December 31,
2016 and December 31, 2015, the net book values of these trademarks were $327,708 and $561,772, respectively, and the net book
value of the domain names were $193,959 and $339,146, respectively.
For the twelve- months ended December 31, 2016, amortization
for trademarks was $234,064. For the twelve months ended December 31, 2015, amortization was $146,290.
For the twelve months ended December 31, 2016, amortization
for domain names was $145,270. For the twelve months ended December 31, 2015, amortization was $90,793.
PCI Certification
During 2015, we acquired a “Payment Card Industry”
(PCI) Certification with our acquisition of PayOnline. This certification had a fair market value of $449,000 at the date of acquisition.
At December 31, 2016 and December 31, 2015, the net book value of this certification was $205,790 and $355,458, respectively.
For the twelve-months ended December 31, 2016, amortization
for this certification was $149,668. For the twelve months ended December 31, 2015, amortization for this certification was $93,542.
Non-Compete Agreements
In connection with our acquisition of Unified Payments, LLC
in 2013, two key executives signed covenants not to compete. These covenants had a three-year life with a net book value $0 and
$81,667 at December 31, 2016 and December 31, 2015, respectively.
NOTE 8. ACCRUED EXPENSES
At December 31, 2016 and December 31, 2015, accrued expenses
amounted to $5,518,823 and $2,975,066 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 as of December 31, 2016 and December 31, 2015.
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Accrued professional fees
|
|
$
|
220,140
|
|
|
$
|
220,140
|
|
PayOnline Accrual
|
|
|
3,784,451
|
|
|
|
618,500
|
|
Accrued interest
|
|
|
183,778
|
|
|
|
-
|
|
Accrued payroll
|
|
|
-
|
|
|
|
79,653
|
|
Accrued bonus
|
|
|
774,485
|
|
|
|
1,635,816
|
|
Accrued franchise taxes
|
|
|
180,000
|
|
|
|
-
|
|
Accrued foreign taxes
|
|
|
131,810
|
|
|
|
79,691
|
|
Short term loan advances
|
|
|
174,376
|
|
|
|
200,000
|
|
Other accrued expenses
|
|
|
69,783
|
|
|
|
141,266
|
|
|
|
$
|
5,518,823
|
|
|
$
|
2,975,066
|
|
The accrual for PayOnline at December 31, 2016 consists of
a $0.3 million earn-out accrual and a $2.0 million stock price guarantee obligation pursuant to a settlement agreement entered
into in connection with the PayOnline acquisition. Additionally, it includes a $1.4 million obligation for refundable merchant
reserves assumed pursuant to an amendment to the PayOnline acquisition agreement. See Note 11 for additional information.
Accrued performance bonuses were $774,485 and $1,635,816 at
December 31, 2016 and 2015, respectively. At December 31, 2015, the bonus accrual consisted of bonuses that were owed at the date
of the Unified Payments acquisition, plus additional bonus accruals from date of acquisition to December 31, 2015.
Accrued interest at December 31, 2016 is comprised of loan
costs associated with RBL notes in the amount of $134,180 as a result of the issuance of additional RBL notes and interest payable
of $49,598 associated with the PayOnline settlement agreement.
We were required to pay $180,000 to the state of Delaware on
March 1, 2017, for franchise taxes relating to 2016. As such we recognized an accrual at December 31, 2016. In addition, we owed
$131,810 in foreign taxes, which primarily consist of VAT and payroll taxes related to our Mobile and Online segments at December
31, 2016.
NOTE 9. SHORT TERM LOANS
Term Loan
On April 14, 2015, Revere Wealth Management, LLC provided a
$200,000 term loan with an annual interest rate of 12% due May 31, 2015. Terms of the loan provided for fees of $2,500 and required
that the first $65,000 of the loan proceeds be used to fund expenses associated with our convertible preferred stock transaction
and convertible senior notes and warrants transaction. This loan was repaid in May 2015.
Senior Convertible Notes and Warrants
On April 30, 2015, we entered into a $5,000,000 Securities
Purchase Agreement (the “Debt SPA”) for the issuance of (i) senior convertible notes in the aggregate principal amount
of $5,000,000 (the “Notes”), convertible into shares of our common stock and (ii) 2,709,360 warrants (the “Warrants”)
to purchase shares of our common stock.
The investors had the right to purchase additional Notes and
Warrants, up to $10,000,000.
The notes accrued interest at 7% (default rate 18%) per year
on the full face amount of $5,000,000, with accelerated interest and principal payments, payable in five (5) monthly installments
in cash and/or shares of our common stock, and mature on April 30, 2018. The Notes were convertible into shares of our common
stock at an initial price of $1.62 per share, subject to market adjustments and “down round” reductions in the conversion
price arising from future stock issuances at prices less than the conversion price.
The Warrants had a term of three years from issuance and were
immediately exercisable to purchase shares of our common stock at an initial exercise price of $1.74 per share, subject to market
adjustments and “down round” reductions in the conversion price arising from future stock issuances at prices less
than the exercise price. Under certain circumstances, the holder of the Warrants may have elected a cashless exercise.
Pursuant to a letter agreement dated August 4, 2015, (i) all
Notes became automatically (i.e., without any further action by us or the investors) null and void on October 11, 2015, (ii) the
investors' right to purchase, and our obligation to issue, Additional Notes and Additional Warrants became automatically null
and void on October 11, 2015.
On December 1, 2015, the warrants previously issued to the
Series A Preferred stock investors were terminated and cancelled in exchange for 250,000 unrestricted shares of our common stock.
NOTE 10. LONG TERM DEBT
Long term debt consists of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
RBL Capital Group, LLC
|
|
$
|
4,044,056
|
|
|
$
|
3,965,000
|
|
MBF Merchant Capital, LLC
|
|
|
520,303
|
|
|
|
-
|
|
Less Current Portion
|
|
|
(808,976
|
)
|
|
|
(518,437
|
)
|
Long Term Debt
|
|
$
|
3,755,383
|
|
|
$
|
3,446,563
|
|
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, entered
into a Loan and Security Agreement with RBL Capital Group, LLC (“RBL”), as lender (the “RBL Loan Agreement”).
Pursuant to the 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 the credit
facility will carry a fixed interest rate of 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, an additional three percent
per annum would be added to such interest rate, and for any other amounts, obligations or payments due to RBL, 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. At December
31, 2016 and 2015 we had $10,955,944 and $6,035,000 available on our RBL credit line. On May 2, 2016, we renewed our credit facility
with RBL, increasing the facility from $10 million to $15 million and extended the term through February 2018.
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, we entered into a $3,315,000 promissory note
with RBL. Net proceeds from the promissory note were used to repay a $3.0 million note previously due to MBF in addition to approximately
$239,000 for working capital. The promissory note required interest only payments at 13.90% interest through January 2015 commencing
on August 20, 2014 followed by monthly interest and principal payments of $90,421 through January 2019. The promissory note balance
reduced the amount available under our RBL credit line. The note also provided for a 2% front end fee due at execution of the
note and a 4% backend fee due at the final payment of the note. At December 31, 2016, the promissory note balance was $0. During
2016, Crede CG III, Ltd. (“Crede”) purchased $1,849,481 of the principal balance of this promissory note in various
tranches. We exchanged and extinguished these promissory note tranches for 164,262 shares of common stock during the second quarter
of 2016, 992,032 shares of our common stock during the third quarter of 2016, and 196,080 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 is $0.
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 219,284 shares of our common stock on June 9, 2016, June 23, 2016, and June 30,
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 91,744 shares of our common stock on May 9, 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 provides for a $20,000 front end refinancing fee, due upon the execution of the loan
and a $104,600 back end fee due at the final payment on May 20, 2021.
MBF Merchant Capital, LLC
We issued the following notes payable to MBF Merchant Capital,
LLC (MBF), which is owned by William Healy, a member of our board of directors.
On March 28, 2016, we entered into a $75,000 promissory note
with MBF. The promissory note provides for interest only payments at 14% through May 28, 2016. From June 28, 2016 through March
28, 2017, we are obligated to make interest and principal payments of $7,990. The promissory note also provides for a 6% backend
fee due at the final payment of the promissory note. As of December 31, 2016, the balance of the note was $23,420.
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 December 31, 2016, the balance of the note was $221,826.
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 loan. At December 31, 2016 the
remaining balance of the note was $275,056.
Crede CG III, Ltd.
On May 2, 2016, we entered into a Master Exchange Agreement
with Crede CG III, Ltd (“Crede”), an entity that purchased a portion our previously issued promissory notes
held by RBL. Pursuant to the Master Exchange Agreement, we have the right to request exchanges up to $3,965,000 of RBL promissory
notes purchased by Crede for shares of our common stock. Also, see Note 18. Subsequent Events.
For the year ended December 31, 2016, we exchanged 1,663,402
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 $1.68. The exchanges also settled current interest and
loan fees of $302,294 and a non-cash exchange premium of $487,064. A summary of these exchanges for the year ended December 31,
2016 is as follows:
Date
|
|
Shares
Issued
|
|
|
Exchange
Price
|
|
|
Principal
Reduction
|
|
|
Interest, Fees
&
Fair Value
Charges
|
|
May 2, 2016
|
|
|
97,857
|
|
|
$
|
2.87
|
|
|
$
|
250,000
|
|
|
$
|
63,142
|
|
May 9, 2016
|
|
|
91,744
|
|
|
|
2.72
|
|
|
|
237,367
|
|
|
|
56,214
|
|
May 16, 2016
|
|
|
66,405
|
|
|
|
2.57
|
|
|
|
162,633
|
|
|
|
36,581
|
|
June 9, 2016
|
|
|
99,025
|
|
|
|
2.02
|
|
|
|
148,341
|
|
|
|
83,378
|
|
June 23, 2016
|
|
|
57,663
|
|
|
|
1.73
|
|
|
|
88,479
|
|
|
|
28,000
|
|
June 30, 2016
|
|
|
62,596
|
|
|
|
1.60
|
|
|
|
85,050
|
|
|
|
30,123
|
|
July 8, 2016
|
|
|
125,220
|
|
|
|
1.60
|
|
|
|
178,650
|
|
|
|
56,762
|
|
July 22, 2016
|
|
|
164,603
|
|
|
|
1.82
|
|
|
|
284,567
|
|
|
|
79,200
|
|
August 4, 2016
|
|
|
52,791
|
|
|
|
1.89
|
|
|
|
80,671
|
|
|
|
34,939
|
|
August 9, 2016
|
|
|
104,942
|
|
|
|
1.91
|
|
|
|
182,012
|
|
|
|
50,961
|
|
August 12, 2016
|
|
|
103,617
|
|
|
|
1.93
|
|
|
|
184,114
|
|
|
|
50,059
|
|
August 31, 2016
|
|
|
156,546
|
|
|
|
1.28
|
|
|
|
177,893
|
|
|
|
61,619
|
|
September 9, 2016
|
|
|
90,138
|
|
|
|
1.11
|
|
|
|
86,749
|
|
|
|
28,629
|
|
September 16, 2016
|
|
|
194,175
|
|
|
|
1.03
|
|
|
|
181,825
|
|
|
|
82,253
|
|
November 8, 2016
|
|
|
98,040
|
|
|
|
1.02
|
|
|
|
81,363
|
|
|
|
28,441
|
|
November 14, 2016
|
|
|
98,040
|
|
|
|
1.02
|
|
|
|
89,767
|
|
|
|
19,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
1,663,402
|
|
|
$
|
1.76
|
|
|
$
|
2,499,481
|
|
|
$
|
789,358
|
|
Cayman Invest, S.A.
On April 21, 2014, we had a Stock Subscription Receivable from
Cayman Invest, S.A. (“CI”) associated with the issuance of a secured convertible senior promissory note. During 2015,
we wrote off $1,111,130 for amounts that were not funded by CI.
Scheduled Debt Principal Repayment
Scheduled principal maturities on indebtedness at December
31, 2016 is as follows:
2017
|
|
$
|
808,976
|
|
2018
|
|
|
1,046,973
|
|
2019
|
|
|
1,010,396
|
|
2020
|
|
|
1,163,015
|
|
2021
|
|
|
534,999
|
|
Balance December 31, 2016
|
|
$
|
4,564,359
|
|
NOTE 11. CONCENTRATIONS
The Company’s total revenue was $54,286,859 and $40,235,362
for the years ended December 31, 2016 and 2015 respectively.
Of the $54,286,859 in 2016 revenues, $48,784,854 (which also
includes its newly acquired PayOnline Systems) was derived from processing of Visa®, MasterCard®, Discover® and American
Express® card transactions and $5,502,004 was derived from providing branded content during 2016.
Of the $40,235,362 in 2015 revenues, $31,204,871
(which also includes its newly acquired PayOnline Systems) was derived from processing of Visa®, MasterCard®, Discover®
and American Express® card transactions and $9,030,491 was derived from providing branded content during 2015.
The credit card processing revenues were from merchant customer
transactions, which are processed primarily by two third-party processors (greater than 5%) during 2016 and two “third-party”
processors (greater than 5%) during 2015. For the twelve months ended December 31, 2016, the Company processed 69% of its total
revenue with Priority Data and 6% of its total revenue with National Processing Company (NPC) and during 2015, and 51% of its
total revenue was processed with Priority Data, and 10% was processed with National Processing Company (NPC).
Mobile electronic payment revenues are generated from merchant
customer transactions which are processed primarily by two mobile operators during the twelve months ended December 31, 2016 and
during the twelve months ended December 31, 2015. For the year ended December 31, 2016, the Company processed 4% of its total
revenue with Mobile Internet Solutions and 3% of its total revenue with HelpLine. During the twelve months ended December 31,
2015, the Company processed 9% of its total revenue with Beeline (OJSC Vimpelcom) and 5% of its total revenue with MTS (Mobile
TeleSystems OJSC).
NOTE 12. COMMITMENTS AND CONTINGENCIES
PayOnline Acquisition Commitments
On May 20, 2015, our subsidiaries TOT Group Europe, Ltd. and
TOT Group Russia LLC, entered into an agreement with Maglenta Enterprises Inc. and Champfremont Holding Ltd. (together, the “Sellers”)
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 subject to certain EBITDA
target achievement 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 agreement
with the Sellers relating to the stock price guarantee provision in the PayOnline acquisition agreement pursuant to which we agreed
to pay the Sellers an aggregate of $2,288,667 plus 10% per annum interest accrued from May 20, 2016 in installments pursuant to
the payment schedule set forth in the settlement agreement and a balloon payment of $1.8 million in May 2017. As a result, for
the twelve month period ended December 31, 2016, we recorded an additional charge of $125,806 to adjust the accrual relating to
the stock price guarantee obligation to the amount agreed to in such settlement agreement and a charge of $125,887 for the related
interest. In addition, on October 25, 2016, we entered into an amendment to the PayOnline acquisition agreement with the Sellers,
in which we agreed to assume $1,433,475 of certain refundable merchant deposit reserves. These reserves are expected to be refunded
during the first half of 2017, and we have recorded a charge in this amount.
Leases
In May 2013, we entered into a lease agreement
for approximately 4,716 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 lease was extended for a period of
five years commencing January 1, 2017 and expiring December 31, 2021 with 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). The
extension has an early termination provision that allows us to cancel the lease with no cancellation fee if we enter into a new
lease agreement with Canal Park Office, LLC. We are currently negotiating with Canal Park Office, LLC for a new, larger space.
NetLabs Systems, LLC, through its Russian representative office,
currently leases 1,654 square feet of office space in Yekaterinburg, Russia, where it conducts Value Added Services and Sales
Central CRM development activities, at annual rent of approximately $24,300. The current lease term expires in June 1, 2017.
PayOnline Systems leases approximately 5,090 square feet of
office space in Moscow, Russia at an annual rent of $141,867. The current lease term for the office space expires on July
15, 2017. For the first regional office, PayOnline leases approximately 276 square feet of office space in Ekaterinburg, Russia
at annual rent of $3,328. For the second regional office, PayOnline leases approximately 155 square feet of office space in Almaty,
Russia at annual rent of $1,340. The leases are automatically renewable. We believe that these facilities are adequate for our
anticipated needs.
Net Element Russia leases approximately 2,033 square feet of
office space in Moscow, Russia at annual rent of $73,960, as well as one corporate apartment at annual rent of $22,600. The current
lease term for the office space expires on January 31, 2018 and we expect to renew this lease at that time. The current lease
term for the corporate apartment expires on August 16, 2017. We believe that these facilities are adequate for our anticipated
needs.
Litigation
Aptito.com, Inc.
On August 6, 2014, our subsidiary (Aptito, LLC) filed a lawsuit
against Aptito.com, Inc. and the shareholders of Aptito.com, Inc., in state court in the 11th Judicial Circuit in and
for Miami-Dade County. This is an interpleader action in regards to 125,000 shares of stock. Aptito, LLC acquired Aptito.com,
Inc. in exchange for, among other things, 125,000 shares of Net Element, Inc. stock. There has been disagreement among the Aptito.com,
Inc. shareholders as to proper distribution of the 125,000 shares. To avoid any liability in regards to improper distribution,
Aptito, LLC filed the interpleader action so as to allow the defendants to litigate amongst themselves as to how the shares should
be distributed. Aptito.com, Inc. opposes the motion to interplead and has filed counterclaims relative to Aptito, LLC non-delivery
of the 125,000 shares. On February 10, 2017, the Court held a hearing on Aptito.com, Inc.’s motion to dismiss
the complaint and Aptito, LLC and Net Element’s motion to dismiss Aptito.com, Inc.’s counterclaims. The
Court denied Aptito.com, Inc.’s motion to dismiss and granted Aptito, LLC and Net Element’s motion to dismiss
the counterclaims without prejudice. The Court also indicated that it will soon hold a hearing on the motion to interplead.
If the motion to interplead is granted, it will be up to the defendants to litigate as to the proper distribution of shares and
Aptito, LLC should be discharged from any purported liability.
On March 21, 2017, Aptito.com, Inc.
filed several counterclaims against Aptito, LLC and us, which we are disputing and will defend.
Gene Zell
In June 2014, we, as plaintiff, commenced an action in the
Miami-Dade Circuit Court, Florida against Gene Zell for defamation of our Company and CEO and tortious interference with our business
relationships. In October 2014, the court granted a temporary injunction against Zell enjoining him from posting any information
about our Company and CEO on any website and enjoining him from contacting our business partners or investors. Zell violated the
Court Order and the Court granted a Motion imposing sanctions against Zell. We continue to seek enforcement of the Court Order.
On April 13, 2015, Zell filed a Motion to set aside the Court Order alleging he was unaware of the Court Proceedings. The Court,
on August 26, 2015, dismissed Zell’s Motion to dissolve the injunction and the injunction order prohibiting Zell from
making further defamatory posts remains in place. We intend to protect our rights by ongoing enforcement
of the Injunction.
Other Legal Proceedings
We are involved in certain legal proceedings and claims which
arise in the ordinary course of business. In our opinion, based on consultations with outside counsel, the results of any of these
ordinary course matters, individually and in the aggregate, are not expected to have a material effect on our results of operations,
financial condition, or cash flows. As more information becomes available, if management should determine that an unfavorable
outcome is probable on such a claim and that the amount of such probable loss that it will incur on that claim is reasonably estimable,
we will record a reserve for the claim in question. If and when we record such a reserve is recorded, it could be material and
could adversely impact our results of operations, financial condition, and cash flows.
NOTE 13. RELATED PARTY TRANSACTIONS
On March 31, 2015, Star Equities, LLC (“Star”)
provided a $125,000 advance to pay certain expenses. The loan was repaid in May 7, 2015. In addition, we received non-interest
bearing advances from Star Equities, LLC, in the aggregate approximately $745,000 in 2015 and $117,000 in 2016. Oleg Firer, our
CEO, is the Chairman and managing member of Star.
Effective March 28, 2016, we entered into
a $75,000 term loan note with MBF Merchant Capital, LLC (“MBF”). The loan provides for interest only payments at 14%
through May 28, 2016. From June 28, 2016 through March 28, 2017, we are obligated to make interest and principal payments of $7,990.
The loan also provided a 6% backend fee due at the final payment of the loan. MBF of which William Healy, a member of our Board
of Directors, is the sole member. As of December 31, 2016, $23,420 remains outstanding.
Effective April 19, 2016, we entered into a $300,000 term loan
note with MBF. The loan 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 loan also provided a 6% back end fee due at the
final payment of the loan. As of December 31, 2016, $221,826 remains outstanding.
Effective July 1, 2016, our subsidiary, TOT Group, Inc., entered
into a $353,500 term loan note with MBF. The loan 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 loan also provided a
1% front end fee and a 6.6% back end fee due at the final payment of the loan. As of December 31, 2016, $275,056 remains outstanding.
During 2015 and 2016, indirect agent commissions resulting
from merchant processing of $108,567 were paid to Prime Portfolios, LLC, an entity owned by Oleg Firer, our CEO, and Steven
Wolberg, our Chief Legal Officer.
NOTE 14. STOCKHOLDERS’ EQUITY
On May 25, 2016, we effected a one-for-ten reverse stock split
of our common stock. Our consolidated financial statements and disclosures reflect for this change in capital structure for all
periods presented.
On June 12, 2015 and June 13, 2016, our shareholders approved
100,000,000 increases in our authorized common stock to 300,000,000 and 400,000,000, respectively.
Convertible Preferred Stock, Series A
On April 30, 2015, we entered into a $5,500,000 Security Purchase
Agreement for the issuance of 5,500 shares of Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock paid
dividends at 9% (default rate 18%) per year on the full face amount of $5,500,000, and required accelerated principal redemption
and dividends payments to be made monthly in cash and/or shares of our common stock through October, 2015, and matured on April
20, 2017. The Series A Convertible Preferred Stock initially was convertible into shares of our common stock at $1.74 per share,
subject to market adjustments and “down round” reductions in the conversion price arising from future stock issuances
at prices less than the conversion price.
The conversion rights embedded in the Series A Convertible
Preferred Stock were at a conversion price below-market, and subject to further market price adjustments and “down round”
provisions. As a result, the beneficial conversion feature (“BCF”) was accounted for as a derivative financial instrument
and was valued at date of issuance using the Black- Scholes-Merton options pricing model, resulting in a recorded value of $212,918
at the time of issuance.
During the year ended December 31, 2015,
the holders of Series A Convertible Preferred Stock converted their 5,500 shares for 3,988,935 shares of our common stock. Pursuant
to the agreement, we issued an additional 420,805 shares of our common stock resulting in a $1,346,648 charge for the value of
the shares issued. Additionally, we recorded preferred stock dividends of $1,585,092 for this transaction.
Equity Incentive Plan Activity
On December 5, 2013, our shareholders approved the Net Element
International, Inc. 2013 Equity Incentive Plan (the “2013 Plan”). Awards under the 2013 Plan may be granted in any
one or all of the following forms: (i) incentive stock options (“Incentive Stock Options”) meeting the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”); (ii) non-qualified stock options (“Non-Qualified
Stock Options”) (unless otherwise indicated, references to “Options” include both Incentive Stock Options and
Non-Qualified Stock Options); (iii) stock appreciation rights (“Stock Appreciation Rights”), which may be awarded
either in tandem with Options (“Tandem Stock Appreciation Rights”) or on a stand-alone basis (“Nontandem Stock
Appreciation Rights”); (iv) shares of common stock that are restricted (“Restricted Shares”); (v) units representing
shares of common stock (“Performance Shares”); (vi) units that do not represent shares of common stock but which may
be paid in the form of common stock (“Performance Units”); and (vii) shares of common stock that are not subject to
any conditions to vesting (“Unrestricted Shares”). The maximum aggregate number of shares of common stock available
for award under the 2013 Plan at December 31, 2016 was 1,280,258, subject to adjustment as provided for in the 2013 Plan. The
2013 Plan is administered by the compensation committee.
On December 10, 2014, the Compensation Committee of the Board
of Directors of the Company approved and authorized the issuance of 1,807,921 restricted shares of common stock and 119,194 incentive
stock options to various employees for services performed during 2013 – 2015 and recorded a compensation charge of $1,684,534
for the 2013 – 2014 portions of these grants. An additional $897,800 of non-cash compensation expense was recognized during
2015.
2013 Equity Incentive Plan - Unrestricted Shares
During the twelve months ended December 31,
2016 and 2015, we issued common stock pursuant to the Net Element International, Inc. 2013 Equity Incentive Plan (as amended,
the “2013 Plan”) to the members of our Board of Directors and recorded compensation charges of $7,363 and $87,000,
respectively.
On June 13, 2016, we issued 475,000 shares of our common stock
to named executives as additional compensation. We recorded a compensation charge of $1,007,000 for the fair value of shares provided.
2013 Equity Incentive Plan - Stock Options
On December 8, 2015, we issued 316,735 incentive
stock options with an exercise price of $2.40 per share. The options have a 10-year life and we recorded compensation expense
of $996,598 at time of issuance for the Black-Scholes value of options provided.
On April 12, 2016, the compensation committee
of the Board of Directors rescinded previously granted incentive stock options to purchase approximately 1.6 million shares of
our common stock, as the amounts granted were inadvertently in excess of individual grant limitations set forth in the 2013 Plan
documents.
On June 13, 2016, we issued 182,408 incentive
stock options pursuant to the 2013 Plan to key management. The option strike price is $2.12 and the term of the option is 10 years.
We recorded a non-cash compensation charge of $386,705 in connection with this issuance.
In September, 2016, we issued 70,310 shares
as incentive compensation to employees and recorded a non-cash compensation charge of $532,701.
At December 31, 2016, we had 333,956 incentive
stock options outstanding with a weighted average exercise price of $2.60 and a weighted average remaining contract term of 9.18
years. All of the stock options were out-of-the-money and had no intrinsic value at December 31, 2016.
See Note 18. Subsequent Events, for awards
granted after December 31, 2016.
Equity Issuances – Insider
Financing
On September 11, 2015, the Company entered into the Letter
Agreement with certain accredited investors, including Star Equities, LLC, of which our Chief Executive Officer, Oleg Firer is
managing member and chairman of the board, Steven Wolberg, our Chief Legal Officer and Secretary, William Healey, a member of
our Board of Directors, and Kenges Rakishev, Chairman of our Board of Directors and a significant shareholder (together, the “Investors”).
Pursuant to the Letter Agreement, the Investors purchased from the Company an aggregate of (i) 11,357,143 restricted shares of
Common Stock (the “Restricted Shares”) to be issued in the future and (ii) options to purchase 11,357,143 restricted
shares of Common Stock, (the “Restricted Options”). The per share purchase price of each Restricted Share was $0.14
for an aggregate purchase price of $1,590,000. The Restricted Options will expire on the fifth (5th) annual anniversary of the
date of the Letter Agreement. Prior to expiration, each Restricted Options is exercisable into one Restricted Share at the exercise
price equal 110% of the closing trading price per one share of Common Stock reported on The NASDAQ Capital Market on the date
of the Letter Agreement. Each Investor may elect to exercise it or his Amended Restricted Option through a cashless exercise.
On October 7, 2015, the Investors and the Company entered into
an agreement to modify certain terms of the Letter Agreement relating to the Restricted Shares. Pursuant to such agreement, the
parties agreed that the Restricted Shares would not be issued to the Investors until the Company’s stockholders approved
the issuance of the Restricted Shares. In addition, on October 7, 2015, certain of the Investors and the Company entered into
an agreement to modify the terms of the Restricted Options. Pursuant to such agreement, the parties agreed that the Restricted
Options cannot be exercised by the Investors until the Company’s stockholders approve the issuance of common stock in connection
with any such exercise. Such stockholder approval was obtained at a special meeting of the Company’s stockholders on November
14, 2015.
On January 21, 2016, the Company entered into a Second Additional
Letter Agreement, as amended on April 14, 2016 (the “Second Additional Agreement”) with Kenges Rakishev. The Second
Additional Agreement further modified the terms of the Letter Agreement, as amended. The Second Additional Agreement provided
for the second and final round of $910,000 equity financing to the Company contemplated by the Letter Agreement in consideration
for the issuance by the Company on June 13, 2016 to Kenges Rakishev of (i) 466,428 restricted shares of the Company’s common
stock based on $1.95 per share price and (ii) options to purchase 466,428 restricted shares of the Company’s common stock
with a strike price of $2.15 and a 5 year life.
Share Issuances - ESOUSA Holdings
On July 6, 2016, we entered into a common stock purchase agreement
(“Purchase Agreement”), with ESOUSA Holdings, LLC, a New York limited liability company (“ESOUSA”), in
which ESOUSA committed to purchase up to an aggregate of $10 million of our shares of common stock over the 30- month term of
the Purchase Agreement. In consideration for entering into the Purchase Agreement, we paid shares of our common stock with a value
equivalent $200,000 as a commitment fee to ESOUSA. The number of shares was calculated using the average of volume weighted average
price for our common stock during the 3 trading day period immediately preceding the date of issuance of such shares. Accordingly,
on August 31, 2016, we issued 131,171 shares of our common stock to ESOUSA based on the price of $1.52 per share.
On September 15, 2016, we issued 454,546 shares of our common
stock to ESOUSA for an aggregate price of $500,000, or $1.10 per share in accordance with the Purchase Agreement. On October 25,
2016, we issued 94,340 shares of our common stock to ESOUSA for an aggregate price of $100,000, or $1.06 per share in accordance
with the Purchase Agreement.
See Note 18. Subsequent Events, for equity issuances to ESOUSA
after December 31, 2016.
Share Issuances - Crede CG III, Ltd.
On May 2, 2016, we entered into a Master
Exchange Agreement with Crede CG III, Ltd., an entity that purchased a portion our previously issued notes held by RBL. 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.
During the year ended December 31, 2016,
we exchanged $2,801,776 of outstanding RBL promissory notes and associated fees for 1,663,402 shares of our common stock (See
Note 10).
Other Share Issuances
On January 25, 2016, we issued 42,565 shares of our common
stock in connection with the earn-out provisions of our acquisition of PayOnline. See Note 18. Subsequent Events, for additional
earn-out shares issued after December 31, 2016.
On August 15, 2016, we issued 95,694 shares of our common stock
and recorded a $200,000 charge in connection with the Orkin litigation settlement (see Note 12. Commitments and Contingencies)
NOTE 15. WARRANTS AND NON-INCENTIVE PLAN OPTIONS
Warrants
In 2013, our predecessor entity (then known as Cazador Acquisition
Corporation Ltd.) issued 8,940,000 warrants to purchase 894,000 shares of common stock in connection with its private placement
and initial public offering. At December 31, 2016 and 2015, we had warrants outstanding to purchase 893,890 shares of common
stock. At December 31, 2016, the warrants have a weighted average exercise price of $75.00 per share and a weighted average remaining
contractual term of 0.75 years (1.75 years at December 31, 2015). These warrants are “out-of-the-money” and have no
intrinsic value at December 31, 2016 and 2015. The warrants are exercisable only if a registration statement relating to the common
shares issuable upon exercise of the warrants is effective and current. These warrants expire on October 1, 2017.
On April 30, 2015, in connection with our issuance of a $5,000,000
senior convertible note, we issued 270,936 warrants to purchase shares of our common stock at a per share exchanged price of $17.40.
On December 1, 2015, these warrants were exercised for 250,000 shares of common stock.
Non-Incentive Plan Options
At December 31, 2016, we had 1,602,142 non-incentive options
outstanding with an exercise price of $2.18 and a remaining contract term of 3.92 years. These options were out of the money at
December 31, 2016 and had no intrinsic value.
NOTE 16. INCOME TAXES
The components of income (loss) before income tax provision
are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
(11,615,285
|
)
|
|
$
|
(11,748,447
|
)
|
Foreign
|
|
|
(2,000,791
|
)
|
|
|
(1,579,479
|
)
|
|
|
$
|
(13,616,076
|
)
|
|
$
|
(13,327,926
|
)
|
There was no current U.S. income tax or deferred
income tax provision for years ended December 31, 2016 and December 31, 2015. There were current foreign tax provisions of $49,375
and $79,000 for the years ended December 31, 2016 and December 31, 2015 respectively.
The following is a reconciliation of the
effective income tax rate with the U.S. federal statutory income tax rate at December 31, 2015 and December 31, 2016:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
U. S.
Federal statutory income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income tax,
net of federal tax benefit
|
|
|
4.1
|
%
|
|
|
4.1
|
%
|
Debt Extinguishment
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Currency translation
adjustment
|
|
|
-0.9
|
%
|
|
|
3.9
|
%
|
Stock based compensation
related permanent differences
|
|
|
0.0
|
%
|
|
|
-5.9
|
%
|
Dividend on preferred
stock related permanent differences
|
|
|
0.0
|
%
|
|
|
-3.6
|
%
|
Foreign taxes
|
|
|
-0.4
|
%
|
|
|
-0.5
|
%
|
Difference in foreign
tax rates
|
|
|
3.4
|
%
|
|
|
0.1
|
%
|
Change
in valuation allowance
|
|
|
-40.5
|
%
|
|
|
-32.7
|
%
|
Effective
income tax rate
|
|
|
-0.4
|
%
|
|
|
-0.5
|
%
|
The effective tax rate on operations of -0.3%
at December 31, 2016 varied from the statutory rate of 34%, primarily due to the permanent difference related to difference in
foreign tax rates and the increase in our valuation allowance. The effective rate on operations of -0.6% at December 31, 2015
varied from the statutory rate of 34% primarily due to dividends paid on preferred stock, stock based compensation and the increase
in our valuation allowance.
Significant components of our deferred tax
assets and liabilities as of December 31, 2016 and December 31, 2015 are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
19,556,555
|
|
|
$
|
17,086,460
|
|
Stock based compensation
|
|
|
906,087
|
|
|
|
572,004
|
|
Contingent legal expenses
|
|
|
0
|
|
|
|
235,259
|
|
Basis difference in goodwill
|
|
|
2,604,306
|
|
|
|
3,038,988
|
|
Basis difference in fixed assets
|
|
|
19,899
|
|
|
|
62,710
|
|
Basis difference in intangible assets
|
|
|
1,714,761
|
|
|
|
1,447,782
|
|
Stock price guarantee adjustment
|
|
|
1,416,870
|
|
|
|
0
|
|
Valuation allowance for deferred tax assets
|
|
|
(26,218,478
|
)
|
|
|
(22,443,203
|
)
|
Total deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Basis difference in fixed assets
|
|
|
-
|
|
|
|
-
|
|
Basis difference in intangible assets
|
|
|
-
|
|
|
|
-
|
|
Total deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts of assets and liabilities used for income tax purposes. At December 31, 2016, we had cumulative federal and state net
operating losses (“NOLs”) carry forwards of approximately $51.4 million. At December 31, 2015, we had cumulative federal
and state NOLs carry forwards of approximately $44.9 million. We also have $11.9 million and $10.4 million in foreign NOLs as
of December 31, 2016 and 2015, respectively. The valuation allowance was increased by $3.6 million in fiscal year 2016. The fiscal
2016 increase was primarily related to additional operating loss incurred, and difference in tax and book basis of goodwill and
other intangible assets. We have considered all the evidence, both positive and negative, that the NOLs and other deferred tax
assets may not be realized and have recorded a valuation allowance for $26 million. The federal NOLs begin to expire in December
2025 while the foreign NOLs begin to expire in 2023.
The timing and manner in which we will be able to utilize some
of its NOLs is limited by Section 382 of the Internal Revenue Code 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 carryforward limitation periods. In the year 2016, 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 change of the ownership, which was approximately $11.1 million. Thus, the total of approximately $15.2 million as of
December 31, 2016 is available to offset future income.
NOTE 17. SEGMENT INFORMATION
Prior to the fourth quarter of 2015, we had
a single reportable business segment: payment processing for electronic commerce. On May 20, 2015, we obtained financial and operational
control of PayOnline, a provider of online payment processing of online transactions in emerging markets for services fees. Additionally,
we rebranded our Mobile Solutions business to Digital Provider and began reporting gross revenues for mobile payments where we
provide access to branded content. Given the size of assets and revenues from PayOnline and Digital Provider, we began reporting
segment information for three operating segments.
Our three reportable segments include: (i) North America Transaction
Solutions for electronic commerce, (ii) Mobile Solutions (primary Russian Federation and CIS) (iii) Online Solutions, which started
up with our acquisition of PayOnline Solutions on May 20, 2015. Management determines the reportable segments based on the internal
reporting used by our Chief Operating Decision Maker to evaluate performance and to assess where to allocate resources. During
the twelve months ending December 31, 2016, the principal revenue stream for all segments came from services fees and branded
content. During the twelve months ending December 31, 2015 the revenue stream for all segments was service fees.
Factors management used to identify the entity’s reportable
segments
Our 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 America Transaction Solutions
Our US payment processing 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 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.
Mobile Solutions
Our Russian mobile and online payment processing segment consists
of Digital Provider which operates primarily in Russia.
In June 2012, we formed our subsidiary, OOO TOT Money to develop
a business in mobile commerce payment processing. TOT Money launched its initial operations in Russia as a payment facilitator
using SMS (short message services, which is a text messaging service) and MMS (multimedia message services) for mobile phone subscribers
in Russia. During 2015, we changed or business model, rebranded our name to Digital Provider, and began to offer branded content
to subscribers.
Online Solutions
On May 20, 2015, we acquired the net assets that comprise PayOnline,
which includes a protected payment processing system to accept bank card payments for goods and services. PayOnline primarily
operates in Russia and CIS.
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
Geographic Summary Information
|
|
2016
Revenues
|
|
|
2016 Long-
Lived Assets
|
|
|
2015
Revenues
|
|
|
2015 Long-
Lived Assets
|
|
North America
|
|
$
|
42,130,901
|
|
|
$
|
9,468,105
|
|
|
$
|
27,388,598
|
|
|
$
|
9,152,499
|
|
Russia and CIS
|
|
|
12,155,958
|
|
|
|
4,625,602
|
|
|
|
12,846,764
|
|
|
|
6,430,306
|
|
The following tables present financial information
of our reportable segments at December 31, 2016. The “corporate and eliminations” column includes all corporate expenses
and intercompany eliminations required for consolidation.
Twelve months ended December 31, 2016
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses
&
Eliminations
|
|
|
Total
|
|
Net revenues
|
|
|
42,130,901
|
|
|
|
5,933,281
|
|
|
|
6,222,677
|
|
|
|
-
|
|
|
$
|
54,286,859
|
|
Cost of revenues
|
|
|
36,342,465
|
|
|
|
5,287,960
|
|
|
|
4,077,816
|
|
|
|
-
|
|
|
|
45,708,241
|
|
Gross Margin
|
|
|
5,788,436
|
|
|
|
645,321
|
|
|
|
2,144,861
|
|
|
|
-
|
|
|
|
8,578,618
|
|
Gross margin %
|
|
|
14
|
%
|
|
|
11
|
%
|
|
|
34
|
%
|
|
|
-
|
|
|
|
16
|
%
|
General, administrative, and asset disposal
|
|
|
2,603,329
|
|
|
|
20,924
|
|
|
|
2,003,388
|
|
|
|
4,170,242
|
|
|
|
8,797,883
|
|
Non-cash compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,463,435
|
|
|
|
3,463,435
|
|
Provision (recovery) for bad debt
|
|
|
1,173,815
|
|
|
|
511,772
|
|
|
|
2,760
|
|
|
|
(110
|
)
|
|
|
1,688,237
|
|
Depreciation and amortization
|
|
|
1,201,268
|
|
|
|
18,970
|
|
|
|
1,837,709
|
|
|
|
408,564
|
|
|
|
3,466,511
|
|
Interest expense (income), net
|
|
|
555,212
|
|
|
|
(42,760
|
)
|
|
|
(28,670
|
)
|
|
|
980,051
|
|
|
|
1,463,833
|
|
Loss from stock value guarantee
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,722,142
|
|
|
|
3,722,142
|
|
Other expenses (income)
|
|
|
4,118
|
|
|
|
(446,592
|
)
|
|
|
32,950
|
|
|
|
2,177
|
|
|
|
(407,347
|
)
|
Net (loss) income for segment
|
|
$
|
250,694
|
|
|
$
|
583,007
|
|
|
$
|
(1,703,276
|
)
|
|
$
|
(12,746,501
|
)
|
|
$
|
(13,616,076
|
)
|
Segment assets
|
|
$
|
14,934,000
|
|
|
$
|
2,685,674
|
|
|
$
|
5,125,140
|
|
|
$
|
564,854
|
|
|
$
|
23,309,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31, 2015
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses
&
Eliminations
|
|
|
Total
|
|
Net revenues
|
|
$
|
27,388,598
|
|
|
$
|
9,043,705
|
|
|
$
|
3,803,059
|
|
|
$
|
-
|
|
|
|
40,235,362
|
|
Cost of revenues
|
|
|
23,497,808
|
|
|
|
8,124,763
|
|
|
|
2,354,644
|
|
|
|
-
|
|
|
|
33,977,215
|
|
Gross Margin
|
|
|
3,890,790
|
|
|
|
918,942
|
|
|
|
1,448,415
|
|
|
|
-
|
|
|
|
6,258,147
|
|
Gross margin %
|
|
|
14
|
%
|
|
|
10
|
%
|
|
|
38
|
%
|
|
|
-
|
|
|
|
16
|
%
|
General, administrative, and asset disposal
|
|
|
2,038,833
|
|
|
|
1,043,187
|
|
|
|
1,349,970
|
|
|
|
4,878,487
|
|
|
|
9,310,477
|
|
Non-cash compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,306,304
|
|
|
|
4,306,304
|
|
Provision (recovery) for bad debt
|
|
|
749,952
|
|
|
|
(100,868
|
)
|
|
|
-
|
|
|
|
487
|
|
|
|
649,571
|
|
Depreciation and amortization
|
|
|
1,212,266
|
|
|
|
20,625
|
|
|
|
971,830
|
|
|
|
308,442
|
|
|
|
2,513,163
|
|
Interest expense (income), net
|
|
|
538,994
|
|
|
|
-
|
|
|
|
773
|
|
|
|
3,035,931
|
|
|
|
3,575,698
|
|
Loss on change in fair value and settlement of beneficial conversion derivative
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,932,496
|
|
|
|
26,932,496
|
|
Gain on debt extinguishment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(27,743,980
|
)
|
|
|
(27,743,980
|
)
|
Gain on asset disposal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,369
|
)
|
|
|
(40,369
|
)
|
Other expenses (income)
|
|
|
3,715
|
|
|
|
4,762
|
|
|
|
74,198
|
|
|
|
38
|
|
|
|
82,714
|
|
Net (loss) income for segment
|
|
$
|
(652,971
|
)
|
|
$
|
(48,764
|
)
|
|
$
|
(948,357
|
)
|
|
$
|
(11,677,836
|
)
|
|
$
|
(13,327,926
|
)
|
Segment assets
|
|
$
|
7,673,944
|
|
|
$
|
1,848,574
|
|
|
$
|
7,531,767
|
|
|
$
|
5,859,226
|
|
|
|
22,913,561
|
|
NOTE 18. SUBSEQUENT EVENTS
On March 3, 2017, we entered into an Amendment
to Master Exchange Agreement dated as of May 2, 2016 with Crede CG III, Ltd. The Amendment extended the expiration date from December
31, 2016 to August 31, 2017, which extends the time prior to which we have the right to request Crede to exchange the promissory
notes for shares of the Company’s common stock on the terms and conditions set forth in the Agreement.
In connection with the ESOUSA Purchase Agreement
(see Note 14 for additional information), we issued the following shares of our common stock to ESOUSA subsequent to December
31, 2016:
Issue
|
|
Number of
|
|
|
Purchase
|
|
|
Share
|
|
Date
|
|
Shares
|
|
|
Amount
|
|
|
Price
|
|
January 19, 2017
|
|
|
240,964
|
|
|
$
|
200,000
|
|
|
$
|
0.83
|
|
January 25, 2017
|
|
|
176,471
|
|
|
|
150,000
|
|
|
|
0.85
|
|
February 8, 2017
|
|
|
1,161,442
|
|
|
|
1,000,000
|
|
|
|
0.86
|
|
March 23, 2017
|
|
|
103,790
|
|
|
|
87,132
|
|
|
|
0.84
|
|
Totals
|
|
|
1,682,667
|
|
|
$
|
1,437,132
|
|
|
$
|
0.85
|
|
On March 1, 2017, we entered into a Promissory Note with Star
in the principal amount of $348,083 (the “Note”). Pursuant to the Note, previously advanced $348,083 to us that is
now being repaid with interest under this agreement. The note provides for 18 monthly interest payments of $3,481 through September
30, 2018 followed by one interest and principle payment on October 1, 2018. The principal balance of the Note outstanding bears
interest at the rate of 12% per annum. In the event of any capital raise by us that is not in the ordinary course of business
and that results in funding in excess of $5 million (a “Liquidity Event”), the Maturity Date will be accelerated to
coincide with the closing date of such Liquidity Event.
Effective 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 provided for interest-only payments at 14.4% interest through
May 20, 2017. From June 20, 2017 through June 20, 2021 (maturity date), we were obligated to make interest and principal payments
of $2,753 per month. We paid $2,000 in costs related to this loan at its inception and another $4,000 of costs is due at the maturity
of the note.
Awards Under the 2013 Equity Incentive Compensation Plan,
as amended
On February 28, 2017, the Compensation Committee (the “Committee”)
of our Board of Directors approved and authorized grants of the following equity awards to our employees and consultants of the
Company pursuant to our 2013 Equity Incentive Compensation Plan, as amended:
|
(i)
|
451,054 qualified options to acquire
shares of our common stock (50% of such options vesting immediately and the balance 50%
of such options vesting in 4 equal proportions quarterly after the grant date) and
|
|
(ii)
|
626,678 restricted shares of our common stock (50% of such shares
vesting immediately and the balance 50% of such shares vesting in 4 equal proportions
quarterly after the grant date).
|
Awards Outside the 2013 Equity Incentive Compensation Plan,
as amended
On February 28, 2017, the Compensation Committee of our board
of directors awarded to Oleg Firer, our Chief Executive Officer, 471,388 restricted shares of our common stock as performance
bonus subject to shareholder approval. In addition, the Committee approved a $300,000 cash performance bonus to Oleg Firer, payable
when we have sufficient capital to pay such cash bonus and cover the Company’s on-going monthly operations.
Other Stock Issuance
Pursuant to the earn out installment provisions of the PayOnline
purchase agreement, we issued an additional 130,823 shares of our common stock and paid $108,583 in March 2017.
EXHIBIT INDEX
Exhibit
No.
|
|
Description
of Exhibit
|
2.1
|
|
Agreement and Plan of Merger, dated as of June 12, 2012, by and
between Cazador Acquisition Corporation Ltd. and Net Element, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s
Current Report on Form 8-K filed with the Commission on June 12, 2012)
|
|
|
|
2.2
|
|
Contribution Agreement, dated April 16, 2013, among Net Element
International, Inc., Unified Payments, LLC, TOT Group, Inc., Oleg Firer, and Georgia Notes 18 LLC (incorporated by reference
to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 17, 2013.
|
|
|
|
2.3
|
|
Term Sheet, dated May 20, 2013, among TOT Group, Inc., Net Element
International, Inc. and Aptito.com, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on
Form 8-K filed with the Commission on May 22, 2013)
|
|
|
|
2.4
|
|
Asset Purchase Agreement, dated June 18, 2013, between Aptito,
LLC and Aptito.com, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
with the Commission on June 24, 2013)
|
|
|
|
2.5
|
|
Contribution Agreement, dated September 25, 2013, among T1T Lab,
LLC, Net Element International, Inc. and T1T Group, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current
Report on Form 8-K filed with the Commission on September 25, 2013)
|
|
|
|
2.6
|
|
Assignment of Membership Interest, dated February 11, 2014, among
T1T Group, LLC, Net Element, Inc., and T1T LAB, LLC (incorporated by reference to Exhibit 2.7 to the Company’s Annual
Report on Form 10-K filed with the Commission on April 15, 2014)
|
|
|
|
2.7
|
|
Binding Offer Letter, dated March 16, 2015, among TOT Group Europe
Ltd., Maglenta Enterprises Inc. and Champfremont Holding Ltd. (incorporated by reference to Exhibit 2.1 to Net Element’s
Current Report on Form 8-K/A filed with the Commission on March 20, 2015)
|
|
|
|
3.1
|
|
Certificate of Corporate Domestication of Cazador, filed with the
Secretary of State of the State of Delaware on October 2, 2012 (incorporated by reference to Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed with the Commission on October 5, 2012)
|
|
|
|
3.2
|
|
Amended and Restated Certificate of Incorporation of Net Element
International, Inc., a Delaware corporation, filed with the Secretary of State of the State of Delaware on October 2, 2012
(incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Commission on October
5, 2012)
|
|
|
|
3.3
|
|
Amended and Restated Bylaws of Net Element International, Inc.,
a Delaware corporation (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with
the Commission on October 5, 2012)
|
|
|
|
3.4
|
|
Certificate of Merger, filed with the Secretary of State of the
State of Delaware on October 2, 2012 (incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form
8-K filed with the Commission on October 5, 2012)
|
|
|
|
3.5
|
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation, dated December 5, 2013, changing the Company’s name from Net Element International, Inc. to Net Element,
Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission
on December 6, 2013)
|
|
|
|
3.6
|
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation, to increase authorized common stock to 200 million shares (incorporated by reference to Exhibit 3.1 of the
Company’s Current Report on Form 8-K filed with the Commission on December 17, 2014)
|
|
|
|
3.7
|
|
Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed
with the Commission on May 1, 2015)
|
|
|
|
3.8
|
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation, dated June 15, 2015, to increase authorized common stock to 300 million shares (incorporated by reference to
Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on June 16, 2015)
|
3.9
|
|
Amendment No. 1 to the Bylaws of the Company, dated June 15, 2015 (incorporated
by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed with the Commission on June 16, 2015)
|
|
|
|
3.10
|
|
Amendment No. 2 to the Bylaws of the Company, dated July 10, 2015 (incorporated by reference
to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on July 10, 2015)
|
|
|
|
3.11
|
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation, as amended,
of the Company (incorporated by reference to Exhibit 3.1 to the Company’s second Current Report on Form 8-K filed with
the Commission on May 24, 2016)
|
|
|
|
3.12
|
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company,
dated June 15, 2016 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with
the Commission on June 16, 2016)
|
|
|
|
4.1
|
|
Specimen Common Stock Certificate of Net Element International, Inc. (incorporated by reference
to Exhibit 4.2 to the Registration Statement on Form S-4 filed by the Company with the Commission on August 31, 2012)
|
|
|
|
4.2
|
|
Warrant Certificate of Cazador Acquisition Corporation Ltd. (incorporated by reference to
Exhibit 4.3 to the Registration Statement on Form F-1 filed by the Company with the Commission on September 3, 2010)
|
|
|
|
4.3
|
|
Registration Rights Agreement by and between Cazador Acquisition Corporation Ltd., Cazador
Sub Holdings Ltd. and Others (incorporated by reference to Exhibit 10.5 to the Registration Statement, as amended, on Form
F-1/A filed by the Company with the Commission on October 6, 2010)
|
|
|
|
4.4
|
|
Warrant Agreement by and between Cazador Acquisition Corporation Ltd. and Continental Stock
Transfer & Trust Company (incorporated by reference to Exhibit 4.4 to the Registration Statement, as amended, on Form
F-1/A filed by the Company with the Commission on October 6, 2010)
|
|
|
|
4.5
|
|
Secured Convertible Senior Promissory Note dated April 21, 2014 between the Company and
Cayman Invest, S.A. (incorporated by reference to Exhibit 4.1 to Net Element’s Current Report on Form 8-K filed with
the Commission on April 22, 2014)
|
|
|
|
4.6
|
|
Form of Amended and Restated Restricted Options to Purchase Shares of Restricted Common
Stock (incorporated by reference to Exhibit 4.1 to Net Element’s Current Report on Form 8-K filed with the Commission
on October 7, 2015)
|
|
|
|
4.7
|
|
Form of Option to Kenges Rakishev to Purchase Shares of Restricted Common Stock (incorporated
by reference to Exhibit 4.1 to Net Element’s Current Report on Form 8-K filed with the Commission on January 22, 2016)
|
|
|
|
4.8
|
|
Registration Rights Agreement, dated as of July 6, 2016, between Net Element, Inc. and ESOUSA
Holdings, LLC (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission
on July 12, 2016)
|
|
|
|
10.1
|
|
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.9 to the Registration
Statement on Form F-1 filed by the Company with the Commission on September 3, 2010)
|
|
|
|
10.2
|
|
Memorandum of Understanding, dated March 23, 2012,
by and between Cazador Acquisition Corporation Ltd. and Cazador Sub-Holdings Ltd. (incorporated by reference to Exhibit
10.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Commission
on March 30, 2012)
|
|
|
|
10.3
|
|
Membership Interest Purchase Agreement (Motorsport) dated as of February 1, 2011 between
Enerfund, LLC and the Company (incorporated by reference to Exhibit 10.29 to the Company’s Transition Report on Form
10-KT/A filed with the Commission on February 3, 2011)
|
10.4
|
|
Joint Venture Agreement, dated April 6, 2012, between Net Element, Inc.
and Igor Yakovlevich Krutoy (incorporated by reference to Exhibit 10.1 to Net Element’s Current Report on Form 8-K filed
with the Commission on April 12, 2012)
|
|
|
|
10.5
|
|
Loan Agreement, dated July 4, 2012, between OOO Sat-Moscow and OOO Net Element Russia (incorporated
by reference to Exhibit 10.1 to Net Element’s Current Report on Form 8-K filed with the Commission on July 10, 2012)
|
|
|
|
10.6
|
|
Credit Agreement, dated August 17, 2012, between Alpha-Bank and OOO Digital Provider (formerly
OOO TOT Money) (incorporated by reference to Exhibit 10.1 to Net Element’s Current Report on Form 8-K filed with the
Commission on August 23, 2012)
|
|
|
|
10.7
|
|
Agreement of Property Rights Pledge, dated August 17, 2012, between Alpha-Bank and OOO Digital
Provider (formerly OOO TOT Money) (incorporated by reference to Exhibit 10.2 to Net Element’s Current Report on Form
8-K filed with the Commission on August 23, 2012)
|
|
|
|
10.8
|
|
General Agreement No. TR-0672 on General Conditions of Financing against Assignment of Monetary
Claim (Factoring) within Russia, dated September 19, 2012, between Alpha-Bank and OOO Digital Provider (formerly OOO TOT Money)
(including related supplementary agreements) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed with the Commission on October 10, 2012)
|
|
|
|
10.9
|
|
Supplemental Agreements dated September 19, 2012, which amend the General Agreement No.
TR-0672 on General Conditions of Financing against Assignment of Monetary Claim (Factoring) within Russia, dated September
19, 2012, between Alpha-Bank and OOO Digital Provider (formerly OOO TOT Money) (incorporated by reference to Exhibit 10.22
to the Company’s Annual Report on Form 10-K filed with the Commission on April 12, 2013)
|
|
|
|
10.10#
|
|
Management and Consulting Services Agreement, dated October 24, 2012, between Bond Street
Management LLC and Net Element International Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the Commission on October 30, 2012)
|
10.11
|
|
Agreement on transfer of rights and obligations, dated July 1, 2012,
among Mobile Telesystems OJSC, OOO RM-Invest and OOO Digital Provider (formerly OOO TOT Money), with respect to Contract No.
D0811373, dated July 1, 2008, between Mobile Telesystems OJSC and OOO RM-Invest (Net Element International, Inc. is requesting
confidential treatment of certain information which has been omitted from this Agreement. The omitted information
has been separately filed with the SEC.) (incorporated by reference to Exhibit 10.33 to the Company’s Current Report
on Form 8-K filed with the Commission on November 19, 2012)
|
|
|
|
10.12
|
|
Contract No. D0811373, dated July 1, 2008, between Mobile Telesystems OJSC and OOO RM-Invest
(including material supplementary agreements related thereto) (Net Element International, Inc. is requesting confidential
treatment of certain information which has been omitted from Contract No. D0811373 and certain of the material supplementary
agreements related thereto. The omitted information has been separately filed with the SEC.) (incorporated by reference
to Exhibit 10.34 to the Company’s Current Report on Form 8-K filed with the Commission on November 19, 2012)
|
|
|
|
10.13
|
|
Contract No. CPA-86, dated September 1, 2012, between OJSC Megafon and OOO Digital Provider
(formerly OOO TOT Money) (Net Element International, Inc. is requesting confidential treatment of certain information which
has been omitted from Contract No. CPA-86. The omitted information has been separately filed with the SEC.) (incorporated
by reference to Exhibit 10.35 to the Company’s Current Report on Form 8-K filed with the Commission on November 19,
2012)
|
|
|
|
10.14
|
|
Contract No. 0382, dated September 20, 2012, between OJSC VimpelCom and OOO Digital Provider
(formerly OOO TOT Money) (including Supplementary Agreement No. 1 thereto) (Net Element International, Inc. is requesting
confidential treatment of certain information which has been omitted from Contract No. 0382 and Supplementary Agreement No.
1 thereto. The omitted information has been separately filed with the SEC.) (incorporated by reference to Exhibit
10.35 to the Company’s Current Report on Form 8-K filed with the Commission on November 19, 2012)
|
|
|
|
10.15
|
|
Loan Agreement, dated November 26, 2012, between Net Element International, Inc. and Infratont
Equities Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
Commission on November 30, 2012)
|
10.16
|
|
Term Sheet, dated March 8, 2013, between Unified Payments, LLC and Net
Element International, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
with the Commission on March 12, 2013)
|
|
|
|
10.17
|
|
Loan Agreement, dated March 8, 2013, among Net Element International, Inc., Unified Payments,
LLC, Oleg Firer and Georgia Notes 18 LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed with the Commission on March 12, 2013)
|
|
|
|
10.18
|
|
Form of Secured Revolving Note made by Unified Payments, LLC and payable to Net Element
International, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with
the Commission on March 12, 2013)
|
|
|
|
10.19
|
|
Non-Recourse Guaranty, dated March 8, 2013, by Oleg Firer and Georgia Notes 18 LLC for the
benefit of Net Element International, Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed with the Commission on March 12, 2013)
|
|
|
|
10.20
|
|
Pledge Agreement, dated March 8, 2013, among Oleg Firer, Georgia Notes 18 LLC and Net Element
International, Inc. (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with
the Commission on March 12, 2013)
|
|
|
|
10.21
|
|
Loan Agreement, dated July 12, 2012, between OOO Digital Provider (formerly OOO TOT Money)
and OOO RM Invest, as amended on July 30, 2012, August 17, 2012 and February 25, 2013 (incorporated by reference to Exhibit
10.34 to the Company’s Annual Report on Form 10-K filed with the Commission on April 12, 2013)
|
|
|
|
10.22
|
|
Termination Agreement for Management and Consulting Agreement, dated April 15, 2013, between
Net Element International, Inc. and Bond Street Management LLC (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on April 17, 2013)
|
|
|
|
10.23
|
|
Form of Indemnification Agreement for executive officers, entered into between Net Element
International, Inc. and each of Jonathan New, Dmitry Kozko, and Francesco Piovanetti (incorporated by reference to Exhibit
10.8 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, filed with the Commission
on May 15, 2013)
|
|
|
|
10.24
|
|
Contract No. CPA/ML-17, dated March 1, 2013, between ZAO MegaLabs and OOO Digital Provider
(formerly OOO TOT Money) (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2013, filed with the Commission on May 15, 2013) (Net Element, Inc. is requesting confidential
treatment of certain information which has been omitted from Contract No. CPA/ML-17. The omitted information has been separately
filed with the Commission.)
|
10.25
|
|
Commercial Lease, dated May 1, 2013, between BGC LLC and Net Element
International, Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2013, filed with the Commission on August 19, 2013)
|
|
|
|
10.26
|
|
Promissory Note, dated May 13, 2013, in the original principal amount of $2 million made
by Net Element International, Inc. and payable to K1 Holding Limited (incorporated by reference to Exhibit 10.7 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013, filed with the Commission on August 19, 2013)
|
|
|
|
10.27
|
|
Letter Agreement, dated January 14, 2013, among OOO Digital Provider (formerly OOO TOT Money),
Tcahai Hairullaevich Katcaev and Varwood Holdings Limited (incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013, filed with the Commission on August 19, 2013)
|
|
|
|
10.28
|
|
Letter Agreement, dated July 1, 2013, among OOO Digital Provider (formerly OOO TOT Money),
OOO NETE, Net Element International, Inc. and Tcahai Hairullaevich Katcaev (incorporated by reference to Exhibit 10.3 to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013, filed with the Commission on August
19, 2013)
|
|
|
|
10.29
|
|
Settlement, Separation Agreement and General Release, dated May 10, 2013, between Net Element
International, Inc. and Curtis Wolfe (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2013, filed with the Commission on August 19, 2013)
|
10.30
|
|
Letter Agreement, dated August 28, 2013, among Net Element International,
Inc., Oleg Firer, Steven Wolberg, Vladimir Sadovskiy, Georgia Notes 18, LLC, Kenges Rakishev and Mike Zoi (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 10, 2013)
|
|
|
|
10.31
|
|
Services Agreement, dated December 5, 2013, between Net Element International, Inc. an K
1 Holding Limited (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with
the Commission on December 6, 2013)
|
|
|
|
10.32
|
|
Letter Agreement, dated December 5, 2013, among TGR Capital, LLC, Net Element International,
Inc. and K 1 Holding Limited (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed with the Commission on December 6, 2013)
|
|
|
|
10.33
|
|
Form of Incentive Stock Option Award Agreement Under the Net Element, Inc. 2013 Equity Incentive
Plan (incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K filed with the Commission
on March 30, 2015)
|
|
|
|
10.34
|
|
Form of Non-Qualified Stock Option Award Agreement Under the Net Element, Inc. 2013 Equity
Incentive Plan (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K filed with the
Commission on March 30, 2015)
|
|
|
|
10.35
|
|
Form of Restricted Share Award Agreement Under the Net Element, Inc. 2013 Equity Incentive
Plan (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K filed with the Commission
on March 30, 2015)
|
|
|
|
10.36
|
|
Assignment of Membership Interest, dated February 11, 2014, between Net Element, Inc. and
T1T Group, LLC (incorporated by reference to Exhibit 10.1 to Net Element’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2014, filed with the Commission on May 15, 2014)
|
|
|
|
10.37
|
|
Loan and Security Agreement, dated June 30, 2014, among RBL Capital Group, LLC, as lender,
and TOT Group, Inc., TOT Payments, LLC, TOT BPS, LLC, TOT FBS, LLC, Process Pink, LLC, TOT HPS, LLC and TOT New Edge, LLC,
as co-borrowers (incorporated by reference to Exhibit 10.1 to Net Element’s Current Report on Form 8-K filed with the
Commission on July 2, 2014)
|
|
|
|
10.38
|
|
Amendment No. 1 effective June 30, 2014 between the Company and Oleg Firer, Steven Wolberg,
Georgia Notes 18, LLC and Vladimir Sadovskiy (incorporated by reference to Exhibit 10.2 to Net Element’s Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2014, filed with the Commission on August 14, 2014)
|
|
|
|
10.39
|
|
Master Exchange Agreement, dated as of September 15, 2014 between the Company and Crede
CG III, Ltd. (incorporated by reference to Exhibit 10.1 to Net Element’s Current Report on Form 8-K filed with the Commission
on September 15, 2014)
|
|
|
|
10.40
|
|
Supplement Agreement No. 14, dated May 21, 2014 (but executed by OOO Digital Provider (formerly
OOO TOT Money) on September 17, 2014), to the General Agreement No. TR-0672 on General Conditions of Financing against Assignment
of Receivables (Factoring) within Russia, dated September 19, 2012, between JSC Alpha-Bank and OOO Digital Provider (formerly
OOO TOT Money) (incorporated by reference to Exhibit 10.1 to Net Element’s Current Report on Form 8-K filed with the
Commission on September 24, 2014)
|
10.41
|
|
Supplement Agreement No. 15, dated September 17, 2014, to the General
Agreement No. TR-0672 on General Conditions of Financing against Assignment of Receivables (Factoring) within Russia, dated
September 19, 2012, between JSC Alpha-Bank and OOO Digital Provider (formerly OOO TOT Money) (incorporated by reference to
Exhibit 10.2 to Net Element’s Current Report on Form 8-K filed with the Commission on September 24, 2014)
|
|
|
|
10.42
|
|
General Agreement No. 09969-HP on General Conditions of Factoring Services under “Liquidity”
Program, dated as of November 5, 2014, between Bank Otkritie Financial Corporation and Digital Provider Limited Liability
Company (incorporated by reference to Exhibit 10.1 to Net Element’s Current Report on Form 8-K filed with the Commission
on November 19, 2014)
|
|
|
|
10.43
|
|
Additional Agreement on Factoring Services under “Finance” Program to General
Agreement on General Conditions of Factoring Services under “Liquidity” Program No. 09969-HP as of November 5,
2014 (incorporated by reference to Exhibit 10.2 to Net Element’s Current Report on Form 8-K filed with the Commission
on November 19, 2014)
|
10.44
|
|
Equity Distribution Agreement between the Company and Revere Securities,
LLC (incorporated by reference to Exhibit 10.1 to Net Element’s Current Report on Form 8-K filed with the Commission
on January 28, 2015)
|
|
|
|
10.45
|
|
Securities Purchase Agreement (Series A Preferred Stock) among the Company and the investors
party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
with the Commission on May 1, 2015)
|
|
|
|
10.46
|
|
Voting Agreement (related to Series A Preferred Stock sale) among the Company and the stockholders
party thereto (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with
the Commission on May 1, 2015)
|
|
|
|
10.47
|
|
Form of Lock-Up Agreement (related to Series A Preferred Stock transaction) (incorporated
by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on May
1, 2015)
|
|
|
|
10.48
|
|
Securities Purchase Agreement (Senior Convertible Notes and Warrants) among the Company
and the investors party thereto (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form
8-K/A filed with the Commission on July 17, 2015)
|
|
|
|
10.49
|
|
Registration Rights Agreement among the Company and the investors party thereto (incorporated
by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Commission on May
1, 2015)
|
|
|
|
10.50
|
|
Form of Lock-Up Agreement (related to Senior Convertible Notes and Warrants transaction)
(incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the Commission
on May 1, 2015)
|
|
|
|
10.51
|
|
Form of Voting Agreement (related to Senior Convertible Notes and Warrants transaction)
among the Company and the stockholders thereto (incorporated by reference to Exhibit 10.7 to the Company’s Current Report
on Form 8-K filed with the Commission on May 1, 2015)
|
|
|
|
10.52
|
|
Acquisition Agreement, dated May 20, 2015, among TOT Group Europe Ltd., ТOT Group
Russia LLC, Maglenta Enterprises Inc. and Champfremont Holding Ltd., Polimore Capital Limited, Brosword Holding Limited and
other Target Companies listed in Exhibit B thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the Commission on May 27, 2015)
|
|
|
|
10.53
|
|
Escrow Agreement, dated May 20, 2015, among TOT Group Europe Ltd., ТOT Group Russia
LLC, Maglenta Enterprises Inc., Champfremont Holding Ltd. and Reznick Law, PLLC (incorporated by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K filed with the Commission on May 27, 2015)
|
|
|
|
10.54
|
|
Guaranty, dated May 20, 2015, among Net Element, Inc., Maglenta Enterprises Inc. and Champfremont
Holding Ltd. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed
with the Commission on May 27, 2015)
|
|
|
|
10.55
|
|
Guaranty, dated May 20, 2015, by Lacerta Management Ltd in favor of TOT Group Europe Ltd.,
and ТOT Group Russia LLC (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form
8-Kfiled with the Commission on May 27, 2015)
|
|
|
|
10.56
|
|
Letter Agreement, dated August 4, 2015, by and among the Company and the investors listed
on the signature pages attached thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form
8-K filed with the Commission on August 4, 2015)
|
10.57
|
|
Letter Agreement, dated August 4, 2015, by and among the Company and
the investors listed on the signature pages attached thereto (incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed with the Commission on August 4, 2015)
|
|
|
|
10.58
|
|
Letter Agreement, dated as of September 11, 2015, among the Company and the investors listed
on the signature pages attached thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form
8-K filed with the Commission on September 16, 2015)
|
|
|
|
10.59
|
|
Additional Letter Agreement among the Company and the investors listed on the signature
pages attached thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
with the Commission on October 7, 2015)
|
10.60
|
|
Amendment to Letter Agreement dated August 4, 2015, dated December 1,
2015, by and among the Company and the investors listed on the signature pages attached thereto (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 2, 2015)
|
|
|
|
10.61
|
|
Amendment to Letter Agreement dated August 4, 2015, dated December 1, 2015, by and among
the Company and the investors listed on the signature pages attached thereto (incorporated by reference to Exhibit 10.2 to
the Company’s Current Report on Form 8-K filed with the Commission on December 2, 2015)
|
|
|
|
10.62
|
|
Second Additional Letter Agreement, dated as of January 21, 2016, between the Company and
Kenges Rakishev (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
Commission on January 22, 2016)
|
|
|
|
10.63
|
|
Amendment No. 1, dated as of April 14, 2016, to Second Additional Letter Agreement, dated
as of January 21, 2016, between the Company and Kenges Rakishev (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on April 15, 2016)
|
|
|
|
10.64
|
|
Letter agreement, dated as of April 28, 2016 between the Company and RBL Capital Group,
LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission
on April 28, 2016)
|
|
|
|
10.65
|
|
Master Exchange Agreement, dated as of May 2, 2016 between the Company and Crede CG III,
Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission
on May 3, 2016)
|
|
|
|
10.66
|
|
Amendment to the Master Exchange Agreement, dated as of May 2, 2016 between the Company
and Crede CG III, Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
with the Commission on March 8, 2017)
|
|
|
|
10.67
|
|
Amendment No. 1, dated as of May 2, 2016, to the Loan and Security Agreement among TOT Group,
Inc., TOT Payments, LLC, TOT BPS, LLC, TOT FBS, LLC, Process Pink, LLC, TOT HPS, LLC, TOT New Edge, LLC and RBL Capital Group,
LLC. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission
on May 4, 2016)
|
|
|
|
10.68#
|
|
2013 Equity Incentive Plan approved on December 5, 2013 (incorporated by reference to Appendix
“A” to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Commission on November 4,
2013)
|
|
|
|
10.69#
|
|
Amendment to 2013 Equity Incentive Plan approved on December 9, 2014 (incorporated by reference
to Appendix “B” to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Commission on
October 31, 2014)
|
|
|
|
10.70#
|
|
Amendment to 2013 Equity Incentive Plan approved on June 15, 2016 (incorporated by reference
to Appendix “B” to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Commission on
April 25, 2016)
|
|
|
|
10.71
|
|
Common Stock Purchase Agreement, dated as of July 6, 2016, between the Company and ESOUSA
Holdings, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
Commission on July 12, 2016)
|
|
|
|
10.72
|
|
Binding Letter of Intent, dated as of July 21, 2016 between Net Element, Inc., Paystar,
Inc. and Nexcharge, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
with the Commission on July 21, 2016)
|
|
|
|
10.73
|
|
Settlement Agreement Amendment among Net Element, Inc., TOT Group Europe, Ltd., ТOT
Group Russia LLC, Maglenta Enterprises Inc. and Champfremont Holding Ltd. (incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K filed with the Commission on October 31, 2016)
|
|
|
|
10.74
|
|
Amendment to the Acquisition Agreement among Net Element, Inc., TOT Group Europe, Ltd.,
ТOT Group Russia LLC, Maglenta Enterprises Inc., Champfremont Holding Ltd. and the Target Companies parties to thereto
(incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on
October 31, 2016)
|
|
|
|
10.75
|
|
Second Amendment to the Acquisition Agreement among Net Element, Inc., TOT Group Europe,
Ltd., ТOT Group Russia LLC, Maglenta Enterprises Inc., Champfremont Holding Ltd. and the Target Companies parties to
thereto (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission
on March 17, 2017)
|
|
|
|
10.76
|
|
Promissory Note, dated March 1, 2017, in the original principal amount of $348,083.32
made by the Company and payable to Star Equities LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the Commission on March 3, 2017)
|
10.77*
|
|
Amendment to Commercial Lease, dated September 12,
2016, between BGC LLC and Net Element International, Inc.
|
|
|
|
10.78*
|
|
Second Amendment to Commercial Lease, dated November 16, 2016, between BGC LLC and Net Element
International, Inc.
|
|
|
|
10.79
|
|
Corporate Guaranty, dated March 23, 2017, by Net Element, Inc. in favor of Cynergy Data,
LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission
on March 24, 2017)
|
|
|
|
10.80
|
|
Amendment to Master Exchange Agreement, dated as of
March 3, 2017, between the Company and Crede CG III, Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on March 8, 2017)
|
|
|
|
21.1*
|
|
List of Subsidiaries
|
|
|
|
23.1*
|
|
Consent of Independent Registered Public Accounting Firm (Daszkal Bolton LLP)
|
|
|
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under
the Securities Exchange Act of 1934
|
|
|
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under
the Securities Exchange Act of 1934
|
|
|
|
32.1*
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
§ 1350
|
|
|
|
101*
|
|
The following financial information from the Annual Report on Form 10-K for the fiscal year
ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language), is filed electronically herewith: (i)
Consolidated Balance Sheets as of December 31, 2016 and 2015; (ii) Consolidated Statements of Operations and Comprehensive
Loss for the Years Ended December 31, 2016 and 2015; (iii) Consolidated Statement of Changes in Stockholders’ Equity
(Deficit) for the Years Ended December 31, 2016 and 2015; (iv) Consolidated Statements of Cash Flows for the Years Ended December
31, 2016 and 2015; and (v) Notes to Consolidated Financial Statements.
|
# Indicates management contract or compensatory plan or arrangement.
* Filed herewith.
Net Element (NASDAQ:NETE)
Historical Stock Chart
From Apr 2024 to May 2024
Net Element (NASDAQ:NETE)
Historical Stock Chart
From May 2023 to May 2024