UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event
reported) August 3, 2015
Net Element, Inc.
(Exact Name of Registrant as Specified
in Charter)
Delaware |
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001-34887 |
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90-1025599 |
(State or Other Jurisdiction
of Incorporation) |
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(Commission File
Number) |
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(IRS Employer
Identification No.) |
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3363 NE 163rd Street, Suite 705, North Miami Beach, FL |
33160 |
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(Address of Principal Executive Offices) |
(Zip Code) |
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(305) 507-8808 |
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(Registrant’s telephone number, including area code) |
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Not Applicable |
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(Former Name or Former Address, if Changed Since Last Report) |
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Check the appropriate box below
if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following
provisions:
| ¨ | Written
communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
EXPLANATORY NOTE
Net Element, Inc. (the
“Company”) is filing this Amendment No. 1 on Form 8-K/A (this “Amendment”) to its Current Report on Form
8-K filed with the Securities and Exchange Commission on May 27, 2015 (the second such report filed on such date reporting under
Items 1.01, 3.02, 8.01 and 9.01) (the “Original Filing”) to include (i) the audited financial statements of PayOnline
System LLC, Innovative Payment Technologies LLC, Polimore Capital Limited and Brosword Holding Limited (collectively, “PayOnline”)
at and for the years ended December 31, 2013 and December 31, 2014, including the report of Daszkal Bolton, LLP, independent
certified public accountants (the “Audited Financial Statements”), and (ii) the pro forma financial information referred
to in Item 9.01(b) of this Amendment (the “Pro Forma Financial Statements”).
The Company hereby
amends Item 9.01 of the Original Filing to include the Audited Financial Statements and the Pro Forma Financial Statements and
to provide the consent of Daszkal Bolton, LLP.
| Item 9.01 | Financial Statements and Exhibits. |
| (a) | Financial statements of businesses acquired. |
The historical unaudited financial statements
of PayOnline at and for the three months ended March 31, 2015 are filed as Exhibit 99.1 to this Amendment and are incorporated
by reference herein.
The historical audited financial statements
of PayOnline at and for the years ended December 31, 2013 and December 31, 2014 are filed as Exhibit 99.2 to this Amendment
and are incorporated by reference herein.
| (b) | Pro forma financial information. |
The following unaudited pro forma condensed
consolidated financial information of the Company, giving effect to the acquisition of PayOnline, are filed as Exhibit 99.3 to
this Amendment and are incorporated by reference herein:
| · | Unaudited pro forma condensed consolidated balance sheet at March
31, 2015 |
| · | Unaudited pro forma condensed consolidated statement of operations
for the year ended December 31, 2014 |
| · | Unaudited pro forma condensed consolidated statement of operations
for the three months ended March 31, 2015 |
Exhibit No. |
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Description |
23.1 |
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Consent of Daszkal Bolton, LLP |
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99.1 |
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Unaudited financial statements of PayOnline at and for the three months ended March 31, 2015 |
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99.2 |
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Audited financial statements of PayOnline at and for the years ended December 31, 2013 and December 31, 2014 |
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99.3 |
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Unaudited pro forma financial statements of the Company |
SIGNATURES
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
Dated: August 3, 2015
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NET ELEMENT, INC. |
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By: |
/s/ Jonathan New |
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Name: |
Jonathan New |
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Title: |
Chief Financial Officer |
EXHIBIT INDEX
Exhibit No. |
|
Description |
23.1 |
|
Consent of Daszkal Bolton, LLP |
|
|
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99.1 |
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Unaudited financial statements of PayOnline at and for the three months ended March 31, 2015 |
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99.2 |
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Audited financial statements of PayOnline at and for the years ended December 31, 2013 and December 31, 2014 |
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99.3 |
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Unaudited pro forma financial statements of the Company |
Exhibit 23.1
Consent of Independent Registered Public
Accounting Firm
The Board of Directors
PayOnline Group:
We hereby consent to the incorporation by reference in
the registration statements on Form S-3 (File Nos. 333-204840, 333-199432 and 333-186621) and Form S-8 (File No. 333-195476)
of Net Element, Inc., of our report dated July 29, 2015 with respect to the statements of assets acquired and liabilities
assumed by Net Element, Inc., of the PayOnline Group, wholly owned subsidiaries of Social Discovery Ventures, at December 31,
2014 and 2013, and the related statements of revenues and direct expenses for the years ended December 31, 2014 and 2013,
which report appears in the Form 8-K/A of Net Element, Inc. dated August 3, 2015.
/s/ Daszkal Bolton LLP
Fort Lauderdale, Florida
August 3, 2015
Exhibit 99.1
PayOnline Group
Abbreviated Statements of Assets Acquired
and Liabilities Assumed
March 31,
2015 and December 31, 2014
| |
March
31, 2015 | | |
December
31, 2014 | |
| |
| | |
| |
Current assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 215,602 | | |
$ | 26,762 | |
Short-term deposits in banks | |
| 153,940 | | |
| 159,976 | |
Trade receivables | |
| 151,476 | | |
| 323,641 | |
Other current assets | |
| 36,574 | | |
| 45,918 | |
Total current assets | |
| 557,592 | | |
| 556,297 | |
Non-current assets | |
| | | |
| | |
Intangible assets, net | |
| 296,116 | | |
| 235,434 | |
Property, plant and equipment, net | |
| 69,100 | | |
| 37,984 | |
Total non-current assets | |
| 365,216 | | |
| 273,418 | |
Total assets acquired | |
$ | 922,808 | | |
$ | 829,715 | |
Current liabilities | |
| | | |
| | |
Customer deposits | |
$ | 45,878 | | |
$ | 47,224 | |
Loans | |
| 89,646 | | |
| 98,718 | |
Other current liabilities | |
| 87,794 | | |
| 64,943 | |
Total current liabilities | |
| 223,318 | | |
| 210,885 | |
Non-current liabilities | |
| | | |
| | |
Deferred tax liabilities | |
| 58,439 | | |
| 71,189 | |
Total liabilities assumed | |
| 281,757 | | |
| 282,074 | |
Net assets acquired | |
$ | 641,051 | | |
$ | 547,641 | |
See notes to the abbreviated financial statements.
PayOnline Group
Abbreviated Statements of Revenues and Direct
Expenses
For Three
Months Ended March 31, 2015 and March 31, 2014
Statement of Revenues and Direct Expenses | |
March 31,2015 | | |
March 31, 2014 | |
| |
| | |
| |
Net Revenues | |
$ | 1,202,878 | | |
$ | 1,390,235 | |
Direct expenses: | |
| | | |
| | |
Cost of revenues | |
| 802,092 | | |
| 947,362 | |
Employee salaries and related benefits | |
| 139,276 | | |
| 249,875 | |
Technology consulting and maintenance | |
| 19,817 | | |
| 22,431 | |
Professional fees and other consulting expenses | |
| 42,300 | | |
| 17,171 | |
Marketing expenses | |
| 44,048 | | |
| 9,411 | |
Lease expenses | |
| 34,019 | | |
| 68,050 | |
Communications | |
| 6,191 | | |
| 8,996 | |
Depreciation expenses | |
| 3,908 | | |
| 5,416 | |
Amortization expenses | |
| 14,729 | | |
| 12,522 | |
Other direct expenses | |
| 22,024 | | |
| 58,305 | |
Total direct expenses | |
| 1,128,404 | | |
| 1,399,539 | |
Net Revenues less Direct Expenses | |
$ | 74,474 | | |
($ | 9,304 | ) |
See notes to the abbreviated financial statements.
PayOnline Group
Notes to
the Abbreviated Financial Statements
Note
1 – Background and Basis of Presentation
PayOnline Group provides card payment processing
services to merchants in the Russian Federation, Europe and Asia. PayOnline Group’s proprietary integrated platform of payment
processing solutions enables merchants to process, Credit, Debit, Card2Card transfer and Payment Split transactions. PayOnline
Group also is a Validated Level 1 PCI Data Security Service Provider. The business of PayOnline Group is comprised of (i) PayOnline
System LLC (Russia), (ii) Innovative Payment Technologies LLC (Russia) (“IPT LLC”), (iii) Brosword Holding Limited
(Cyprus), and (iv) Polimore Capital Limited (Cyprus) (collectively, “PayOnline,” “PayOnline Group” or “the
Company”).
In March 2015, the Board of Directors of
Social Discovery Ventures (“SDV”) approved the sale of its PayOnline merchant payment processing portfolio investments
to a subsidiary of Net Element, Inc. The proposed transaction was finalized in May 2015.
The PayOnline carve-out financial information
presents the historical carve-out financial position and results of operations of PayOnline. The PayOnline financial information
has been derived from the accounting records of SDV on a carve-out basis and the results do not necessarily reflect what the results
of operations and financial position would have been had PayOnline been operating as a separate entity or its future results in
respect of Net Element, Inc. as it will exist upon completion of the transaction.
SDV’s investment in PayOnline, presented
as “Net Assets” in the PayOnline carve-out abbreviated financial information, includes the accumulated net earnings
and accumulated net distributions to SDV. PayOnline’s results are comprised of the historical operations of the integrated
operations of PayOnline, as well as a portion of the market optimization and corporate functions of SDV.
PayOnline historically has been operated
as a component within a large compendium of jointly operated and integrated complimentary investments and has utilized the former
owner’s centralized corporate/taxation accounting system, as well as its legal services and certain IT related services,
costs which were shared among all of the former owner’s jointly operated investments and businesses.
The majority of the assets and liabilities
of PayOnline have been identified based on the existing divisional structure. The operating results of PayOnline have been specifically
identified based on SDV’s existing divisional organization. However, certain other expenses presented in the Statement of
Revenues and Direct Expenses represent allocations and estimates of the cost of corporate and administrative services incurred
by SDV.
Salaries and related benefits have been
allocated to PayOnline based on management’s best estimate of how services historically were provided by existing employees.
Estimates for administration costs, namely
rent, accounting and legal services and IT support, have been allocated based on methodologies that management believes to be reasonable.
PayOnline Group
Notes to
the Abbreviated Financial Statements
Note
1 – Background and Basis of Presentation, continued
Income taxes have been recorded as if PayOnline
had been a separate tax paying legal entity, filing separate tax returns in its local jurisdictions. The calculation of income
taxes is based on a number of assumptions, allocations and estimates, including those used to prepare the PayOnline Carve-out financial
information.
Note
2 – Summary of Significant Accounting Policies
Principles of
Presentation
The carve-out financial information includes
the combined accounts of PayOnline System LLC, Polimore Capital Limited, Brosword Holding Limited and Innovative Payment Technologies,
LLC (collectively, the “Company”), and are presented in accordance with generally accepted accounting principles in
the United States. All significant intercompany account balances and transactions have been eliminated in combination.
Foreign Currency
The Russian Ruble (“RUB”) is
the functional currency of PayOnline System LLC and IPT LLC. The U.S. dollar is the functional currency of Polimore Capital Ltd
and Brosword Holding Ltd. The presentation currency of the Company is U.S. dollars.
All asset and liability amounts of PayOnline
System LLC and IPT LLC have been translated into U.S. dollars at end-of-period exchange rates. Income and expenses have been translated
at average exchange rates in effect during the years presented. Differences from translation of foreign currency financial statements
into presentation currency have been included in Net assets acquired.
Cash and Cash
Equivalents
The Company considers all highly liquid
investments purchased with original maturities of three (3) months or less to be cash equivalents.
Accounts Receivable
The Company continually monitors the rate
of credit card collections on a merchant by merchant basis. The Company maintains reserves for potential credit losses which, when
realized, have been within the range of management's allowance for doubtful accounts. The Company establishes an allowance for
doubtful accounts based on historical credit card collection experience and any specific merchant collection issues that the Company
has identified. At March 31, 2015 and at December 31, 2014, the Company determined that no allowance for doubtful accounts was
necessary.
Property and Equipment
Property and equipment is primarily
comprised of computer equipment, servers and furniture and are stated at cost. The Company computes depreciation using the straight-line
method over the estimated useful lives of the assets, generally five (5) years.
PayOnline Group
Notes to
the Abbreviated Financial Statements
Note
2 – Summary of Significant Accounting Policies
Intangible
Assets
Intangible assets consist principally
of the cost of internally and externally developed payment processing technologies which are amortized using the straight-line
method over their respective useful lives, generally five (5) years.
Intangible assets which were
sponsored and funded by government grants are presented net of the amount of the corresponding grant. The grant is amortized concurrently
over the life of the corresponding intangible asset as a reduction to amortization expense.
Revenue Recognition
Revenue is generated from fees
charged to merchants for web-based payment processing services. The Company charges these merchants a percentage rate based upon
the merchant's monthly charge volume and risk profile. In addition the Company receives fees for providing administrative support
to merchants. Revenue is recognized when the services are rendered.
In accordance with the agreements
of the Company and the banks, the Company bears main risks in relation of the full amount of payment, including credit risk for
insolvent merchants. Thus the Company’s revenue includes the Company’s commissions and fees received from merchants
and banks, and bank commission retained by banks from merchants.
Income
Taxes
Income taxes have been calculated in accordance
with local legislation of the country where the corresponding company operates. Deferred income tax is provided using the balance
sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes. Deferred tax assets for deductible temporary differences and tax loss
carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the
deductions can be utilized.
The Company accounts for income taxes in
accordance with ASC 740, Income Taxes. The Company records a liability for uncertain tax positions when it is probable that
a loss has been incurred and the amount can be reasonably estimated. .At March 31, 2015 and at December 31, 2014, the Company has
no liabilities for uncertain tax positions. The Company's policy is to recognize interest and penalties related to income tax matters
as a component of income tax expense. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements,
and changes in tax law and new authoritative rulings.
Generally, the Company is not subject to
examinations by income tax authorities prior to 2012.
Date of Management’s
Review
Management has considered all events that
have occurred subsequent to March 31, 2015and through July 29, 2015, the date these abbreviated financial statements were available
to be issued.
PayOnline Group
Notes to
the Abbreviated Financial Statements
Note 3 – Intangible Assets
Intangible assets consisted of the following
at March 31, 2015 and December 31, 2014:
| |
March 31, 2015 | | |
December 31, 2014 | |
| |
Cost | | |
Accumulated Amortization | | |
Net | | |
Cost | | |
Accumulated Amortization | | |
Net | |
Software | |
$ | 404,020 | | |
$ | (102,135 | ) | |
$ | 301,885 | | |
$ | 334,939 | | |
$ | (88,460 | ) | |
$ | 246,479 | |
Other | |
| 27,081 | | |
| (1,712 | ) | |
| 25,369 | | |
| 25,546 | | |
| (1,291 | ) | |
| 24,255 | |
Grant | |
| (56,614 | ) | |
| 25,476 | | |
| (31,138 | ) | |
| (58,834 | ) | |
| 23,534 | | |
| (35,300 | ) |
Total | |
$ | 374,487 | | |
$ | (78,371 | ) | |
$ | 296,116 | | |
$ | 301,651 | | |
$ | (66,217 | ) | |
$ | 235,434 | |
The following table shows future amortization
expenses for intangible assets at March 31, 2015:
| |
9 months 2015 | | |
2016 | | |
2017 | | |
2018 | | |
2019 and later | |
Amortization expense | |
$ | 51,004 | | |
$ | 64,225 | | |
$ | 64,156 | | |
$ | 43,851 | | |
$ | 72,880 | |
The Company received four (4) grants from
the Russian government. All grants are fixed-priced and aimed at development of software for payments processing. The Company owns
all rights for software developed, while under government request may be required to provide a non-exclusive license for use of
the software. At March 31, 2015, the Company remains obligated to provide certain reports to the granting agency.
Note 4 – Loans Payable
During 2014, Polimore Capital Limited issued
unsecured loans payable to a third party. The loans aggregate to approximately $60,000, and accrue PIK interest at six percent
(6.0%) per annum. The amount of interest charged is payable together with the loan at maturity in 2019. The loans include certain
restrictive covenants. At March 31, 2015, Polimore was out of compliance, and therefore the loans have been classified within current
liabilities.
Other loans at March 31, 2015 and at December
31, 2014, represent unsecured short-term borrowings received from individuals with interest rates of up to six percent (6.0%) per
annum.
Note 5 – Commitments
and Contingencies
Legal Matters
From time to time, the Company may become
party to asserted claims, litigation and/or administrative proceedings arising from its operations in the ordinary course of business.
The Company is not a party to any litigation or administrative proceedings that management believes would have a material adverse
effect on the Company’s business, results of operations, financial condition or cash flows.
PayOnline Group
Notes to
the Abbreviated Financial Statements
Note 5 – Commitments
and Contingencies, continued
Tax legislation
Russian tax, currency and customs legislation
is subject to varying interpretation, and changes, which can occur frequently. Management’s interpretation of such legislation
as applied to the transactions and activity of the Company may be challenged by the regional and federal authorities. The tax authorities
may be taking a more assertive position in their interpretation of legislation and their assessments, and it is possible that transactions
and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties
and interest may be assessed. Fiscal periods remain open to review by the authorities in respect to taxes for three calendar years
preceding the year of review. Under certain circumstances, reviews may cover longer periods.
PayOnline System LLC uses a simplified
tax regime and pays 15% tax from income calculated by cash method according to tax rules instead of ordinary income tax, VAT and
some other. PayOnline System LLC will be required to switch to the ordinary tax system from the simplified tax regime after the
acquisition because in accordance with the Russian legislation the simplified tax regime is not allowed for entities owned by corporations.
Note 6 – Concentration of Risk
Cash Concentrations
The Company holds cash and places deposits
mainly in VTB Bank and SDM bank. At March 31, 2015, cash and cash equivalents in the amount of $186,133 or 86%,and $12,885 or 48%
at December 31, 2014, and 100% of deposits, were held in these banks. In December 2014, an “A-“rating was assigned
to SDM bank by Fitch rating agency and “Aaa.ru” rating was assigned to VTB Bank by VTB Moody’s rating agency.
Supplier’s
Concentrations
During the three months ended March 31,
2014, there was one (1) supplier who provided $138,224 of software development. There was no software development provided from
this supplier during the three months ended March 31, 2015.
Third Party Processors
The Company processes $1,084,440 or 90%
of its revenues for three months ended March 31, 2015 ($1,308,339 or 94% of its revenues for three months ended March 31, 2014)
via VTB bank (formerly TranskreditBank).
Note 7 – Related Party Transactions
Payonline System LLC received two interest-free
loans from a related party, which were repaid during 2014.Innovative Payment Technologies LLC received three interest-free loans
from a related party in 2014. The aggregate amount payable at March 31, 2015and December 31, 2014 was $27,367 and $37,328, respectively.
PayOnline Group
Notes to
the Abbreviated Financial Statements
Note 7 – Related Party Transactions,
continued
The following expenses represent allocations
and estimates of the cost of services incurred by SDV. These allocations and estimates were based on methodologies that management
believes to be reasonable.
Shared expense ($) | |
Three months ended March 31, 2015 | | |
Three months ended March 31, 2014 | |
Rent Expense | |
$ | 33,247 | | |
$ | 68,051 | |
Professional Fees: Accounting Services | |
| 4,824 | | |
| 8,586 | |
Professional Fees: Legal | |
| 4,824 | | |
| 8,586 | |
Inside Consulting: Technology | |
| 4,824 | | |
| 8,586 | |
Total | |
$ | 47,719 | | |
$ | 93,809 | |
Note 8 – Cash Flow Information (unaudited)
The following table presents cash flows detailed by major activities:
| |
Three months ended March 31, 2015 | | |
Three months ended March 31, 2014 | |
Cash flows from operating activities | |
$ | 241,402 | | |
$ | 301,767 | |
Cash flows from investing activities | |
| (52,274 | ) | |
| (151,655 | ) |
Cash flows from financing activities | |
| (9,073 | ) | |
| (52,437 | ) |
Impact of foreign exchange on cash | |
| 8,785 | | |
| 9,355 | |
Net change in cash | |
| 188,839 | | |
| 107,030 | |
Cash and cash equivalents – beginning of period | |
| 26,762 | | |
| 86,549 | |
Cash and cash equivalents – end of period | |
$ | 215,602 | | |
$ | 193,579 | |
Exhibit 99.2
Independent
Auditors’ Report
To the
Board of Directors
PayOnline Group
Miami, Florida
We have audited the accompanying statements
of and assets acquired and liabilities assumed by Net Element, Inc., pursuant to an Acquisition Agreement dated May 20, 2015,
of the PayOnline Group, wholly owned subsidiaries of Social Discovery Ventures, at December 31, 2014 and 2013, and the related
statements of revenues and direct expenses for the years ended December 31, 2014 and 2013, and the related notes (collectively,
the Abbreviated Financial Information).
Management’s
Responsibility for the Financial Statements
Management
is responsible for the preparation and fair presentation of the Abbreviated Financial Information in accordance with accounting
principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal
control relevant to the preparation and fair presentation of the Abbreviated Financial information that is free from material misstatement,
whether due to fraud or error.
Auditors’
Responsibility
Our
responsibility is to express an opinion on the Abbreviated Financial Information based on our audit. We conducted our audit in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statement is free from material misstatement.
An
audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant
to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation
of the financial statements.
We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the Abbreviated Financial
Information referred to above present fairly, in all material respects, the statements of assets acquired and liabilities assumed
of the PayOnline Group at December 31, 2014 and 2013, and the statements of revenues and direct expenses for the years then
ended, in conformity with U.S. generally accepted accounting principles.
Continued for previous page
Emphasis of Matter
The accompanying Abbreviated Financial
Information was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission
for inclusion in the Form 8-K as described in Note 1, and are not intended to be a complete presentation of the financial position
or the results of operations of the PayOnline Group.
/s/ Daszkal Bolton, LLP
Fort
Lauderdale, Florida
July 29, 2015
PayOnline Group
Abbreviated Statements of Assets Acquired
and Liabilities Assumed
December
31, 2014 and 2013
| |
2014 | | |
2013 | |
| |
| | |
| |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 26,762 | | |
$ | 86,549 | |
Short-term deposits in banks | |
| 159,976 | | |
| 155,824 | |
Trade receivables | |
| 323,641 | | |
| 236,852 | |
Other current assets | |
| 45,918 | | |
| 94,261 | |
Total current assets | |
| 556,297 | | |
| 573,486 | |
Non-current assets: | |
| | | |
| | |
Intangible assets, net | |
| 235,434 | | |
| 193,221 | |
Property, plant and equipment, net | |
| 37,984 | | |
| 83,767 | |
Total non-current assets | |
| 273,418 | | |
| 276,988 | |
Total assets acquired | |
$ | 829,715 | | |
$ | 850,474 | |
Current liabilities: | |
| | | |
| | |
Customer deposits | |
$ | 47,224 | | |
$ | 378,122 | |
Loans | |
| 98,718 | | |
| 51,025 | |
Other current liabilities | |
| 64,943 | | |
| 69,928 | |
Total current liabilities | |
| 210,885 | | |
| 499,075 | |
Non-current liabilities: | |
| | | |
| | |
Deferred tax liabilities | |
| 71,189 | | |
| 10,954 | |
Total liabilities assumed | |
| 282,074 | | |
| 510,029 | |
Net assets acquired | |
$ | 547,641 | | |
$ | 340,445 | |
See notes to the abbreviated financial statements.
PayOnline Group
Abbreviated Statements of Revenues and Direct
Expenses
For the Years
Ended December 31, 2014 and 2013
| |
2014 | | |
2013 | |
| |
| | |
| |
Net Revenues | |
$ | 6,729,228 | | |
$ | 5,997,495 | |
Direct expenses: | |
| | | |
| | |
Bank commissions | |
| 4,595,623 | | |
| 4,047,877 | |
Employee salaries and related benefits | |
| 814,121 | | |
| 966,162 | |
Technology consulting and maintenance | |
| 86,475 | | |
| 46,586 | |
Professional fees and other consulting expenses | |
| 225,598 | | |
| 96,101 | |
Marketing expenses | |
| 201,176 | | |
| 306,613 | |
Lease expenses | |
| 216,876 | | |
| 298,651 | |
Communications | |
| 38,938 | | |
| 49,165 | |
Depreciation expenses | |
| 20,112 | | |
| 16,528 | |
Amortization expenses | |
| 65,714 | | |
| 37,506 | |
Other direct expenses | |
| 36,075 | | |
| 54,151 | |
Total direct expenses | |
| 6,300,709 | | |
| 5,919,340 | |
Net Revenues less Direct Expenses | |
$ | 428,520 | | |
$ | 58,155 | |
See notes to the abbreviated financial statements.
PayOnline Group
Notes to
Abbreviated Financial Statements
Note
1 – Background and Basis of Presentation
PayOnline Group provides card payment processing
services to merchants in the Russian Federation, Europe and Asia. PayOnline Group’s proprietary integrated platform of payment
processing solutions enables merchants to process, Credit, Debit, Card2Card transfer and Payment Split transactions. PayOnline
Group also is a Validated Level 1 PCI Data Security Service Provider. The business of PayOnline Group is comprised of (i) PayOnline
System LLC (Russia), (ii) Innovative Payment Technologies LLC (Russia) (“IPT LLC”), (iii) Brosword Holding Limited
(Cyprus), and (iv) Polimore Capital Limited (Cyprus) (collectively, “PayOnline,” “PayOnline Group” or “the
Company”).
In March 2015, the Board of Directors of
Social Discovery Ventures (“SDV”) approved the sale of its PayOnline merchant payment processing portfolio investments
to a subsidiary of Net Element, Inc. The proposed transaction was finalized in May 2015.
The PayOnline carve-out financial information
presents the historical carve-out financial position and results of operations of PayOnline. The PayOnline financial information
has been derived from the accounting records of SDV on a carve-out basis and the results do not necessarily reflect what the results
of operations and financial position would have been had PayOnline been operating as a separate entity or its future results in
respect of Net Element, Inc. as it will exist upon completion of the transaction.
SDV’s investment in PayOnline, presented
as “Net Assets” in the PayOnline carve-out abbreviated financial information, includes the accumulated net earnings
and accumulated net distributions to SDV. PayOnline’s results are comprised of the historical operations of the integrated
operations of PayOnline, as well as a portion of the market optimization and corporate functions of SDV.
PayOnline historically has been operated
as a component within a large compendium of jointly operated and integrated complimentary investments and has utilized the former
owner’s centralized corporate/taxation accounting system, as well as its legal services and certain IT related services,
costs which were shared among all of the former owner’s jointly operated investments and businesses.
The majority of the assets and liabilities
of PayOnline have been identified based on the existing divisional structure. The operating results of PayOnline have been specifically
identified based on SDV’s existing divisional organization. However, certain other expenses presented in the Statement of
Revenues and Direct Expenses represent allocations and estimates of the cost of corporate and administrative services incurred
by SDV.
Salaries and related benefits have been
allocated to PayOnline based on management’s best estimate of how services historically were provided by existing employees.
Estimates for administration costs, namely
rent, accounting and legal services and IT support, have been allocated based on methodologies that management believes to be reasonable.
PayOnline Group
Notes to
Abbreviated Financial Statements
Note
1 – Background and Basis of Presentation, continued
Income taxes have been recorded as if PayOnline
had been a separate tax paying legal entity, filing separate tax returns in its local jurisdictions. The calculation of income
taxes is based on a number of assumptions, allocations and estimates, including those used to prepare the PayOnline Carve-out financial
information.
Note
2 – Summary of Significant Accounting Policies
Principles of
Presentation
The carve-out financial information includes
the combined accounts of PayOnline System LLC, Polimore Capital Limited, Brosword Holding Limited and Innovative Payment Technologies,
LLC (collectively, the “Company”), and are presented in accordance with generally accepted accounting principles in
the United States. All significant intercompany account balances and transactions have been eliminated in combination.
Foreign Currency
The Russian Ruble (“RUB”) is
the functional currency of PayOnline System LLC and IPT LLC. The U.S. dollar is the functional currency of Polimore Capital Ltd
and Brosword Holding Ltd. The presentation currency of the Company is U.S. dollars.
All asset and liability amounts of PayOnline
System LLC and IPT LLC have been translated into U.S. dollars at end-of-period exchange rates. Income and expenses have been translated
at average exchange rates in effect during the years presented. Differences from translation of foreign currency financial statements
into presentation currency have been included in Net assets acquired.
Cash and Cash
Equivalents
The Company considers all highly liquid
investments purchased with original maturities of three (3) months or less to be cash equivalents.
Accounts Receivable
The Company continually monitors the rate
of credit card collections on a merchant by merchant basis. The Company maintains reserves for potential credit losses which, when
realized, have been within the range of management's allowance for doubtful accounts. The Company establishes an allowance for
doubtful accounts based on historical credit card collection experience and any specific merchant collection issues that the Company
has identified. At December 31, 2014 and 2013, the Company determined that no allowance for doubtful accounts was necessary.
Property and Equipment
Property and equipment is primarily
comprised of computer equipment, servers and furniture and are stated at cost. The Company computes depreciation using the straight-line
method over the estimated useful lives of the assets, generally five (5) years.
PayOnline Group
Notes to
Abbreviated Financial Statements
Note
2 – Summary of Significant Accounting Policies
Intangible
Assets
Intangible assets consist principally
of the cost of internally and externally developed payment processing technologies which are amortized using the straight-line
method over their respective useful lives, generally five (5) years.
Intangible assets which were
sponsored and funded by government grants are presented net of the amount of the corresponding grant. The grant is amortized concurrently
over the life of the corresponding intangible asset as a reduction to amortization expense.
Revenue Recognition
Revenue is generated from fees
charged to merchants for web-based payment processing services. The Company charges these merchants a percentage rate based upon
the merchant's monthly charge volume and risk profile. In addition the Company receives fees for providing administrative support
to merchants. Revenue is recognized when the services are rendered.
In accordance with the agreements
of the Company and the banks, the Company bears main risks in relation of the full amount of payment, including credit risk for
insolvent merchants. Thus the Company’s revenue includes the Company’s commissions and fees received from merchants
and banks, and bank commission retained by banks from merchants.
Income
Taxes
Income taxes have been calculated in accordance
with local legislation of the country where the corresponding company operates. Deferred income tax is provided using the balance
sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes. Deferred tax assets for deductible temporary differences and tax loss
carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the
deductions can be utilized.
The Company accounts for income taxes in
accordance with ASC 740, Income Taxes. The Company records a liability for uncertain tax positions when it is probable that
a loss has been incurred and the amount can be reasonably estimated. At December 31, 2014 and 2013, the Company has no liabilities
for uncertain tax positions. The Company's policy is to recognize interest and penalties related to income tax matters as a component
of income tax expense. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, and changes
in tax law and new authoritative rulings.
Generally, the Company is not subject to
examinations by income tax authorities prior to 2011.
Date of Management’s
Review
Management has considered all events that
have occurred subsequent to December 31, 2014 and through July 29, 2015, the date these abbreviated financial statements were available
to be issued.
PayOnline Group
Notes to
Abbreviated Financial Statements
Note 3 – Intangible Assets
Intangible assets consisted of the following
at December 31, 2014 and 2013:
| |
| | |
2014 | | |
| | |
| | |
2013 | | |
| |
| |
Cost | | |
Accumulated Amortization | | |
Net | | |
Cost | | |
Accumulated Amortization | | |
Net | |
Software | |
$ | 334,939 | | |
$ | (88,460 | ) | |
$ | 246,479 | | |
$ | 330,415 | | |
$ | (56,494 | ) | |
$ | 273,921 | |
Other | |
| 25,546 | | |
| (1,291 | ) | |
| 24,255 | | |
| 465 | | |
| (261 | ) | |
| 204 | |
Grant | |
| (58,834 | ) | |
| 23,534 | | |
| (35,300 | ) | |
| (101,130 | ) | |
| 20,226 | | |
| (80,904 | ) |
Total | |
$ | 301,651 | | |
$ | (66,217 | ) | |
$ | 235,434 | | |
$ | 229,750 | | |
$ | (36,529 | ) | |
$ | 193,221 | |
The following table shows future amortization
expenses for intangible assets at December 31, 2014:
| |
2015 | | |
2016 | | |
2017 | | |
2018 | | |
2019 | |
Amortization expense | |
$ | 59,113 | | |
$ | 55,238 | | |
$ | 55,230 | | |
$ | 34,129 | | |
$ | 31,724 | |
The Company received four (4) grants from
the Russian government. All grants are fixed-priced and aimed at development of software for payments processing. The Company owns
all rights for software developed, while under government request may be required to provide a non-exclusive license for use of
the software. At December 31, 2014 the Company remains obligated to provide certain reports to the granting agency.
Note 4 – Loans Payable
During 2014, Polimore Capital Limited issued
unsecured loans payable to a third party. The loans aggregate to approximately $60,000, and accrue PIK interest at six percent
(6.0%) per annum. The amount of interest charged is payable together with the loan at maturity in 2019. The loans include certain
restrictive covenants. At December 31, 2014, Polimore was out of compliance, and therefore the loans have been classified within
current liabilities.
Other loans at December 31, 2014, and all
loans at December 31, 2013, represent unsecured short-term borrowings received from individuals with interest rates of up to six
percent (6.0%) per annum.
Note 5 – Commitments
and Contingencies
Legal Matters
From time to time, the Company may become
party to asserted claims, litigation and/or administrative proceedings arising from its operations in the ordinary course of business.
The Company is not a party to any litigation or administrative proceedings that management believes would have a material adverse
effect on the Company’s business, results of operations, financial condition or cash flows.
PayOnline Group
Notes to
Abbreviated Financial Statements
Note 5 – Commitments
and Contingencies, continued
Tax legislation
Russian tax, currency and customs legislation
is subject to varying interpretation, and changes, which can occur frequently. Management’s interpretation of such legislation
as applied to the transactions and activity of the Company may be challenged by the regional and federal authorities. The tax authorities
may be taking a more assertive position in their interpretation of legislation and their assessments, and it is possible that transactions
and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties
and interest may be assessed. Fiscal periods remain open to review by the authorities in respect to taxes for three calendar years
preceding the year of review. Under certain circumstances, reviews may cover longer periods.
PayOnline System LLC uses a simplified
tax regime and pays 15% tax from income calculated by cash method according to tax rules instead of ordinary income tax, VAT and
some other. PayOnline System LLC will be required to switch to the ordinary tax system from the simplified tax regime after the
acquisition because in accordance with the Russian legislation the simplified tax regime is not allowed for entities owned by corporations.
Note 6 – Concentration of Risk
Cash Concentrations
The Company holds cash and places deposits
mainly at VTB Bank and SDM bank. At December 31, 2014, cash and cash equivalents in the amount of $12,885 or 48%, and $76 998
or 89% at December 31, 2013, and 100% of deposits, were held in these banks. In December 2014, an “A-“ rating was assigned
to SDM bank by Fitch rating agency and “Aaa.ru” rating was assigned to VTB Bank by VTB Moody’s rating agency.
Supplier’s
Concentrations
During 2014, there was one (1) supplier
who provided $249,811 of software development. There was no software development provided from this supplier in 2013.
Third Party Processors
The Company processes $6,258,927 or 93%
of its revenues in 2014 ($5,643,200 or 94% of its revenues in 2013) through arrangements with VTB bank (formerly TranskreditBank).
Note 7 – Related Party Transactions
Payonline System LLC received two interest-free
loans from a related party. The aggregate amount payable at December 31, 2013 was $52,437, and was repaid during 2014. Innovative
Payment Technologies LLC received three interest-free loans from a related party in 2014. The aggregate amount payable at December
31, 2014 was $37,328.
PayOnline Group
Notes to
Abbreviated Financial Statements
Note 7 – Related Party Transactions,
continued
The following expenses represent allocations
and estimates of the cost of services incurred by SDV. These allocations and estimates were based on methodologies that management
believes to be reasonable and include administrative costs.
Shared expense ($) | |
2014 | | |
2013 | |
Rent Expense | |
$ | 215,265 | | |
$ | 298,651 | |
Professional Fees: Accounting Services | |
| 31,232 | | |
| 37,679 | |
Professional Fees: Legal | |
| 31,232 | | |
| 37,679 | |
Inside Consulting: Technology | |
| 31,232 | | |
| 37,679 | |
Total | |
$ | 308,961 | | |
$ | 411,688 | |
Note 8 – Cash Flow Information (unaudited)
The following table presents cash flows detailed by major activities:
| |
2014 | | |
2013 | |
Cash flows from operating activities | |
$ | 276,413 | | |
$ | 500,496 | |
Cash flows from investing activities | |
| (340,262 | ) | |
| (249,680 | ) |
Cash flows from financing activities | |
| 17,926 | | |
| (180,545 | ) |
Impact of foreign exchange on cash | |
| (13,864 | ) | |
| (2,538 | ) |
Net change in cash | |
| (59,787 | ) | |
| 67,734 | |
Cash and cash equivalents – beginning of the year | |
| 86,549 | | |
| 18,816 | |
Cash and cash equivalents – end of the year | |
$ | 26,762 | | |
$ | 86,549 | |
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
On
May 20, 2015, TOT Group Europe, Ltd. and TOT Group Russia LLC (collectively, the “Purchasers”),
each a subsidiary of Net Element, Inc. (the “Company”),
entered into an Acquisition Agreement (the "Agreement") with Maglenta Enterprises Inc. and Champfremont
Holding Ltd. (collectively, the “Sellers”) to acquire all of the issued and outstanding equity interests of
PayOnline System LLC, Innovative Payment Technologies LLC, Polimore Capital Limited and Brosword Holding Limited
(collectively, “PayOnline”). PayOnline’s business includes the operation of a protected payment processing
system to accept bank card payments for goods and services. The Purchasers are entitled to the full economic benefit from
the acquisition of PayOnline from the effective date of the Agreement.
Purchase consideration is 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, the extra
earn out payments based on a multiple of EBITDA. The Agreement sets forth the determination of the value of such shares based on
the closing sales price on the date before each applicable payment date.
The Purchasers have provided the Sellers with guarantee that
the value of the stock held at the end of the 12-month period following the issuance of restricted Common shares (“Guarantee
Period”) will not be less than the value at the date of issuance of such stock. Subject to certain conditions, if at the
end of the Guarantee Period the value of any such remaining stock is less than the value of such stock at the date of the issuance
of such stock, the Purchasers will pay a cash amount equaling the difference between such values.
The following unaudited pro forma condensed consolidated financial
information is based on this historical consolidated financial information of the Company and PayOnline and has been prepared to
reflect the proposed Acquisition and related financing transactions. The Company financed the cash component of the Acquisition,
including the payment of related fees and expenses, with proceeds from the issuance of $5.5 million of Series A, 9% Convertible
Preferred Stock.
The unaudited pro forma condensed consolidated financial information
is provided for informational purposes only. The unaudited pro forma condensed consolidated financial information is not necessarily
indicative of operating results that would have been achieved had the Acquisition been completed at January 1, 2014 and does
not intend to project the future financial results of the Company after the Acquisition. The unaudited pro forma condensed consolidated
balance sheet does not purport to reflect what the Company’s financial condition would have been had the transaction closed
on March 31, 2015 or for any future or historical period. The unaudited pro forma condensed consolidated statements of operations
and balance sheet do not reflect the transaction costs of the Acquisition, the costs of any integration activities or benefits
from the Acquisition and synergies that may be derived.
The unaudited pro forma condensed consolidated balance sheet
combines the consolidated balance sheet of the Company and PayOnline at March 31, 2015, as if the Acquisition occurred at that
date. The interim unaudited pro forma condensed consolidated statement of operations combines the unaudited statement of operations
for the Company and PayOnline for the three months ended March 31, 2015. The unaudited pro forma condensed consolidated statement
of operations for the year ended December 31, 2014 combines the audited statements of operations of the Company PayOnline
for the year ended December 31, 2014. The unaudited pro forma condensed consolidated statements of operations are prepared
as if the Acquisition occurred on January 1, 2014.
The unaudited pro forma condensed consolidated financial information
should be read in conjunction with the following information:
| • | Notes to the unaudited pro forma condensed consolidated
financial information. |
| • | Net Element, Inc.’s Current Report on Form 8-K filed
May 27, 2015, including the exhibits thereto. |
| • | Unaudited interim financial statements of the Company at
and for the three months ended March 31, 2015, which are included in the Company’s Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2015. |
| • | Audited financial statements of the Company at and for
the year ended December 31, 2014, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2014. |
| • | Unaudited interim financial information of PayOnline at
and for the three months ended March 31, 2015 which are included in Exhibit 99.1 of this Current Report on Form 8-K/A. |
| • | Audited financial information of PayOnline at December 31,
2014 and for the years ended December 31, 2014 and 2013 which are included in Exhibit 99.2 of this Current Report on Form
8-K/A. |
NET ELEMENT, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2015
| |
Net Element, Inc. | | |
PayOnline | | |
Pro Forma Adj | | |
Pro Forma Consolidated | |
ASSETS | |
| | | |
| | | |
| | | |
| | |
Current assets: | |
| | | |
| | | |
| | | |
| | |
Cash | |
$ | 766,279 | | |
$ | 369,542 | | |
$ | 1,540,520 | (a)(b) | |
$ | 2,676,341 | |
Accounts receivable, net | |
| 3,275,720 | | |
| 151,476 | | |
| | | |
| 3,427,196 | |
Prepaid expenses and other assets | |
| 755,674 | | |
| 36,574 | | |
| | | |
| 792,248 | |
Total current assets, net | |
| 4,797,673 | | |
| 557,592 | | |
| 1,540,520 | | |
| 6,895,785 | |
Fixed assets, net | |
| 60,850 | | |
| 69,100 | | |
| - | | |
| 129,950 | |
Intangible assets, net | |
| 2,273,695 | | |
| 296,116 | | |
| 6,260,310 | (a) | |
| 8,830,121 | |
Goodwill | |
| 6,671,750 | | |
| - | | |
| | | |
| 6,671,750 | |
Other long term assets | |
| 225,189 | | |
| - | | |
| - | | |
| 225,189 | |
Total assets | |
$ | 14,029,157 | | |
$ | 922,808 | | |
$ | 7,800,830 | | |
$ | 22,752,795 | |
| |
| | | |
| | | |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | | |
| | | |
| | |
Current liabilities: | |
| | | |
| | | |
| | | |
| | |
Accounts payable | |
$ | 3,398,814 | | |
$ | - | | |
$ | - | | |
$ | 3,398,814 | |
Deferred revenue | |
| 437,625 | | |
| - | | |
| - | | |
| 437,625 | |
Accrued expenses | |
| 2,372,425 | | |
| 192,111 | | |
| - | | |
| 2,564,536 | |
Notes payable (current portion) | |
| 318,405 | | |
| 89,646 | | |
| - | | |
| 408,051 | |
Due to related parties | |
| 125,000 | | |
| - | | |
| - | | |
| 125,000 | |
Total current liabilities | |
| 6,652,269 | | |
| 281,757 | | |
| - | | |
| 6,934,026 | |
Note payable (non-current portion) | |
| 3,646,595 | | |
| - | | |
| - | | |
| 3,646,595 | |
Total liabilities | |
| 10,298,864 | | |
| 281,757 | | |
| - | | |
| 10,580,621 | |
| |
| | | |
| | | |
| | | |
| | |
STOCKHOLDERS' EQUITY | |
| | | |
| | | |
| | | |
| | |
Preferred stock ($1,000 par value) | |
| - | | |
| - | | |
| 5,500,000 | (b) | |
| 5,500,000 | |
Common stock ($.0001 par value, 200,000,000 shares authorized) | |
| 4,618 | | |
| - | | |
| 477 | (a) | |
| 5,095 | |
Paid in capital | |
| 137,290,970 | | |
| - | | |
| 3,599,523 | (a) | |
| 140,890,493 | |
Stock subscription receivable | |
| (1,111,130 | ) | |
| - | | |
| - | | |
| (1,111,130 | ) |
Accumulated other comprehensive loss | |
| (1,359,628 | ) | |
| - | | |
| - | | |
| (1,359,628 | ) |
Accumulated deficit | |
| (131,355,552 | ) | |
| - | | |
| (658,119 | )(a)(b) | |
| (132,013,671 | ) |
Net assets of PayOnline | |
| - | | |
| 641,051 | | |
| (641,051 | )(a) | |
| - | |
Noncontrolling interest | |
| 261,015 | | |
| - | | |
| - | | |
| 261,015 | |
Total stockholders' equity | |
| 3,730,293 | | |
| 641,051 | | |
| 7,800,830 | | |
| 12,172,174 | |
Total liabilities and stockholders' equity | |
$ | 14,029,157 | | |
$ | 922,808 | | |
$ | 7,800,830 | | |
$ | 22,752,795 | |
See accompanying notes to Unaudited Pro
Forma Consolidated Condensed Financial Statements
NET ELEMENT, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2014
| |
Net Element, Inc. | | |
PayOnline | | |
Pro Forma Adj | |
| |
Pro Forma Consolidated | |
| |
| | | |
| | | |
| | |
| |
| | |
Net revenues | |
$ | 21,194,461 | | |
$ | 6,729,228 | | |
$ | - | |
| |
$ | 27,923,689 | |
| |
| | | |
| | | |
| | |
| |
| | |
Costs and expenses: | |
| | | |
| | | |
| | |
| |
| | |
Cost of revenues | |
| 15,883,681 | | |
| 4,595,623 | | |
| - | |
| |
| 20,479,304 | |
General and administrative
(includes $4,267,334 of share based compensation for the twelve months ended December 31, 2014) | |
| 11,353,244 | | |
| 1,619,259 | | |
| 359,480 | |
(e) | |
| 13,331,983 | |
Recovery of provision for loan losses | |
| (1,153,147 | ) | |
| - | | |
| - | |
| |
| (1,153,147 | ) |
Depreciation and amortization | |
| 2,358,136 | | |
| 85,826 | | |
| 1,977,325 | |
(g) | |
| 4,421,287 | |
Total costs and operating expenses | |
| 28,441,914 | | |
| 6,300,708 | | |
| 2,336,805 | |
| |
| 37,079,427 | |
Income (Loss) from operations | |
| (7,247,453 | ) | |
| 428,520 | | |
| (2,336,805 | ) |
| |
| (9,155,738 | ) |
Interest expense, net | |
| (3,705,694 | ) | |
| - | | |
| - | |
| |
| (3,705,694 | ) |
Gain on change in fair value and settlement of beneficial conversion derivative | |
| 5,569,158 | | |
| - | | |
| 478,261 | |
(d) | |
| 6,047,419 | |
Loss on debt extinguishment | |
| (6,184,219 | ) | |
| - | | |
| - | |
| |
| (6,184,219 | ) |
Gain on debt restructure | |
| 1,596,000 | | |
| - | | |
| - | |
| |
| 1,596,000 | |
Loss from asset disposal | |
| (87,151 | ) | |
| - | | |
| - | |
| |
| (87,151 | ) |
Other expense | |
| (155,407 | ) | |
| - | | |
| - | |
| |
| (155,407 | ) |
Income (Loss) from continuing operations before income taxes | |
| (10,214,766 | ) | |
| 428,520 | | |
| (1,858,544 | ) |
| |
| (11,644,790 | ) |
Income taxes | |
| - | | |
| - | | |
| - | |
| |
| - | |
Income (Loss) from continuing operations | |
| (10,214,766 | ) | |
| 428,520 | | |
| (1,858,544 | ) |
| |
| (11,644,790 | ) |
Net loss attributable to the noncontrolling interest | |
| 29,250 | | |
| - | | |
| - | |
| |
| 29,250 | |
Net income (loss) from continuing operations attributable to Net Element, Inc. | |
| (10,185,516 | ) | |
| 428,520 | | |
| (1,858,544 | ) |
| |
| (11,615,540 | ) |
Dividends for the benefit of preferred stockholders | |
| - | | |
| - | | |
| (1,548,068 | ) |
(c) | |
| (1,548,068 | ) |
Foreign currency translation | |
| (1,080,911 | ) | |
| - | | |
| - | |
| |
| (1,080,911 | ) |
Comprehensive Income (loss) | |
$ | (11,266,427 | ) | |
$ | 428,520 | | |
$ | (3,406,612 | ) |
| |
$ | (14,244,519 | ) |
| |
| | | |
| | | |
| | |
| |
| | |
Loss per share - basic and diluted | |
$ | (0.27 | ) | |
| | | |
| | |
| |
$ | (0.29 | ) |
| |
| | | |
| | | |
| | |
| |
| | |
Weighted average number of common shares outstanding - basic and diluted | |
| 37,255,052 | | |
| | | |
| 2,503,781 | |
(f) (h) | |
| 39,758,833 | |
See accompanying notes to Unaudited Pro
Forma Consolidated Condensed Financial Statements
NET ELEMENT, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2015
| |
Net Element, Inc. | | |
PayOnline | | |
Pro Forma Adj | | |
Pro Forma Consolidated | |
| |
| | |
| | |
| | |
| |
Net revenues | |
$ | 5,540,207 | | |
$ | 1,202,878 | | |
$ | - | | |
$ | 6,743,085 | |
| |
| | | |
| | | |
| | | |
| | |
Costs and operating expenses: | |
| | | |
| | | |
| | | |
| | |
Cost of revenues | |
| 4,614,072 | | |
| 802,092 | | |
| - | | |
| 5,416,164 | |
General and administrative (includes $601,371 and $52,050 of share based compensation for the three months ended March 31, 2015 and 2014 respectively) | |
| 2,637,469 | | |
| 307,675 | | |
| - | | |
| 2,945,144 | |
Provision for bad debts | |
| 9,331 | | |
| - | | |
| - | | |
| 9,331 | |
Depreciation and amortization | |
| 438,769 | | |
| 18,637 | | |
| 494,331 | (j) | |
| 951,737 | |
Total costs and operating expenses | |
| 7,699,641 | | |
| 1,128,404 | | |
| 494,331 | | |
| 9,322,376 | |
Income (loss) from operations | |
| (2,159,434 | ) | |
| 74,474 | | |
| (494,331 | ) | |
| (2,579,291 | ) |
Interest expense, net | |
| (117,594 | ) | |
| - | | |
| - | | |
| (117,594 | ) |
Other income (expense) | |
| 29,073 | | |
| - | | |
| - | | |
| 29,073 | |
Net income (loss) before income taxes | |
| (2,247,955 | ) | |
| 74,474 | | |
| (494,331 | ) | |
| (2,667,812 | ) |
Income taxes | |
| - | | |
| - | | |
| - | | |
| - | |
Net income (loss) | |
| (2,247,955 | ) | |
| 74,474 | | |
| (494,331 | ) | |
| (2,667,812 | ) |
Net loss attributable to the noncontrolling interest | |
| 8,747 | | |
| - | | |
| - | | |
| 8,747 | |
Net income (loss) attributable to Net Element, Inc. shareholders | |
| (2,239,208 | ) | |
| 74,474 | | |
| (494,331 | ) | |
| (2,659,065 | ) |
Foreign currency translation | |
| (108,167 | ) | |
| | | |
| - | | |
| (108,167 | ) |
Comprehensive income (loss) | |
$ | (2,347,375 | ) | |
$ | 74,474 | | |
$ | (494,331 | ) | |
$ | (2,767,232 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss per share - basic and diluted | |
$ | (0.05 | ) | |
| | | |
| | | |
$ | (0.05 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding - basic and diluted | |
| 46,057,972 | | |
| | | |
| 7,974,441 | (i)(k) | |
| 54,032,413 | |
See accompanying notes to Unaudited Pro
Forma Consolidated Condensed Financial Statements
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information
1. Basis of Presentation
The unaudited pro forma condensed combined consolidated financial
information presented here is based on the historical consolidated financial information of Net Element, Inc. (the “Company”)
and PayOnline System LLC, Innovative Payment Technologies LLC, Polimore Capital Limited and Brosword Holding Limited (collectively,
“PayOnline”). The unaudited pro forma condensed statements of operations for the three months ended March 31, 2015
and the year ended December 31, 2014 assume the Company’s acquisition of PayOnline (the “Acquisition”) had been
completed at January 1, 2014. The unaudited pro forma condensed consolidated balance sheet at March 31, 2015 assumes the Acquisition
and related financings were completed on that date.
Pro forma adjustments reflected in the unaudited pro forma condensed
consolidated balance sheet are based on items that are directly attributable to the proposed Acquisition and related financings
and that are factually supportable. Pro forma adjustments reflected in the unaudited pro forma condensed consolidated statements
of operations are based on items directly attributable to the proposed Acquisition and related financings and are factually supportable
and expected to have a continuing impact on the Company.
At this time, the Company has not completed detailed valuation
analyses to determine the fair values of PayOnline’s assets and liabilities. Accordingly, the unaudited pro forma condensed
consolidated financial information includes a preliminary allocation of the purchase price based on assumptions and estimates that,
while considered reasonable under the circumstances, are subject to changes, which may be material.
2. Transaction Summary
The estimated purchase consideration and preliminary estimate
of related excess purchase consideration over book value of net assets acquired are as follows:
Cash paid for PayOnline Business | |
$ | 3,600,000 | |
| |
| | |
Stock paid for PayOnline Business * | |
| 3,600,000 | |
| |
| | |
Total | |
$ | 7,200,000 | |
* At the end of the 12-month period (“Guarantee
Period”) following the issuance of restricted shares of the Company's common stock to Maglenta Enterprises Inc. and Champfremont
Holding Ltd. (collectively, the “Sellers”), TOT Group Europe, Ltd. and TOT Group Russia LLC (collectively, the “Purchasers”)
will guaranty that the value of such stock then not sold by the Sellers will not be less than the value of such at the date of
the issuance of such stock. Subject to certain conditions, if at the end of the Guarantee Period the value of the any such remaining
stock is less than the value of such stock at the date of the issuance of such stock, the Purchasers will pay a cash amount equaling
the difference between such values.
Preliminary Purchase Price Allocation:
| |
Fair Value Estimate | |
| |
| |
Gateway and Platform Software | |
$ | 3,000,000 | |
Merchant and Consumer Customers | |
| 1,866,258 | |
Contract with SD Ventures | |
| 1,000,000 | |
PCI Level 1 Compliant | |
| 500,000 | |
Domain Names | |
| 312,220 | |
Cash | |
| 512,736 | |
Accounts Receivable | |
| 254,587 | |
Fixed Assets (net) | |
| 98,230 | |
Other Assets | |
| 32,532 | |
Total Assets | |
$ | 7,576,563 | |
| |
| | |
Accounts Payable and Accrued Expenses | |
$ | 125,615 | |
Other Current Liabilities | |
| 54,457 | |
Related Party Payable | |
| 95,917 | |
Other Liabilities | |
| 100,574 | |
Total Liabilities | |
| 376,563 | |
Net Assets | |
$ | 7,200,000 | |
The Company has not recognized the deferred tax impact of the
purchase accounting adjustments, pending final determination of fair values.
The pro forma presentation does not reflect any voluntary conversion
of preferred stock.
For purposes of preparing this unaudited pro forma condensed
consolidated financial information, the Company has assumed that funding for the cash component of the Acquisition comes from the
issuance of the Company’s Series A Convertible Preferred Stock, $1,000 par value (the “Preferred Stock”).
3. Pro Forma Adjustments
The unaudited pro forma condensed consolidated balance sheet
includes adjustments made to historical financial information that were calculated assuming the Acquisition had been completed
at March 31, 2015. The unaudited pro forma adjustments are based upon available information and certain assumptions that the Company
believes are reasonable under the circumstances. The adjustments reflect management’s preliminary estimates of the purchase
price allocation, which may change upon finalization of appraisals and other valuation studies that are in process.
The unaudited pro forma condensed consolidated statements of
operations and comprehensive income (loss) include adjustments made to historical financial information that were calculated assuming
the Acquisition had been completed at January 1, 2014. The unaudited pro forma condensed consolidated financial information
does not include the impact of potential cost savings or other operating efficiencies that could result from the Acquisition.
The following items resulted in adjustments reflected in the
unaudited pro forma condensed consolidated financial information.
Pro Forma Balance Sheet Adjustments
| a. | Purchase accounting to record the purchase of PayOnline
consisted of estimating fair value of PayOnline’s net assets acquired. The following assets were adjusted to their estimated
fair value: |
Preliminary Purchase Price Allocation: |
|
| |
Fair Value Estimate | | |
Book Value | | |
Adjustment | |
Gateway and Platform Software | |
$ | 3,000,000 | | |
$ | 405,948 | | |
$ | 2,594,052 | |
Merchant and Consumer Customers | |
| 1,866,258 | | |
| - | | |
| 1,866,258 | |
Contract with SD Ventures | |
| 1,000,000 | | |
| - | | |
| 1,000,000 | |
PCI Level 1 Compliant | |
| 500,000 | | |
| - | | |
| 500,000 | |
Domain Names | |
| 312,220 | | |
| 12,220 | | |
| 300,000 | |
| |
| | | |
| | | |
$ | 6,260,310 | |
|
b. |
Net Element has issued 5,500 shares of Preferred Stock to fund a portion of the Acquisition. Dividends can be paid in cash or shares of the Company’s common Stock. The calculation of pro forma dividend expense for the periods presented was calculated using 92% of the Volume Weighted Average Price (VWAP) at the end of each month the preferred shares are estimated to be outstanding. In addition, related stock issuance costs of $359,480 were deducted from retained earnings for underwriting and associated fees. |
Pro Forma Income Statement Adjustments for the Twelve Months
Ended December 31, 2014
| c. | The dividend for Preferred Stock issued to fund the cash portion of PayOnline purchase price was calculated using the Volume
Weighted Average Price (VWAP) at the end of each month the preferred shares were assumed outstanding plus amortization of the beneficial
conversion feature discount. |
VWAP Date | |
VWAP | | |
92% of VWAP | | |
# Shares to Dividend | | |
Market Price | | |
Dividend Expense | |
6/30/2014 | |
| 1.8316 | | |
| 1.6851 | | |
| 53,410 | | |
$ | 1.91 | | |
$ | 102,013 | |
5/30/2014 | |
| 2.1963 | | |
| 2.0206 | | |
| 89,083 | | |
$ | 2.15 | | |
$ | 191,528 | |
4/30/2014 | |
| 2.2878 | | |
| 2.1048 | | |
| 85,520 | | |
$ | 2.23 | | |
$ | 190,709 | |
3/31/2014 | |
| 3.4226 | | |
| 3.1488 | | |
| 57,165 | | |
$ | 3.47 | | |
$ | 198,362 | |
2/28/2014 | |
| 3.7762 | | |
| 3.4741 | | |
| 51,812 | | |
$ | 3.68 | | |
$ | 190,668 | |
1/31/2014 | |
| 4.5397 | | |
| 4.1765 | | |
| 43,098 | | |
$ | 4.56 | | |
$ | 196,527 | |
| |
| | | |
| | | |
| Dividend expense | | |
$ | 1,069,807 | |
| |
| | | |
| | | |
| Beneficial Conversion Feature | | |
$ | 478,261 | |
| |
| | | |
| | | |
| Total Dividend Expense | | |
$ | 1,548,068 | |
|
d. |
Represents change in fair value of beneficial conversion derivative. |
| e. | Related stock issuance costs of $359,480 were recorded for underwriting and other fees associated with the sale of preferred
stock to fund a portion of the PayOnline acquisition. A corresponding reduction to cash was recorded for pro forma purposes. |
| f. | Pro forma consideration consisted of 791,209 shares of the Company’s common stock issued with a total fair value $3.6
million. |
| g. | Represents amortization of capitalized intangible assets over their estimated economic useful lives as follows |
| |
Fair Value Estimate | | |
Amort Life | | |
Mo. Amort | | |
Amort 2014 | |
Gateway and Platform Software | |
$ | 3,000,000 | | |
| 36 | | |
$ | 83,333 | | |
$ | 1,000,000 | |
Merchant and Consumer Customers | |
| 1,866,258 | | |
| 60 | | |
| 31,104 | | |
| 373,252 | |
Contract with SD Ventures | |
| 1,000,000 | | |
| 36 | | |
| 27,778 | | |
| 333,333 | |
PCI Level 1 Compliant | |
| 500,000 | | |
| 36 | | |
| 13,889 | | |
| 166,667 | |
Domain Names | |
| 312,220 | | |
| 36 | | |
| 8,673 | | |
| 104,073 | |
| |
| | | |
| | | |
| | | |
$ | 1,977,325 | |
| h. | To reflect the conversion of Preferred Stock issued to common shares during the first six months of 2014. The Preferred Stock
self-liquidates in six monthly payments pursuant to the terms of the preferred stock agreement. The pro forma number of shares
issued at conversion plus the number of shares issued as dividends were calculated as follows. |
VWAP Date | |
VWAP | | |
92% of VWAP | | |
# Shares to Dividend | | |
Weighted Avg Div Shares | |
PS Liq Calc - Convert to C/S Using Hist VWAP | | |
Weighted Avg ("WA") Shares Issued | |
6/30/2014 | |
| 1.8316 | | |
| 1.6851 | | |
| 53,410 | | |
26,705 | |
| 296,723 | | |
| 148,362 | |
5/30/2014 | |
| 2.1963 | | |
| 2.0206 | | |
| 89,083 | | |
51,965 | |
| 494,903 | | |
| 288,694 | |
4/30/2014 | |
| 2.2878 | | |
| 2.1048 | | |
| 85,520 | | |
57,013 | |
| 475,110 | | |
| 316,740 | |
3/31/2014 | |
| 3.4226 | | |
| 3.1488 | | |
| 57,165 | | |
42,874 | |
| 317,582 | | |
| 238,187 | |
2/28/2014 | |
| 3.7762 | | |
| 3.4741 | | |
| 51,812 | | |
43,177 | |
| 287,844 | | |
| 239,870 | |
1/31/2014 | |
| 4.5397 | | |
| 4.1765 | | |
| 43,098 | | |
39,507 | |
| 239,434 | | |
| 219,481 | |
| |
| | | |
| | | |
| | | |
WA Conversion Shares | | |
| 1,451,333 | |
| |
| | | |
| | | |
| | | |
WA Dividend Shares | | |
| 261,240 | |
| |
| | | |
| | | |
| | | |
Total Shares Pd for P/S | | |
| 1,712,572 | |
The number of shares of the Company’s common
stock to be issued upon conversion of Preferred Stock is affected by the VWAP of the Company’s common stock. The VWAP has
gone down significantly during 2015 and the number of shares actually issued were materially greater than the pro forma presentation
above.
Pro Forma Income Statement Adjustments for the Three Months
Ended March 31, 2015
| i. | Pro forma consideration consisted of 791,209 shares of the Company’s common stock issued with a total fair value $3.6
million. |
| j. | Represents amortization of capitalized intangible assets over their estimated economic useful lives as follows: |
| |
Fair Value Estimate | | |
Amort Life | | |
Mo. Amort | | |
Amort 1Q15 | |
Gateway and Platform Software | |
$ | 3,000,000 | | |
| 36 | | |
$ | 83,333 | | |
$ | 250,000 | |
Merchant and Consumer Customers | |
| 1,866,258 | | |
| 60 | | |
| 31,104 | | |
| 93,313 | |
Contract with SD Ventures | |
| 1,000,000 | | |
| 36 | | |
| 27,778 | | |
| 83,333 | |
PCI Level 1 Compliant | |
| 500,000 | | |
| 36 | | |
| 13,889 | | |
| 41,667 | |
Domain Names | |
| 312,220 | | |
| 36 | | |
| 8,673 | | |
| 26,018 | |
| |
| | | |
| | | |
| | | |
$ | 494,331 | |
| k. | Represents the 2014 conversion of Preferred Stock shares to common stock shares. Preferred Stock shares were sold to fund a
portion of the PayOnline purchase price. |
The fair value estimate for identifiable intangible assets is
preliminary and is determined based on the assumptions that market participants would use in pricing an asset, based on the most
advantageous market for the asset (i.e., its highest and best use). This preliminary fair value estimate could include assets that
are not intended to be used, may be sold or are intended to be used in a manner other than their best use. For purposes of the
accompanying unaudited pro forma condensed combined financial information, it is assumed that all assets will be used in a manner
that represents their highest and best use. The final fair value determination for identified intangibles may differ from this
preliminary determination.
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