Attached files
| file | filename |
|---|---|
| EX-21.1 - Net Element, Inc. | v205159_ex21-1.htm |
| EX-10.27 - Net Element, Inc. | v205159_ex10-27.htm |
| EX-10.28 - Net Element, Inc. | v205159_ex10-28.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
|
Date
of Report (Date of Earliest Event Reported):
|
December
14, 2010
|
Net Element,
Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
000-51108
|
20-0715816
|
||
|
(State
or other jurisdiction of
|
(Commission
|
(I.R.S.
Employer Identification No.)
|
||
|
incorporation
or organization)
|
File
Number)
|
|
1450 S. Miami Avenue. Miami, Florida
|
33130
|
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's telephone number,
including area code: (305)
507-8808
TOT
Energy, Inc.
12100 NE 16th Ave., N. Miami,
FL 33161
Former
name or former address, if changed since last report
Check the appropriate box below if the
Form 8-K filing is intended to simultaneously satisfy the filing obligation of
the registrant under any of the following provisions:
|
¨
|
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|
|
¨
|
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
|
¨
|
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
|
|
¨
|
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
|
Explanatory
Note
Net
Element, Inc. (formerly TOT Energy, Inc.) is filing this Current Report on Form
8-K in connection with its acquisition of Openfilm, LLC, as more fully
described herein. Net Element, Inc. had previously registered its securities
pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) and has been a reporting company subject to the
requirements of Section 13 of the Exchange Act since 2005. No additional
securities are being registered hereby. References to non-Form 8-K Item numbers
and captions correspond to Item numbers and captions contained in a registration
statement on Form 10, which information is supplied herewith in compliance with
SEC requirements.
Defined
Terms
Net
Element, Inc. is a corporation organized under the laws of the State of
Delaware. As used in this report, unless the context otherwise requires, the
terms “Net Element,” “Company,” “we,” “us,” “our” and “group” refer to Net
Element, Inc. and, as applicable, its majority-owned and consolidated
subsidiaries.
Forward-Looking
Statements
This
report contains forward-looking statements that reflect the current views of our
management with respect to future events. Forward-looking statements generally
are identified by the words “expects,” “anticipates,” “believes,” “intends,”
“estimates,” “aims,” “plans,” “will,” “will continue,” “seeks” and similar
expressions. Forward-looking statements are based on current plans, estimates
and projections, and therefore you should not place too much reliance on them.
Forward-looking statements speak only as of the date they are made, and we
undertake no obligation to update any forward-looking statement in light of new
information or future events, although we intend to continue to meet our ongoing
disclosure obligations under the U.S. securities laws and under other applicable
laws. Forward-looking statements involve inherent risks and uncertainties, most
of which are difficult to predict and are generally beyond our control. We
caution you that a number of important factors could cause actual results or
outcomes to differ materially from those expressed in, or implied by, the
forward-looking statements. These factors include, among other factors: the
development or acquisition of an operating business, attracting and retaining
competent management and other personnel, successful implementation of our
business strategy, and successful integration and promotion of any business
developed or acquired. If these or other risks and uncertainties
(including those described in our most recent Annual Report on Form 10-K
for the fiscal year ended March 31, 2010 filed with the U.S. Securities and
Exchange Commission) materialize, or if the assumptions underlying any of these
statements prove incorrect, our actual results may be materially different from
those expressed or implied by such statements.
World
Wide Web addresses contained in this report are for explanatory purposes only
and they (and the content contained therein) do not form a part of and are not
incorporated by reference into this report.
i
Form
8-K Item 1.01 Entry into a Material Definitive Agreement.
Form
8-K Item 2.01 Completion of Acquisition or Disposition of Assets.
Item
1. Business.
Development
of Business
Net
Element, Inc. (formerly TOT Energy, Inc.) (the “Company”), was organized on
February 6, 2004 under the laws of the State of Delaware under the name Splinex
Technology, Inc., which was a wholly-owned subsidiary of Splinex, LLC, a Florida
limited liability company, and was the surviving entity pursuant to a merger
with Ener1 Acquisition Corp., a Delaware corporation and wholly-owned subsidiary
of Ener1, Inc., a Florida corporation. The Company initially intended to develop
advanced technologies in the three-dimensional or 3D computer graphics industry.
Since October 28, 2003 (“Inception”), the date of formation of Splinex, LLC,
through December 17, 2007, we operated in a development phase typical of a
software company and focused on developing technologies and products and
securing intellectual property rights while we developed relationships with
potential customers and resellers. Under an agreement effective April 1, 2004
(the “Contribution Agreement”), Splinex, LLC contributed substantially all of
its assets, liabilities and operations to the Company. Due to lack of
significant sales, we substantially reduced our workforce and overhead costs
beginning in September 2005. From September 2005 through July 2007, Ener1 Group,
Inc., a related party, loaned us money to fund our operations. In July 2007,
Ener1 Group, Inc. stopped funding our operations, except that Mr. Curtis Wolfe,
our then general counsel and a current director, did receive compensation by
Ener 1 Group, Inc. for legal services provided to the Company. For more
information, see “Item 6. Executive Compensation.”
On
December 17, 2007, (1) certain holders, who had received shares in the Company
as distributions from Splinex LLC, transferred their ownership of 35,162,334
shares of common stock of the Company to Splinex LLC for nominal consideration,
and (2) Bzinfin, S.A., a British Virgin Islands limited corporation (indirectly
owned by an affiliate of Ener1 Group, Inc., a Florida company of which Mike Zoi
(our current Chairman and Chief Executive Officer) is a shareholder and director
and which is the majority shareholder of Ener1, Inc.) and Ener1 Group assigned
debt obligations of the Company to Splinex LLC in the amount of $2,805,207 and
$845,864, respectively. Under a Purchase Agreement dated December 17, 2007, TGR
Capital, LLC (which changed its name to Enerfund, LLC in September 2008), a
Florida limited liability company (“Enerfund”), which is wholly-owned by Mike
Zoi, acquired all of the membership interests in Splinex LLC, thereby giving
Enerfund control of Splinex LLC.
Under an
Exchange Agreement dated December 18, 2007, the Company agreed to issue
113,500,000 newly issued shares of the Company to Splinex LLC of which 8,500,000
shares were issued to Bzinfin and 2,125,000 were issued to a former affiliate of
Splinex, LLC. Splinex LLC owned 98,157,334 shares of the Company as of December
17, 2007 and an aggregate of 201,032,334 shares after the completion of the
Exchange Agreement on December 18, 2007. The Company had 100,757,769 shares
outstanding at December 17, 2007 and 214,257,769 shares outstanding after the
completion of the Exchange Agreement. In June 2008, Splinex, LLC changed its
name to TGR Energy, LLC (“TGR”).
Short
term financing is provided by TGR Energy, LLC (“TGR”), an entity controlled by
our president, as we require additional working capital, pursuant to a
Subscription Agreement dated August 7, 2008 (the “Subscription Agreement”). TGR
has agreed to provide up to $2,000,000 (the “Investment Amount”) in exchange for
up to 100,000,000 shares of common stock and warrants to purchase up to
50,000,000 shares of common stock at an exercise price of $0.05 per share.
Pursuant to the Subscription Agreement, TGR will fund the Investment Amount as
required in our operational budget. TGR’s obligation to fund the Investment
Amount will be reduced by any future third party funding or investment on terms
no less favorable than those contained in the Subscription Agreement. On
January 12, 2010, TGR agreed to increase its funding commitment from $2,000,000
to $4,000,000 in exchange for up to an additional 100,000,000 shares of the
Company’s common stock and warrants to purchase up to 50,000,000 shares of the
Company’s common stock at an exercise price of $0.05 per share for a period of
five years from date of issuance.
1
On July
16, 2008, we entered into a Joint Venture Agreement (the “JV Agreement”) with
Evgeny Bogorad (“Bogorad”), owner of Sibburnefteservis, Ltd. of Novosibirsk,
Russia, an oil services company (“SIBBNS”). Pursuant to the JV Agreement,
Bogorad contributed certain of SIBBNS’ assets and personnel to a joint venture
company named TOT-SIBBNS, Ltd., a Russian corporation (“TOT-SIBBNS”). An
independent appraisal company appraised the contributed assets at
USD$6,221,881.We ended development stage activity on July 16, 2008 when we
acquired a 75% interest in the TOT-SIBBNS joint venture and began operations in
the oil and gas service industry, including the exploration, development,
production, and marketing of crude oil and natural gas in Russia and
Kazakhstan. At the closing on July 16, 2008, we issued to Bogorad
3,000,000 shares of our common stock in exchange for a 75% interest in
TOT-SIBBNS.
TOT-SIBBNS
obtained its first contract and began drilling operations in the Fall 2008.
However, financial constraints and the declining price of oil resulted in a
suspension of drilling operation in January 2009. Drilling operations did not
recommence during the Winter 2009 and most employees were furloughed in April
2009.
TOT-SIBBNS
had expectations of continuing exploratory drilling (both through its existing
customer and new customers) for the 2009/2010 drilling season as the price of
oil had risen significantly and TOT-SIBBNS was able to secure an additional
drilling contract in November 2009. However, in January 2010, it became
questionable whether activities with TOT-SIBBNS’ initial customer would
recommence in the short term, and there remained uneasiness in the market over
the continued improvement in crude oil prices, which had a negative impact on
the exploratory drilling market in Russia at that time. Accordingly,
on January 27, 2010, after several weeks of exploring other business
opportunities, the Company altered its business focus and decided to exercise
its option to unwind the joint venture and pursue other development
opportunities.
The
Company and TOT-SIBBNS executed an unwind agreement whereby the Company
exchanged its 75% interest in TOT-SIBBNS for the 3,000,000 shares given to
Evgeny Bogorad in 2008. The unwind of the joint venture was consummated as
of March 31, 2010. The unwind of the TOT-SIBBNS joint venture has been
accounted for using the guidance provided in ASC 845 (previously APB 29), as a
disposal “other than by sale” similar to a spin-off transaction, with the shares
received reflected as treasury stock and recorded on the Company’s balance sheet
at its carrying basis in the net assets of the joint venture as of March 31,
2010.
KORLEA-TOT
is our 51% joint venture with Korlea Invest Holding AG of Switzerland (“Korlea”)
who is a provider and trader of energy assets in the Czech Republic. The joint
venture, Korlea-TOT, established as of July 17, 2008, was expected to assist in
the marketing of oil assets sourced by the Company and its contacts and
affiliates. There has been no activity to date with this joint venture.
Accordingly, in November 2010, we sent Korlea notice of our intention to unwind
this arrangement. The Company intends to sell its ownership in the KORLEA-TOT
joint venture to Korlea in exchange for a cash payment equal to 51% of the cash
balance in the joint venture on the date of unwind. Consummation of
this transaction will be subject to obtaining certain approvals and making
certain filings overseas. It is expected that this transaction will be completed
during the first quarter of 2011.
Since
April 1, 2010, we have engaged in the development of an alternative energy
services business and we have concurrently pursued a strategy to develop and/or
acquire technology and applications for use in the online media industry. In
furtherance of this strategy, we have acquired Openfilm, LLC, a Florida limited
liability company, engaged in the development of technology and operation of a
website that supports the advancement of independent film on the Internet, as
more fully described below. We
believe that our technology platforms and development expertise will enable us
to enhance the digital distribution of content in a variety of industries.
Accordingly, in addition to our acquisition of Openfilm, we intend to explore
the possibility of acquiring other internet portal properties and companies with
similar goals of connecting people in various vertical markets, such as the
medical, music, film, sports and legal markets.
2
In
pursuing our strategies to develop an alternative energy services business and
further develop an online media company, from time to time, we may be engaged in
various discussions to acquire businesses or formulate joint venture or other
arrangements. Our policy is not to disclose discussions or potential
transactions until definitive agreements have been executed. Where appropriate,
acquisitions will be financed with equity shares and this may result in
substantial dilution to existing stockholders.
Several
factors raise significant doubt as to our ability to continue operating as a
going concern. These factors include our history of net losses and,
as of March 31, 2010, due to the unwind of the TOT-SIBBNS joint venture, we had
no significant operations and a working capital deficit. Management recognizes
that the Company must raise capital sufficient to fund business activities until
such time as it can generate sufficient revenues and net cash flows in amounts
necessary to enable it to continue in existence, of which there can be no
assurance. We are dependent upon TGR or Mike Zoi (as a result of his controlling
interest in TGR and our dependence on the Subscription Agreement with TGR) to
fund our operations. Our independent auditors’ report on our financial
statements for the year ended March 31, 2010 contains an explanatory paragraph
about our ability to continue as a going concern. Management believes that our
current operating strategy, as described in the preceding paragraphs and the
obligation of TGR to provide funding under the Subscription Agreement, provides
the opportunity for us to continue as a going concern; however, there is no
assurance this will occur.
On
November 11, 2010, our Board of Directors adopted a resolution changing the
Company’s fiscal year end from March 31 to December 31. Management believes
that this change will allow better alignment of the Company’s annual planning
and budget processes with its new business strategy as we are no longer engaged
in the seasonal oil and gas business.
Development
of an Alternative Energy Services Business
Our
continued efforts to develop an alternative energy business have included hiring
a project manager and Chief Operating Officer and soliciting various commercial
enterprises in order to develop alternative energy related
projects. Through Green1 Energy, LLC, we continue to develop a
downstream solar business focused on providing commercial solar solutions and
other energy efficiency projects such as retrofitting lighting and lighting
design to increase usage efficiency and reduce costs for customers. While Green1
has recently commenced development and marketing efforts, the Company believes
that the market for alternative energy efficiency is growing and that Green1
will be able to obtain projects in the near future.
As part
of our strategy to develop an online media company, on December 14, 2010, we
entered into a purchase agreement (the “Openfilm Purchase Agreement”) with the
members of Openfilm, LLC, a Florida limited liability company engaged in
the development of
technology and operation of a website that supports the advancement of
independent film on the Internet. Mike Zoi, our President, through
his control of Enerfund, LLC and MZ Capital, LLC, both Florida limited liability
companies, held approximately 70% of Openfilm’s outstanding membership interests
prior to the acquisition by the Company. Pursuant to the Openfilm Purchase
Agreement, the Company acquired all of the outstanding membership interests in
Openfilm by exchanging for such interests an aggregate of 107,238,421 shares of
common stock of the Company to the security holders of Openfilm, of which
45,937,500 shares were issued to Enerfund (a company controlled by Mike Zoi),
29,062,500 shares were issued to MZ Capital, LLC (a company controlled by Mike
Zoi), 24,950,000 shares were issued to Dmitry Kozko, CEO of Openfilm, and an
aggregate of 7,288,421 shares were issued to the remaining seven non-controlling
security holders of Openfilm. Upon completion of the acquisition transaction on
December 14, 2010, Openfilm became a wholly-owned subsidiary of the Company.
Additionally, in connection with the acquisition of Openfilm, the Company
established NetLab Systems, LLC (NetLab), a Florida limited liability company,
and transferred the ownership of certain intellectual property assets from
Openfilm to NetLab. Openfilm and NetLab entered into a Technology Transfer and
License Agreement granting Openfilm the right to use certain technology
transferred to NetLab. For more information, see “– Licensing Arrangement
between Openfilm and NetLab” below. Research and development
activities are conducted primarily through Zivos, LLC, a Ukrainian limited
liability company and wholly-owned subsidiary of Openfilm. Up until the date of
acquisition, Openfilm operations were funded primarily by entities controlled by
our President Mike Zoi. As of the date of acquisition of Openfilm by the
Company, Openfilm operations will be funded pursuant to the Subscription
Agreement with TGR.
3
Business
of Openfilm
Openfilm,
LLC was formed as a Florida limited liability company on November 16, 2007 under
the name Zivos, LLC. On April 9, 2008, Zivos, LLC changed its name to Openfilm,
LLC. Openfilm is an online media company that supports a community of
independent film enthusiasts and filmmakers. Openfilm owns and operates a
website (www.Openfilm.com),
which is based on a proprietary video platform (licensed to Openfilm by NetLab)
and certain know-how and methods developed by Openfilm that unite elements of
the film industry that are of most interest and value to Openfilm’s users in a
single location. Openfilm derives revenues from video advertising, video content
syndication, display advertising and membership fees, as well as, contest entry
fees, as discussed more fully below.
Openfilm
has developed an award-winning website that currently showcases approximately
7,000 films of various lengths and genres, aggregated from film festivals, film
schools and independent filmmakers from around the world. Films are displayed
online in large HD video format and filmmakers are able to upload their films
and interact with other users through a networking platform.
Openfilm
offers aspiring filmmakers an opportunity to have their work seen by a
distinguished group of Hollywood insiders who make up the Openfilm Advisory
Board, including actor James Caan (Chairman), fellow Godfather co-star Robert
Duvall, director Marc Rydell and actor and filmmaker Scott Caan. Advisory Board
members act as a group of “mentors” who interact with Openfilm’s premium members
through online web chats that are held on a periodic basis. The
Advisory Board members also serve as judges for various competitions promoted by
Openfilm.
The
proprietary technologies and software platform developed for Openfilm have
applications in many other vertical online markets that will enable Openfilm and
NetLab to generate revenues through the sale of software licensing, market
reports, e-commerce transactions, festival services and others products and
services. Openfilm believes that it is well positioned to capitalize on the
rapidly growing independent film market (estimated by eMarketer, Inc., an
independent digital marketing research company, to be in excess of $4 billion
annually), as well as the online advertising market (estimated by eMarketer™ to
be in excess of $25 billion annually).
Openfilm.com
Website
Openfilm.com is an online
platform created from various proprietary technologies that provides a unique
value proposition for independent filmmakers, advertisers, film festivals, film
schools and viewers. The website provides its community of filmmakers
and film enthusiasts with an opportunity to interact with each other and
directly with “Hollywood insiders” who comprise our Advisory Board. Poised to
capitalize on the emerging online video market, Openfilm believes its software
(licensed from NetLab) will transform the way independent films are discovered,
produced and distributed.
Openfilm.com
offers filmmakers free basic services, including unlimited uploads and streaming
of approved premium HD video content. In addition, Openfilm provides a revenue
sharing program for filmmakers, including advertising revenues derived from
distribution of their film content, thus allowing Openfilm to attract some of
the best content creators in the world, as well as their existing fan
bases.
4
Content
Openfilm
has aggregated a content library of over 7,000 independently produced films from
film schools, festivals, organizations and independent filmmakers. All content
goes through various screenings to ensure it meets specified quality and
copyright standards. The films are then converted to HD formats to ensure they
will be seen in the highest quality on the Internet. The Openfilm library
consists of short, feature-length and animated works.
Recognition
and awards
To date,
Openfilm has been recognized by industry publications and has received the
following industry awards:
|
|
·
|
Movie
Maker Magazine named Openfilm one of the “top 50 websites for filmmakers”
– June 2009
|
|
|
·
|
13th
Annual Webby Award Official Honoree – May
2009
|
|
|
·
|
Reelseo.com
named Openfilm “The Lexus of Video Sharing Social Communities” – February
2009
|
|
|
·
|
Video
Maker Magazine named Openfilm “Video Sharing Site of 2008” – December
2008
|
Openfilm
Growth Strategy
Openfilm
intends to grow its membership base organically and through premium upgrades in
membership status, and also to acquire online properties with targeted
communities that will maximize traffic to the Openfilm
website. Maximization of traffic to the Openfilm website will
increase membership enrollment and provide an enhanced value proposition for
advertisers.
Additionally,
Openfilm (in conjunction with NetLab) intends to provide services to film
festivals and other film related enterprises, as well as other vertical markets
that would benefit from the technology and know-how developed for
Openfilm.
Revenue
Streams
Openfilm
has identified several revenue streams that it intends to develop further as
resources permit as follows:
Openfilm
believes it is in a strong position to monetize its video content library
through targeted advertising based on user behaviors and also through direct
sales and distribution of films uploaded by its members. Openfilm utilizes
proprietary technology (licensed from NetLab) that tracks online user activity
on its website (in accordance with applicable Openfilm website privacy policies)
and builds profiles based on the content metadata accessed to determine the
interests of users. Based on user activity, targeted advertisements
can be offered to specific users at different areas of the website or imbedded
within the accessed content. Accordingly, multiple products and services can be
offered to users that would be of interest to them based on their activity on
the Openfilm website.
Openfilm
will offer the two most commonly used ad monetization tools for video websites,
but will bundle them with NetLab’s proprietary technology to create higher
return on investment (ROI) for advertisers. Openfilm believes it can
significantly increase click-through-rates (CTR) using NetLab’s proprietary
technology and know-how as compared with currently available methods used on
other websites. Openfilm’s behavior tracking system will further add to CTR and
enhance the user’s experience on the website. Several types of advertising
opportunities are offered through the Openfilm website:
5
Display Ads – traditional
banner advertising placed throughout the site will be offered in standard sizes
with a minimum insertion fee and specified rates for CPM (cost per 1,000
views). Premium subscription members will have the option to turn off
banner advertisement exposure.
Video Insertions – small
segmented video commercials inserted into video content, similar to how
commercials are displayed on Television, and include video pre-roll, post roll,
or mid-roll insertions. The current standard compensation metric is also based
on CPM. Currently Openfilm has an arrangement with the leading ad
provider in the market to provide insertion ads until Openfilm can fully launch
its behavior tracking system, which will enable Openfilm to better target and
place ads.
Video Overlay Ads – ads that
play every 90 seconds located primarily at the bottom of film content that
generate multiple impressions per content view. These ads are
currently provided by ScanScout, the largest provider of overlay
ads.
Currently,
over 80% of all Openfilm.com advertising can be found on video content pages.
Openfilm expects to be able to provide advertising opportunities with respect to
approximately 70% of all traffic to its website.
Other
revenue opportunities are available through sponsorship of a particular channel
(content categories or groupings created by users) or event on Openfilm.com.
Rates will generally be based on monthly CPM exposure.
Membership
Fees
Openfilm
offers viewers and filmmakers three levels of membership enrollment – Free, Plus
and Pro membership plans. Free membership allows users to upload films and
videos and comment on content of other members, and also view live web chats and
vote on and rate film content submissions. Premium membership
services require payment of a monthly fee and are currently available at two
distinct levels:
|
|
·
|
“Plus”
membership enrollment at $2.95 per month allows members all of the
benefits of free membership plus access to a comprehensive database of
film festivals, the ability to submit to participating contests via the
Openfilm website, the option to sell mobile versions of their film
content and the ability to opt in or opt out of banner advertisements. A
Plus membership also provides the ability to solicit and accept donations
to fund member projects and to request that Openfilm assist in obtaining
third party syndication of the member’s work.
|
|
|
·
|
“Pro”
memberships enrollment at $9.95 per month allows members to enjoy all of
the benefits of Plus membership as well as priority uploading of new
content, the ability to submit questions and participate in the Openfilm
Live web chats, access to detailed earnings reports relating to the
member’s content, direct sales of digital versions of content and other
premium services.
|
All
members are afforded the opportunity to win a contract to produce a
feature-length film in conjunction with Openfilm Studios. Premium
members also have the ability to interact with Openfilm Advisory Board Members
and other celebrity guests through live web chat forums, email, and
blogs. Interaction with Advisory Board Members ranges from viewing a
filmmaker’s work to chatting with them live online or via e-mail and
blogs.
Film
Festival Services
Openfilm
intends to attract independent filmmakers who actively submit to film festivals.
Film festivals attract submissions in return for potential exposure and cash
prizes to the filmmaker. There are over 6,000 Film Festivals and contests around
the world, each with average annual submissions in the hundreds. Most of these
annual entries are submitted via regular post. Very few film festivals have the
capability to receive submissions by electronic means. Openfilm has developed
software that it believes will streamline the electronic submission process,
which can be utilized with all festival formats.
6
The
Openfilm film festival solution incorporates patent pending software (licensed
from NetLab), the Contest System (using Launchpad), which provides film
festivals and sponsoring brands a secure online solution for hosting and
conducting competitions, including submission processing and management
applications and database reporting and analysis tools. Openfilm already
maintains a database on its website that consists of more than 2,000 film
festivals with descriptions and details for submission of content.
Designed
to meet the high demand of the film festival marketplace, the Contest System
provides easy-to-use functionality that Openfilm believes will transform the
film festival market into a predominantly online market, which will also
increase the reach and accessibility of each of the film festivals. The Contest
System will reduce administrative work and redundancies and streamline the
submission and tracking process. The Contest System also contains a judging
module, which is intended to assist judges in their review and evaluation
functions.
Openfilm
believes that through the use of the Contest System, film festivals and brands
will be provided with an added value proposition to offer their sponsors and
brands in a more streamlined, controlled and targeted environment.
The
Contest System can be modified for other contest applications. The Contest
System includes a “know-how” comparison module, which allows individuals to
upload their content and match the content to current and upcoming contests in
the database, thus ensuring compatibility with format and other contest
criteria.
Contest
Entry Fees
Contest
Entry Fees relate to the submission of films for participation in Openfilm
Studios competitions. Currently, competitions are limited to Short Film
submissions on a semi-annual basis. These contests provide the filmmaker with
the opportunity to win a management and production contract with Openfilm
Studios. Short Film entries will be accompanied by a fee that Openfilm believes
is substantially lower than comparable offline competitions. For more
information, see “ – Openfilm Studios” below.
Sponsorships
of Celebrity Chats
Openfilm
expects celebrity chats to be sponsored for a fee by a variety of companies. To
secure celebrity participation beyond Openfilm’s current Advisory Board members
(Advisory Board members have committed to participate in two chats per year),
Openfilm may share revenues generated from the chats with certain celebrities.
Openfilm believes that the celebrity’s participation will result in increased
traffic to the website and consequently increased subscriptions from the
celebrity’s own fan base and increased advertising revenues. Openfilm may pay a
small fee to the guest celebrity or share membership revenues for a brief period
leading up to the celebrity’s appearance.
Openfilm
has identified other potential sources of revenue that it is currently
exploring, such as:
Guest Lectures – Using the
Openfilm platform to invite filmmakers and industry experts to conduct online
seminars. Participants would be charged an access fee to view and interact with
the expert on a real-time basis. Separate fees will be charged for those
desiring to view archived sessions. Current system processes allow Openfilm to
run up to 1,000 simultaneous sessions.
7
Online Education – Through
guest lectures, especially those conducted by professors, Openfilm can provide
educational seminars in various film industry areas and may seek to obtain
educational accreditation to offer online courses to institutions of higher
learning.
Targeted Screenings – The
Openfilm platform is available for public or private screenings of content,
whereby filmmakers can arrange screenings of their work for a predetermined
group and time with full chat capabilities. This service will help filmmakers
and other industry professionals discuss films and content in real-time with a
specifically targeted audience prior to distribution or production.
Motion Picture Studios – The
Openfilm platform will be able to test market films for major motion picture
studios. Upon releasing and marketing a trailer or segment of film, the Openfilm
platform, along with its community of users, can be exposed to new content for
feedback analysis. Public or private options can be accommodated, as
well as detailed customized reporting metrics.
Market Reports – As a result
of the large collection of information from the Openfilm behavior tracking
system and contest management solutions, Openfilm will be able to compile market
trend and other reports for brands/advertisers and major motion picture
studios.
E-commerce distribution of
videos – Similar to the Apple® iTunes model, which revolutionized the way
music is distributed online, Openfilm’s platform allows filmmakers to sell their
own content on the Openfilm website. Content creators will be able to sell their
own content for the price they determine and pay Openfilm a small
fee. Additionally, Openfilm can offer all types of distribution
models, from mobile downloads to downloads via television sets, and through
other devices and platforms.
Openfilm
Studios
Openfilm
has held contests accepting short film submissions from filmmakers who desire an
opportunity to win a financing and management contract to produce a feature film
with Openfilm Studios, a movie production company and wholly-owned subsidiary of
Openfilm. Openfilm Studios may raise additional funding for the feature film
production through co-production partnerships. Openfilm Studios may also sell
films it produces to film studios or distribution companies for distribution to
theatrical venues, for DVD production, network and cable broadcast, and device
downloads. Openfilm Studios intends to acquire and produce scripts
and films not associated with contests.
Openfilm
intends to promote a semi-annual competition through its
website. Registered users will be able to vote on films
submitted. The voting cycle will be open for one month after all
submissions are received. The finalists will be presented to the Advisory Board
for further review and evaluation. Openfilm premium subscribers will be invited
to view select online evaluation and award events. Winner(s) will be awarded
financing and management contracts. Runners-up will be given additional
opportunities to collaborate with Openfilm Studios.
Films
produced by Openfilm Studios will be distributed through various methods through
Openfilm’s distribution partners. Revenues received from contest winner
collaboration will be shared with the winning filmmaker. Openfilm is currently
looking for a strategic partner to help evolve and finance its Openfilm Studios
business. In addition to contest winners, Openfilm Studios intends to produce
films in conjunction with various collaborators, including independent
filmmakers, and engage in film distribution activities through traditional
sources as projects are completed.
Distribution
Arrangements
Openfilm
has secured distribution partnerships to create additional revenue sources for
both Openfilm and its filmmaker members. These partnerships include arrangements
with TiVo, Inc. – owner of the TiVo® digital video recording device, MiniWeb
Technologies Limited – a 9 million member TV/Internet video distribution
services company based in the UK, Boxee, Inc. – a digital device company that
provides Internet and social applications through TV sets, and
others. Most of these distribution arrangements permit Openfilm and
its filmmakers to distribute content that includes embedded advertising that can
yield additional revenues to Openfilm and its filmmaker members. Openfilm also
has an agreement with HCCTV (Houston Community College Television on local
Comcast channel 12), a Houston-based cable channel with over 700,000
subscribers.
8
Online
Video Viewing Market
According
to comScore, Inc., a leading digital information service, more than 175 million
U.S.-based Internet users viewed over 5.4 billion video content sessions online
during October 2010 for an average of approximately 15.1 hours per viewer.
Google (including its YouTube subsidiary) serviced approximately 83.5% of all
videos viewed online by U.S. viewers during the month. According to comScore,
approximately 84.4% of the total U.S. Internet audience viewed online video
during October 2010.
Although
there is a wide spectrum of video-related websites, we believe that Openfilm
serves a unique and growing audience. While YouTube is the market
leader in viewed videos, a significant portion of videos uploaded are of low
production quality. Hulu™, a collaboration of film studios and television
broadcast networks, primarily offers a selection of network TV shows, clips and
movies from its affiliates. Openfilm believes that it is currently the premiere
destination for independently produced, high quality video content and that its
product and service offerings present an attractive alternative for consumers in
this market space.
Online
Video Advertising Market
According
to eMarketer™, total online advertising expenditures for 2009 were in excess
of $22 billion and are expected to approach $24 billion for 2010 and
grow substantially over the next several years. Openfilm believes that as
companies become more aware of the ROI metrics offered online compared to
television, which is currently estimated as a $58.6 billion market in terms of
advertising expenditures, advertisers will increasingly gravitate toward
targeted online advertising to reach selected audiences. TV advertisement is
mostly made up of Video ads. In comparison, online video ads are estimated to
represent approximately $1.5 billion of the total online advertising
market. According to comScore, American online users viewed
approximately 4.6 billion video advertisements during the month of October
2010. Openfilm believes that online video advertising will ultimately
dominate the online advertising marketplace. Current online industry efforts are
focusing on replicating the traditional cable television model, which includes
charging for content viewership. Whether such efforts prove successful or
another model emerges, Openfilm believes that it is well positioned to become a
significant market participant.
Openfilm
is working with the top video ad networks, including Tremor Media, Inc. (ranked
second largest online advertiser and number one among video advertisers), which
supplies a significant portion of advertising content on the Openfilm website on
behalf of Openfilm, including targeted marketing to its viewer audience.
Openfilm also has advertising relationships with other online video
advertisers, such as SpotXchange (5th largest
online advertiser) and ScanScout (8th largest
online advertiser).
Since the
average online video viewer watched 15.1 hours of video content during the month
of October 2010, Openfilm believes that during that period of time the viewer
can be exposed to over 500 targeted ads. With the assistance of the
Openfilm platform, Openfilm believes that its products and services present a
compelling value proposition for advertisers.
Proprietary
Technologies
In
connection with the acquisition of Openfilm, we transferred certain intellectual
property assets of Openfilm to our wholly-owned subsidiary, NetLab Systems, LLC,
a Florida limited liability company, in order to better protect and manage our
proprietary technologies and further exploit them for other vertical markets.
Each of the proprietary technologies used by Openfilm is subject to a Technology
Transfer and License Agreement with NetLab. For more information, see “–
Licensing Arrangement between Openfilm and NetLab” below.
9
We
believe that in the online video sector, only a small percentage of the hundreds
of Internet portals are able to employ proprietary technologies because most
systems are generally built on open source coding platforms. We believe that as
a result of the proprietary technology used by Openfilm (licensed from NetLab)
combined with its “know-how,” Openfilm can better serve its target markets and
members. Further, we believe that these technologies allow us to build scalable
systems that can be implemented in virtually any market.
The
Openfilm Contest Management System, called Launchpad (licensed from
NetLab), uses
various methods and algorithms to conduct and manage online contests of any
form. The system enables Openfilm to “white label” online contests, with robust
backend functionality that allows control of the contest with minimal technical
training. We believe that Launchpad controls allow contest hosts to receive,
filter and judge submissions quicker, more easily and more efficiently.
Submissions can be in the form of video files, audio and other common digital
formats. The system is designed to provide scalability in functionality and
application processing. We believe that the Launchpad contest
platform enables optimum engagement of consumers and more effective capturing of
data and management of content.
Although
Film Festivals are considered natural consumers of the Launchpad platform, as it
will help them significantly reduce administrative expenses and streamline the
submission and judging process, it can also be an effective tool in the
corporate and education sectors and other areas that may need a resource or
talent management system.
Subconscious user behavior
tracking is another proprietary system owned by NetLab, which monitors
viewers as they interact with Openfilm’s website. Content on the website is
coded using mathematical algorithms to arrange content based on its collective
and/or average evaluations. The resulting data gathered through user experiences
can be used in a variety of ways. This preference monitoring system will assist
Openfilm’s advertising clients in directed marketing campaigns and will provide
Openfilm with effective and reliable audience participation in its offerings.
Additionally, user behavior tracking will yield profiles for each user, allowing
the best possible video recommendations system to evolve.
Openfilm
currently offers, to a limited extent, video with programmable story lines that
allow content creators to offer interactive experiences for their viewers, such
as selection of alternative movie endings. The Openfilm interactive system
(licensed from NetLab) allows digital product placement of any branded item into
any frame of content. Dynamic tracking of the insertion and user interaction is
expected to result in valuable brand placement optimization and advertisers will
be able to determine the best frames within videos to place their brand for
maximum exposure and return on investment.
Other
Technology Advancements
Showcasing
quality content is one of the highest priorities on the
Internet. Openfilm utilizes a unique submission processing system
(licensed from NetLab), which converts videos into High Definition (HD) and
allows publication in multiple resolutions. Additionally, Openfilm
products and services provide a wide array of tools that permit content owners
to enhance and control various aspects of the distribution and viewing process
and to generate a variety of useful analytical reports.
Through
the reach of the Openfilm website and other online syndication partners,
Openfilm’s content providers are able to offer their content for sale through
various methods including desktop downloads and on mobile devices.
A 3-D
viewing experience is also available and will soon be debuted through the
Openfilm video player.
10
Technology
Diversification
The
online software currently utilized by Openfilm (licensed from NetLab) was
designed with scalability to enable it to be utilized across different vertical
markets. The Openfilm platform and its proprietary technological advantages can
be adapted to other markets, such as sports, education, government and corporate
applications, music and other sources and uses of online content.
Due to a
variety of technological innovations and advantages, many of which are eligible
for patent protection, we believe that Openfilm and NetLab will be able to
generate revenue from various sources, maximizing utilization of these
technologies in various markets. Multiple revenue streams leave no
dependency on one business model. The Openfilm and other NetLab technologies are
built on broad principles, with flexibility, scalability and adaptability in
mind.
The
Company will generally rely on a combination of trade secret, copyright,
trademark and patent law to protect its proprietary rights in the intellectual
property. Although Openfilm and other customers will utilize NetLab’s
proprietary platforms and other products in object code form, no assurance can
be given that unauthorized third parties will not be able to copy such software.
In addition, there can be no assurance that the Company’s competitors will not
independently utilize existing technologies to develop products that are
substantially equivalent or superior to those of the Company. The
Company could incur substantial costs in defending itself or its licensees in
litigation brought by third parties, or in seeking a determination of the scope
and validity of the proprietary intellectual property rights of
others.
Development
Team
Our
technology development team consists of more than 35 engineers. The majority of
the team has been working together for the past three years to enhance the
Openfilm website and develop new proprietary features that will bring additional
functionality to users and revenue sources to Openfilm and
others. Development activities are conducted primarily offshore in
Dnepropetrovsk, Ukraine through Openfilm’s wholly-owned subsidiary, Zivos, LLC,
a Ukranian company. We believe that overall research and development costs are
significantly less than comparable facilities and staff in the United
States.
Licensing
Arrangement between Openfilm and NetLab
In
connection with the acquisition of Openfilm and the transfer of certain
technologies to NetLab, Openfilm and NetLab entered into a Technology Transfer
and License Agreement whereby Openfilm has been granted a perpetual,
non-exclusive license to use, modify and enhance certain of the NetLab
technologies used in conjunction with the Openfilm website. Openfilm is required
to pay to NetLab a license fee equal to five percent of the gross revenue
generated by Openfilm’s use of the licensed NetLab technologies. The initial
term of this arrangement is ten years with automatic one year renewals unless
sooner terminated in the event of breach or upon 30 days prior written notice
after the initial term.
11
Research
and Development
Management
believes that the Company’s future success depends in part upon the timely
enhancement of existing products and the development of new products and
applications. The Company is currently developing new software products relating
to information management with broad applications in the commercial, government
and education markets and enhancing existing products to improve price and
performance, expand product capabilities, simplify user interfaces, help define
and support emerging industry standards, and develop interoperability with most
products and devices commonly used in the Company’s targeted markets. Up until
the date of acquisition, Openfilm operations, including research and development
costs, were funded primarily by entities controlled by our President Mike Zoi.
As of the date of acquisition of Openfilm by the Company, Openfilm operations
will be funded pursuant to the Subscription Agreement with
TGR. However, the Company may pursue other external research
and development funding sources and collaborative partners.
For
fiscal 2010 (through September 30, 2010), fiscal 2009 and fiscal 2008, the
research and development expense of Openfilm was approximately $405,959,
$483,013, and $187,402, respectively.
Regulation
The
Company does not believe that it is required to obtain government approval of
its products or services. However, since Openfilm collects certain information
from members and users on its website, Openfilm will be subject to current and
future government regulations regarding the collection, use and safeguarding of
consumer information over the Internet.
Openfilm
is subject to the California Online Privacy Protection Act of 2003 (CA OPPA),
which requires website operators to post its privacy policy on its website and
to include certain disclosures relating to the type of information collected,
how it is used and how users can review and make changes to the information
collected. Openfilm believes that it is in compliance with the CA
OPPA.
In recent
years, the Federal government has proposed several pieces of legislation designed to regulate information obtained online and safeguard
personal and confidential consumer information from theft or compromise.
Although none of such legislation has yet been enacted, the Company believes
that consumer protection initiatives similar to the Privacy Act of 2005, the
Information Protection and Security Act, the Identity Theft Prevention Act of
2005, the Online Privacy Protection Act of 2005, the Consumer Privacy Protection
Act of 2005, the Anti-phishing Act of 2005, and the Social Security Number
Protection Act of 2005, will be enacted in the near future.
Many of
the companies with whom Openfilm competes or expects to compete have
substantially greater financial resources, research and development
capabilities, sales and marketing staffs and distribution channels and are
better known than Openfilm. We believe that the principal factors affecting
Openfilm’s ability to compete are the accessibility, functionality and ease of
use of the Openfilm website, and the compelling nature of the value proposition
to advertisers and brands, as well as, the performance and unique features of
the Openfilm platform and other applications and solutions offered by Openfilm,
the effectiveness of marketing efforts, the success of its video contests and
film production and distribution abilities and pricing of membership
and other offers.
Openfilm
believes that it can successfully differentiate itself from its competitors due
to the proprietary technology licensed from NetLab, its unique focus on
independent filmmakers and their content, and its Celebrity Advisory Board.
Openfilm’s tiered membership model allows flexibility for users and promotes
migration from lower value membership plans to premium membership
plans.
Other
competitive advantages include the ability of independent filmmakers to submit
their films on Openfilm’s website, receive valuable feedback from Advisory Board
members and to participate in online contests. Films that are
showcased on the Openfilm website undergo a rigorous screening process to ensure
they meet quality standards of production and artistic merit.
12
We
believe that the proprietary technologies (licensed from NetLab), which are
utilized by Openfilm are not commonly found in the online video-sharing world
and thus provide a distinct competitive advantage for Openfilm primarily because
of the ability of Openfilm to deploy customized solutions for its members,
advertisers and others.
Employees
We
conduct operations from our Miami, Florida headquarters, our Ukrainian technical
facility and our California satellite office. Our Miami headquarters provides
operations, finance, IT, legal, human resources and business development
resources to our operating businesses, Openfilm and Green1. As of the date
hereof, there were 12 people in our Miami headquarters, including our senior
executive officers, the senior management of Openfilm and Green1, and various
support staff.
Our
technology development is conducted primarily in facilities located in
Dnepropetrovsk, Ukraine through Openfilm’s wholly-owned subsidiary, Zivos, LLC,
a Ukranian company. This facility includes 35 highly skilled
engineers and technology professionals, as well as, management and financial
personnel and support staff.
Our
satellite office in Los Angeles, California accommodates our Advisory Board
members and others during live studio chats, and includes Openfilm’s director of
communications, director of business development and one marketing support
person.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
This
Current Report on Form 8-K contains forward -looking statements. These
statements relate to our expectations, hopes, intentions or strategies regarding
future events or future financial performance. Any statements contained in this
report that are not statements of historical fact may be deemed forward-looking
statements. In some cases, forward-looking statements can be identified by
terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,”
“intend,” “believe,” “estimate,” “predict,” “potential” or “continue,” or the
negative of such terms or other comparable terminology. Forward-looking
statements include but are not limited to statements regarding: our future
business plans; future sales of our product and services; introduction of new
products and services; expected hiring levels; marketing plans; increases of
selling, general and administrative costs; financing requirements and capital
raising plans; successful integration and development of acquired businesses;
regulatory and economic factors affecting our businesses and other factors that
may impact our acquisition and development strategy, some of which are beyond
our control and difficult to predict. These statements are only predictions and
are subject to a number of assumptions, risks and uncertainties that could cause
actual results to differ materially from those expressed or implied in the
forward-looking statements. The following important factors, in addition to
those discussed in our other filings with the Securities and Exchange Commission
(the “Commission”) from time to time, and other unforeseen events or
circumstances, could affect our future results and could cause those results or
other outcomes to differ materially from those expressed or implied in our
forward-looking statements: general economic conditions; competition; our
ability to raise capital; our ability to control costs; changes within our
industries; new and upgraded products and services by us or our competitors;
employee retention; sovereign risk; legal and regulatory issues; changes in
accounting policies or practices; currency translation and exchange risks; and
the market acceptance of our products and services.
All
forward-looking statements are based on information available to us on the date
of this filing, and we assume no obligation to update such statements, although
we will continue to comply with our obligations under the securities
laws.
13
The
following discussion should be read in conjunction with our other filings with
the Commission and the consolidated financial statements and related notes
included in this report.
General
We are
currently engaged in the development of an alternative energy services business
and we are concurrently pursuing a strategy to develop and/or acquire technology
and applications for use in the online media industry. In furtherance of these
strategies, we have acquired Openfilm and continue to develop an alternative
energy business. We believe that our technology platforms and development
expertise will enable us to enhance the digital distribution of content in a
variety of industries. Accordingly, in addition to our acquisition of Openfilm,
we intend to explore the possibility of acquiring other internet portal
properties and companies with similar goals of connecting people in various
vertical markets, such as the medical, music, film, sports and legal markets.
From time to time, we may be engaged in various discussions to acquire
businesses or formulate joint venture or other arrangements. Our policy is not
to disclose discussions or potential transactions until definitive agreements
have been executed. Where appropriate, acquisitions will be financed with equity
shares and this may result in substantial dilution to existing
stockholders.
Since the
unwind of the TOT-SIBBNS joint venture effective March 31, 2010, the Company has
had no significant operations until the acquisition of Openfilm. Management
recognizes that the Company must raise capital sufficient to fund business
activities until such time as it can generate sufficient revenues and net cash
flows in amounts necessary to enable it to continue in existence, of which there
can be no assurance.
Short
term financing is provided by TGR Energy, LLC (“TGR”), an entity controlled by
our president, as we require additional working capital, pursuant to a
Subscription Agreement dated August 7, 2008 (the “Subscription Agreement”). TGR
has agreed to provide up to $2,000,000 (the “Investment Amount”) in exchange for
up to 100,000,000 shares of common stock and warrants to purchase up to
50,000,000 shares of common stock at an exercise price of $0.05 per share.
Pursuant to the Subscription Agreement, TGR will fund the Investment Amount as
required in our operational budget. TGR’s obligation to fund the Investment
Amount will be reduced by any future third party funding or investment on terms
no less favorable than those contained in the Subscription Agreement. On
January 12, 2010, TGR agreed to increase its funding commitment from $2,000,000
to $4,000,000 in exchange for up to an additional 100,000,000 shares of the
Company’s common stock and warrants to purchase up to 50,000,000 shares of the
Company’s common stock at an exercise price of $0.05 per share for a period of
five years from date of issuance.
For the
fiscal year ended March 31, 2009, TGR was issued an aggregate of 82,725,335
shares of common stock of the Company and fully vested warrants to purchase
41,362,168 shares of common stock of the Company at an exercise price of $0.05
per share pursuant to the terms of the Subscription Agreement. These
issuances were in exchange for financings under the Subscription Agreement in
the aggregate amount of $1,654,507 of which $1,017,097 was cash and $637,410
related to refinancing of previously outstanding notes payable. A
compensation charge of $8,827,218 was recorded for the fiscal year ended March
31, 2009. This amount is calculated as the difference between the market
price of our common stock at the end of each quarter in which shares were issued
and the subscription price of the common shares ($0.02) multiplied by the number
of shares issued, plus the Black-Scholes valuation of the warrants issued as
calculated at the end of each quarter.
For the
fiscal year ended March 31, 2010, TGR was issued an aggregate of 16,186,515
shares of common stock of the Company and fully vested warrants to purchase
8,093,757 shares of common stock of the Company at an exercise price of $0.05
per share pursuant to the terms of the Subscription Agreement. These
issuances were in exchange for financings under the Subscription Agreement in
the aggregate amount of $323,730. A compensation charge of $4,717,677 was
recorded for the fiscal year ended March 31, 2010. This amount is calculated as
the difference between the market price of our common stock at the end of each
quarter in which shares were issued and the subscription price of the common
shares ($0.02) multiplied by the number of shares issued, plus the Black-Scholes
valuation of the warrants issued as calculated at the end of each
quarter.
14
For the
quarter ended June 30, 2010, TGR was issued 10,037,315 shares of common stock of
the Company and fully vested warrants to purchase 5,019,157 shares of common
stock of the Company for $0.05 per share in exchange for funding of $200,746
provided during the quarter under the terms of the Subscription Agreement. A
compensation charge of $1,154,336 was recorded for the quarter ended June 30,
2010 as an officer of the Company is also a principal of TGR and the securities
issued were below market value as of the issue date.
For the
quarter ended September 30, 2010, TGR was issued 2,240,450 shares of common
stock of the Company and fully vested warrants to purchase 1,120,225 shares of
common stock of the Company for $0.05 per share in exchange for funding of
$44,809 provided during the quarter under the terms of the Subscription
Agreement. A compensation charge of $22,404 was recorded for the quarter ended
September 30, 2010 as an officer of the Company is also a principal of TGR and
the securities issued were below market value as of the issue date.
The
Company entered into a Sponsorship Agreement with American Speed Factory dated
April 22, 2009, whereby the Company would receive certain promotional services
and sponsorship rights to display the Company’s logo in connection with the 2009
Ferrari Challenge racing season in exchange for the issuance of 500,000 shares
of restricted stock of the Company. This arrangement was valued at
$50,000, which amount was recorded as an advertising expense for the quarter
ended June 30, 2009.
Through
May 15, 2009, Mr. New’s base salary was $140,000 with a $30,000 bonus payable
quarterly for meeting agreed-upon objectives. On May 15, 2009, Mr. New’s
base salary was reduced from $140,000 to 91,000 and his bonus was reduced from
$30,000 to $19,500 annually. To partially offset the reduction in salary, the
Company provided Mr. New with 25,000 shares of fully vested common stock in lieu
of his March 31, 2009 cash bonus and 200,000 shares of common stock which vest
monthly from April 1, 2009 to September 30, 2009. A compensation charge of
$12,500 was recorded for the quarter ended June 30, 2009 and a compensation
charge of $10,000 was recorded for the quarter ended September 30, 2009, which
reflects the market value per share ($0.10) on the first trading day after the
date of grant. At March 31, 2010, the Company provided Mr. New with
250,000 shares of fully vested common stock for services provided to the company
under a salary reduction. A compensation charge of $37,500 was recorded
for the quarter ended March 31, 2010, which reflects the market value per share
($0.15) on the first trading day after the date of grant.
Other
employees (other than officers and directors) receiving salary reductions were
granted a total of 50,000 shares of common stock vesting monthly between April
1, 2009 and September 30, 2009. The Company recorded a compensation
expense of $2,347 for the quarter ended June 30, 2009 and a compensation expense
of $1,042 for the quarter ended September 30, 2009, to reflect the market
value of stock provided in lieu of cash compensation. Both of these
charges were calculated using the price per share of common stock ($0.10) on the
first trading date after the date of grant.
Pursuant
to a Stock Purchase Agreement dated November 23, 2009, TGR agreed to sell to
Dune Capital Group ("Dune") an aggregate of 5,000,000 shares of common stock of
the Company held by TGR for a purchase price of $0.10 per share or an aggregate
of $500,000. The purchase price is required to be paid on or before April
1, 2010. Dune paid $300,000 on November 23, 2009. In order to ensure compliance
with obligations under Section 16 of the Securities Exchange Act of 1934, prior
to the issuance of shares to Dune by TGR, TGR assigned this Purchase Agreement
to the Company. Accordingly, the Company received $300,000 pursuant to this
agreement and issued an aggregate of 3,000,000 shares of common stock of the
Company to Dune on January 12, 2010. On April 28, 2010, the Company
agreed to terminate the Stock Purchase Agreement with Dune and rescind the prior
issuance of common stock. The Company repurchased the 3,000,000 shares of common
stock previously issued to Dune for $300,000. The redeemed shares were
accounted for as treasury stock.
At
September 30, 2010, the Company had options to purchase 1,200,000 shares of
common stock outstanding under its stock option plan, of which options to
purchase 920,370 shares of common stock are vested, with an exercise price of
$0.25 per share and with a remaining weighted average contractual term of 4.51
years. The Company also had warrants to purchase 55,595,307 shares of common
stock outstanding at December 31, 2009 with a strike price of $0.05 per share
and a remaining average contractual term of 3.53 years.
15
As set
forth in our audited financial statements for the fiscal years ended March 31,
2010 and 2009, several factors raise significant doubt as to our ability to
continue operating as a going concern. These factors include our
history of net losses and that as of March 31, 2010, due to the unwind of the
TOT-SIBBNS joint venture, we had no significant operations until the acquisition
of Openfilm effective as of December 14, 2010, and a working capital deficit. We
are dependent upon TGR or Mike Zoi (as a result of his controlling interest in
TGR and our dependence on the Subscription Agreement with TGR) to fund our
operations. Our independent auditors’ report on our financial statements for the
year ended March 31, 2010 contains an explanatory paragraph about our ability to
continue as a going concern. Management believes that our current operating
strategy, as described in the preceding paragraphs and the obligation of TGR to
provide funding under the Subscription Agreement, provides and opportunity for
us to continue as a going concern; however, there is no assurance this will
occur.
On
November 11, 2010, our Board of Directors adopted a resolution changing our
fiscal year end from March 31 to December 31 effective immediately. Accordingly,
the first 12-month fiscal year will run from January 1, 2011 through December
31, 2011. The nine-month period from April 1, 2010 through December 31, 2010
will be presented in our annual report on Form 10-K to be filed within 90 days
of December 31, 2010. We will provide comparative financial information to
assist in period-to-period comparisons. Our Board believes that this change will
allow better alignment of our annual planning and budget processes with our new
business strategy as we are no longer engaged in the seasonal oil and gas
business.
Historical
Overview
On July
16, 2008, we entered into a Joint Venture Agreement (the “JV Agreement”) with
Evgeny Bogorad (“Bogorad”), owner of Sibburnefteservis, Ltd. of Novosibirsk,
Russia, an oil services company (“SIBBNS”). Pursuant to the JV Agreement,
Bogorad contributed certain of SIBBNS’ assets and personnel to a joint venture
company named TOT-SIBBNS, Ltd., a Russian corporation (“TOT-SIBBNS”). An
independent appraisal company appraised the contributed assets at USD
$6,221,881.We ended development stage activity on July 16, 2008 when we acquired
a 75% interest in the TOT-SIBBNS joint venture and began operations in the oil
and gas service industry, including the exploration, development, production,
and marketing of crude oil and natural gas in Russia and
Kazakhstan. At the closing on July 16, 2008, we issued to Bogorad
3,000,000 shares of our common stock in exchange for a 75% interest in
TOT-SIBBNS.
TOT-SIBBNS
obtained its first contract and began drilling operations in the Fall 2008.
However, financial constraints and the declining price of oil resulted in a
suspension of drilling operation in January 2009. Drilling operations did not
recommence during the Winter 2009 and most employees were furloughed in April
2009.
TOT-SIBBNS
had expectations of continuing exploratory drilling (both through its existing
customer and new customers) for the 2009/2010 drilling season as the price of
oil had risen significantly and TOT-SIBBNS was able to secure an additional
drilling contract in November 2009. However, in January 2010, it became
questionable whether activities with TOT-SIBBNS’ initial customer would
recommence in the short term, and there remained uneasiness in the market over
the continued improvement in crude oil prices, which had a negative impact on
the exploratory drilling market in Russia at that time. Accordingly,
on January 27, 2010, after several weeks of exploring other business
opportunities, the Company altered its business focus and decided to exercise
its option to unwind the joint venture and pursue other development
opportunities.
16
The
Company and TOT-SIBBNS executed an unwind agreement whereby the Company
exchanged its 75% interest in TOT-SIBBNS for the 3,000,000 shares given to
Evgeny Borograd in 2008. The unwind of the joint venture was consummated as
of March 31, 2010. The unwind of the TOT-SIBBNS joint venture has been
accounted for using the guidance provided in ASC 845 (previously APB 29), as a
disposal “other than by sale” similar to a spin-off transaction, with the shares
received reflected as treasury stock and recorded on the Company’s balance sheet
at its carrying basis in the net assets of the joint venture as of March 31,
2010. Operations of TOT-SIBBNS are included in the Company’s consolidated
financial statements at March 31, 2010 as discontinued operations, but will not
be included in the consolidated financial statements subsequent to March 31,
2010.
KORLEA-TOT
is our 51% joint venture with Korlea Invest Holding AG of Switzerland
(“Korlea”), a provider and trader of energy assets in the Czech Republic. The
joint venture, Korlea-TOT, established as of July 17, 2008, was expected to
assist in the marketing of oil assets sourced by other TOT-Energy companies and
contacts. There has been no activity to date with this joint venture.
Accordingly, in November 2010, we sent Korlea notice of our request to unwind
this arrangement. The Company intends to sell its ownership in the KORLEA-TOT
joint venture to Korlea in exchange for a cash payment equal to 51% of the cash
balance in the joint venture on the date of unwind. Consummation of
this transaction will be subject to obtaining certain approvals and making
certain filings overseas. It is expected that this transaction will be completed
during the first quarter of 2011.
The
Company intends to develop a downstream solar business that will provide
complete solar solutions (design, installation, maintenance and finance) to
commercial customers. This is intended to be accomplished through the
hiring of key personnel and perhaps acquisitions. In this regard, the
Company recently hired a project manager and Chief Operating Officer for this
business. We expect to utilize existing commercial real estate industry
relationships of our management to generate opportunities for solar installation
projects in the United States.
As part
of our strategy to develop an online media company, on December 14, 2010, we
entered into a purchase agreement (the “Openfilm Purchase Agreement”) with the
members of Openfilm, LLC, a Florida limited liability company engaged in
the development of
technology and operation of a website that supports the advancement of
independent film on the Internet. Mike Zoi, our President, through
his control of Enerfund, LLC and MZ Capital, LLC, both Florida limited liability
companies, held approximately 70% of Openfilm’s outstanding membership interests
prior to the acquisition by the Company. Pursuant to the Openfilm Purchase
Agreement, the Company acquired all of the outstanding membership interests in
Openfilm by exchanging for such interests an aggregate of 107,238,421 shares of
common stock of the Company to the security holders of Openfilm, of which
45,937,500 shares were issued to Enerfund (a company controlled by Mike Zoi),
29,062,500 shares were issued to MZ Capital, LLC (a company controlled by Mike
Zoi), 24,950,000 shares were issued to Dmitry Kozko, CEO of Openfilm, and an
aggregate of 7,288,421shares were issued to the remaining seven non-controlling
security holders of Openfilm. Upon completion of the acquisition transaction on
December 14, 2010, Openfilm became a wholly-owned subsidiary of the Company.
Additionally, in connection with the acquisition of Openfilm, the Company
established NetLab Systems, LLC (NetLab), a Florida limited liability company,
and transferred the ownership of certain intellectual property assets from
Openfilm to NetLab. Openfilm and NetLab entered into a Technology Transfer and
License Agreement granting Openfilm the right to use certain technology
transferred to NetLab. Research and development activities are conducted
primarily through Zivos, LLC, a Ukrainian limited liability company and
wholly-owned subsidiary of Openfilm. Up until the date of acquisition, Openfilm
operations were funded primarily by entities controlled by our President Mike
Zoi. As of the date of acquisition of Openfilm by the Company, Openfilm
operations will be funded pursuant to the Subscription Agreement with
TGR.
Net
Element Results of Operations for the Three-Month Periods Ended September 30,
2010 and 2009
We
reported a net loss of $208,452 or $(0.00) per share for the three months
ended September 30, 2010, compared to a net loss of $2,472,588 or $(0.01) per
share for the three months ended September 30, 2009. Weighted average shares
outstanding were 330,840,721 and 305,370,458 for the quarters ended September
30, 2010 and 2009, respectively.
The net
loss for the three month period ended September 30, 2010 was favorably impacted
by the reduced non-cash compensation expense of $30,923 related primarily to
warrants issued pursuant to the Subscription Agreement with TGR as compared with
the quarter ended September 30, 2009. The non-cash compensation expense for the
three months ended September 30, 2009 was $2,077,306.
17
General
and administrative expenses for the three months ended September 30, 2010 were
$208,482, of which $30,923 was attributable to non-cash compensation expenses as
compared to general and administrative expenses for the three months ended
September 30, 2009 of $2,313,588, which includes non-cash compensation expenses
of $2,096,863. The remaining general and administrative expense of $177,919
for the three months ended September 30, 2010 were slightly lower than the
remaining general and administrative expense (excluding non-cash compensation)
of $216,725 for the three months ended September 30, 2009 primarily due to a
reduction in travel expenses of $15,453. In addition to the reduction in
travel expense, investor relations costs were lower by $12,250 and accounting
and auditing fees were lower by $9,550 during the quarter ended September 30,
2010 as compared with the quarter ended September 30, 2009.
During
the three months ended September 30, 2010, we obtained funding of an aggregate
of $44,809 under the Subscription Agreement with TGR and issued 2,240,450 shares
of common stock. On September 30, 2010, the market value and subscription price
were the same resulting in no compensation charge for the shares purchased at
current market value under the Subscription Agreement. Additionally,
warrants to purchase 1,120,225 shares of common stock were issued in connection
with these fundings and a corresponding compensation expense of $22,404 was
recorded based on a Black-Scholes valuation model.
The
non-controlling interest relating to the Korlea-TOT joint venture decreased by
$30 for the three months ended September 30, 2010 as compared with a decrease of
$25 for the three months ended September 30, 2009. The joint venture
non-controlling interest reflects the joint venture partner’s ownership of the
joint venture.
Net
Element Results of Operations for the Six-Month Periods Ended September 30, 2010
and 2009
We
reported a net loss of $1,596,756 or $(0.00) per share for the six months
ended September 30, 2010, compared to a net loss of $4,098,427 or $(0.01) per
share for the six months ended September 30, 2009. Weighted average shares
outstanding were 325,865,379 and 303,323,673 for the six months ended September
30, 2010 and 2009, respectively.
The net
loss for the six month period ended September 30, 2010 was favorably impacted by
a reduction in the non-cash compensation expense to $1,193,685 related primarily
to common stock and warrants issued pursuant to the Subscription Agreement with
TGR as compared with the non-cash compensation expense of $3,434,223 for the six
months ended September 30, 2009.
General
and administrative expenses for the six months ended September 30, 2010 were
$1,596,815 of which $1,193,685 was attributable to non-cash compensation
expenses as compared to general and administrative expenses for the six months
ended September 30, 2009 of $3,902,167 which includes non-cash compensation
expenses of $3,434,223. The remaining general and administrative expenses of
$403,130 for the six months ended September 30, 2010 were less than the
remaining general and administrative expenses (excluding non-cash compensation)
of $467,944 for the six months ended September 30, 2009 primarily due to a
reduction in investor relations expenses of $83,535. In addition to a
reduction in investor relations costs, travel expenses for the six months ended
September 30, 2010 were reduced by $19,373, offset in part by increases in
accounting and auditing fees ($24,312) and legal fees ($8,595) as compared with
the six months ended September 30, 2009.
During
the six months ended September 30, 2010, we obtained funding of an aggregate of
$245,555 under the Subscription Agreement with TGR and recognized a non-cash
compensation expense totaling $1,176,741 which includes $702,612 for the
issuance of 12,277,765 shares of common stock. This charge is the result of an
intrinsic value calculation that measures the difference between fair value on
date of issuance of the shares and the purchase price per share under the
Subscription Agreement. Additionally, the warrants to purchase
6,139,382 shares of common stock issued in connection with these fundings
resulted in compensation expense of $474,129 based on a Black-Scholes valuation
model.
18
The
non-controlling interest relating to the Korlea-TOT joint venture decreased by
$59 for the six months ended September 30, 2010 as compared with a decrease $39
for the six months ended September 30, 2009. The joint venture non-controlling
interest reflects the joint venture partner’s ownership of the joint
venture.
We
incurred a net loss of $6,596,834 or $0.02 per share, for the year ended March
31, 2010 (“fiscal 2010”) compared to a net loss of $12,177,140, or $0.05 per
share, for the year ended March 31, 2009 (“fiscal 2009”). The net
loss of $6,596,834 for fiscal 2010 includes a loss from discontinued operations
of $646,017 or $0.00 per share relating to the TOT-SIBBNS joint venture (see
note 12) as compared to a loss from discontinued operations of $1,799,816, or
$0.01 per share relating to the TOT-SIBBNS joint venture for fiscal
2009. Our total operating expenses from continuing operations for
fiscal 2010 were $5,789,352 as compared to operating expenses for fiscal 2009 of
$10,378,126. Other expenses were $171,025 in fiscal 2010 compared with
other income of $802 in fiscal 2009.
For
fiscal 2010, our operating expenses consisted of $5,789,352, of which $19,540
was attributable to Korlea-TOT. Operating expenses for fiscal 2010
related primarily to compensation expense ($4,717,677) in connection with
issuances of stock and warrants pursuant to the Subscription
Agreement. Payroll expenses were $602,420, professional fees for
legal, accounting, consulting and tax preparation were $115,933 and other
general and administrative expenses were $333,782, consisting primarily of
investor relations expenses ($83,535), travel expenses ($23,215), directors and
officers insurance ($15,304), telephone expense ($11,799) and rent
($10,000).
For
fiscal 2009, our operating expenses consisted of $10,378,126, of which $0
related to Korlea-TOT. Operating expenses in fiscal 2009 related primarily to
compensation expense ($8,812,774) in connection with issuances of stock and
warrants pursuant to the Subscription Agreement. Payroll expenses were $656,702,
professional fees for legal, accounting, consulting and tax preparation were
$316,857 and other general and administrative expenses were $591,793 consisting
primarily of travel expenses ($118,321), rent ($101,341), investor relations
expenses ($154,246), directors and officers insurance ($15,273) and telephone
($7,031).
The
non-controlling interest in loss of consolidated subsidiary was $9,560 in fiscal
2010 and $0 in fiscal 2009. The non-controlling interest relates to
the 49% non-controlling interest in Korlea-TOT retained by our joint venture
partner.
Openfilm
Results of Operations for the Three-Month Periods Ended September 30, 2010 and
2009
Total
revenues were $11,396 for the three months ended September 30, 2010 as compared
with $198 for the three months ended September 30, 2009. This
increase was primarily due to an advertising contract in 2010 attributable to
Openfilm that it did not have in 2009. Additionally, Openfilm
subscription revenues were $3,647 for the three months ended September 30, 2010
and $0 for the three months ended September 30, 2009. This increase
is primarily attributable to fees received in 2010 for contest entries, and to a
lesser extent, monthly premium membership fees. There were no
contests during 2009.
Cost of
sales was $162,387 for the three months ended September 30, 2010 as compared
with $155,108 for the three months ended September 30, 2009. Higher
operating costs ($34,320) during 2010 for Openfilm website development, hosting,
streaming and maintenance were offset in part by reductions in amortization of
capitalized website development expenses ($27,041) as compared with the three
months ended September 30, 2009.
19
General
and administrative expenses for the three months ended September 30, 2010 were
$458,241 as compared with $73,615 for the three months ended September 30,
2009. The increase is primarily attributable to the costs of contest
prize and other marketing efforts relating to the film contest held during this
period ($282,924). In addition, payroll and benefits expenses were higher
($57,501) along with increased costs for public relations ($21,074), web related
expenses ($6,788), travel ($6,427), professional fees ($4,345) and other
expenses ($5,567). These expenses increased during the 2010 period as operations
ramped-up as compared with the 2009 period.
During
the three months ended September 30, 2010, Enerfund (a company controlled by
Mike Zoi) advanced $431,066 in loan proceeds to fund Openfilm
operations. During the three months ended September 30, 2009,
Openfilm received member contributions of $166,747 from Kazo, LLC (a company
controlled by Mike Zoi) to fund operations.
Openfilm
Results of Operations for the Nine-Month Periods Ended September 30, 2010 and
2009
Revenues
were $35,188 for the nine months ended September 30, 2010 as compared with
$3,076 for the nine months ended September 30, 2009. The increase is
primarily due to an increase in advertising revenues from a new advertising
contract entered into during 2010, and to a lesser extent, from an increase in
membership fees (due to a growing membership base) and film contest entry
fees.
Cost of
sales for the nine months ended September 30, 2010 were $429,476 compared with
$464,622 for the nine months ended September 30, 2009. Cost of sales
decreased due to a reduction in capitalized website amortization costs ($23,424)
and a reduction in depreciation expense ($10,846) for the nine months ended
September 30, 2010 compared with the nine months ended September 30,
2009.
Openfilm
general and administrative expenses for the nine months ended September 30, 2010
were $722,461 as compared with $252,798 for the nine months ended September 30,
2009, primarily as a result of increased operational activities in the 2010
period as compared with the 2009 period. The higher expenses in 2010
were due to the increase in film contest and related marketing expenses of
$280,797. In addition, payroll related expenses were $58,686 higher
along with increased costs for consulting and professional fees ($90,830),
investor relations ($21,095) and other expenses ($18,255) as compared with the
2009 period.
For the
nine months ended September 30, 2010, Enerfund advanced $908,088 in loan
proceeds to fund Openfilm operations in the United States and Ukraine as
compared with member contributions of $279,472 for the nine months ended
September 30, 2009. In addition, during the nine months ended
September 30, 2009, Openfilm borrowed $250,000 from Prisma Trading, an
unaffiliated entity, to help fund operations during this period, which amount
was repaid in July and October, 2010.
Openfilm
Results of Operations for the Year Ended December 31, 2009 Compared to the Year
Ended December 31, 2008
Revenue
for the twelve months ended December 31, 2009 was $7,492 as compared with $0 for
the twelve months ended December 31, 2008. The Openfilm website was
launched on July 16, 2008 and no advertising revenue was received during
2008. Minimal advertising revenue was received in 2009 as Openfilm
was primarily focused on developing additional functionalities of the website
and strategies relating to revenue generation from the website.
Cost of
sales was $603,287 for the twelve months ended December 31, 2009 as compared
with $466,143 for the twelve months ended December 31, 2008. Internet
and hosting expenses accounted for $81,249 of the increase as we had a full year
of hosting and streaming in 2009 versus one-half year in
2008. Additionally, the amortization of capitalized website
development costs were $46,850 higher for the twelve months ended December 31,
2009 primarily as a result of amortization for a full year as compared to six
months during 2008. The remaining difference of $9,045 was due to
higher operating expenses in the Ukraine primarily due to higher capitalized
payroll costs.
20
General
and administrative expenses were $372,195 for the twelve months ended December
31, 2009 as compared with $597,623 for the twelve months ended December 31,
2008. Salaries, benefits and consulting fees were $203,381 for the
twelve months ended December 31, 2009 as compared with $462,738 for the twelve
months ended December 31, 2008. Salaries were higher in 2008 due to
increased headcount in the United States during the 2008 period. Additionally,
non-cash compensation was $47,849 higher in 2008 than 2009 due to the issuance
of equity interests provided to Advisory Board Members during 2008.
Rent
Expense decreased $48,128 for the year ended December 31, 2009 as compared with
the year ended December 31, 2008, primarily due to the reduction of employees
and office space. This decrease was offset in part by increased
professional fees ($21,635) for the twelve months ended December 31, 2009 as
compared with the twelve months ended December 31, 2008 due to increased
expenses for travel expenses and patent filings. Additionally, other
general and administrative costs were $60,422 higher primarily due to higher
traffic acquisition costs ($42,071) and increased insurance expenses for
directors and officers ($12,089).
For the
year ended December 31, 2009, Enerfund advanced $252,221 and Kazo advanced
$222,149 to Openfilm to fund operations. In addition, Openfilm borrowed $250,000
from Prisma Trading, an unaffiliated third party, which was repaid in 2010.
During 2008, Kazo provided advances totaling $2,842,703 to Openfilm, and
Openfilm was due $1,425,873 from Enerfund. As of December 31, 2009, all amounts
owed to Kazo and Enerfund and amounts due from Enerfund were converted to
preferred equity of Openfilm with a liquidation preference of $1,850,900, which
preferred equity was retired for no additional consideration in connection with
the Openfilm acquisition by the Company. Additionally, as of December 31, 2009,
Mike Zoi was due $106,300 from Openfilm, which was repaid in 2010.
Going
Concern
Openfilm
had a net loss of $1,108,831 for the nine months ended September 30, 2010, and
$965,785 and $1,063,766 for the years ended December 31, 2009 and 2008,
respectively, and further losses are anticipated. Openfilm had a negative cash
flow from operations of $810,872 for the nine months ended September 30, 2010,
and $758,039 and $917,375 for the years ended December 31, 2009 and 2008,
respectively. Openfilm’s ability to continue operating is limited without
continued availability of financing, of which there can be no assurance. These
matters raise substantial doubt about Openfilm’s ability to continue as a going
concern. The financial statements do not include any adjustments relating to the
recovery of the recorded assets or the classification of the liabilities that
might be necessary should Openfilm be unable to continue as a going
concern. Up until the date of acquisition, Openfilm operations were funded
primarily by entities controlled by our President Mike Zoi. As of the date of
acquisition of Openfilm by the Company, Openfilm operations will be funded
pursuant to the Subscription Agreement with TGR.
Pro
Forma Results
The
following unaudited pro forma condensed combined financial information gives pro
forma effect to the acquisition of Openfilm by the Company. The transaction has
been accounted for as a merger between entities under common control due to the
commonality of ownership between us and Openfilm.
The
following unaudited pro forma condensed consolidated financial statements and
explanatory notes present how the financial statements of the Company may have
appeared had the acquisition occurred on April 1, 2009 (with respect to the
results of operations) or as of September 30, 2010 (with respect to the balance
sheet information). Adjustments to the six month pro forma presentation for the
period ended September 30, 2010 and September 30, 2009 include adjustments to
eliminate the quarterly results of Openfilm for the first quarter of each of
fiscal 2010 and 2009 in order to provide comparative six-month operating results
concurrent with results of Net Element’s first and second quarters (April 1
through September 30) of its 2011 and 2010 fiscal years.
Openfilm’s
net loss for the three months ended March 31, 2010 was $244,393, a decrease of
$52,544, as compared with the net loss of $296,937 for the three months ended
March 31, 2009. The decrease in net loss for the 2010 period was the result of
decreases in both cost of sales and general and administrative expenses. Cost of
sales decreased by $17,075 due to reduced internet and hosting expenses in 2010.
General and administrative expenses decreased by $34,811 due to a decrease in
website traffic acquisition expense ($41,938) and payroll expense ($28,619),
partially offset by an increase in professional fees ($24,406) and advertising
expenses ($8,945).
21
These
unaudited pro forma condensed consolidated financial statements have been
derived from and should be read together with the historical financial
statements and related notes of the Company included in this current report on
Form 8-K and the Quarterly Report on Form 10-Q for the quarter and six months
ended September 30, 2010. Openfilm’s historical financial statements for
the years ended December 31, 2009 and 2008 and the three and nine month periods
ended September 30, 2010 are included elsewhere in this report.
The
unaudited pro forma condensed consolidated financial information has been
prepared by management, are presented for illustrative purposes only, and do not
purport to represent what the results of operations or financial position of the
Company would have been had the acquisition occurred as of the dates indicated,
nor is it indicative of future financial position or results of operations for
any period.
Combined
Pro forma Balance Sheet
September
30, 2010
|
|
Net Element, Inc.
|
Openfilm, LLC
|
Adjustments
(1)
|
Combined
|
||||||||||||
|
ASSETS
|
||||||||||||||||
|
Current
assets
|
||||||||||||||||
|
Cash
|
$ | 98,364 | $ | 6,255 | $ | - | $ | 104,619 | ||||||||
|
Accounts
Receivable
|
- | 20,930 | - | 20,930 | ||||||||||||
|
Deposits
|
8,000 | 20,300 | - | 28,300 | ||||||||||||
|
Total
current assets
|
106,364 | 47,485 | - | 153,849 | ||||||||||||
|
Fixed
assets
|
||||||||||||||||
|
Machinery,
furniture and equipment
|
12,319 | 95,001 | - | 107,320 | ||||||||||||
|
Less:
accumulated depreciation
|
(6,040 | ) | (87,383 | ) | - | (93,423 | ) | |||||||||
|
Total
fixed assets (net)
|
6,279 | 7,618 | - | 13,897 | ||||||||||||
|
Total
assets
|
$ | 112,643 | $ | 55,103 | $ | - | $ | 167,746 | ||||||||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||||||||||
|
Liabilities
|
||||||||||||||||
|
Accounts
payable
|
$ | 26,867 | $ | 55,942 | $ | - | $ | 82,809 | ||||||||
|
Accrued
expenses
|
1,170,879 | 289,297 | - | 1,460,176 | ||||||||||||
|
Notes
and accounts payable to related parties
|
- | 1,014,716 | - | 1,014,716 | ||||||||||||
|
Note
payable
|
- | 150,000 | - | 150,000 | ||||||||||||
|
Total
liabilities
|
1,197,746 | 1,509,955 | - | 2,707,701 | ||||||||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||||||||||
|
STOCKHOLDERS'
DEFICIT AND MEMBERS' EQUITY
|
||||||||||||||||
|
Preferred
stock ($.001 par value, 100,000,000 shares authorized and no shares issued
and outstanding)
|
- | - | - | - | ||||||||||||
|
Common
stock ($.001 par value, 800,000,000 shares authorized)
|
333,055 | - | 107,238 | 440,293 | ||||||||||||
|
Treasury
stock, at cost; 6,250,000 shares
|
(2,641,640 | ) | - | - | (2,641,640 | ) | ||||||||||
|
Paid
in capital
|
26,098,149 | - | (1,545,960 | ) | 24,552,189 | |||||||||||
|
Accumulated
other comprehensive income
|
13,930 | - | - | 13,930 | ||||||||||||
|
Accumulated
deficit
|
(24,916,539 | ) | - | - | (24,916,539 | ) | ||||||||||
|
Noncontrolling
interest
|
27,942 | - | - | 27,942 | ||||||||||||
|
Common
members' equity
|
- | (3,289,622 | ) | 3,289,622 | - | |||||||||||
|
Deferred
compensation
|
- | (16,130 | ) | - | (16,130 | ) | ||||||||||
|
Series
A preferred members' equity
|
- | 1,850,900 | (1,850,900 | ) | - | |||||||||||
|
Total
deficit & members' equity
|
(1,085,103 | ) | (1,454,852 | ) | - | (2,539,955 | ) | |||||||||
|
Total
liabilities and stockholders' deficit & members'
equity
|
$ | 112,643 | $ | 55,103 | $ | - | $ | 167,746 | ||||||||
|
(1)
|
Reflects
the issuance of common stock to the members of Openfilm, LLC pursuant to
the Openfilm Purchase Agreement. The net assets of Openfilm, LLC
remain at historical cost as the transaction is accounted for as a merger
of entities under common
control.
|
22
Combined
Pro forma Statement of Operations
|
For the three months ended 9-30-10
|
For the three months ended 9-30-09
|
|||||||||||||||||||||||
|
Net Element, Inc
|
Openfilm, LLC
|
Combined
|
Net Element, Inc
|
Openfilm, LLC
|
Combined
|
|||||||||||||||||||
|
Sales
|
$ | - | $ | 11,396 | $ | 11,396 | $ | - | $ | 198 | $ | 198 | ||||||||||||
|
Cost
of sales
|
- | 162,387 | 162,387 | - | 155,108 | 155,108 | ||||||||||||||||||
|
Gross
Profit
|
- | (150,991 | ) | (150,991 | ) | - | (154,910 | ) | (154,910 | ) | ||||||||||||||
|
Operating
Expenses
|
||||||||||||||||||||||||
|
General
and administrative
|
208,482 | 458,241 | 666,723 | 2,313,588 | 73,615 | 2,387,203 | ||||||||||||||||||
|
Loss
from operations
|
(208,482 | ) | (609,232 | ) | (817,714 | ) | (2,313,588 | ) | (228,525 | ) | (2,542,113 | ) | ||||||||||||
|
Non-operating
expense
|
||||||||||||||||||||||||
|
Gain
on disposal of fixed assets
|
- | - | - | - | - | - | ||||||||||||||||||
|
Other
income
|
- | 3,647 | 3,647 | - | - | - | ||||||||||||||||||
|
Loss
before income tax provision
|
(208,482 | ) | (605,585 | ) | (814,067 | ) | (2,313,588 | ) | (228,525 | ) | (2,542,113 | ) | ||||||||||||
|
Income
tax provision
|
- | - | - | - | - | - | ||||||||||||||||||
|
Net
Loss from continuing operations
|
(208,482 | ) | (605,585 | ) | (814,067 | ) | (2,313,588 | ) | (228,525 | ) | (2,542,113 | ) | ||||||||||||
|
Net
loss attributable to the noncontrolling interest
|
30 | - | 30 | 25 | - | 25 | ||||||||||||||||||
|
Net
loss from discontinued operations
|
- | - | - | (159,025 | ) | - | (159,025 | ) | ||||||||||||||||
|
Net
loss
|
(208,452 | ) | (605,585 | ) | (814,037 | ) | (2,472,588 | ) | (228,525 | ) | (2,701,113 | ) | ||||||||||||
|
Other
comprehensive income
|
||||||||||||||||||||||||
|
Foreign
currency translation loss
|
12,700 | - | 12,700 | 6,119 | - | 6,119 | ||||||||||||||||||
|
Comprehensive
loss
|
$ | (195,752 | ) | $ | (605,585 | ) | $ | (801,337 | ) | $ | (2,466,469 | ) | $ | (228,525 | ) | $ | (2,694,994 | ) | ||||||
Combined
Pro forma Statement of Operations
|
For the six months ended
9-30-10
|
For the six months ended
9-30-09
|
|||||||||||||||||||||||||||||||
|
Net Element, Inc
|
Openfilm, LLC
|
Adjustments
(2)
|
Combined
|
Net Element, Inc
|
Openfilm, LLC
|
Adjustments
(2)
|
Combined
|
|||||||||||||||||||||||||
|
Sales
|
$ | - | $ | 35,188 | $ | (333 | ) | $ | 34,855 | $ | - | $ | 3,076 | $ | - | $ | 3,076 | |||||||||||||||
|
Cost
of sales
|
- | 429,476 | (128,839 | ) | 300,637 | - | 464,622 | (145,914 | ) | 318,708 | ||||||||||||||||||||||
|
Gross
Profit
|
- | (394,288 | ) | 128,506 | (265,782 | ) | - | (461,546 | ) | 145,914 | (315,632 | ) | ||||||||||||||||||||
|
Operating
Expenses
|
||||||||||||||||||||||||||||||||
|
General
and administrative
|
1,596,815 | 722,461 | (116,242 | ) | 2,203,034 | 3,902,167 | 252,798 | (151,053 | ) | 4,003,912 | ||||||||||||||||||||||
|
Loss
from operations
|
(1,596,815 | ) | (1,116,749 | ) | 244,748 | (2,468,816 | ) | (3,902,167 | ) | (714,344 | ) | 296,967 | (4,319,544 | ) | ||||||||||||||||||
|
Non-operating
expense
|
||||||||||||||||||||||||||||||||
|
Gain
on disposal of fixed assets
|
- | - | - | - | - | 2,175 | - | 2,175 | ||||||||||||||||||||||||
|
Other
income (expense)
|
- | 7,918 | (355 | ) | 7,563 | - | 30 | (30 | ) | - | ||||||||||||||||||||||
|
Loss
before income tax provision
|
(1,596,815 | ) | (1,108,831 | ) | 244,393 | (2,461,253 | ) | (3,902,167 | ) | (712,139 | ) | 296,937 | (4,317,369 | ) | ||||||||||||||||||
|
Income
tax provision
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Net
Loss from continuing operations
|
(1,596,815 | ) | (1,108,831 | ) | 244,393 | (2,461,253 | ) | (3,902,167 | ) | (712,139 | ) | 296,937 | (4,317,369 | ) | ||||||||||||||||||
|
Net
loss attributable to the noncontrolling interest
|
59 | - | - | 59 | 39 | - | - | 39 | ||||||||||||||||||||||||
|
Net
loss from discontinued operations
|
- | - | - | - | (196,299 | ) | - | - | (196,299 | ) | ||||||||||||||||||||||
|
Net
loss
|
(1,596,756 | ) | (1,108,831 | ) | 244,393 | (2,461,194 | ) | (4,098,427 | ) | (712,139 | ) | 296,937 | (4,513,629 | ) | ||||||||||||||||||
|
Other
comprehensive income
|
||||||||||||||||||||||||||||||||
|
Foreign
currency translation loss
|
3,958 | - | - | 3,958 | (1,292 | ) | - | - | (1,292 | ) | ||||||||||||||||||||||
|
Comprehensive
loss
|
$ | (1,592,798 | ) | $ | (1,108,831 | ) | $ | 244,393 | $ | (2,457,236 | ) | $ | (4,099,719 | ) | $ | (712,139 | ) | $ | 296,937 | $ | (4,514,921 | ) | ||||||||||
|
(2)
|
Reflects
the elimination of operating results of Openfilm, LLC for the periods from
January 1 through March 31, 2010 and 2009 in order to provide comparative
six-month results consistent with Net Element’s quarterly
fiscal reporting
periods.
|
23
Combined
Pro forma Statement of Operations
|
For the fiscal year ended
|
||||||||||||
|
3-31-10
|
12-31-09
|
|||||||||||
|
Net Element, Inc
|
Openfilm, LLC
|
Combined
|
||||||||||
|
Sales
|
$ | - | $ | 7,492 | $ | 7,492 | ||||||
|
Cost
of sales
|
- | 603,287 | 603,287 | |||||||||
|
Gross
Profit
|
- | (595,795 | ) | (595,795 | ) | |||||||
|
Operating
Expenses
|
||||||||||||
|
General
and administrative
|
5,789,352 | 372,195 | 6,161,547 | |||||||||
|
Loss
from operations
|
(5,789,352 | ) | (967,990 | ) | (6,757,342 | ) | ||||||
|
Non-operating
expense
|
||||||||||||
|
Gain
on disposal of fixed assets
|
- | 2,175 | 2,175 | |||||||||
|
Other
income (expense)
|
(171,025 | ) | 30 | (170,995 | ) | |||||||
|
Loss
before income tax provision
|
(5,960,377 | ) | (965,785 | ) | (6,926,162 | ) | ||||||
|
Income
tax provision
|
- | - | - | |||||||||
|
Net
Loss from continuing operations
|
(5,960,377 | ) | (965,785 | ) | (6,926,162 | ) | ||||||
|
Net
loss attributable to the noncontrolling interest
|
9,560 | - | 9,560 | |||||||||
|
Net
loss from discontinued operations
|
(646,017 | ) | - | (646,017 | ) | |||||||
|
Net
loss
|
(6,596,834 | ) | (965,785 | ) | (7,562,619 | ) | ||||||
|
Other
comprehensive income
|
||||||||||||
|
Foreign
currency translation loss
|
(26,903 | ) | - | (26,903 | ) | |||||||
|
Comprehensive
loss
|
$ | (6,623,737 | ) | $ | (965,785 | ) | $ | (7,589,522 | ) | |||
Liquidity
and capital resources
At
September 30, 2010, Net Element had an accumulated deficit of $24,916,539 and
cash of $98,364. We are dependent upon receiving funds from our controlling
stockholder, TGR Energy, LLC, which is controlled by our president, Mike Zoi.
Pursuant to the Subscription Agreement, TGR is obligated to invest up to
$4,000,000 to fund working capital requirements in exchange for up to
200,000,000 shares of our common stock and warrants to purchase up to
100,000,000 shares of common stock with an exercise price of $0.05. The shares
and warrants will be issued quarterly and we will record an appropriate
compensation expense as necessary based on the fair value of the securities on
the last day of each fiscal quarter (the date of issuance). At September 30,
2010, the remaining investment obligation under the Subscription Agreement was
$1,776,208.
Openfilm
had a net loss of $1,108,831 for the nine months ended September 30, 2010, and
$965,785 and $1,063,766 for the twelve months ended December 31, 2009 and 2008,
respectively, and further losses are anticipated. Openfilm had a negative cash
flow from operations of $810,872 for the nine months ended September 30, 2010,
and $758,039 and $917,375 for the twelve months ended December 31, 2009 and
2008, respectively. Openfilm’s ability to continue operating is limited without
continued availability of financing, of which there can be no assurance. These
matters raise substantial doubt about Openfilm’s ability to continue as a going
concern as set forth in its audited financial statements for the twelve months
ended December 31, 2009 and 2008. Up until the date of acquisition, Openfilm
operations were funded primarily by entities controlled by our President Mike
Zoi. As of the date of acquisition of Openfilm by the Company, Openfilm
operations will be funded pursuant to the Subscription Agreement with
TGR.
24
Critical
Accounting Policies and Estimates
Our
significant accounting policies are described more fully in Note 1 to Net
Element’s consolidated financial statements and Note 2 to Openfilm’s
consolidated financial statements. Management is required to make certain
estimates and assumptions during the preparation of our financial statements in
accordance with generally accepted accounting principles. These estimates
and assumptions impact the reported amount of assets and liabilities as well as
disclosures regarding any contingencies. Actual results could differ from
estimates and this could impact reported net income or the value of our assets
and liabilities.
In
applying estimates, management uses its judgment to determine the appropriate
assumptions to be used in the determination of certain estimates. Those
estimates are based on our historical experience, terms of existing contracts,
our observance of trends in the industry, information provided by outside
sources, trade journals and other sources, as appropriate.
Deferred
Taxes.
Estimates of deferred income taxes and items giving rise to deferred tax assets
and liabilities reflect management’s assessment of actual future taxes to be
paid on items reflected in the financial statements, giving consideration to
both timing and the probability of the realization. Actual income taxes
could vary from these estimates for a variety of reasons including changes in
tax law, operating results that vary from budget or the review of our tax
returns by the IRS.
Valuation of
Stock Based Compensation. Stock based
compensation has been provided by the Company in order to preserve the cash flow
necessary to grow our business. In addition, we entered into the
Subscription Agreement described above to strengthen our available sources of
capital. We believe the estimate of stock based compensation is a
“critical accounting estimate” that significantly affects our results of
operations. Management of the Company has discussed the development and
selection of this critical accounting estimate with our board of directors and
the board of directors has reviewed the Company’s disclosure relating to it in
this Report.
Capitalized
Website Costs. Openfilm capitalizes certain
software development costs. Generally, costs for developing website application
and infrastructure, creating the initial graphics of the website, and adding
upgrades and enhancements are capitalized whereas costs for planning, adding
content, and operating the website are expensed as incurred. Net capitalized
website costs are recorded at cost less accumulated amortization. Amortization
is provided for on a straight-line basis over the expected useful life of the
website. Openfilm evaluates the recoverability of intangible assets periodically
and takes into account events or circumstances that warrant revised estimates of
useful lives or that indicate impairment exists.
Revenue. Openfilm
recognizes revenue when the persuasive evidence of an arrangement exists, no
significant company obligations remain, collection of the related receivable is
reasonably assured, and the fees are fixed or determinable. Openfilm recognizes
revenue on a gross basis and publisher expenses that are directly related to a
revenue-generating event are recorded as a component of cost of revenue.
Additionally, fee revenue from transactions on Openfilm’s affiliate marketing
networks are recognized on a net basis where Openfilm acts as an agent in these
transactions and the payments to publishers are the contractual obligation of
the advertiser customers.
25
Off-balance
sheet arrangements
At
September 30, 2010, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4) of Regulation S-K promulgated under the
Securities Exchange Act of 1934, as amended.
Recently
Issued Accounting Pronouncements
In June
2009, the FASB issued an amendment to ASC 810-10. This amendment requires
an enterprise to qualitatively assess the determination of the primary
beneficiary of a Variable Interest Entity “VIE” based on whether the enterprise:
(1) has the power to direct the activities of a VIE that most significantly
effect the entity’s economic performance; and (2) has the obligation to
absorb losses of the entity or the right to receive benefits from the entity
that could potentially be significant to the VIE. ASC 810-10, as amended,
requires an ongoing reconsideration of the primary beneficiary, and amends the
events that trigger a reassessment of whether an entity is a VIE. This statement
is effective as of the beginning of a reporting entity’s first annual reporting
period that begins after November 15, 2009. Earlier application is
prohibited. Retrospective application is optional. Adoption of this standard has
not had, and is not expected in the future to have, a significant impact on our
financial condition and results of operations.
In
September 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements.” ASU 2009-13 addresses the unit of accounting for multiple-element
arrangements. In addition, ASU 2009-13 revises the method by which consideration
is allocated among the units of accounting. Specifically, the
overall consideration is allocated to each deliverable by establishing a selling
price for individual deliverables based on a hierarchy of evidence, involving
vendor-specific objective evidence, other third party evidence of the selling
price, or the reporting entity’s best estimate of the selling price of
individual deliverables in the arrangement. ASU 2009-13 will be effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Adoption of this standard
is not expected to have a significant impact on our financial condition and
results of operations.
Quantitative
and Qualitative Disclosures About Market Risk
We do not
have material exposure to market risks associated with changes in interest rates
related to cash equivalent securities held at September 30, 2010.
Item
3. Properties.
We lease
approximately 6,500 square feet of office space in Miami, Florida at an annual
rental of $187,785. The current lease term expires December 31, 2011 and may be
extended for an additional year at our option at an annual rental of
approximately $201,695. Our corporate headquarters and Openfilm operations are
conducted at this location. We believe that this facility is adequate for the
Company’s anticipated needs.
Zivos,
LLC leases approximately 1,600 square feet of office space in Dnipropetrovsk,
Ukraine, where it conducts primarily research and development activities, at an
annual rental of approximately $12,000 (not including utilities). The current
lease term expires July 31, 2011. We believe that this facility is adequate for
its anticipated needs.
Openfilm
subleases approximately 450 square feet of office space in Los Angeles, CA,
which is used primarily for marketing, public relations and celebrity chat
(studio) activities. The lease term is month to month and the monthly rent is
approximately $1,500. We believe that this facility is adequate for
its anticipated needs.
26
Item
4. Security Ownership of Certain Beneficial Owners and
Management.
The table
below contains information as of December 13, 2010 (the most recent practicable
date for which information could be obtained, and giving effect to the
acquisition of Openfilm and the issuance of an additional 107,238,421 shares of
common stock of the Company as if the acquisition transaction was consummated on
December 13, 2010) about stockholders whom we believe are the beneficial owners
of more than five percent (5%) of our outstanding common stock, as well as
information regarding stock ownership by our directors and director nominees and
our Chief Executive Officer, our named executive officers, and our directors,
director nominees and named executive officers as a group. Except as described
below, we know of no person that beneficially owns more than 5% of our
outstanding common stock. As of December 13, 2010 there were 441,294,698 shares
of common stock outstanding (after giving effect to the issuance of shares
relating to the acquisition of Openfilm). We believe, based on information
supplied by the following persons that, except as noted, the persons named in
this table have sole voting and investment power with respect to all shares of
common stock which they beneficially own. The amount and percentage of common
stock beneficially owned are reported on the basis of regulations of the SEC
governing the determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a “beneficial owner” of a security if
that person has or shares “voting power,” which includes the power to vote or to
direct the voting of such security, or “investment power,” which includes the
power to dispose of or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities of which that person has
a right to acquire beneficial ownership within 60 days. The address of each
person or entity named in the following table is c/o Net Element, Inc., 1450 S.
Miami Avenue. Miami, Florida 33130.
|
Name and Address of Beneficial Owner
|
Amount and Nature of
Beneficial owner (number of
Common shares)
|
Percent of
Class
|
||||||
|
Mike
Zoi (1)
|
443,054,425 | 89.1 | % | |||||
|
Dmitry
Kozko (2)
|
24,950,000 | 5.7 | ||||||
|
James
Caan (3)
|
5,568,421 | 1.3 | ||||||
|
Curtis
Wolfe (4)
|
1,100,000 | * | ||||||
|
Jonathan
New (5)
|
1,261,111 | * | ||||||
|
Directors
and named executive officers as a group (1)(2)(3)(4)(5)
|
476,158,957 | 95.6 | % | |||||
* Less
than one percent (1%)
|
(1)
|
Includes 5,754 shares of common
stock held by Mr. Zoi, 312,453,364 shares of common stock and warrants to
purchase 55,595,307 shares of common stock that are held by TGR over which
Mr. Zoi has dispositive and voting power, and 75,000,000 shares of common
stock received in exchange for his ownership interest in Openfilm that is
held by Enerfund (45,937,500 shares) and MZ Capital, LLC (29,062,500
shares), a limited liability company over which Mr. Zoi has dispositive
and voting power and whose members include Mr. Zoi, Mr. Kozko and Mr. Kozko's wife and minor children (Mr. Kozko and his wife and minor children have no voting or dispositive control over the shares of the Company held by MZ Capital and therefore disclaim beneficial ownership thereof).
|
|
(2)
|
CEO
of Openfilm. Reflects shares of common stock received in exchange for his
ownership interest in Openfilm.
|
|
(3)
|
Director
nominee appointed to Board of Directors effective January 1, 2011.
Reflects shares of common stock received in exchange for his ownership
interest in Openfilm.
|
|
(4)
|
Includes 100,000 shares
underlying the grant of stock options expiring on August 12, 2013 and a
strike price of $0.25 per share, and the grant on December 9, 2010 of
1,000,000 shares of restricted stock of the Company in lieu of payment for
legal services provided to the Company, primarily in connection with the
acquisition of Openfilm.
|
27
|
(5)
|
Reflects 786,111 shares
underlying stock options that are currently exercisable with respect to
stock options to purchase 1,000,000 shares of common stock that were
granted on August 13, 2008 and vest ratably over 36 months from the date
of grant. These options expire on August 13, 2013 and have a strike
price of $0.25. Also includes restricted stock grants totaling
475,000 shares made during fiscal 2009 and
2010.
|
Form
8-K Item 5.02 Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers.
The
names, ages and offices held of all of the Company’s directors, director
nominees and executive officers are set forth in the table below:
|
Name
|
Age
|
Position
|
Year
Appointed
|
|||
|
Mike
Zoi
|
43
|
CEO,
Director
|
2007
|
|||
|
Curtis
Wolfe
|
46
|
Secretary,
Director
|
2007
|
|||
|
James
Caan
|
70
|
Director
Nominee
|
2011
|
|||
|
Dmitry
Kozko
|
27
|
CEO,
Openfilm
|
2009
|
|||
|
Jonathan
New
|
50
|
Chief
Financial Officer
|
2008
|
|||
|
Ivan
Onuchin
|
34
|
Chief
Technical Officer
|
2010
|
Each of
our directors will hold office until our next annual meeting of stockholders at
which directors are elected or until his successor is duly elected and
qualified.
Mr. Zoi
has been the CEO and a Director of the Company since 2007. Mr. Zoi has also been
a director and president of Ener1 Group since 2001, a privately held investment
firm he co-founded in 2001. Mr. Zoi indirectly holds a minority interest in
Ener1 Group. Ener1 Group owns approximately 52% of Ener1, Inc., a public company
engaged primarily in the business of designing, developing and manufacturing
high-performance, rechargeable, lithium-ion batteries and battery systems for
energy storage. Mr. Zoi served as a Director of Ener1, Inc. (NASDAQ: HEV) from
February 2002 to August 2008 and a vice president from February 2007 to August
2008. Since 2007, Mr. Zoi has been the managing member of TGR Energy LLC, a
Florida investment company, which owns approximately 89% of the Company. Mr. Zoi
is responsible for strategy and directly manages all senior executives of the
Company. Mr. Zoi also directs all merger and acquisition activities of the
Company. His expertise includes strategic development, branding and corporate
alliances. Earlier in his career, Mr. Zoi worked in various capacities relating
to international finance and business development. Mr. Zoi also controls Kazo,
LLC and Enerfund, LLC, Florida-based investment companies that have provided
funding to Openfilm in the past. Mike Zoi’s niece is married to Dmitry
Kozko.
28
Mr. James
Caan is currently the Chairman of Advisory Board of Openfilm and a director
nominee of the Company. Mr. Caan exchanged his ownership interest in Openfilm
for shares of common stock of the Company in connection with the acquisition of
Openfilm by the Company on December 14, 2010. Mr. Caan has been appointed to
fill the vacancy created by the departure of Stuart Murdoch earlier in 2010,
which appointment will take effect as of January 1, 2011 and he will serve until
the next annual meeting of stockholders at which directors are elected. Pursuant
to Mr. Caan’s advisory agreement with Openfilm, Mr. Zoi and Mr. Kozko are
obligated to vote their shares in favor of Mr. Caan as a director of the Company
for the next three years. Mr. Caan is an actor and director working in the film
and TV industries for over 40 years and one of the industry’s most renowned
talents, having starred in over 80 films. As Chairman of the Openfilm Advisory
Board, Mr. Caan will oversee the other advisory board members, help recruit
additional celebrity talent when needed, offer his wisdom to the Openfilm
community as he evaluates submissions, serve as a judge for the online
competitions and interact with emerging talent and other Openfilm
members.
Dmitry
Kozko co-founded Openfilm in 2007 and has been the CEO of Openfilm since 2009.
Prior to 2009, Mr. Kozko was Chief Marketing Officer of
Openfilm. With an extensive technical background, he is responsible
for the operations of Openfilm and until Openfilm’s acquisition by the Company,
was responsible to oversee the software development team. Prior to founding
Openfilm, Mr. Kozko was a consultant responsible for developing the business
infrastructure and Web presence for companies and clients in the online
entertainment, real estate and consumer goods space. Since 2006, Mr. Kozko has
provided consulting services to Enerfund and TGR (investment companies
controlled by Mike Zoi) and assisted in evaluating technology-based companies.
From March 2006 through February 2007, Mr. Kozko was a principal of Caribbean
Soda, LLC, a beverage distribution company in Southern Florida, responsible for
expansion of the soft drinks of Hitond, Inc., a New York company, into the
Florida market. From March 2004 to March 2006, Mr. Kozko worked as an
independent contractor for Re/Max SouthShore Realty in New York, primarily
responsible for technological solutions development, market research automation,
business development and sales assistant. A native of St. Petersburg,
Russia, Mr. Kozko emigrated to the U.S. in 1995. During his tenure with
Openfilm, Mr. Kozko was responsible for marketing and sales initiatives,
business development, overseeing technological development and capital raising.
Dmitry Kozko is married to Mike Zoi’s niece.
On March
10, 2008, Jonathan New joined the Company as Chief Financial
Officer. Mr. New served as Chief Operating Officer of Ener1, Inc.
from 2001 to 2003. From 2004 to 2006, Mr. New owned and operated Wholesale Salon
Furniture Corp.com. The Florida company imported and distributed
salon equipment. The business was sold in
2006. Thereafter, until joining the Company, Mr. New provided counsel
to public companies on a variety of corporate accounting, reporting and audit
related issues. Prior to joining Ener1 in 2001, Mr. New held controller and
chief financial officer positions with companies including Haagen-Dazs, RAI
Credit Corporation and Prudential of Florida. Mr. New obtained his BS in
Accounting from Florida State University and began his career with Accenture. He
is a member of the Florida Institute of Certified Public Accountants and the
American Institute of Certified Public Accountants.
Mr. Ivan
Onuchin joined the Company on November 1, 2010 and was appointed Chief
Technology Officer of the Company and its subsidiaries on December 14, 2010.
From December 2008 though October 2010, Mr. Onuchin was employed with EdgeTech,
Inc., an underwater imaging company, as a software engineer responsible for the
creation of architecture and software development for a new generation of
products for managing advanced underwater sonar imaging systems. From September
2005 until December 2008, Mr. Onuchin was working as the Chief Technology
Officer of Helpful Technologies, Inc. and its subsidiaries, a Florida-based
software development company providing products that simplify access and
navigation to the Internet. Mr. Onuchin’s responsibilities included development
of break-through technologies allowing users to navigate on the Internet without
launching a browser. From February 2004 through June 2005, Mr. Onuchin was the
Chief Technology Officer of Splinex, Inc., a predecessor of the Company which
was involved in the development of advanced technologies in the
three-dimensional computer graphics industry. Throughout his career, Mr. Onuchin
was responsible for the creation of proprietary intellectual property portfolios
and managed local and outsourced teams of software developers. Mr. Onuchin has a
post-graduate degree from the Russian Academy of Science, where he has also
taught classes in advanced mathematics. Mr. Onuchin has also taught at Ural
State Technical University and Ural State University.
29
Board
composition
Currently,
our board of directors consists of two members. Mr. Caan has been appointed to
fill the vacancy created by Stuart Murdoch’s resignation earlier in 2010, which
appointment will take effect as of January 1, 2011. The number of directors may
change from time to time, as determined by resolution adopted by a majority of
the board of directors. Our by-laws require a minimum of one director and allow
a maximum of nine directors.
Currently,
there is no one serving on the board who is a “financial expert” or
“independent” under the Commission’s standards (Rule 10A-3 of the Exchange Act)
as the Company’s limited financial resources are not adequate to attract and
retain qualified candidates.
Committees
of the board of directors
In
December 2004, our board of directors established a Nominating and Compensation
Committee and an Audit Committee. Currently, there are no members of
these committees, which did not meet during fiscal 2010.
Audit
Committee
Our audit
committee’s main function is to oversee our accounting and financial reporting
processes, internal systems of control, independent auditor relationships and
the audits of our financial statements. This committee’s responsibilities
include:
|
|
·
|
Selecting
and hiring our independent
auditors.
|
|
|
·
|
Evaluating
the qualifications, independence and performance of our independent
auditors.
|
|
|
·
|
Approving
the audit and non-audit services to be performed by our independent
auditors.
|
|
|
·
|
Reviewing
the design, implementation, adequacy and effectiveness of our internal
controls and our critical accounting
policies.
|
|
|
·
|
Overseeing
and monitoring the integrity of our financial statements and our
compliance with legal and regulatory requirements as they relate to
financial statements or accounting
matters.
|
|
|
·
|
Reviewing
with management and our auditors any earnings announcements and other
public announcements regarding our results of
operations.
|
|
|
·
|
Preparing
the audit committee report we are required to include in filings with the
Commission.
|
Currently,
the entire board of directors is serving as the audit committee.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors, executive officers and holders of more than 10% of our outstanding
common stock to file with the Securities and Exchange Commission reports
regarding their ownership and changes in ownership of the common stock. Based
solely upon a review of copies of forms furnished to our Company, the following
officers and directors and holders of more than 10% of our common stock did not
timely filed the statement of changes in beneficial ownership on Form 4 or the
statement of beneficial ownership on Form 3 pursuant to Section 16(a) during
fiscal 2010 as follows:
NONE.
30
Code
of Ethics
We have a
Code of Ethics that applies to our officers and directors. The code provides
written standards that are reasonably designed to deter wrongdoing and promote:
(1) honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interests between personal and professional relationships;
(2) full, fair, accurate, timely and understandable disclosure in reports and
documents that we file with or submit to the SEC or in other public
communications we make; (3) compliance with applicable laws, rules and
regulations; (4) prompt reporting of internal violations of the code; and (5)
accountability for the adherence to the code. Our Code of Ethics can be found on
our Company website at http://netelement.com/about-us/way/code-of-ethics/
. We will provide a copy of our Code of Ethics to any person without
charge, upon written request to the Company.
Openfilm
Advisory Board
Our
Advisory Board consists of world class actors, producers, writers and directors,
who are willing to mentor Openfilm’s member filmmakers and offer advice on their
projects. Each of our Advisory Board members is widely recognized for their
quality work and passion for all aspects of film-making. Each Advisory Board
member has committed their time to participate in a minimum of two annual webcam
chat appearances with Openfilm’s premium members. Advisory Board members also
provide valuable insight and advice to management on strategy and business
development and serve as judges for Openfilm’s semi-annual contests. Openfilm
provided each Advisory Board member with an ownership interest in Openfilm
(which was exchanged for shares of common stock of the Company in connection
with the acquisition) and reimburses Advisory Board members for certain travel
related expenses. Our Advisory Board members are as follows:
James
Caan – Chairman of Advisory Board
 |
|
Actor
and director, James Caan, is the Chairman of Openfilm’s Advisory Board.
Mr. Caan joined Openfilm with the belief that succeeding in the film
business requires talent, an unshakeable belief in yourself and being in
the “right place at the right time.” He feels Openfilm will create that
“right place” for inspiring filmmakers, harnessing the power of the
Internet to provide a forum for films to be seen by industry insiders. As
an Advisory Board Member, Mr. Caan will mentor the next generation of
talent who will continue his passion to entertain and
inspire.
|
Mr. Caan
studied acting in New York and soon began to work in numerous TV roles, making
his big screen debut with the starring role in Lady in a Cage (1964) with
Olivia de Havilland. He quickly garnered the attention of audiences and critics
with his work in Red Line
7000 (1965), El
Dorado (1966), Journey
to Shiloh (1968) and The
Rain People (1969). In one of his most acclaimed roles, Mr. Caan was cast
as the hot-tempered gangster Santino "Sonny" Corleone in Francis Ford Coppola’s
The Godfather (1972).
The film earned Caan a Best Supporting Actor Oscar nomination. That same year,
he received a Best Actor Emmy nomination for the award-winning Brian’s Song. He later
reprised the role of Sonny Corleone in The Godfather: Part II
(1974).
Mr. Caan
moved on to act in a diverse number of films, including a cop-buddy crime
partnership with Alan Arkin in Freebie and the Bean (1974), a
man playing for his life in the critically acclaimed The Gambler (1974) and pairing
with Barbara Streisand in Funny
Lady (1975). Two further strong starring roles came in the 1975 films
Rollerball and The Killer Elite. He starred
in fellow Advisory Board Member Mark Rydell’s films Cinderella Liberty (1973),
Harry and Walter Go to New
York (1976) and For the
Boys (1991).
Mr. Caan
acted in a variety of films throughout the 1980’s and 1990’s, including the
critically acclaimed heist movie Thief (1981), the supernatural
romantic comedy Kiss Me
Goodbye (1982), Francis Ford Coppola’s Gardens of Stone (1987), and
the sci-fi hit Alien
Nation (1988). He surprised audiences with his portrayal of a meek
romance novelist held captive after a car accident by a deranged fan in Misery (1990). Other films
include Honeymoon in
Vegas (1992), The
Program (1993) and Flesh
and Bone (1993). Mr. Caan made his directorial debut in 1981 with the
film Hide in Plain Sight
(1981), which won him accolades from every known film critic.
31
Over
recent years, Mr. Caan has influenced a new generation of fans. He has
consistently created intriguing characters in such films as The Yards (2000), The Way of the Gun (2000) and
City of Ghosts (2002).
In 2003, Mr. Caan starred alongside Nicole Kidman in Lars von Trier’s
provocative tale Dogville and later caught the
attention of both child and adult audiences starring alongside Will Ferrell in
the now holiday classic, Elf. For many years, Mr. Caan
was also seen as the casino security chief in the television series Las Vegas.
In some
of his latest projects, Mr. Caan lent his voice for the animated film Cloudy with a Chance of
Meatballs and starred in features New York, I Love You and Mercy, written by and
costarring his son Scott. He will be seen in the upcoming film Middle Men and is currently
starring alongside Keanu Reeves in Henry’s Crime.
As one of
the industry’s most renowned actor’s, Mr. Caan is also a veteran, having starred
in well over 80 films. He is widely known and celebrated in the entertainment
community by industry workers of all ages and professions. As Chairman of the
Openfilm Advisory Board, Mr. Caan will oversee and collaborate with other
Advisory Board members, help recruit additional celebrity talent when needed,
offer his wisdom to the Openfilm community as he evaluates submissions, serve as
a judge for online competitions and interact with emerging talent and Openfilm
members.
Robert
Duvall – Advisory Board Member
 |
|
Renowned
actor, director and producer Robert Duvall joined Openfilm as a member of
the Advisory Board. Mr. Duvall will evaluate film submissions, serve as a
judge for Openfilm’s online contests and interact with emerging talent and
Openfilm members.
|
Mr.
Duvall is a celebrated force in the film industry, having won an Academy Award,
two Emmy Awards and four Golden Globe Awards among many others for his
performances throughout his career. He began acting in theater and in small and
supporting television roles before garnering recognition in the TV series MASH (1970) and George Lucas’
film THX 1138 (1971).
Shortly after, Mr. Duvall starred in The Rain People (1969), The Godfather (1972), and
The Godfather Part II
(1974) all with Openfilm Advisory Board Chairman James Caan, as well as Network (1976), The Great Santini (1979) and
True Confessions
(1981).
In the
1979 film Apocalypse Now
(1979), Mr. Duvall received accolades for his performance as “Lt. Col. Kingore”.
He earned his second Academy Award nomination for the role and was named by the
Guinness Book of World
Records as the most versatile actor in the world. In 1983, Mr. Duvall won
an Oscar for his role in Tender
Mercies.
Mr.
Duvall has appeared in many productions over the past several decades including
The Natural (1984),
Colors (1988), Lonesome Dove (1989), Stalin (1992), The Man Who Captured Eichmann
(1996), The Apostle
(1997), A Civil Action
(1998), Gods and
Generals (2003) and Broken Trail (2006). Mr.
Duvall has directed several pictures, such as the documentary We're Not the Jet Set (1977),
Angelo My Love (1983)
and Assassination Tango
(2002). He received his third Best Actor nomination and fifth Oscar nomination
for his role in The
Apostle (1997), which he wrote, directed and produced.
Most
recently, Mr. Duvall has been seen in many films such as Lucky You (2007), We Own the Night (2007), Four Christmases (2008), The Road (2009) and Crazy Heart (2009), which he
also produced.
32
Mark
Rydell – Advisory Board Member
 |
|
Director,
producer and actor Mark Rydell has joined Openfilm as a member of the
Advisory Board. Mr. Rydell will evaluate film submissions, serve as a
judge for Openfilm’s online contests and interact with Openfilm members.
With over 40 years of experience in the entertainment industry, Mr. Rydell
has seen filmmaking progress through technology advances and believes
Openfilm will help new emerging talent get recognized, discovered and
financed in ways never before
possible.
|
Mr.
Rydell began his career as an actor and became known for his roles in television
shows including The Edge of
Night and As the World
Turns. He later received critical acclaim for his role as the violent
Jewish mob kingpin, Marty Augustine, in The Long Goodbye
(1973).
Mr.
Rydell has directed numerous actors who received coveted nominations and awards
in many of his films. His directing credits include The Reivers (1969), The Cowboys (1972), Cinderella Liberty (1973),
The Rose (1979), On Golden Pond (1981), for
which he received an Oscar nomination for Best Director, The River (1984), For the Boys (1991) and Intersection (1994). Most
recently, he directed the 2006 film Even Money. Mr. Rydell also
directed the TV bio-pic James
Dean (2001), in which he played head of Warner Studios Jack
Warner.
In
addition to his work with Openfilm, Mr. Rydell is dedicated to educating
aspiring artists. He has worked for many decades at The Actors Studio, a
non-profit theatre workshop for professional actors, directors and writers, and
currently serves as the Artistic Director and Executive Director in West
Hollywood. In 2009, Mr. Rydell, actor Martin Landau and screenwriter/playwright
Lyle Kessler teamed up to produce a unique two-day event covering the
disciplines of acting, directing and writing called “The Total Picture Seminar".
With his help, we will be able to assemble similar seminars and classes
online.
Scott
Caan – Advisory Board Member
 |
|
Actor,
writer and director Scott Caan serves as a member of the Advisory Board of
Openfilm. The son of actor and director James Caan, he grew up around
actors and other industry professionals and benefited from having an
insider’s look at what it takes to be successful in the film world. He is
committed to sharing his knowledge with a new crop of talent. In this
role, Mr. Caan will evaluate film submissions, provide insight and work
with the rest of the Advisory Board members to help jump-start the careers
of aspiring filmmakers.
|
Mr. Caan
began acting in the 1990s and has appeared in numerous independent and studio
films. After studying acting at the Playhouse West in Los Angeles, Mr. Caan
quickly gained recognition for his roles in such films as Enemy of the State (1998) and
Varsity Blues (1999).
Mr. Caan subsequently appeared in the films Ready To Rumble (2000), American Outlaws (2001) and
Into the Blue (2005), as
well as the box office successes Ocean's Eleven, Ocean's Twelve, and Ocean's Thirteen.
Mr. Caan
began creating his own material, making his screenwriting and directorial debut
in 2003 with the film Dallas
362, which won the Critics Award at the 2003 CineVegas International Film
Festival. He also wrote and directed the 2006 comedy The Dog Problem, in which he
plays one of the supporting characters.
33
Most
recently, Mr. Caan has been seen as a Hollywood talent manager on the HBO series
Entourage and starred in
the film Mercy, which he
wrote and produced. His book of photography, Scott Caan Photography Vol.1,
was published in 2009.
Item
6. Executive Compensation.
The
following table sets forth all compensation awarded, earned or paid by us for
services rendered in all capacities to us for the fiscal year ended March 31,
2010 to our Chief Executive Officer and President and our other executive
officers who earn more than $100,000 annually in salary and bonus or are
otherwise considered significant employees. We refer to these individuals as the
“named executive officers.”
Summary
Compensation Table
|
Name and Principal Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Stock Awards
($)
|
Option
Awards ($)
|
All Other
Compen-
sation ($)
|
Total ($)
|
|||||||||||||||||||
|
Mike
Zoi,
|
2010
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||||||||
|
Chief
Executive Officer
|
2009
|
$
|
59,391
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
59,391
|
|||||||||||||
|
Jonathan
New,
|
2010
|
$
|
91,000
|
$
|
19,500
|
$
|
$60,000
|
$
|
-
|
$
|
-
|
$
|
170,500
|
|||||||||||||
|
Chief Financial
Officer
|
2009
|
$
|
140,000
|
$
|
20,426
|
$
|
-
|
$
|
21,296
|
$
|
-
|
$
|
181,722
|
|||||||||||||
|
Curtis
Wolfe, Executive Vice President,
|
2010
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2,500
|
$
|
2,500
|
|||||||||||||
|
General
Counsel (Resigned 09/30/08)
|
2009
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
10,000
|
$
|
60,500
|
$
|
70,500
|
|||||||||||||
Mike Zoi
became Chief Executive Officer on December 17, 2008 effective with his purchase
of member interests in Splinex, LLC. For fiscal 2010 and 2009, Mr.
Zoi was entitled to receive a salary of $350,000, the majority of which has been
deferred at Mr. Zoi’s election. Mr. Zoi’s salary deferral is payable on demand
and does not accrue interest.
Jonathan
New joined us on March 10, 2008. Up until May 15, 2009, Mr. New’s
base salary was $140,000 with a $30,000 bonus payable quarterly for meeting
agreed upon objectives. On May 15, 2009, Mr. New’s base salary was reduced
from $140,000 to 91,000 and his bonus was reduced from $30,000 to $19,500
annually. To partially offset the reduction in salary, the Company provided Mr.
New with 25,000 shares of fully vested common stock in lieu of his March 31,
2009 cash bonus and 200,000 shares of common stock which vest monthly from April
1, 2009 to September 30, 2009. Additionally, Mr. New was granted 250,000
shares of fully vested common stock at March 31, 2010. A compensation
charge of $60,000 was recorded during fiscal 2010 for the 475,000 shares granted
during the fiscal year reflecting the then current market value per share on the
first trading day after the dates of grant as detailed below:
|
Date
|
Number of
Shares
|
Compensation
Expense
|
Market Value
Per Share
|
|||||||||
|
06/03/09
|
25,000 | $ | 2,500 | $ | 0.10 | |||||||
|
09/30/09
|
200,000 | $ | 20,000 | $ | 0.10 | |||||||
|
03/31/10
|
250,000 | $ | 37,500 | $ | 0.15 | |||||||
34
Mr. New
also participates in the Company’s equity incentive compensation
plan.
Curtis
Wolfe serves as Secretary and a Director of the Company. Mr.
Wolfe served as Executive Vice President and General Counsel of the
Company from December 17, 2007 to September 30, 2008. For fiscal 2009, Mr.
Wolfe received an aggregate of $60,500 for legal services provided to the
Company and this amount was expensed to legal fees in the combined statement of
operations. For fiscal 2010, Mr. Wolfe received $2,500 for legal services
provided to the Company and this amount was expensed to legal fees in the
consolidated statement of operations. Mr. Wolfe also participates in
the Company’s equity incentive compensation plan.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END 2010
|
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
Option
Exercise
Price ($)
|
Option Expiration
Date
|
|||||||||||||
|
Stuart
Murdoch
|
100,000
|
-
|
-
|
$
|
0.25
|
February
7, 2013
|
||||||||||||
|
Curtis
Wolfe
|
100,000
|
-
|
-
|
$
|
0.25
|
July
8, 2015
|
||||||||||||
|
Jonathan
New
|
550,926
|
449,074
|
449,074
|
$
|
0.25
|
July
8, 2015
|
||||||||||||
On August
13, 2008, the Board of Directors approved (i) the issuance of fully vested
options to purchase 100,000 shares of common stock to Curtis Wolfe for his
services as a board member and (ii) the issuance of options to purchase
1,000,000 shares of common stock to Jonathan New for his services as Chief
Financial Officer. Mr. New’s stock options will vest ratably over three years.
Both sets of options will have a term of 7 years from date of grant and a strike
price of $0.25 per share.
|
Equity Compensation Plan Information
|
|
|||||||||||
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
|
Weighted-
average exercise
price of
outstanding
options, warrants
and rights
|
Number of
securities
remaining available
for future issuance
under equity
compensation
plans (excluding
securities reflected
in column (a))
|
|
|||||||||
|
Plan category
|
(a)
|
(b)
|
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
1,200,000
|
$
|
0.25
|
3,975,000
|
||||||||
35
2010
DIRECTOR COMPENSATION
No
compensation was granted to board members of Net Element during fiscal 2010 for
their services as members of the board of directors.
Employment
Agreements
None.
See Executive Compensation above.
Openfilm
Compensation Information
Summary
Compensation Table
|
Name and Principal Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Stock Awards
($)
|
Option
Awards ($)
|
All Other
Compen-
sation ($)
|
Total ($)(1)
|
|||||||||||||||||||
|
Dmitry
Kozko
Chief
Executive Officer
|
2009
|
$
|
60,000
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
13,980
|
$
|
73,980
|
|||||||||||||
|
(1)
|
Dmitry
Kozko is the co-founder and Chief Executive Officer (as of 2009) of
Openfilm and receives an annual salary of $60,000, health and life
insurance benefits available to employees generally, and a car allowance
of $1,165 per month. Mr. Kozko also receives consulting fees from Enerfund
unrelated to services provided to
Openfilm.
|
Item
7. Certain Relationships and Related Transactions, and Director
Independence.
On
December 17, 2007, (1) certain holders, who had received shares in the Company
as distributions from Splinex LLC, transferred their ownership of 35,162,334
shares of common stock of the Company to Splinex LLC for nominal consideration,
and (2) Bzinfin, S.A., a British Virgin Islands limited corporation that is
indirectly owned by an affiliate of Ener1 Group, Inc., a Florida company of
which Mike Zoi is a shareholder and director and which is the majority
shareholder of Ener1, Inc., and Ener1 Group assigned debt obligations of the
Company to Splinex LLC in the amount of $2,805,207 and $845,864, respectively.
Under a Purchase Agreement dated December 17, 2007, TGR Capital, LLC (which
changed its name to Enerfund, LLC in September 2008), a Florida limited
liability company (“Enerfund”), which is wholly-owned by Mike Zoi, acquired all
of the membership interests in Splinex LLC, thereby giving Enerfund control of
Splinex LLC.
Under an
Exchange Agreement dated December 18, 2007, the Company agreed to issue
113,500,000 newly issued shares of the Company to Splinex LLC of which 8,500,000
shares were issued to Bzinfin and 2,125,000 were issued to a former affiliate of
Splinex, LLC. Splinex LLC owned 98,157,334 shares of the Company as of December
17, 2007 and an aggregate of 201,032,334 shares after the completion of the
Exchange Agreement on December 18, 2007. The Company had 100,757,769 shares
outstanding at December 17, 2007 and 214,257,769 shares outstanding after the
completion of the Exchange Agreement. In June 2008, Splinex, LLC changed its
name to TGR Energy, LLC (“TGR”).
36
On August
7, 2008, the Company and TGR, which held 94% of the Company’s outstanding common
stock, entered into the Subscription Agreement described above pursuant to which
TGR has agreed to provide funding of up to $2,000,000 (the “Investment Amount”)
in exchange for up to 100,000,000 shares of the Company’s common stock and
warrants to purchase up to 50,000,000 shares of the Company’s common stock at an
exercise price of $0.05 per share. Pursuant to the Subscription Agreement, TGR
will fund the Investment Amount as required in the Company’s operational budget.
TGR’s obligation to fund the Investment Amount will be reduced by any future
third party funding or investments in the Company on terms no less favorable
than those contained in the Subscription Agreement. On January 12, 2010, TGR
agreed to increase the Investment Amount from $2,000,000 to $4,000,000 in
exchange for up to an additional 100,000,000 shares of the Company’s common
stock and warrants to purchase up to 50,000,000 shares of the Company’s common
stock at an exercise price of $0.05 per share for a period of five years from
date of issuance.
For the
fiscal year ended March 31, 2009, TGR was issued an aggregate of 82,725,335
shares of common stock of the Company and fully vested warrants to purchase
41,362,168 shares of common stock of the Company at an exercise price of $0.05
per share pursuant to the terms of the Subscription Agreement. These
issuances were in exchange for financings under the Subscription Agreement in
the aggregate amount of $1,654,507 of which $1,017,097 was cash and $637,410
related to refinancing of previously outstanding notes payable to a related
party. A compensation charge of $8,827,218 was recorded for the fiscal
year ended March 31, 2009. This amount is calculated as the difference between
the market price of our common stock at the end of each quarter in which shares
were issued and the subscription price of the common shares ($0.02) multiplied
by the number of shares issued, plus the Black-Scholes valuation of the warrants
issued as calculated at the end of each quarter.
For the
fiscal year ended March 31, 2010, TGR was issued an aggregate of 16,186,515
shares of common stock of the Company and fully vested warrants to purchase
8,093,757 shares of common stock of the Company at an exercise price of $0.05
per share pursuant to the terms of the Subscription Agreement. These
issuances were in exchange for financings under the Subscription Agreement in
the aggregate amount of $323,730. A compensation charge of $4,717,677 was
recorded for the fiscal year ended March 31, 2009. This amount is calculated as
the difference between the market price of our common stock at the end of each
quarter in which shares were issued and the subscription price of the common
shares ($0.02) multiplied by the number of shares issued, plus the Black-Scholes
valuation of the warrants issued as calculated at the end of each
quarter.
For the
quarter ended June 30, 2010, TGR was issued 10,037,315 shares of common stock of
the Company and fully vested warrants to purchase 5,019,157 shares of common
stock of the Company for $0.05 per share in exchange for funding of $200,746
provided during the quarter under the terms of the Subscription Agreement. A
compensation charge of $1,154,336 was recorded for the quarter ended June 30,
2010 as an officer of the Company is also a principal of TGR and the securities
issued were below market value as of the issue date.
For the
quarter ended September 30, 2010, TGR was issued 2,240,450 shares of common
stock of the Company and fully vested warrants to purchase 1,120,225 shares of
common stock of the Company for $0.05 per share in exchange for funding of
$44,809 provided during the quarter under the terms of the Subscription
Agreement. A compensation charge of $22,404 was recorded for the quarter ended
September 30, 2010 as an officer of the Company is also a principal of TGR and
the securities issued were below market value as of the issue date.
As part
of our strategy to develop an online media company, on December 14, 2010, we
entered into a purchase agreement with the members of Openfilm. Mike
Zoi, our President, through his control of Enerfund, LLC and MZ Capital, LLC,
both Florida limited liability companies, held approximately 70% of Openfilm’s
outstanding membership interests prior to the acquisition by the Company.
Pursuant to the Openfilm Purchase Agreement, the Company acquired all of the
outstanding membership interests in Openfilm by exchanging for such interests an
aggregate of 107,238,421 shares of common stock of the Company to the security
holders of Openfilm, of which 45,937,500 shares were issued to Enerfund (a
company controlled by Mike Zoi), 29,062,500 shares were issued to MZ Capital,
LLC (a company controlled by Mike Zoi), 24,950,000 shares were issued to Dmitry
Kozko, CEO of Openfilm, and an aggregate of 7,288,421 shares were issued to the
remaining seven non-controlling security holders of Openfilm. Upon completion of
the acquisition transaction on December 14, 2010, Openfilm became a wholly-owned
subsidiary of the Company. Up until the date of acquisition, Openfilm operations
were funded primarily by entities controlled by our President Mike Zoi. As of
the date of acquisition of Openfilm by the Company, Openfilm operations will be
funded pursuant to the Subscription Agreement with TGR.
37
Director
Independence
Currently,
there is no one serving on the board or any committee thereof who is a
“financial expert” or “independent” under the Commission’s standards (Rule 10A-3
of the Exchange Act) as the Company’s limited financial resources are not
adequate to attract and retain qualified candidates. For more information
regarding the Board and committees thereof, see “Item 5. Directors and Executive
Officers.”
Board
meetings and committees; annual meeting attendance
During
fiscal 2010, the board held seven meetings by telephonic conference or unanimous
written consent in lieu of a meeting. During fiscal 2010, Stuart Murdoch
attended less then 75% of the telephonic board meetings and resigned from the
Board in September 2010.
The
Company does not have a formal policy regarding attendance by directors at
annual meetings of security holders. However, if any board members do attend the
annual meeting of security holders, their expenses will be
reimbursed.
Item
8. Legal Proceedings.
From time
to time, we may be involved in litigation relating to claims arising in the
normal course of operations. We are not currently a party to any material legal
proceedings as of the date hereof.
Item
9. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters.
There
currently is no established public trading market for our common stock. The
number of shareholders of record of our common stock at December 7, 2010 was
206. The number of shareholders of record does not include beneficial owners of
common stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries. The principal markets for our
stock were the Over The Counter Bulletin Board (OTCBB) and Pink Sheets LLC. On
December 7, 2010, the price of our common stock last traded at $0.01 per share
on the OTCBB.
The
following table sets forth the high and low prices for our common stock for the
quarterly periods indicated as reported by the OTCBB. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
|
Fiscal Year
|
Quarter Ended
|
High
|
Low
|
|||||||
|
2009
|
June
30, 2008
|
$
|
0.12
|
$
|
0.12
|
|||||
|
September
30, 2008
|
$
|
0.13
|
$
|
0.13
|
||||||
|
December
31, 2008
|
$
|
0.07
|
$
|
0.07
|
||||||
|
March
31, 2009
|
$
|
0.30
|
$
|
0.07
|
||||||
|
2010
|
June
30, 2009
|
$
|
0.22
|
$
|
0.22
|
|||||
|
September
30, 2009
|
$
|
0.23
|
$
|
0.23
|
||||||
|
December
31, 2009
|
$
|
0.15
|
$
|
0.15
|
||||||
|
March
31, 2010
|
$
|
0.15
|
$
|
0.15
|
||||||
|
2011
|
June
30, 2010
|
$
|
0.15
|
$
|
0.09
|
|||||
|
September
30, 2010
|
$
|
0.09
|
$
|
0.01
|
||||||
38
We have
not paid any cash dividends during the last two fiscal years and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future.
There was
no public market for Openfilm membership interests since its
inception.
Plan
Shares Outstanding
The
following table sets forth information as of March 31, 2010 with respect to the
Company’s 2004 Stock Option Plan, approved by our security holders. The 2004
Stock Option Plan authorizes the issuance of a maximum of 10,000,000 shares
underlying options. The Company previously granted options to purchase a total
of 4,825,000 shares of common stock, of which options to purchase 4,737,500
shares of common stock expired unexercised.
|
Plan Category
|
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
the first column)
|
|||||||||
|
Equity
compensation plans
approved
by security holders.
|
1,200,000
|
$
|
0.25
|
3,975,000
|
||||||||
Form
8-K Item 3.02, Unregistered Sales of Equity Securities.
Item
10. Recent Sales of Unregistered Securities.
On August
7, 2008, our Board of Directors approved a Subscription Agreement dated August
7, 2008 (the “Subscription Agreement”) with TGR, wherein TGR committed to invest
up to $2,000,000 (the “Investment Amount”) in exchange for up to 100,000,000
shares of the Company's common stock for $0.02 per share. In addition, we
granted TGR warrants to purchase up to 50,000,000 shares of common stock for
$0.05 per share. These warrants may be exercised within five years from the date
of grant. The shares and warrants are issuable under the Subscription Agreement
upon the funding from time to time by TGR. The valuation date to determine the
appropriate compensation charge is the last day of the quarter then ended. The
Subscription Agreement was amended on January 12, 2010 to increase the
Investment Amount by an additional $2,000,000 to $4,000,000 in exchange for up
to an additional 100,000,000 shares of common stock and 50,000,000 warrants to
purchase common stock for $0.05 per share for a period of 5 years from date of
issuance.
39
For the
fiscal year ended March 31, 2009, TGR was issued an aggregate of 82,725,335
shares of common stock of the Company and fully vested warrants to purchase
41,362,168 shares of common stock of the Company at an exercise price of $0.05
per share pursuant to the terms of the Subscription Agreement. These issuances
were in exchange for financings under the Subscription Agreement in the
aggregate amount of $1,654,507 of which $1,017,097 was cash and $637,410 related
to refinancing of previously outstanding notes payable.
For the
fiscal year ended March 31, 2010, TGR was issued an aggregate of 16,186,515
shares of common stock of the Company and fully vested warrants to purchase
8,093,757 shares of common stock of the Company at an exercise price of $0.05
per share pursuant to the terms of the Subscription Agreement. These issuances
were in exchange for financings under the Subscription Agreement in the
aggregate amount of $323,730.
For the
quarter ended June 30, 2010, TGR was issued 10,037,315 shares of common stock of
the Company and fully vested warrants to purchase 5,019,157 shares of common
stock of the Company for $0.05 per share in exchange for funding of $200,746
provided during the quarter under the terms of the Subscription
Agreement.
For the
quarter ended September 30, 2010, TGR was issued 2,240,450 shares of common
stock of the Company and fully vested warrants to purchase 1,120,225 shares of
common stock of the Company for $0.05 per share in exchange for funding of
$44,809 provided during the quarter under the terms of the Subscription
Agreement.
Through
May 15, 2009, Mr. New’s base salary was $140,000 with a $30,000 bonus payable
quarterly for meeting agreed upon objectives. On May 15, 2009, Mr.
New’s base salary was reduced from $140,000 to $91,000 and his bonus was reduced
from $30,000 to $19,500 annually. To partially offset the reduction in salary,
the Company provided Mr. New with 25,000 shares of fully vested common stock in
lieu of his March 31, 2009 cash bonus and 200,000 shares of common stock which
vested monthly from April 1, 2009 to September 30, 2009. On March 31,
2010, Mr. New was granted 250,000 fully vested shares of the Company’s common
stock and a compensation charge of $37,500 was recorded based on the fair value
of the stock issued on the date of grant.
Other
employees (other than officers and directors) receiving salary reductions were
granted a total of 50,000 shares of common stock which vested monthly between
April 1, 2009 and September 30, 2009.
Pursuant
to a Stock Purchase Agreement dated November 23, 2009, TGR agreed to sell to
Dune Capital Group ("Dune") an aggregate of 5,000,000 shares of common stock of
the Company held by TGR for a purchase price of $0.10 per share or an aggregate
of $500,000. The purchase price is required to be paid on or before April
1, 2010. Dune paid $300,000 on November 23, 2009. In order to ensure compliance
with obligations under Section 16 of the Securities Exchange Act of 1934, prior
to the issuance of shares to Dune by TGR, TGR assigned this Purchase Agreement
to the Company. Accordingly, the Company received $300,000 pursuant to this
agreement and issued an aggregate of 3,000,000 shares of common stock of the
Company to Dune on January 12, 2010. On April 28, 2010, the Company
agreed to terminate the Stock Purchase Agreement with Dune and rescind the prior
issuance of common stock. The Company refunded $300,000 to Dune in exchange for
return of the 3,000,000 shares of common stock previously issued. For
more information relating to the repurchase of Dune shares, see Note 13 –
Subsequent Events, of the Notes to Consolidated Financial Statements, which
information is incorporated herein by reference.
On
November 1, 2008, the Company entered into a Letter Agreement with Olympus
Securities LLC (the “Agreement”). Under the Agreement, Olympus was appointed the
Company’s exclusive financial advisor and investment banker (collectively, the
“Services”) for a period of seven (7) months. After expiration of this initial
term, the Agreement is to automatically continue on a month-to-month basis, with
each party having the right to terminate on thirty (30) days notice. The
Agreement included a fee of one thousand dollars ($1,000) per month in return
for the Services, except for the first month, where, instead of the monthly fee,
the Company granted five (5) year warrants to Olympus to purchase one million
(1,000,000) shares of the Company's common stock at ten cents ($.10) per share.
The warrants were valued at $149,999 and were to be amortized over the
seven-month term of the Agreement. The Agreement contains other provisions
relating to payments of cash, stock and warrants in connection with any future
financing or investment transaction completed through Olympus. The Company has
not yet paid a cash fee or provided the abovementioned warrants to Olympus due
to the failure by Olympus to provide meaningful investment banking services
until world financial markets stabilized and, more recently, due to the unwind
of the TOT-SIBBNS joint venture. The Company has amortized the
warrant charge of $149,999 during fiscal 2010 and accrued this amount in the
financial statements.
40
At March
31, 2010, the Company had options to purchase 1,200,000 shares of common stock
outstanding under its stock option plan, of which options to purchase 750,926
shares of common stock are vested, with an exercise price of $0.25 per share and
with a remaining weighted average contractual term of 4.95 years.
The
Company also had warrants to purchase 49,455,925 shares of common stock
outstanding at March 31, 2010 with a strike price of $0.05 per share and a
remaining contractual term of 3.55 years pursuant to the Subscription
Agreement.
The
Company entered into a Sponsorship Agreement with American Speed Factory dated
April 22, 2009, whereby the Company would receive certain marketing and
promotional services and sponsorship rights to display the Company’s logo in
connection with the 2009 Ferrari Challenge racing season in exchange for the
issuance of 500,000 shares of restricted stock of the Company.
Pursuant
to the Openfilm Purchase Agreement, on December 14, 2010, the Company acquired
all of the outstanding membership interests in Openfilm by exchanging for such
interests an aggregate of 107,238,421 shares of common stock of the Company to
the security holders of Openfilm, of which 45,937,500 shares were issued to
Enerfund (a company controlled by Mike Zoi), 29,062,500 shares were issued to MZ
Capital, LLC (a company controlled by Mike Zoi), 24,950,000 shares were issued
to Dmitry Kozko, CEO of Openfilm, and an aggregate of 7,288,421 shares were
issued to the remaining seven non-controlling security holders of
Openfilm.
On December 14, 2010, the Company issued 1,000,000 shares of common
stock to Curtis Wolfe in exchange for legal services provided on behalf of the
Company.
We
believe that each of the foregoing securities transactions were exempt from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended, by virtue of Section 4(2) of the Securities Act which exempts
transactions by an issuer not involving any public offering.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
See
information relating to issuances to an affiliate pursuant to the Subscription
Agreement, the rescission of the purchase of common stock by Dune Capital, and
the exchange of membership interests for shares of common stock of the Company
in connection with the Openfilm acquisition, as described under “Item 10. Recent
Sales of Unregistered Securities.”
Item
11. Description of Registrant's Securities to be
Registered.
The
Company has only one class of common stock, and such common stock has $0.001 par
value. Any holder of such common stock has no dividend rights or
preemptive right to acquire unissued shares or securities convertible into such
shares (or carrying a right to subscribe to or acquire shares).
There is
no provision in the Company’s By-Laws or its charter that would have an effect
of delaying, deferring or preventing a change in control of the Company and that
would operate only with respect to an extraordinary corporate transaction
involving the Company.
41
Item
12. Indemnification of Directors and Officers.
Section
145 (“Section 145”) of the Delaware General Corporation Law, as amended (the
“DGCL”), permits indemnification of directors, officers, agents and controlling
persons of a corporation under certain conditions and subject to certain
limitations. Section 145 empowers a corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was a director,
officer or agent of the corporation or another enterprise if serving at the
request of the corporation. Depending on the character of the proceeding, a
corporation may indemnify against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with such action, suit or proceeding if the person indemnified
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. In the case of an action by or in the right of the
corporation, no indemnification may be made with respect to any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a present or former director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to above or in the defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys’ fees)
actually and reasonably incurred by such person in connection
therewith. The foregoing is only a summary of the described sections
of the Delaware General Corporation Law and is qualified in its entirety by
reference to such sections.
The
Company’s Certificate of Incorporation and bylaws provide that it shall
indemnify each of our officers and directors to the fullest extent permitted by
Section 145, including the advancement of expenses.
The
Company’s Bylaws provides that the Company shall have the power to indemnify
(including reasonable expenses) any director, officer, employee or agent of the
Company and that such person shall not be liable for monetary damages in any
proceeding, provided that such person acted in good faith and in a manner he or
she reasonably believed to be in, or not opposed to, the best interests of the
Company, and with respect to any criminal action or proceeding, had no reason or
cause to believe his or her conduct was unlawful. However, indemnification or
advancement of expenses shall not be made to or on behalf of any director,
officer, employee, or agent if a judgment or other final adjudication
establishes that his or her actions, or omissions to act, were material to the
cause of action so adjudicated and constitute:
(a) A violation of the criminal law,
unless the director, officer, employee, or agent had reasonable cause to believe
his or her conduct was lawful or had no reasonable cause to believe his or her
conduct was unlawful;
(b) A transaction from which the
director, officer, employee, or agent derived an improper personal benefit;
or
(c) Willful misconduct or a conscious
disregard for the best interests of the corporation in a proceeding by or in the
right of the corporation to procure a judgment in its favor or in a proceeding
by or in the right of a shareholder.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
(Securities Act) may be permitted with respect to the Company’s directors,
officers and controlling persons pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
42
Item
13. Financial Statements and Supplementary Data.
See “Item
15. Financial Statements and Exhibits.”
Item
14. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
NONE
Item
15. Financial Statements and Exhibits (Form 8-K Item 9.01 Financial Statements
and Exhibits).
|
(a)
|
Financial
Statements. The Net Element financial statements and the
accompanying notes thereto are incorporated herein by reference from the
SEC filings designated below. The Openfilm financial statements appear
immediately after the signature page to this report and are incorporated
herein by reference.
|
|
NET ELEMENT FINANCIAL
STATEMENTS:
|
|
Unaudited
Condensed Consolidated Balance Sheets – as of September 30, 2010 and
March 31, 2010 – incorporated by reference to the Quarterly Report on Form
10-Q filed with the Commission on November 15, 2010.
|
|
Unaudited
Condensed Consolidated Statements Of Operations – for the three and
six months ended September 30, 2010 And 2009 – incorporated by reference
to the Quarterly Report on Form 10-Q filed with the Commission on November
15, 2010.
|
|
Audited
Consolidated Balance Sheets – as of March 31, 2010 and 2009 – incorporated
by reference to the Annual Report on Form 10-K filed with the Commission
on July 13, 2010.
|
|
Audited
Consolidated Statements of Operations – for the twelve Months Ended March
31, 2010 and 2009 – incorporated by reference to the Annual Report on Form
10-K filed with the Commission on July 13, 2010.
|
|
Audited
Consolidated Statements of Changes in Stockholders’ Deficiency in Assets
for the Twelve Months Ended March 31, 2010 and 2009 – incorporated by
reference to the Annual Report on Form 10-K filed with the Commission on
July 13, 2010.
|
|
Audited
Consolidated Statements of Cash Flows for the Twelve Months Ended March
31, 2010 and 2009 – incorporated by reference to the Annual Report on Form
10-K filed with the Commission on July 13,
2010.
|
43
|
OPENFILM FINANCIAL
STATEMENTS:
|
|
Unaudited
Condensed Consolidated Balance Sheets – as of September 30, 2010 and
2009
|
|
Unaudited
Condensed Consolidated Statements of Operations – for the three and
nine months ended September 30, 2010 and 2009
|
|
Unaudited
Condensed Consolidated Statements of Members’ Equity – for the nine
months ended September 30, 2010 and December 31, 2009
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows – for the nine months
ended September 30, 2010 and December 31, 2009
|
|
Audited
Consolidated Balance Sheets as of December 31, 2009 and
2008
|
|
Audited
Consolidated Statements of Operations – for the twelve months ended
December 31, 2009 and 2008
|
|
Audited
Consolidated Statements of Members’ Equity – for the years ended December
31, 2009 and 2008
|
|
Audited
Consolidated Statements of Cash Flows – for the twelve months ended
December 31, 2009 and
2008
|
(b) Exhibits.
|
Exhibit
Number
|
Description
|
|
|
2.1
|
Agreement
and Plan of Merger among Ener1 Acquisition Corp., Registrant and Ener1,
Inc., dated as of June 9, 2004, incorporated herein by reference to
Exhibit 2.1 to Splinex’s Registration Statement on Form S-1 filed with the
Commission on June 24, 2004 (Registration No.
333-116817)
|
|
|
2.2
|
First
Amendment to Agreement and Plan of Merger among Ener1 Acquisition Corp.,
Registrant and Ener1, Inc., dated as of October 13, 2004,
incorporated herein by reference to Exhibit 2.2 to Amendment No, 1 to
Splinex’s Registration Statement on Form S-1 filed with the Commission on
October 15, 2004 (Registration No. 333-116817)
|
|
|
2.3
|
Second
Amendment to Agreement and Plan of Merger among Ener1 Acquisition Corp.,
Splinex and Ener1, Inc., dated as of December 23, 2004, incorporated
herein by reference to Exhibit 2.3 to Amendment No. 3 to Splinex’s
Registration Statement on Form S-1 filed with the Commission on December
27, 2004 (Registration No. 333-116817)
|
|
|
3.1
|
Certificate
of Incorporation of Splinex, incorporated herein by reference to Exhibit
3.1 to Splinex’s Registration Statement on Form S-1 filed with the
Commission on June 24, 2004 (Registration No.
333-116817)
|
|
|
3.2
|
Certificate
of Merger of Splinex, incorporated herein by reference to Exhibit 3.2 to
Amendment No. 3 to Splinex’s Registration Statement on Form S-1 filed with
the Commission on December 27, 2004 (Registration No.
333-116817)
|
|
|
3.3
|
Bylaws
of Splinex, incorporated herein by reference to Exhibit 3.3 to Splinex’s
Registration Statement on Form S-1 filed with the Commission on June 24,
2004 (Registration No. 333-116817)
|
|
|
3.4
|
Certificate
of Amendment of Articles of Incorporation, incorporated herein by
reference to Appendix A to Schedule 14C filed with the Commission on
February 11, 2009.
|
|
|
10.1
|
Bridge
Loan Agreement between Registrant and Ener1 Group, Inc. dated November 2,
2004 incorporated herein by reference to Exhibit 10.13 to Amendment No. 2
to Splinex’s Registration Statement on Form S-1 filed with the Commission
on December 3, 2004 (Registration No.
333-116817)
|
44
|
10.2
|
Amendment
to Bridge Loan Agreement between Registrant and Ener1 Group, Inc. dated
November 17, 2004 incorporated herein by reference to Exhibit 10.14 to
Amendment No. 2 to Splinex’s Registration Statement on Form S-1 filed with
the Commission on December 3, 2004 (Registration No.
333-116817)
|
|
|
10.3
|
Employment
Agreement between Christian Schormann and Splinex dated January 12, 2005,
incorporated herein by reference to Exhibit 10.15 of the Current Report on
Form 8-K filed with the Commission on January 25, 2005.
|
|
|
10.4
|
Revolving
Debt Funding Commitment Agreement between Bzinfin, S.A. and Registrant,
dated as of June 9, 2004, incorporated herein by reference to Exhibit
10.1 to Splinex’s Registration Statement on Form S-1 filed with the
Commission on June 24, 2004 (Registration No.
333-116817)
|
|
|
10.5
|
2004
Stock Option Plan of Registrant, incorporated herein by reference to
Exhibit 10.2 to Splinex’s Registration Statement on Form S-1 filed with
the Commission on June 24, 2004 (Registration No.
333-116817)
|
|
|
10.6
|
Form of
Stock Option Agreement of Registrant, incorporated herein by reference to
Exhibit 10.3 to Splinex’s Registration Statement on Form S-1 filed with
the Commission on June 24, 2004 (Registration No.
333-116817)
|
|
|
10.7
|
Sublease
Agreement between Ener1 Group, Inc. and Splinex, LLC, dated as of
November 1, 2003, assigned to Registrant as of April 1, 2004,
incorporated herein by reference to Exhibit 10.4 to Splinex’s Registration
Statement on Form S-1 filed with the Commission on June 24, 2004
(Registration No. 333-116817)
|
|
|
10.8
|
Contribution
Agreement between Splinex, LLC and Registrant, dated as of April 1,
2004, incorporated herein by reference to Exhibit 10.5 to Splinex’s
Registration Statement on Form S-1 filed with the Commission on June 24,
2004 (Registration No. 333-116817)
|
|
|
10.9
|
Assignment
and Assumption of Employment Agreements between Splinex, LLC and
Registrant, dated as of April 1, 2004, incorporated herein by
reference to Exhibit 10.6 to Splinex’s Registration Statement on Form S-1
filed with the Commission on June 24, 2004 (Registration No.
333-116817)
|
|
|
10.10
|
Global
Bill of Sale and Assignment and Assumption Agreement between Splinex, LLC
and Registrant, dated as of April 1, 2004, incorporated herein by
reference to Exhibit 10.7 to Splinex’s Registration Statement on Form S-1
filed with the Commission on June 24, 2004 (Registration No.
333-116817)
|
|
|
10.11
|
Employment
letter between Gerard Herlihy and Registrant, dated May 20, 2004,
incorporated herein by reference to Exhibit 10.8 to Splinex’s Registration
Statement on Form S-1 filed with the Commission on June 24, 2004
(Registration No. 333-116817)
|
|
|
10.12
|
Consulting
Agreement between Dr. Peter Novak and Registrant, dated
January 1, 2004, incorporated herein by reference to Exhibit 10.9 to
Splinex’s Registration Statement on Form S-1 filed with the Commission on
June 24, 2004 (Registration No. 333-116817)
|
|
|
10.13
|
Form
of Employee Innovations and Proprietary Rights Assignment Agreement,
incorporated herein by reference to Exhibit 10.10 to Splinex’s
Registration Statement on Form S-1 filed with the Commission on June 24,
2004 (Registration No.
333-116817)
|
45
|
10.14
|
Form
of Indemnification Agreement, incorporated herein by reference to Exhibit
10.11 to Amendment No. 3 to Splinex’s Registration Statement on Form S-1
filed with the Commission on December 27, 2004 (Registration No.
333-116817)
|
|
|
10.15
|
Employment
Agreement between Michael Stojda and Registrant, dated September 1,
2004, incorporated herein by reference to Exhibit 10.12 to Amendment No. 1
to Splinex’s Registration Statement on Form S-1 filed with the Commission
on October 15, 2004 (Registration No. 333-116817)
|
|
|
10.16
|
Reseller
Agreement between Waterloo Maple Inc. and the Company dated May 27, 2005.,
incorporated herein by reference to Exhibit 10.1 to Splinex’s Current
Report on Form 8-K, filed with the Commission on June 3,
2005
|
|
|
10.17
|
Severance
Agreement dated November 21, 2005 by and between Splinex and Michael
Stojda, incorporated by reference to Exhibit 10.1 to Splinex’s Current
Report on Form 8-K, filed with the Commission on November 21,
2005
|
|
|
10.18
|
Termination
Agreement dated October 17, 2005 by and between Splinex and Christian
Schormann, incorporated by reference to Exhibit 10.2 to Splinex’s Current
Report on Form 8-K, filed with the Commission on November 21,
2005
|
|
|
10.19
|
First
Amendment to Splinex Technology, Inc. 2004 Stock Option Plan, incorporated
by reference to Exhibit 10.19 to the Annual Report on Form 10-K for the
year ended March 31, 2009, filed with the Commission on June 30,
2009
|
|
|
10.20
|
Joint
Venture Agreement dated July 16, 2008 by and between the Company and
Evgeni Bogarad, incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K, filed with the Commission on July 23,
2008
|
|
|
10.21
|
Notarial
Deed dated July 17, 2008 by and between the Company and Korlea Invest
Holding AG, incorporated by reference to Exhibit 10.20 to the Quarterly
Report on Form 10-Q, filed with the Commission on November 18,
2008
|
|
|
10.22
|
Subscription
Agreement dated August 7, 2008 by and between the Company and TGR Energy,
LLC, incorporated by reference to Exhibit 10.20 to the Quarterly Report on
Form 10-Q, filed with the Commission on November 18,
2008
|
|
|
10.23
|
Amendment
to the Subscription Agreement between TGR Energy, LLC and the Company
dated January 12, 2010, incorporated by reference to Exhibit 10.20 to the
Quarterly Report on Form 10-Q filed with the Commission on February 16,
2010
|
|
|
10.24
|
Assignment
between TGR Energy, LLC and the Company dated January 12, 2010,
incorporated by reference to Exhibit 10.21 to the Quarterly Report on Form
10-Q filed with the Commission on February 16, 2010, incorporated by
reference to Exhibit 10.24 to the Annual Report on Form 10-K, filed with
the Commission on July 13, 2010.
|
|
|
10.25
|
Joint
Venture Dissolution Agreement dated March 31, 2010 between the Company and
Sibburnefteservis, LTD., TOT-SIBBNS, LTD and Evgeni Bogorad, incorporated
by reference to Exhibit 10.25 to the Annual Report on Form 10-K, filed
with the Commission on July 13,
2010.
|
46
|
10.26
|
Stock
Repurchase Agreement dated April 28, 2010 between the Company, TGR Energy,
LLC and Dune Capital Group LLC, incorporated by reference to Exhibit 10.26
to the Annual Report on Form 10-K, filed with the Commission on July 13,
2010.
|
|
|
10.27*
|
Membership
Interest Purchase Agreement dated December 14, 2010 by and among the
Company, Openfilm, LLC and the members of Openfilm.
|
|
|
10.28*
|
Technology
Transfer and License Agreement dated December 14, 2010 between NetLab
Systems, LLC and Opernfilm, LLC.
|
|
|
14
|
Code
of Ethics, incorporated by reference to Exhibit 10.2 to Splinex’s Annual
Report on Form 10-K for the year ended March 31, 2005, filed with the
Commission on June 30, 2005
|
|
|
21.1*
|
List
of Subsidiaries
|
* Filed
herewith.
47
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, thereunto duly
authorized.
|
Net
Element, Inc.
|
|||
|
Date:
December 15, 2010
|
By:
|
/s/ Jonathan
New
|
|
|
Name:
Jonathan New
|
|||
|
Title:
Chief Financial Officer
|
|||
48
FINANCIAL STATEMENT
INDEX
|
Page
|
|
|
No.
|
|
|
NET ELEMENT FINANCIAL
STATEMENTS:
|
|
|
Unaudited
Condensed Consolidated Balance Sheets – as of September 30, 2010 and March
31, 2010 – incorporated by reference to the Quarterly Report on Form 10-Q
filed with the Commission on November 15, 2010.
|
|
|
Unaudited
Condensed Consolidated Statements Of Operations – for the three and six
months ended September 30, 2010 And 2009 – incorporated by reference to
the Quarterly Report on Form 10-Q filed with the Commission on November
15, 2010.
|
|
|
Audited
Consolidated Balance Sheets – as of March 31, 2010 and 2009 – incorporated
by reference to the Annual Report on Form 10-K filed with the Commission
on July 13, 2010.
|
|
|
Audited
Consolidated Statements of Operations – for the twelve Months Ended March
31, 2010 and 2009 – incorporated by reference to the Annual Report on Form
10-K filed with the Commission on July 13, 2010.
|
|
|
Audited
Consolidated Statements of Changes in Stockholders’ Deficiency in Assets
for the Twelve Months Ended March 31, 2010 and 2009 – incorporated by
reference to the Annual Report on Form 10-K filed with the Commission on
July 13, 2010.
|
|
|
Audited
Consolidated Statements of Cash Flows for the Twelve Months Ended March
31, 2010 and 2009 – incorporated by reference to the Annual Report on Form
10-K filed with the Commission on July 13, 2010.
|
|
|
OPENFILM FINANCIAL
STATEMENTS:
|
|
Unaudited
Condensed Consolidated Financial Statements:
|
|
|
Unaudited
Condensed Consolidated Balance Sheets
|
F-4
|
|
Unaudited
Condensed Consolidated Statements of Operations
|
F-5
|
|
Unaudited
Condensed Consolidated Statements of Members’ Equity
|
F-6
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows
|
F-7
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
F-8 -12
|
|
Report
of Independent Registered Public Accounting Firm
|
F-15
|
|
Consolidated
Financial Statements:
|
|
|
Consolidated
Balance Sheets
|
F-16
|
|
Consolidated
Statements of Operations
|
F-17
|
|
Consolidated
Statements of Members’ Equity
|
F-18
|
|
Consolidated
Statements of Cash Flows
|
F-19
|
|
Notes
to Consolidated Financial Statements
|
F-20 - 24
|
F-1
Openfilm,
LLC
Unaudited
Condensed Consolidated
Financial
Statements
September
30, 2010
F-2
Table of
Contents
|
Unaudited
Condensed Consolidated Financial Statements:
|
|
|
Unaudited
Condensed Consolidated Balance Sheets
|
F-4
|
|
Unaudited
Condensed Consolidated Statements of Operations
|
F-5
|
|
Unaudited
Condensed Consolidated Statements of Members’ Equity
|
F-6
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows
|
F-7
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
F-8 -12
|
F-3
Openfilm,
LLC
Unaudited
Condensed Consolidated Balance Sheets
September
30, 2010 And
December
31, 2009
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 6,255 | $ | 9,646 | ||||
|
Accounts
receivable
|
20,930 | - | ||||||
|
Total
current assets
|
27,185 | 9,646 | ||||||
|
Fixed
assets:
|
||||||||
|
Computers
and Equipment
|
69,815 | 68,880 | ||||||
|
Furniture
and fixtures
|
25,186 | 25,186 | ||||||
|
Less:
accumulated depreciation
|
(87,383 | ) | (68,102 | ) | ||||
|
Total
fixed assets
|
7,618 | 25,964 | ||||||
|
Other
assets:
|
||||||||
|
Deposits
|
20,300 | 20,000 | ||||||
|
Capitalized
web development
|
- | 46,852 | ||||||
|
Total
other assets
|
20,300 | 66,852 | ||||||
|
Total
assets
|
$ | 55,103 | $ | 102,462 | ||||
|
LIABILITIES AND MEMBERS'
EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 55,942 | $ | 74,234 | ||||
|
Accrued
expenses
|
289,297 | 33,585 | ||||||
|
Notes
and accounts payable to related parties
|
1,014,716 | 106,300 | ||||||
|
Note
payable
|
150,000 | 250,000 | ||||||
|
Total
current liabilities
|
1,509,955 | 464,119 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Members'
equity
|
||||||||
|
Common
members' equity
|
(3,289,622 | ) | (2,196,791 | ) | ||||
|
Deferred
compensation
|
(16,130 | ) | (15,766 | ) | ||||
|
Series
A preferred members' equity
|
1,850,900 | 1,850,900 | ||||||
|
Total
members' equity
|
(1,454,852 | ) | (361,657 | ) | ||||
|
Total
liabilities and members' equity
|
$ | 55,103 | $ | 102,462 | ||||
See
accompanying notes to financial statements.
F-4
Openfilm,
LLC
Unaudited
Condensed
Consolidated
Statements of
Operations
For
The
Three
And
Nine
Months
Ended
September
30, 2010 And
2009
|
Three Months Ended
|
Three Months Ended
|
Nine Months Ended
|
Nine Months Ended
|
|||||||||||||
|
September 30,
|
September 30,
|
September 30,
|
September 30,
|
|||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Revenue,
net
|
$ | 11,396 | $ | 198 | $ | 35,188 | $ | 3,076 | ||||||||
|
Cost
of revenue
|
162,387 | 155,108 | 429,476 | 464,622 | ||||||||||||
|
Gross
margin
|
(150,991 | ) | (154,910 | ) | (394,288 | ) | (461,546 | ) | ||||||||
|
Operating
expenses:
|
||||||||||||||||
|
General
and administrative
|
458,241 | 73,615 | 722,461 | 252,798 | ||||||||||||
|
Total
operating expenses
|
458,241 | 73,615 | 722,461 | 252,798 | ||||||||||||
|
Loss
from operations
|
(609,232 | ) | (228,525 | ) | (1,116,749 | ) | (714,344 | ) | ||||||||
|
Other
income:
|
||||||||||||||||
|
Other
income
|
3,647 | - | 7,918 | 30 | ||||||||||||
|
Gain
on Sale of Assets
|
- | - | - | 2,175 | ||||||||||||
|
Total
other income
|
3,647 | - | 7,918 | 2,205 | ||||||||||||
|
Net
loss
|
$ | (605,585 | ) | $ | (228,525 | ) | $ | (1,108,831 | ) | $ | (712,139 | ) | ||||
See
accompanying notes to financial statements.
F-5
Openfilm,
LLC
Unaudited
Condensed Consolidated Statements Of Members' Equity
For
The
Nine
Months
Ended
September
30, 2010 And
December
31, 2009
|
Series A Preferred
|
||||||||||||||||||||||||
|
Members' Equity
|
Common Members' Equity
|
|||||||||||||||||||||||
|
Deferred
|
Total
|
|||||||||||||||||||||||
|
# of Units
|
Amount
|
# of Units
|
Amount
|
Comp
|
Members' Equity
|
|||||||||||||||||||
|
Balance
at December 31, 2009
|
1,000,000 | $ | 1,850,900 | 106,378,947 | $ | (2,196,791 | ) | $ | (15,766 | ) | $ | (361,657 | ) | |||||||||||
|
Issuance
of Common Units for Compensation
|
800,000 | 16,000 | (16,000 | ) | - | |||||||||||||||||||
|
Amortization
of Deferred Compensation
|
- | - | - | - | 15,636 | 15,636 | ||||||||||||||||||
|
Net
Loss
|
- | - | - | (1,108,831 | ) | - | (1,108,831 | ) | ||||||||||||||||
|
Balance
at September 30, 2010
|
1,000,000 | $ | 1,850,900 | 107,178,947 | $ | (3,289,622 | ) | $ | (16,130 | ) | $ | (1,454,852 | ) | |||||||||||
See
accompanying notes to the consolidated financial statements.
F-6
Openfilm,
LLC
Unaudited
Condensed
Consolidated
Statements Of
Cash
Flows
For
The
Nine
Months
Ended
September
30, 2010 And
December
31, 2009
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (1,108,831 | ) | $ | (965,785 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
66,133 | 135,267 | ||||||
|
Gain
on sale of equipment
|
- | (2,175 | ) | |||||
|
Share
based compensation
|
15,636 | 7,984 | ||||||
|
Change
in operating assets and liabilities:
|
||||||||
|
Deposits
|
(300 | ) | - | |||||
|
Account
receivable
|
(20,930 | ) | - | |||||
|
Accounts
payable
|
(18,293 | ) | 73,313 | |||||
|
Accrued
expenses
|
255,713 | (6,643 | ) | |||||
|
Total
adjustments
|
297,959 | 207,746 | ||||||
|
Net
cash used in operating activities
|
(810,872 | ) | (758,039 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of equipment
|
(935 | ) | (6,993 | ) | ||||
|
Capitalized
website development costs
|
- | - | ||||||
|
Proceeds
from sale of equipment
|
- | 12,000 | ||||||
|
Net
cash (used in) provided by investing activities
|
(935 | ) | 5,007 | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from third party loan
|
- | 250,000 | ||||||
|
Repayment
of third party loan
|
(100,000 | ) | - | |||||
|
Proceeds
from related party for note receivable
|
908,416 | 1,642,520 | ||||||
|
Payment
to related party for note receivable
|
- | (1,168,150 | ) | |||||
|
Net
cash provided by financing activities
|
808,416 | 724,370 | ||||||
|
Net
decrease in cash
|
(3,391 | ) | (28,662 | ) | ||||
|
Cash
at beginning of period
|
9,646 | 38,308 | ||||||
|
Cash
at end of period
|
$ | 6,255 | $ | 9,646 | ||||
|
Supplemental disclosure of cash flow
information:
|
||||||||
|
Cash
during the year for interest
|
$ | - | $ | - | ||||
|
Non-cash
investing and financing activities:
|
||||||||
|
Issuance
of member interest in settlement of notes
|
$ | - | $ | 1,850,900 | ||||
See
accompanying notes to the consolidated financial statements.
F-7
Openfilm,
LLC
Notes
to Unaudited Condensed Consolidated Financial Statements
Note 1 – Nature of
Operations
Nature of
Operations
Openfilm,
LLC (“Openfilm” or the “Company”) was formed as a limited liability company
in the State of Florida on November 16, 2007, under the name Zivos,
LLC. On April 9, 2008, an amendment was filed thereby changing the
name to Openfilm, LLC. The Company is a technology company and online
community of independent film lovers and filmmakers.
Openfilm
owns and operates a website www.openfilm.com. The Company believes its
proprietary video platform unites the best elements of the film industry in one
place. The Company plans to derive revenues from revenue streams that
include video advertising, video content syndication, display advertising
and membership fees.
Note 2 – Summary of
Significant Accounting Policies
Going
Concern
The
Company had a net loss of $1,108,831 and $712,139 for the nine month periods
ended September 30, 2010 and 2009, and further losses are
anticipated. The Company had a negative cash flow from operations of
$810,872 and $758,039 for the nine month periods ended September 30, 2010 and
December 31, 2009, respectively. The Company’s ability to continue is limited
without continued financing from its existing members. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments
relating to the recovery of the recorded assets or the classification of the
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Basis of
Presentation
The
accompanying financial statements include the consolidated accounts of Openfilm,
LLC and its wholly-owned subsidiary, Zivos, LLC, combined with the accounts of
Openfilm, Inc. and FullScreen Music, LLC, related parties due to common
ownership. All material intercompany transactions have been
eliminated in the consolidation and combination.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted principles for interim financial
information. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
results for the interim periods presented have been included.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles (“GAAP”) in the United States (“U.S.”) requires management
to make estimates, judgments, and assumptions that affect the reported amounts
of assets, liabilities, revenues, and expenses and the related disclosure of
contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates including those related to the useful lives of property
and equipment and capitalized website costs, stock-based compensation, income
taxes, and contingencies. Actual results may differ from these
estimates.
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less as cash equivalents. There were no cash
equivalents at each balance sheet date presented.
F-8
Openfilm,
LLC
Notes
to Unaudited Condensed Consolidated Financial Statements
Note 2 – Summary of
Significant Accounting Policies, continued
Property and
Equipment
Property
and equipment are stated at cost less accumulated
depreciation. Depreciation is provided for on a straight-line basis
over the estimated useful lives of the assets per the following
table. The Company periodically reviews property and equipment to
determine that the carrying values are not impaired.
|
Furniture
and fixtures
|
3
years
|
|
Office
and computer equipment
|
2
years
|
|
Software
|
2
years
|
Capitalized Website
Costs
The
Company capitalizes certain software development costs. Generally,
costs for developing website application and infrastructure, creating the
initial graphics of the website, and adding upgrades and enhancements are
capitalized whereas costs for planning, adding content, and operating the
website are expensed as incurred. Net capitalized website costs are
recorded at cost less accumulated amortization. Amortization is
provided for on a straight-line basis over the expected useful life of the
website. The Company evaluates the recoverability of intangible
assets periodically and takes into account events or circumstances that warrant
revised estimates of useful lives or that indicate impairment
exists.
Revenue
The
Company recognizes revenue when the persuasive evidence of an arrangement
exists, no significant company obligations remain, collection of the related
receivable is reasonably assured, and the fees are fixed or
determinable.
The
Company recognizes revenue on a gross basis and publisher expenses that are
directly related to a revenue-generating event are recorded as a component of
cost of revenue. Additionally, fee revenue from transactions on the Company's
affiliate marketing networks are recognized on a net basis where the
Company acts as an agent in these transactions and the payments to publishers
are the contractual obligation of the advertiser customers.
Stock-Based
Compensation
The
Company accounts for its granted stock-based awards at fair value, and amortizes
its related compensation expense over any vesting period.
Income
Taxes
As a
Florida Limited Liability Company, the Company is not considered a separate
entity from its owners for tax purposes. The Company does not pay any income
taxes itself; instead, the members of the LLC pay taxes on their allocated share
of profits (or deduct their share of business losses) on their personal tax
returns.
Note 3 – Fair Value of
Financial Instruments
The
Company’s financial instruments, including cash, accounts payable and accrued
expenses, are carried at historical cost basis, which approximates their fair
values because of the short-term nature of these instruments.
F-9
Openfilm,
LLC
Notes
to Unaudited Condensed Consolidated Financial Statements
Note 4 – Property and
Equipment
Property
and equipment consisted of the following at September 30, 2010 and December 31,
2009:
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Furniture
and fixtures
|
$ | 25,186 | $ | 25,186 | ||||
|
Office
and computer equipment
|
69,815 | 68,880 | ||||||
|
Less:
accumulated depreciation
|
(87,383 | ) | (68,102 | ) | ||||
|
Property
and equipment, net
|
$ | 7,618 | $ | 25,964 | ||||
Depreciation
expense for the nine month period ended September 30, 2010 and September 30,
2009 was $19,281 and $31,175, respectively. Depreciation expense
categorized as cost of revenue for the nine month period ended September 30,
2010 and September 30, 2009 was $17,477 and $28,323, respectively.
Note 5– Capitalized Website
Costs
Capitalized
website costs consisted of the following at September 30, 2010 and December 31,
2009:
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Capitalized
website costs
|
$ | 187,402 | $ | 187,402 | ||||
|
Less:
accumulated amortization
|
(187,402 | ) | (140,550 | ) | ||||
|
Capitalized
website costs, net
|
$ | - | $ | 46,852 | ||||
Amortization
expense for the nine month period ended September 30, 2010 and 2009 was $46,852
and $70,276 respectively. Amortization expense categorized as cost of
revenue for the nine month period ended September 30, 2010 and September 30,
2009 was $9,414 and $14,120, respectively.
Note 6 –
Concentrations
Concentration of Credit
Risk
The
Company maintains cash balances at a financial institution in
Florida. The balance, at any given time, may exceed Federal Deposit
Insurance Corporation (“FDIC”) insurance limits of $250,000 per
institution. At December 31, 2009 and 2008, the cash account was not
in excess of FDIC insured limits.
The
Company also maintains cash funds at a financial institution in the Ukraine.
Such funds approximated $82 and $3,476 at September 30, 2010 and December 31,
2009, respectively. The non-United States bank balances are not
insured and there is risk of loss in the event such banks should
fail.
F-10
Openfilm,
LLC
Notes
to Unaudited Condensed Consolidated Financial Statements
Note 7 – Commitments and
Contingencies
Leases
On August
1, 2008, the Company entered into a six-month lease agreement for studio and
office in North Miami, Florida. The lease called for aggregate
monthly payments of $5,000.
During
2009, the Company entered and modified new leases for its existing office
space. The modified lease calls for month-to-month payments in the
amount of $300, and either party may terminate the lease by giving the other
party thirty (30) days written notice (See Subsequent Events – Note
10).
The
Company also leases office space in the Ukraine on a month-to-month basis for
approximate $1,000 per month (8,000 GRN) plus actual cost of
utilities.
On
September 1, 2010, the Company entered into a month-to-month lease for
additional office space in Miami for $700 per month.
Rent
expense for the periods ended September 30, 2010 and 2009 was $6,075 and 7,400,
respectively.
Promotional
Programs
The
Company offers opportunities for independent film makers to enter online “Get It
Made” film contests to win a cash prize of $50,000 and a film financing contract
providing services worth $450,000 with Openfilm Studios. The first contest ended
September 30, 2010. The cash prize and services provided are inclusive in
accrued expenses for $250,000. A third online contest, “About
Us, “ending November 30, 2010 offers a cash prize of $1,000. These promotional
programs are funded by the Company’s members.
Litigation
From time
to time, the Company may become subject to legal proceedings, claims and
litigation arising in the ordinary course of business. The Company is
not currently a party to any material legal proceedings, nor is the Company
aware of any other pending or threatened litigation that would have a material
adverse effect on the Company’s business, operating results, cash flows or
financial condition should such litigation be resolved unfavorably.
Note 8 – Members’
Equity
The
Company is authorized to issue Series A Preferred Membership Units and Common
Membership Units. The Series A Preferred Membership Units have certain rights
and preferences, including a liquidation preference. Per the operating
agreement, profit and loss are allocated to Common members in proportion to
their respective units.
During
2008, the Company issued 75,000,000 Common Membership Units and committed to
issue 40,384,614 Common Membership Units to three (3) employees (13,461,538
Units each) as share-based awards (the “2008 Commitment”).
During
2009, the Company issued 13,461,538 Common Membership Units pursuant to the 2008
Commitment, and two of the employees agreed to forfeit their rights to receive
the Common Membership Units as part of a Separation Agreement with the
Company. In addition, the Company issued 1,000,000 Series A Preferred
Membership Units and issued 31,378,947 Common Membership Units to employees as
share-based awards.
As of
December 31 2009, the Company had a total of 106,378,947 Common Membership Units
and 1,000,000 Series A Preferred Membership Units outstanding.
As of
September 30, 2010 the Company had a total of 107,178,947 Common Membership
Units and 1,000,000 Series A Preferred Membership Units
outstanding.
F-11
Openfilm,
LLC
Notes
to Unaudited Condensed Consolidated Financial Statements
Note 9 – Related Party
Transactions
The
managing member and significant shareholder of the Company is Enerfund LLC, an
entity owned by Mike Zoi.
Notes
payable to related parties is comprised of the following amounts at September
30, 2010 and December 31, 2009:
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Due
to Mike Zoi
|
$ | 106,628 | $ | 106,300 | ||||
|
Due
to Kazo*
|
- | - | ||||||
|
Note
receivable - Enerfund, LLC
|
908,088 | - | ||||||
|
Note
payable to related parties
|
$ | 1,014,716 | $ | 106,300 | ||||
* Kazo
and Enerfund, LLC are owned by Mike Zoi
Amounts
due Mike Zoi and Kazo are non-interest bearing obligations.
In
connection with the Amended and Restated Operating Agreement on October 12,
2009, the Company issued 1,000,000 units of Series A preferred shares in
consideration for funding (net settlement of Notes) in the amount of
$1,850,900.
Note 10 – Subsequent
Events
Extinguishment of Note
Payable
In
October of 2010, the Company repaid the $250,000 third party Note
payable.
F-12
Openfilm,
LLC
Consolidated
Financial Statements
December
31, 2009 and 2008
F-13
Table of
Contents
|
Report
of Independent Registered Public Accounting Firm
|
F-15
|
|
Consolidated
Financial Statements:
|
|
|
Consolidated
Balance Sheets
|
F-16
|
|
Consolidated
Statements of Operations
|
F-17
|
|
Consolidated
Statements of Members’ Equity
|
F-18
|
|
Consolidated
Statements of Cash Flows
|
F-19
|
|
Notes
to Consolidated Financial Statements
|
F-20 - F-24
|
F-14
Report of Independent
Registered Public Accounting Firm
To the
Members
Openfilm,
LLC
Miami,
Florida
We have
audited the accompanying consolidated balance sheets of Openfilm, LLC as of
December 31, 2009 and 2008, and the related consolidated statement of
operations, members’ equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We
conducted our audit 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 financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, 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 Openfilm, LLC, as December
31, 2009 and 2008, 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 discussed in Note 2
to the consolidated financial statements, the Company has incurred losses from
activities and incurred negative cash flows from operations. This
raises substantial doubt about the Company’s ability to continue as a going
concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
Daszkal Bolton LLP
Sunrise,
Florida
October
14, 2010
F-15
Openfilm,
LLC
Consolidated
Balance
Sheets
December
31, 2009 And
2008
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 9,646 | $ | 38,308 | ||||
|
Total
current assets
|
9,646 | 38,308 | ||||||
|
Fixed
assets:
|
||||||||
|
Computers
|
68,880 | 61,889 | ||||||
|
Production
equipment
|
- | 17,984 | ||||||
|
Furniture
and fixtures
|
25,186 | 25,186 | ||||||
|
Less:
accumulated depreciation
|
(68,102 | ) | (34,695 | ) | ||||
|
Total
fixed assets
|
25,964 | 70,364 | ||||||
|
Other
assets:
|
||||||||
|
Deposits
|
20,000 | 20,000 | ||||||
|
Capitalized
web development
|
46,852 | 140,552 | ||||||
|
Total
other assets
|
66,852 | 160,552 | ||||||
|
|
||||||||
|
Total
assets
|
$ | 102,462 | $ | 269,224 | ||||
|
LIABILITIES AND MEMBERS'
EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 74,234 | $ | 921 | ||||
|
Accrued
expenses
|
33,585 | 51,895 | ||||||
|
Notes
and accounts payable to related parties
|
106,300 | 1,482,830 | ||||||
|
Note
payable
|
250,000 | - | ||||||
|
Total
current liabilities
|
464,119 | 1,535,646 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Members'
equity
|
||||||||
|
Common
members' equity
|
(2,196,791 | ) | (1,266,422 | ) | ||||
|
Deferred
compensation
|
(15,766 | ) | - | |||||
|
Series
A preferred members' equity
|
1,850,900 | - | ||||||
|
Total
members' equity
|
(361,657 | ) | (1,266,422 | ) | ||||
|
Total
liabilities and members' equity
|
$ | 102,462 | $ | 269,224 | ||||
See
accompanying notes to financial statements.
F-16
Openfilm,
LLC
Consolidated
Statements Of
Operations
Years
Ended
December
31, 2009 And
2008
|
2009
|
2008
|
|||||||
|
Revenue
|
$ | 7,492 | $ | - | ||||
|
Cost
of revenue
|
603,287 | 466,143 | ||||||
|
Gross
margin
|
(595,795 | ) | (466,143 | ) | ||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
372,195 | 597,623 | ||||||
|
Total
operating expenses
|
372,195 | 597,623 | ||||||
|
Loss
from operations
|
(967,990 | ) | (1,063,766 | ) | ||||
|
Other
income:
|
||||||||
|
Gain
on disposal of property and equipment
|
2,175 | - | ||||||
|
Other
income
|
30 | - | ||||||
|
Total
other income
|
2,205 | - | ||||||
|
Loss
before income taxes
|
(965,785 | ) | (1,063,766 | ) | ||||
|
Provision
for income taxes
|
- | - | ||||||
|
Net
loss
|
$ | (965,785 | ) | $ | (1,063,766 | ) | ||
See
accompanying notes to financial statements.
F-17
Openfilm,
LLC
Consolidated
Statements Of
Members'
Equity
Years
Ended
December
31, 2009 And
2008
|
Series A Preferred
|
||||||||||||||||||||||||
|
Members' Equity
|
Common Members' Equity
|
|||||||||||||||||||||||
|
Deferred
|
Total
|
|||||||||||||||||||||||
|
# of Units
|
Amount
|
# of Units
|
Amount
|
Comp
|
Members' Equity
|
|||||||||||||||||||
|
Balance,
December 31, 2007
|
- | $ | - | - | $ | (235,156 | ) | $ | - | $ | (235,156 | ) | ||||||||||||
|
Issuance
of Common Units for Compensation
|
- | - | 75,000,000 | 32,500 | (32,500 | ) | - | |||||||||||||||||
|
Amortization
of Deferred Compensation
|
- | - | - | - | 32,500 | 32,500 | ||||||||||||||||||
|
Net
Loss
|
- | - | - | (1,063,766 | ) | - | (1,063,766 | ) | ||||||||||||||||
|
Balance,
December 31, 2008
|
- | - | 75,000,000 | (1,266,422 | ) | - | (1,266,422 | ) | ||||||||||||||||
|
Issuance
of Common Units for 2008 Compensation
|
- | - | 13,461,538 | 5,832 | - | 5,832 | ||||||||||||||||||
|
Contribution
of Issuable Common Units to Capital
|
- | - | - | 11,667 | - | 11,667 | ||||||||||||||||||
|
Issuance
of Common Units for Compensation
|
- | - | 17,917,409 | 17,917 | (17,917 | ) | - | |||||||||||||||||
|
Amortization
of Deferred Compensation
|
- | - | - | - | 2,151 | 2,151 | ||||||||||||||||||
|
Issuance
of Preferred Units for Settlement of Loans
|
1,000,000 | 1,850,900 | - | - | - | 1,850,900 | ||||||||||||||||||
|
Net
Loss
|
- | - | - | (965,785 | ) | - | (965,785 | ) | ||||||||||||||||
|
Balance,
December 31, 2009
|
1,000,000 | $ | 1,850,900 | 106,378,947 | $ | (2,196,791 | ) | $ | (15,766 | ) | $ | (361,657 | ) | |||||||||||
See
accompanying notes to financial statements.
F-18
Openfilm,
LLC
Consolidated
Statements of
Cash
Flows
Years
Ended
December
31, 2009 And
2008
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (965,785 | ) | $ | (1,063,766 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
135,267 | 81,075 | ||||||
|
Gain
on sale of equipment
|
(2,175 | ) | - | |||||
|
Share
based compensation
|
7,984 | 32,500 | ||||||
|
Change
in operating assets and liabilities:
|
||||||||
|
Deposits
|
- | (20,000 | ) | |||||
|
Accounts
payable
|
73,313 | 921 | ||||||
|
Accrued
expenses
|
(6,643 | ) | 51,895 | |||||
|
Total
adjustments
|
207,746 | 146,391 | ||||||
|
Net
cash used in operating activities
|
(758,039 | ) | (917,375 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of equipment
|
(6,993 | ) | (105,059 | ) | ||||
|
Capitalized
website development costs
|
- | (187,402 | ) | |||||
|
Proceeds
from sale of equipment
|
12,000 | - | ||||||
|
Net
cash provided by (used in) investing activities
|
5,007 | (292,461 | ) | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from third party loan
|
250,000 | - | ||||||
|
Proceeds
from related party for note receivable
|
1,642,520 | 2,674,017 | ||||||
|
Payment
to related party for note receivable
|
(1,168,150 | ) | (1,425,873 | ) | ||||
|
Net
cash provided by financing activities
|
724,370 | 1,248,144 | ||||||
|
Net
(decrease) increase in cash
|
(28,662 | ) | 38,308 | |||||
|
Cash
at beginning of period
|
38,308 | - | ||||||
|
Cash
at end of period
|
$ | 9,646 | $ | 38,308 | ||||
|
Supplemental disclosure of cash flow
information:
|
||||||||
|
Cash
during the year for interest
|
$ | - | $ | - | ||||
|
Non-cash
investing and financing activities:
|
||||||||
|
Cash
paid for income taxes
|
$ | 1,850,900 | $ | - | ||||
See
accompanying notes to financial statements.
F-19
Openfilm,
LLC
Notes
to Consolidated Financial Statements
Note 1 – Nature of
Operations
Nature of
Operations
Openfilm,
LLC (“Openfilm” or the "Company") was formed as a limited liability company
in the State of Florida on November 16, 2007 under the name Zivos,
LLC. On April 9, 2008, an amendment was filed thereby changing the
name to Openfilm, LLC. The Company is a technology company and online
community of independent film lovers and filmmakers.
Openfilm
owns and operates a website www.openfilm.com. The Company believes its
proprietary video platform unites the best elements of the film industry in one
place. The Company plans to derive revenues from revenue streams that
include video advertising, video content syndication, display advertising
and membership fees.
Note 2 – Summary of
Significant Accounting Policies
Going
Concern
The
Company had a net loss of $965,785 and $1,063,766 for the years ended December
31, 2009 and 2008, and further losses are anticipated. The Company
had a negative cash flow from operations of $758,039 and $917,375 for the years
ended December 31, 2009 and 2008, respectively. The Company’s ability
to continue is limited without continued financing from its existing
members. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recovery of the recorded assets or
the classification of the liabilities that might be necessary should the Company
be unable to continue as a going concern.
Basis of
Presentation
The
accompanying financial statements include the consolidated accounts of Openfilm,
LLC and its wholly-owned subsidiary, Zivos, LLC, combined with the accounts of
Openfilm, Inc. and FullScreen Music, LLC, related parties due to common
ownership. All material intercompany transactions have been
eliminated in the consolidation and combination.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles (“GAAP”) in the United States (“U.S.”) requires management
to make estimates, judgments, and assumptions that affect the reported amounts
of assets, liabilities, revenues, and expenses and the related disclosure of
contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates including those related to the useful lives of property
and equipment and capitalized website costs, stock-based compensation, income
taxes, and contingencies. Actual results may differ from these
estimates.
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less as cash equivalents. There were no cash
equivalents at each balance sheet date presented.
F-20
Openfilm,
LLC
Notes
to Consolidated Financial Statements
Note 2 – Summary of
Significant Accounting Policies, continued
Property and
Equipment
Property
and equipment are stated at cost less accumulated
depreciation. Depreciation is provided for on a straight-line basis
over the estimated useful lives of the assets per the following
table. The Company periodically reviews property and equipment to
determine that the carrying values are not impaired.
|
Furniture
and fixtures
|
3
years
|
|
Office
and computer equipment
|
2
years
|
|
Software
|
2
years
|
Capitalized Website
Costs
The
Company capitalizes certain software development costs. Generally,
costs for developing website application and infrastructure, creating the
initial graphics of the website, and adding upgrades and enhancements are
capitalized whereas costs for planning, adding content, and operating the
website are expensed as incurred. Net capitalized website costs are
recorded at cost less accumulated amortization. Amortization is
provided for on a straight-line basis over the expected useful life of the
website. The Company evaluates the recoverability of intangible
assets periodically and takes into account events or circumstances that warrant
revised estimates of useful lives or that indicate impairment
exists.
Revenue
The
Company recognizes revenue when the persuasive evidence of an arrangement
exists, no significant company obligations remain, collection of the related
receivable is reasonably assured, and the fees are fixed or
determinable.
The
Company recognizes revenue on a gross basis and publisher expenses that are
directly related to a revenue-generating event are recorded as a component of
cost of revenue. Additionally, fee revenue from transactions on the Company's
affiliate marketing networks are recognized on a net basis where the
Company acts as an agent in these transactions and the payments to publishers
are the contractual obligation of the advertiser customers.
Stock-Based
Compensation
The
Company accounts for its granted stock-based awards at fair value, and amortizes
its related compensation expense over any vesting period.
Income
Taxes
As a
Florida Limited Liability Company, the Company is not considered a separate
entity from its owners for tax purposes. The Company does not pay any income
taxes itself; instead, the members of the LLC pay taxes on their allocated share
of profits (or deduct their share of business losses) on their personal tax
returns.
Note 3 – Fair Value of
Financial Instruments
The
Company’s financial instruments, including cash, accounts payable and accrued
expenses, are carried at historical cost basis, which approximates their fair
values because of the short-term nature of these instruments.
F-21
Openfilm,
LLC
Notes
to Consolidated Financial Statements
Note 4 – Property and
Equipment
Property
and equipment consisted of the following at December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Furniture
and fixtures
|
$ | 25,186 | $ | 25,186 | ||||
|
Office
and computer equipment
|
68,880 | 61,889 | ||||||
|
Production
Equipment
|
- | 17,984 | ||||||
|
Less:
accumulated depreciation
|
(68,102 | ) | (34,695 | ) | ||||
|
Property
and equipment, net
|
$ | 25,964 | $ | 70,364 | ||||
Depreciation
expense for the years ended December 31, 2009 and 2008 was $41,566 and $34,225,
respectively.
Note 5– Capitalized Website
Costs
Capitalized
website costs consisted of the following at December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Capitalized
website costs
|
$ | 187,402 | $ | 187,402 | ||||
|
Less:
accumulated amortization
|
(140,550 | ) | (46,850 | ) | ||||
|
Capitalized
website costs, net
|
$ | 46,852 | $ | 140,552 | ||||
The
following is a schedule of estimated future amortization expense of capitalized
website costs at December 31, 2009:
|
Year
ending December 31, 2010
|
$ | 46,852 |
Amortization
expense for the years ended December 31, 2009 and 2008 was $93,701 and $46,850,
respectively.
Note 6 –
Concentrations
Concentration of Credit
Risk
The
Company maintains cash balances at a financial institution in
Florida. The balance, at any given time, may exceed Federal Deposit
Insurance Corporation (“FDIC”) insurance limits of $250,000 per
institution. At December 31, 2009 and 2008, the cash account was not
in excess of FDIC insured limits.
The
Company also maintains cash funds at a financial institution in the Ukraine.
Such funds approximated $3,476 and $3,475 at December 31, 2009 and 2008,
respectively. The non-United States bank balances are not insured and
there is risk of loss in the event such banks should fail.
F-22
Openfilm,
LLC
Notes
to Consolidated Financial Statements
Note 7 – Commitments and
Contingencies
Leases
On August
1, 2008, the Company entered into a six-month lease agreement for studio and
office in North Miami, Florida. The lease called for aggregate
monthly payments of $5,000.
During
2009, the Company entered and modified new leases for its existing office
space. The modified lease calls for month-to-month payments in the
amount of $300, and either party may terminate the lease by giving the other
party thirty (30) days written notice (See Subsequent Events – Note
10).
The
Company also leases office space in the Ukraine on a month-to-month basis for
approximate $1,000 per month (8,000 GRN) plus actual cost of
utilities.
Rent
expense for the years ended December 31, 2009 and 2008 was $30,756 and 96,475,
respectively.
Promotional
Programs
The
Company offers opportunities for independent film makers to enter online “Get It
Made” film contests to win a cash prize of $50,000 and a film financing contract
worth $450,000 with Openfilm Studios. These promotional programs are funded by
the Company’s members.
Litigation
From time
to time, the Company may become subject to legal proceedings, claims and
litigation arising in the ordinary course of business. The Company is
not currently a party to any material legal proceedings, nor is the Company
aware of any other pending or threatened litigation that would have a material
adverse effect on the Company’s business, operating results, cash flows or
financial condition should such litigation be resolved unfavorably.
Note 8 – Members’
Equity
The
Company is authorized to issue Series A Preferred Membership Units and Common
Membership Units. The Series A Preferred Membership Units have certain rights
and preferences, including a liquidation preference. Per the operating
agreement, profit and loss are allocated to Common members in proportion to
their respective units.
During
2008, the Company issued 75,000,000 Common Membership Units and committed to
issue 40,384,614 Common Membership Units to three (3) employees (13,461,538
Units each) as share-based awards (the “2008 Commitment”).
During
2009, the Company issued 13,461,538 Common Membership Units pursuant to the 2008
Commitment, and two of the employees agreed to forfeit their rights to receive
the Common Membership Units as part of a Separation Agreement with the
Company. In addition, the Company issued 1,000,000 Series A Preferred
Membership Units and issued 31,378,947 Common Membership Units to employees as
share-based awards.
As of
December 31 2009, the Company had a total of 106,378,947 Common Membership
Units and 1,000,000 Series A Preferred Membership Units
outstanding.
F-23
Openfilm,
LLC
Notes
to Consolidated Financial Statements
Note 9 – Related Party
Transactions
The
managing member and significant shareholder of the Company is Enerfund LLC, an
entity owned by Mike Zoi.
Notes
payable to related parties is comprised of the following amounts at December 31,
2009 and 2008:
|
2009
|
2008
|
|||||||
|
Due
to Mike Zoi
|
$ | 106,300 | $ | 66,000 | ||||
|
Due
to Kazo*
|
- | 2,842,703 | ||||||
|
Note
receivable - Enderfund, LLC
|
- | (1,425,873 | ) | |||||
|
Note
payable to related parties
|
$ | 106,300 | $ | 1,482,830 | ||||
* Kazo
and Enerfund, LLC are owned by Mike Zoi
Amounts
due Mike Zoi and Kazo are non-interest bearing obligations.
In
connection with the Amended and Restated Operating Agreement on October 12,
2009, the Company issued 1,000,000 units of Series A preferred shares in
consideration for funding (net settlement of Notes) in the amount of
$1,850,900.
Note 10 – Subsequent
Events
Lease
Commitment
On
September 1, 2010, the Company entered into a month-to-month lease for
additional office space in Miami for $700 per month.
Extinguishment of Note
Payable
In
October of 2010, the Company repaid the $250,000 third party Note
payable.
F-24