Net Element, Inc.
Annual Report 2014

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 001-34887 Net Element, Inc.(Exact name of registrant as specified in its charter) Delaware 90-1025599(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.) 3363 NE 163 rd Street, Suite 705North Miami Beach, FL 33160(Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (305) 507-8808 Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registeredCommon Stock, par value $0.0001 per share NASDAQ Capital Market Securities registered under Section 12(g) of the Exchange Act: Warrants, each exercisable for one share of Common Stock(Title of class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ YES x NO Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ YES x NO Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. x YES ¨ NO Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). x YES ¨ NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company)Smaller reporting company x Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ YES x NO The aggregate market value of the registrant’s common equity, other than shares held by persons who may be deemed affiliates of the registrant, as ofJune 30, 2014 was approximately $15,876,969 (based upon the reported closing price of $1.91 per share on June 30, 2014). The registrant had 47,460,032 shares of common stock outstanding as of March 30, 2015. DOCUMENTS INCORPORATED BY REFERENCE: NONE Defined Terms; Share Amounts and Consideration for Shares Net Element, Inc. (formerly known as Net Element International, Inc.) is a corporation organized under the laws of the State of Delaware. As used in thisAnnual Report on Form 10-K (this “Report”), unless the context otherwise requires, the terms “Company,” “we,” “us,” and “our” refer to Net Element, Inc.and, as applicable, its majority-owned and consolidated subsidiaries.  Forward-Looking Statements This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. Any statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Forward-looking statements generally are identified by the words “expects,” “anticipates,” “believes,” “intends,” “estimates,” “aims,”“plans,” “may,” “will,” “continue,” “seeks,” “should,” “believe,” “potential” or the negative of such terms and similar expressions. Forward-lookingstatements are based on current plans, estimates and projections, and therefore you should not place too much reliance on them. Forward-looking statementsspeak only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement in light of new information orfuture events, except as expressly required by law. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predictand are generally beyond the Company’s control. The Company cautions you that a number of important factors could cause actual results or outcomes todiffer materially from those expressed in, or implied by, the forward-looking statements. These factors include, among other factors: ■the impact of any new or changes made to laws, regulations, card network rules or other industry standards affecting our business;■the impact of any significant chargeback liability and liability for merchant or customer fraud, which we may not be able to accurately anticipateand/or collect;■our ability to secure or successfully migrate merchant portfolios to new bank sponsors if current sponsorships are terminated;■our and our bank sponsors’ ability to adhere to the standards of the Visa and MasterCard payment card associations;■our reliance on third-party processors and service providers;■our dependence on independent sales groups (“ISGs”) that do not serve us exclusively to introduce us to new merchant accounts;■our ability to pass along increases in interchange costs and other costs to our merchants;■our ability to protect against unauthorized disclosure of merchant and cardholder data, whether through breach of our computer systems orotherwise;■the effect of the loss of key personnel on our relationships with ISGs, card associations, bank sponsors and our other service providers;■the effects of increased competition, which could adversely impact our financial performance;■the impact of any increase in attrition due to an increase in closed merchant accounts and/or a decrease in merchant charge volume that we cannotanticipate or offset with new accounts;■the effect of adverse business conditions on our merchants;■our ability to adopt technology to meet changing industry and customer needs or trends;■the impact of any decline in the use of credit cards as a payment mechanism for consumers or adverse developments with respect to the credit cardindustry in general;■the impact of any adverse conditions in industries in which we obtain a substantial amount of our bankcard processing volume;■the impact of seasonality on our operating results;■the impact of any failure in our systems due to factors beyond our control;■the impact of any material breaches in the security of third-party processing systems we use;■the impact of any new and potential governmental regulations designed to protect or limit access to consumer information;■the impact on our profitability if we are required to pay federal, state or local taxes on transaction processing;■the impact on our growth and profitability if the markets for the services that we offer fail to expand or if such markets contract;■our ability (or inability) to continue as a going concern;■the impact of sanctions against Russia on our operating results;■the Company’s ability (or inability) to obtain additional financing in sufficient amounts or on acceptable terms when needed;■the impact on our operating results as a result of impairment of our goodwill and intangible assets;■our material weaknesses in internal control over financial reporting and our ability to maintain effective controls over financial reporting in thefuture; and■the other factors identified in the section of this Report entitled “Risk Factors.” If these or other risks and uncertainties (including those described in Part I, Item 1A of this Report and the Company’s subsequent filings with the U.S.Securities and Exchange Commission (the “Commission”)) materialize, or if the assumptions underlying any of these statements prove incorrect, theCompany’s actual results may be materially different from those expressed or implied by such statements. We undertake no obligation to publicly revise anyforward-looking statement to reflect circumstances or events after the date of this Report to reflect the occurrence of unanticipated events. You should,however, review the factors and risks described in the reports we file from time-to-time with the Commission after the date of this Report. World Wide Web addresses contained in this Report are for explanatory purposes only and they (and the content contained therein) do not form a part of, andare not incorporated by reference into, this Report.  TABLE OF CONTENTS PagePART I Item 1.Business. 4 Item 1A.Risk Factors. 16 Item 1B.Unresolved Staff Comments. 21 Item 2.Properties. 21 Item 3.Legal Proceedings. 21 Item 4.Mine Safety Disclosures. 22 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 23 Item 6.Selected Financial Data. 23 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations. 24 Item 7A.Quantitative and Qualitative Disclosures About Market Risk. 32 Item 8.Financial Statements and Supplementary Data. 32 Item 9.Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. 32 Item 9A.Controls and Procedures. 32 Item 9B.Other Information. 34 PART III Item 10.Directors, Executive Officers and Corporate Governance. 34 Item 11.Executive Compensation. 36 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 37 Item 13.Certain Relationships and Related Transactions, and Director Independence. 39 Item 14.Principal Accountant Fees and Services. 41 PART IV Item 15.Exhibits and Financial Statement Schedules. 41 Signatures 42  PART I Item 1. Business. Company Overview Net Element, Inc. (“Net Element,” the “Company,” “we,” “us,” and “our”) is a global payments-as-a-service, technology group specializing in mobilepayments and value-added transactional services in the United States and emerging countries. The Company operates in a single operating segment as aprovider of transactional services and mobile payment solutions. Through its U.S. based subsidiaries, the Company generates revenues from transactionalservices, valued-added payment technologies and proprietary cloud-based point of sale payments platform for small and medium-sized businesses (“SME”).Through several international subsidiaries, the Company operates its international business with a focus on transactional services, mobile paymentstransactions and value-added payment technologies in emerging countries including Russian Federation and the Commonwealth of Independent States(“CIS”), where our subsidiary TOT Money holds a leadership position in mobile payments. General Business Developments In 2014, we completed a number of transactions and other changes in pursuit of our strategy of enhancing financial results, creating a strong operationalfoundation and competitive advantage. We believe the following transactions and actions have focused and strengthened our company and improved ourcapital structure and cash flow. Our primary actions during 2014 were as follows: ·On November 24, 2014, TOT Money entered into a financing agreement with Bank Otkritie Financial Corp. (“Bank Otkritie”), oneof Russia’s largest private listed banks. This financing is complementary to our Alfa-Bank factoring facility, and provides additional flexibility andcapacity to expand our presence in Russia’s transactional services market. In conjunction with the Alfa-Bank factoring agreement, TOT Money willhave approximately $15 million of available credit to help fund its growth. Per the three-year Agreement, TOT Money will assign to Bank Otkritieits accounts receivable as security for financing in an aggregate amount of up to 200 million Russian rubles (approximately USD $4.2 million basedon the currency exchange rate as of the close of business November 17, 2014). Included in this Agreement, Moscow-based Bank Otkritie will trackthe status of TOT Money’s account receivables, monitor timeliness of payment of such accounts receivable, and provide related servicing. OlegFirer, our Chief Executive Officer, has personally guaranteed our agreement with Bank Otkritie. This financing is a factoring facility in which TOTMoney could assign to the bank certain (but not all) of its accounts receivable suitable to the lender under such facility as security for financing. Accordingly, the amounts of our draws under such facility from time to time will depend on the amounts of the accounts receivable suitable for suchassignment as of the time we choose to draw under such facility. We have not drawn any funds under such credit facility. ·On October 17, 2014, we filed a $50 million universal shelf registration statement on Form S-3 with the Securities and Exchange Commission. Theregistration statement is intended to provide the Company with increased financial flexibility to execute on its business strategy and invest inopportunities in mobile payments and value-added transactional services. ·On September 23, 2014, Alfa-Bank, Russia’s largest private bank, renewed and increased Net Element’s Russian subsidiary OOO TOT Money (“TOTMoney”) credit facility from 300 million Russian rubles to 415 million Russian rubles (approximately USD $11 million at the time of theagreement). This financing facility will support our next stage of growth and operations in Russia and the Commonwealth of Independent States.This financing is a factoring facility in which TOT Money could assign to the bank certain (but not all) of its accounts receivable suitable to thelender under such facility as security for financing. Accordingly, the amounts of our draws under such facility from time to time will depend on theamounts of the accounts receivable suitable for such assignment as of the time we choose to draw under such facility. We have not drawn any fundsunder such credit facility. TOT Money’s previous financing agreement with Alfa-Bank, secured in September, 2012, for the amount of 300 millionRussian rubles (approximately USD $9.8 million, at the time of the agreement), expired May 20, 2014 and was fully repaid, using TOT Money’sworking capital, in accordance with the terms of the agreement. ·On September 17, 2014, we announced the integration of Apple® services into our point-of-sale payment acceptance hardware and software. Thisenabled our merchants the ability to accept Apple Pay from customers. This new service will create a unique experience for customers who want topay at the point-of-sale using their Apple® iPhone 6, Apple® iPhone 6 Plus and Apple® Watch devices. ·On September 15, 2014, we entered into a debt exchange agreement with Crede CG III, Ltd. (“Crede”), a wholly owned subsidiary of Crede CapitalGroup, LLC. Under the agreement, we effectively eliminated $15,876,860 of indebtedness in exchange for 5,802,945 shares of the Company’scommon stock. In addition to saving on the financing expenses associated with holding high-interest rate loans, we freed up a significant amount ofcash flow and strengthened our balance sheet by replacing debt with equity. ·On July 2, 2014, we closed on a $10 million credit facility from RBL Capital Group, LLC (“RBL Capital”). The $10 million credit facility extendedto us by RBL Capital, triggered the conversion provisions of the first round convertible debt financing provided by Cayman Invest, S.A. (“CI”),converting its debenture to common shares of our Company. The effect of the new $10 million credit facility and the CI debt conversion was tosignificantly reduce our total outstanding indebtedness. The Company utilized $3 million of the $10 million credit facility to pay in full its loanobligations to MBF Merchant Capital, LLC. ·On June 30, 2014, we appointed William Healy to our board of directors. Mr. Healy is an accomplished financial services industry veteran with morethan 24 years of merchant financing and electronic payments industry experience. Mr. Healy is currently the President of Funds4Growth, a leadinginvestment firm focused on financing of payment service providers in the United States. Since launching Funds4Growth, Mr. Healy has successfullystructured and financed in excess of $100 million in merchant base loans. Prior to his tenure at Funds4Growth, Mr. Healy founded MBF Leasing,LLC in November of 2003, where he was responsible for strategic planning along with the financial and operational management. Prior to that, Mr.Healy spent 13 years with the CIT Group, Inc., where he was the President of CIT’s Lease Finance Group. ·On May 21, 2014, we appointed Drew Freeman to our Board of Directors. Mr. Freeman is an accomplished industry veteran with more than 30 yearsof electronic payments and merchant services industry experience. His experience includes extensive work with agent banks, referral banks, directsales, software integration, internet sales, dining programs, American Express, Diners Club, Discover Card, JCB and ISO/MSP programs. 4 ·On April 21, 2014, we entered into a Secured Convertible Senior Promissory Note (the “Note”) with Cayman Invest, S.A. (“CI”). Pursuant to theNote, CI agreed to loan to the Company $11,200,000.00. No interest will accrue under the Note; provided, however, that upon a default under theNote, the Note will accrue simple interest, at 12% per annum. Prior to March 31, 2015, effective upon a first financing closing after the date of theNote, in which the Company receives financing of at least $10 million from a third party (the “Qualified Financing”), the entire principal amount ofthe Note will be automatically converted into common shares of the Company equal to 15% of the then outstanding shares of the Company.Effective upon an equity financing after the date of the Note in which the Company issues stock, (other than a Qualified Financing) or at any timebefore or after March 31, 2015, at the option of CI, the entire principal amount of the Note may be converted into common shares of the Companyequal to 15% of the then outstanding shares of the Company. Unless converted, the outstanding amount under the Note will be due and payable onthe earlier of March 31, 2015 and the closing of a sale of a majority of the ownership of the Company or any voluntary or involuntary liquidation,dissolution or winding up of the Company. Under the Note, the Company agreed to take all actions to have the obligations under the Notepositioned as a senior security interest secured by all assets of the Company and by those payment processing portfolios owned by the Company asof the date of the Note. During 2014, we recorded a gain on the change in fair value on the beneficial conversion derivative in the amount of$5,569,158 as a result of the conversion of the Cayman Invest loan to common stock. This was offset by a loss on debt payoff of the Cayman Investloan in the amount of ($3,962,406) primarily due to the write-off of the remaining debt discount on the loan ·On February 11, 2014, we agreed to transfer to T1T Group all of the Company’s minority interest in T1T Lab, LLC primarily in consideration for ourrelease from our obligation to make future capital contributions to T1T Lab, LLC. This transaction completed the full divesture of our interests inentertainment assets (websites). Following the end of our 2014 fiscal year, on March 16, 2015, TOT Group Europe, Ltd. (“TOT Group Europe”), one of our subsidiaries, entered into aBinding Offer Letter (the "Offer") with Maglenta Enterprises Inc. and Champfremont Holding Ltd. to acquire all of the issued and outstanding equity interestsof the PayOnline group of companies (collectively, “PayOnline”) to be named in the course of preparation of a legally binding acquisition agreement.PayOnline’s business includes the operation of a protected payment processing system to accept bank card payments for goods and services. The consideration for all of the equity interests of PayOnline will be a combination of cash and restricted shares, payable in five installments. The Offer setsforth the determination of the value of such shares based on the closing sales price on the date before each applicable payment date and provides certainadditional restrictions on trading of the Company's common stock. The first installment will be payable upon closing of the PayOnline acquisition and willconsist of $3.6 million in cash and the restricted shares of the Company's common stock with a value of $3.6 million. The other four installments will bepayable after the end of each applicable quarter for which the installment is calculated, and will consist of a combination of cash and the restricted shares ofthe Company's common stock, in each case equal to the earn-out. The earn out will be calculated based on PayOnline EBITDA for certain post-closingperiods, multiplied by 1.35. Pursuant to the Offer, the aggregate valuation of PayOnline on a debt-free basis will be $8,482,000, and the purchase price willnot exceed such amount. At the end of the 12-month period following the issuance of restricted shares of the Company's common stock to the Sellers (“Guarantee Period”), TOT GroupEurope will guaranty that the value of such stock then not sold by the sellers of PayOnline equity interests (the “Sellers”) will not be less than the value ofsuch at the date of the issuance of such stock. Subject to certain conditions, if at the end of the Guarantee Period the value of the any such remaining stock isless than the value of such stock at the date of the issuance of such stock, TOT Group Europe will pay a cash amount equaling the difference between suchvalues. If any party terminates the Offer, it will be subject to $400,000 penalty. Our Corporate Organization Our Company was formed in 2010 and incorporated as a Cayman Islands exempted company with limited liability under the name Cazador AcquisitionCorporation Ltd. (“Cazador”). Cazador was a blank check company incorporated for the purpose of effecting a merger; share capital exchange; assetacquisition; share purchase; reorganization or similar business combination with one or more operating businesses or assets. In 2012, Cazador completed amerger (the “Merger”) with Net Element, Inc., a Delaware corporation (“Net Element”), which was a company with businesses in the online media and mobilecommerce payment processing markets. Immediately prior to the effectiveness of the Merger, the Company (then known as Cazador Acquisition CorporationLtd.) changed its jurisdiction of incorporation by discontinuing as an exempted company in the Cayman Islands and continuing and domesticating as acorporation incorporated under the laws of the State of Delaware. Effective upon consummation of the Merger, (i) Net Element was merged with and into theCompany, resulting in Net Element ceasing to exist and the Company continuing as the surviving company in the Merger, and (ii) the Company changed itsname to Net Element International, Inc. In 2013, the Company divested its non-core entertainment assets. In December 2013, the Company changed its nameto Net Element, Inc. We entered the mobile payments business through the launch of TOT Money in Russia in 2012. We entered the financial technology andvalue-added transactional service business through the acquisitions of Unified Payments in April 2013 and Aptito in June 2013. Our principal office islocated at 3363 NE 163rd Street, Suite 705, North Miami Beach, Florida 33160, and our main telephone number is (305) 507-8808. Our Industry Segment We manage one segment, consisting of payment-as-a-service offering, which includes: transactional processing, mobile payment solutions, value-addedtransactional offerings and proprietary cloud-based point of sale payments platform. ·TOT Payments, our transactional processing group for the SME business, provides technology and services that businesses require to accept cashlesstransactions. TOT Payments processes cashless transactions for card-present (or “swipe”) or card-not-present transactions, including point-of-sale(“POS”), mobile POS (“mPOS”), EMV, near field communication (“NFC”), Apple Pay®, Internet businesses, service-oriented businesses, and mailorder / telephone order (“MOTO”) merchants. TOT Payments also processes other cashless transactions including checks and direct debits. TOTPayments services include merchant performance analytics and merchant back office reporting. TOT Payments services are distributed in most partthrough ISGs, value-added resellers, system integrators and affinity partners. TOT Payments markets its services in the United States under the brandUnified Payments (www.unifiedpayments.com ). ·Aptito is our cloud based Software-as-a-Service (“SaaS”) restaurant management solution, which provides integrated POS, mPOS, Kiosk, DigitalMenus functionality to drive consumer engagement via Apple® iPad®-based POS, kiosk and all other cloud-connected devices. Aptito’sproprietary, customer engaged, patent-pending, cloud-based platform provides hospitality merchants with tools to increase sales, productivity andcustomer loyalty. Utilizing its disruptive platform, Aptito provides merchants a feature-rich, innovative and socially driven, all-in-one digitalsoftware solution for the food-service industry. Aptito’s Restaurant mPOS solution provides restaurants with tools to increase sales, productivity, andcustomer loyalty. Aptito’s suite of integrated tools enables inventory management, complete payroll, staff scheduling, patron reservations anddigital menus. More capable and less costly than a traditional POS system, Aptito doesn’t have the steep learning curve associated with typical POSproducts (www.aptito.com ) 5 ·TOT Money is our proprietary, state-of-the-art mobile payments and commerce platform, which provides carrier-integrated mobile paymentssolutions, mobile campaign management and distribution. TOT Money mobile platform is positioned in the center of the mobile commerce fordigital goods with carrier billing checkout and offers various mobile payment solutions for web services and mobile applications. We providemobile payment solutions to help digital merchants, such as: social networks, games, online magazines and digital media monetize its mobileclients and the subscription base. We provide users with a simple, secure and fast way to pay for purchases via mobile without a credit card or a bankaccount. Our mobile campaign tools allow for the delivery of scalable mobile campaigns on behalf of our content partners. TOT Money’srelationships and integration with mobile operators gives us substantial geographic coverage, a strong capacity for innovation in mobile paymentsand messaging, and the ability to offer its clients In-App payments, Wireless Access Protocol (“WAP”) click, premium Short Message Services (“P-SMS”), Online and Carrier Billing. This deep integration with carriers and expertise in mobile direct billing enables our partners to experience thenext generation of mobile payments in just one click. The Company has 18 Software Engineers located in our offices in Miami, Moscow and Yekaterinburg, providing all of our software development and supportrequirements. Our Services Payments Acceptance. We provide merchants with turnkey payment acceptance solutions, which include the necessary hardware and software, as well as thenecessary technology, to integrate into their existing POS systems, applications and websites. We also provide transaction processing, training, on-goingcustomer, and technical support, risk management to help detect and prevent fraudulent transactions, real-time online reporting, analytics and administrativetools. For these services, we charge our merchants a discount fee, or “Merchant Discount”, which is based primarily on a percentage of the dollar amount ofeach transaction we process. The Merchant Discount may vary based on several factors, including the type of merchant, the type of payment method used andwhether the transaction process is a swipe card-based transaction, mobile transaction or a card-not-present transaction. ·Card-based Transactions. A transaction is initiated when a consumer purchases a product or service at a merchant using his or her card. At the pointof sale, the consumer’s credit card information is submitted to our processing vendor, which then communicates with the card-issuing bank throughthe proper association network (such as Visa or MasterCard) to authorize the transaction. After authorization, we instruct our processing vendor toroute funds from the card-issuing bank to our sponsoring bank. Our sponsoring bank, which sponsors us for membership in the Visa, MasterCard orother card association, settles the transaction with the merchant. We pay interchange fees and assessment fees to the card-issuing bank and the creditcard association, respectively, which are typically passed through in the Merchant Discount. We outsource certain services to third parties, includingthe receipt and settlement of funds and after-hours customer and technical support. We believe this structure allows us to maintain an efficientoperating structure and enables us to expand our operations without significantly increasing our fixed costs or capital expenditures. ·Mobile Transactions. A mobile transaction is initiated when a consumer purchases digital goods or subscribes to digital content using its mobilephone number as a form of payment. Allowing merchants to have the charge added to a customer’s phone bill, or more commonly in markets wherepre-paid dominates have it deducted from the user’s balance, bypasses the traditional card-based ecosystem. We use our proprietary mobilepayments platform to integrate with mobile operators and facilitate mobile transaction in real-time or on subscription basis. We share revenues withmobile operators and charge our merchants a Merchant Discount fee for processing of such transactions. -Mobile One Click Payments. Mobile one click payment service provides users with an easy and intuitive way of paying for their goods andservices via the browser on their mobile device. Mobile one click payment service allows users browsing websites on their mobile device topurchase digital goods and services directly through their mobile browser. Mobile one click payment service automatically recognizes theuser’s mobile number and charges the purchase to their mobile bill or deducts it from their pre-paid credit in just one click. We use an encryptedidentification process to immediately recognize the user’s phone number, which provides a secure and automatic authentication, so that thepayment process only takes one click. There’s no need for passwords and PIN numbers. -In-App Payment. In-App Payment allows application users to purchase goods and services from inside the native application in just one click.In-App payment technology recognizes the user’s phone number and charges the purchase to their mobile bill or deducts it from their pre-paidcredit. This service has been optimized to work both for users connected to the Mobile Operator’s network (for e.g. 3G, EDGE, GPRS) and alsofor users connected via WiFi. In-App Payment is available for both One-time and Subscription payment models. -Web & Desktop Payments. Web Payment allows users browsing merchant’s website on a desktop PC to purchase digital goods and services andcharge it directly to their mobile phone bill or deduct the amount from their pre-paid credit. The user’s purchase is authenticated through asecure pin code, which is sent to their mobile. -Subscription Payments. Subscription Payments option allows merchants to automatically charge users’ mobile bill on a periodic, weekly ormonthly basis. By introducing this option merchants will be able to offer users that subscribe access to premium features. Examples of purchasesthat may benefit from Subscription Payments include online content site subscriptions and credit top ups. -P-SMS Billing. Purchases are made by means of Premium SMS sent or received where the payment is charged to the user’s mobile monthly billor deducted from his or her prepaid credit. All-in-one Digital POS Platform. Utilizing its disruptive platform, Aptito provides merchants a feature-rich, innovative and socially driven, all-in-onedigital software solution for the food-service industry. Aptito’s Restaurant mPOS solution provides restaurants with tools to increase sales, productivity, andcustomer loyalty. Aptito’s suite of integrated tools enables inventory management, complete payroll, staff scheduling, patron reservations and digital menus.More capable and less costly than a traditional POS system, Aptito doesn’t have the steep learning curve associated with typical POS products. Business Analytics. Our information, analytics and reporting solutions empower merchants to utilize payment data and analytics to manage and grow theirbusiness. The Unified Payments Insight solution uses transactional data, online reputation management and social media to help identify sales trends andseize opportunities for growth. Merchant Management Portal – Sales Central is our cloud-based solution providing an integrated toolkit to both Independent Sales Organizations andmerchants to effectively manage a variety of sales, operations, reporting and accounting functions. Sales Central for ISGs is our comprehensive back officesolution for Independent Sales Organization. Our merchant underwriting and boarding process is seamless and paperless. Merchant Library allows ISO tosafely store and retrieve any agreement, form or contract, related to ISG’s merchants. Our ISGs are equipped with merchant pricing, residuals calculation andrisk management modules, which take care of most of their day-to-day operations. Our ISGs can manage customers’ profit by using multi-level, single-click,drill-down navigation to pricing, detail, summary and statement information. 6 Relationships with Mobile Operators, Sponsors and Processors Mobile Operators. In order for us to provide payment and SMS messaging services to mobile subscribers and debit their accounts for payments, we need tohave contractual agreements with mobile operators, which allow us to bill its subscribers. We have direct and indirect agreements with mobile operators andmobile operator aggregators in over 40 countries. The three largest mobile operators through which we process the majority of our transactions are: MobileTeleSystems OJSC (“MTS”), MegaFon OJSC (“MegaFon”) and OJSC VimpelCom (“VimpelCom”). These contracts with mobile operators, allow us tofacilitate payments using SMS, Multimedia Messaging Services (“MMS”) and WAP for their mobile phone subscribers. From time to time, we may enter intoagreements with additional mobile operators and mobile operator aggregators. In addition, we also have contracts and our platform is integrated with variousmobile operator aggregators, which give us access to mobile operator networks in approximately 50 countries. As an example of processing a mobile transaction, the below diagram illustrates the participants involved in a mobile payment transaction. There are fourmain participants, the user, the mobile operator, transaction processor (TOT Mobile Platform) and the mobile applications (Merchants). Merchants areprimarily content or digital goods providers such as: social networks, games and online magazines. In order to provide transaction-processing services for Visa and MasterCard transactions, a financial institution that is a principal member of the Visa andMasterCard card association must sponsor us. Additionally, we must be registered with Visa and MasterCard as a member service provider. Sponsoring Banks. Because we are not a member bank as defined by Visa and MasterCard rules and regulations, in order to authorize and settle bankcardtransactions for our merchants, we must be sponsored by a financial institution that holds a member bank status. We have agreements with several banks thatsponsor us for membership in the Visa and MasterCard card associations and settle card transactions for our merchants. The principal sponsoring bankthrough which we process the majority of our transaction in the United States is BMO Harris Bank. From time to time, we may enter into agreements withadditional banks. See “Risk Factors – Risk Factors Relating to Our Business – We rely on bank sponsors, which have substantial discretion with respect tocertain elements of our business practices, in order to process bankcard transactions. If these sponsorships are terminated and we are not able to secure orsuccessfully migrate merchant portfolios to new bank sponsors, we will not be able to conduct our business.” Processing Vendors. We have agreements with several processing vendors to provide us with, on a non-exclusive basis transaction processing andtransmittal, transaction authorization and data capture, and access to various reporting tools. Our primary processing vendor in the United States is CynergyData, LLC (“Cynergy”), which provides us with the processing conduit to Total System Services, Inc. (“TSYS”) authorization and settlement network. Wehave entered into several service agreements with Cynergy. Each of the Cynergy service agreements may be terminated by Cynergy if, among other things,(i) certain insolvency events occur with respect to us or (ii) we fail to maintain our good standing in the Visa or MasterCard associations. We may terminateeach of the agreements if, among other things, (i) certain insolvency events occur with respect to Cynergy, (ii) Cynergy materially breaches any of the terms,covenants or conditions of the agreements and fails to cure such breach within 30 days following receipt of written notice thereof, or (iii) under certaincircumstances, Cynergy is unable to perform services described in the agreement. As an example of processing an electronic payment, the below diagram illustrates the participants involved in a credit card transaction. There are four mainparticipants, the merchant, the service provider (TOT payments), the sponsoring bank and the data processor. Merchants are primarily business owners thataccept credit card payment in exchange for their merchandise and services.  7 Our Client Base In Russia, we enable mobile payment processing services for more than 390 million mobile users in Russia through strategic direct agreements andintegrations with Top 3 mobile operators such as Mobile TeleSystem, MegaFon and VimpelCom, Ltd. In January 2015, we have reached a crucial companymilestone by exceeding 1 million recurring mobile payment subscribers. As of December 31, 2014, our mobile payments subscriber base consisted of941,668 recurring mobile payments subscribers. In the United States, we have developed significant expertise in industries that we believe present relatively low risks as the customers are generally presentand the products or services are generally delivered at the time the transaction is processed. These include: ■Professional service providers■Restaurants■Brick and mortar retailers■Educational service providers■Food stores■Automotive sales and repair shops■Hotel and lodging establishments Merchants we serve typically process on average $11,223 each month in credit card transactions and have an average transaction value of $54.35 pertransaction. Larger payment processors have traditionally underserved these merchants. As a result, these merchants have historically paid higher transactionfees than larger merchants and have not been provided with tailored solutions and on-going services that larger merchants typically receive from largerpayment processing providers. As of December 31, 2014, approximately 44% of our SME merchants were eating places and restaurants and 18% were schools and educational services. Noother merchant class has exceeded 3% concentration. High concentration in eating places and restaurants reflects the efforts of our sales team, activelytargeting our Aptito product line. The following table reflects the percentage concentration of our merchant base by class: SIC/MCC Description % of Total 5812 EATING PLACES, RESTAURANTS 44.34%8299 SCHOOLS & EDUCATIONAL SVCS 17.59%5814 FAST FOOD RESTAURANTS 2.10%5399 MISCELLANEOUS GENERALMERCHANDISE 2.07%5712 FURNITURE & HOME FURNISHINGS 1.62%7011 HOTELS, MOTELS & RESORTS 1.54%7538 AUTOMOTIVE REPAIR SHOPS-NON-DEALER 1.46%7298 HEALTH & BEAUTY SPAS 1.44%5411 GROCERY STORES & SUPERMARKETS 1.41%8043 OPTICIANS, OPTICAL GOODS & EYEGLASSES 1.36%7230 BEAUTY SHOPS & BARBER SHOPS 1.36%5499 MISCELLANEOUS FOOD STORES-SPECIALTY 1.24% The following table reflects the percentage concentration of our merchant base by state: StateTrans VolumeNY29.84%NJ10.25%NC9.13%CA7.21%FL6.72%TX5.14%IL4.37%CT3.08%PA3.13%WA2.19%MA2.13%VA2.23%CO1.36%AZ1.32%OH1.67%SC1.36% Merchant and Transaction Risk Management In the United States, we focus our sales efforts on low-risk bankcard merchants and have developed systems and procedures designed to minimize ourexposure to potential merchant losses. Effective risk management helps us minimize merchant losses for the mutual benefit of our merchants, Independent Sales Organization (ISO) and ourselves.Our Underwriting and Risk Management Policy and procedures help to protect us from fraud perpetrated by our merchants. We believe our knowledge andexperience in dealing with attempted fraud has resulted in our development and implementation of effective risk management and fraud prevention systemsand procedures. In 2014, we experienced losses of .008% of our SME card processing volume. 8 We employ the following systems and procedures to minimize our exposure to merchant and transaction fraud: ■Application Evaluation Underwriting. There are varying degrees of risk associated with different merchant types based on their industry, the natureof the merchant’s business, processing volumes and average transaction size. As such, varying levels of scrutiny are needed to evaluate a merchantapplication and to underwrite a prospective merchant account. These range from basic due diligence for merchants with low risk profiles to morecomprehensive review for higher risk merchants. The results of this assessment serves as the basis for decisions regarding acceptance of the merchantaccount, criteria for establishing reserve requirements, processing limits, average transaction amounts and pricing. Once aggregated, these factorsalso assist TOT Payments in monitoring transactions for those accounts when pre-determined criteria have been exceeded. ■Merchant Monitoring. We employ several levels of merchant account monitoring to help us identify suspicious transactions and trends. Dailymerchant activity is sorted into a number of customized reports by our systems. Our risk management team reviews any unusual activity highlightedby these reports, such as larger than normal transactions or credits, and monitors other parameters that are helpful in identifying suspicious activity.We have daily windows to decide if any transactions should be held for further review, which provides us time to interview a merchant or issuingbank to determine the validity of suspicious transactions. We also place merchants who require special monitoring on alert status and have engageda third-party web crawling solution that scans all merchant websites for content and integrity. ■Investigation and Loss Prevention. If a merchant exceeds any parameters established by our underwriting and/or risk management staff or violatesregulations established by the applicable bankcard network or the terms of our merchant agreement, one of our investigators will identify theincident and take appropriate action to reduce our exposure to loss and the exposure of our merchant. This action may include requesting additionaltransaction information, withholding or diverting funds, verifying delivery of merchandise or even deactivating the merchant account. Additionally,Relationship Managers may be instructed to retrieve equipment owned by us. In addition, to protect ourselves from unexpected losses, we maintaina reserve account with our sponsoring bank, which can be used to offset any losses incurred at a given time. As of December 31, 2014, our reservebalance was $151,306, our reserve is capped at $250,000 at any given time and replenished by funding 0.03% of bankcard processing volume in theevent we need to use it to fund an unexpected loss. This reserve is accounted for on our balance sheet under the caption “other assets”. ■Reserves. Some of our merchants are required to post reserves (cash deposits) that are used to offset chargebacks incurred. Our sponsoring bankshold such reserves related to our merchant accounts as long as we are exposed to loss resulting from a merchant’s processing activity. In the eventthat a small company finds it difficult to post a cash reserve upon opening an account with us, we may build the reserve by retaining a percentage ofeach transaction the merchant performs until the reserve is established. This solution permits the merchant to fund our reserve requirementsgradually as its business develops. As of December 31, 2014, our total reserve deposits were approximately $35,000. We have no legal title to thecash accounts maintained at the sponsor bank in order to cover potential chargeback and related losses under the applicable merchant agreements.We also have no legal obligation to these merchants with respect to these reserve accounts. Accordingly, we do not include these accounts and thecorresponding obligation to the merchants in our consolidated financial statements. In Russia, we are responsible for content compliance and merchant underwriting and are subject to chargebacks for the full value of the transaction. If anysuch chargebacks arise we pass these chargebacks to our merchants, in the event we are unsuccessful in passing these charges to the merchant we areresponsible for these chargebacks. In 2014, we had no losses from our mobile payments processing volume, as all chargebacks were collected from ouraggregators. Market Overview The financial technology and transaction processing industry is an integral part of today’s worldwide financial structure. The industry is continuallyevolving, driven in large part by technological advances. The benefits of card-based payments allow merchants to access a broader universe of consumers,enjoy faster settlement times and reduce transaction errors. By using credit or debit cards, consumers are able to make purchases more conveniently, whetherin person, over the Internet, or by mail, fax or telephone, while gaining the benefit of loyalty programs, such as frequent flyer miles or cash back, which areincreasingly being offered by credit or debit card issuers. Consumers are also beginning to use card-based and other electronic payment methods for purchases at an earlier age in life, and increasingly for small dollaramount purchases. Given these advantages of card-based payment systems to merchants and consumers, favorable demographic trends, and the resultingproliferation of credit and debit card usage, we believe businesses will increasingly seek to accept card-based payment systems in order to remaincompetitive. Our management believes that cash transactions are becoming progressively obsolete. The proliferation of bankcards has made the acceptance of bankcardpayments a virtual necessity for many businesses, regardless of size, in order to remain competitive. In addition, the advent and growth of e-commerce havemarked a significant new trend in the way business is being conducted. E-commerce is dependent upon credit and debit cards, as well as other cashlesspayment processing methods. The payment processing industry continues to evolve rapidly, based on the application of new technology and changing customer needs. We intend tocontinue to evolve with the market to provide the necessary technological advances to meet the ever-changing needs of our market place. Traditional playersin the industry must quickly adapt to the changing environment or be left behind in the competitive landscape. 9 Competition The payment processing industry is highly competitive. We compete with other providers of payment processing services on the basis of the followingfactors: ■quality and reliability of service;■ability to evaluate, undertake and manage risk;■ability to attract and retain independent sales organizations;■ability to offer differentiating products and services;■speed in approving merchant applications and deploying equipment; and■cost to the customer. We are committed not only to servicing clients’ current processing needs, but also to being amongst the first to make available new technologies that mayimprove our merchants’ respective competitive positions. We are committed to gaining the expertise and relationships to adopt and implement newtechnologies that we believe may differentiate our service offerings. Many large and small companies compete with us in providing payment processing services and related services to a wide range of merchants. Many of ourcurrent and prospective competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories,more developed infrastructures, greater name recognition and/or more established relationships in the industry than we have. Because of this our competitorsmay be able to adopt more aggressive pricing policies than we can, develop and expand their service offerings more rapidly, adapt to new or emergingtechnologies and changes in customer requirements more quickly, take advantage of acquisitions and other opportunities more readily, achieve greatereconomies of scale, and devote greater resources to the marketing and sale of their services. There are also many smaller transaction processors that providevarious services to small and medium sized merchants. See “Risk Factors - Risk Factors Related to Our Business Generally - The markets in which we operateare very competitive, and many of our competitors and potential competitors are larger, more established and better capitalized than we are.” We believe that our specific focus on smaller merchants, in addition to our understanding of the needs and risks associated with providing paymentprocessing services to small merchants and ISGs, gives us a competitive advantage over larger competitors, which have a broader market perspective andpriorities. We also believe that we have a competitive advantage over competitors of a similar or smaller size that may lack our extensive experience, value-added product offering and resources. Our Business Strategy To continue to grow our business, our strategy is to focus on providing merchants with the ability to process a variety of electronic transactions, includingcard-based swipe transaction, mobile transaction or a card-not-present transaction. Key elements of our business strategy include: ■continuing to strive to enhance our risk management capabilities and solutions for our merchants;■expanding our merchant customer base in our transaction processing for the SME business segment;■expanding into high growth segments and verticals;■broaden and deepen our distribution channels; and■expanding the geographical availability of our payment-as-a-service, mobile payments value-added product offering into new territories. With our existing infrastructure and supplier relationships, we believe that we can accommodate expected industry growth. We believe that our availablecapacity and infrastructure will allow us to take advantage of operational efficiencies as we grow our processing volume and expand to other geographicalterritories. Sales and Marketing We market and sell our services to merchants throughout the United States primarily through a network of ISGs, which are non-employee, external salesorganizations with which we have contractual relationships, partnerships with various associations, value-added resellers and technology integrators, throughthe use of electronic media, telemarketing and other programs utilizing partnerships with other companies that market products and services to smallbusinesses. Our relationships with ISGs are typically mutually non-exclusive, permitting us to establish relationships with multiple ISGs and permitting ourgroups to enter into relationships with other providers of transaction processing services. We believe that this sales approach provides us with access to anexperienced sales force to market our services with limited investment in sales infrastructure and management time. We believe our focus on the unique needsof small and medium size merchants allows us to develop compelling offerings for our sales channels to bring to prospective merchants and provides us witha competitive advantage in our target market. Among the services and capabilities we provide are rapid application response time, merchant applicationacceptance by fax or on-line submission, superior customer service, merchant reporting and robust analytics. In addition, by controlling the underwritingprocess we believe we offer the ISGs more rapid and consistent review of merchant applications than may be available from other service providers.Additionally, in certain circumstances, we offer our sales organizations tailored compensation programs and unique technology applications to assist them inthe sales process. We keep an open dialogue with our sales partners to address their concerns as quickly as possible and work with them in investigatingchargebacks or potentially suspicious activity with the aim of ensuring our merchants do not unduly suffer downtime or the unnecessary withholding offunds. As compensation for their referral of merchant accounts, we pay our ISGs an agreed-upon residual, or percentage of the income we derive from thetransactions we process from the merchants they refer to us. The amount of the residuals we pay to our ISGs varies on a case-by-case basis and depends onseveral factors, including but not limited to the number and type of merchants each group refers to us. We provide additional incentives to our ISGs,including, from time to time, advances and merchant acquisition bonuses that are secured by income earned from the referred merchant and repayable fromfuture compensation that may be earned by the groups in respect to the merchant they have referred to us. For the year ended December 31, 2014, we hadprovided merchant acquisition incentives to ISGs in an aggregate amount of $0.34 million. Our organic growth plan calls for future incentives to be fundedto our ISGs for referred merchants. 10 Value-Added Technology and Services Our Services Aptito – Aptito is a new generation of proprietary, smart, customer engaged, patent-pending restaurant management system, comprising Point-of-Sale (POS),mPOS, self-ordering Kiosk, digital menus, based on Apple® iPad® and iPhone®, integrated with credit card readers, cash drawers, receipt and kitchenprinters. Through its cloud-based, off-line capable payments platform, Aptito offers merchants an innovative, socially driven, all-in-one digital softwaresolution that offers a complete package of features for the food-service industry. Aptito’s Restaurant mPOS solution provides restaurants with tools toincrease sales, productivity, and customer loyalty. Aptito’s suite of fully integrated modules enables inventory management, payroll and tips, staffscheduling, patron reservations and digital menus. We believe the Aptito all-in-one digital solution is the next evolutionary step for restaurants that are seeking to increase customer awareness and loyalty,offer their valued customers a modern and interactive way to order food, and receive personalized and interactive service. Aptito’s all-in-one social solutionwill drive traffic to restaurants via deals, specials, promotions, and rewards. We expect our social media integration to propel Aptito above platforms that lacksocial integration and position Aptito to achieve a substantial market share. Sales Central - is our cloud-based solution providing an integrated toolkit to both Independent Sales Organizations and merchants to effectively manage avariety of sales, operations, reporting and accounting functions. Sales Central for ISOs is our comprehensive back office solution for Independent Sales Organization. Our merchant underwriting and boarding process isseamless and paperless. Merchant Library allows ISO to safely store and retrieve any agreement, form or contract, related to ISO’s merchants. Our ISOs areequipped with merchant pricing, residuals calculation and risk management modules, which take care of most of their day-to-day operations. Our ISOs canmanage customers’ profit by using multi-level, single-click, drill-down navigation to pricing, detail, summary and statement information. Sales Central for Merchants is our complimentary reporting, accounting and analytics back office solution for small and medium size merchants. SalesCentral for Merchants offers a variety of reporting tools along with easy to read and understand charts enables merchants to analyze their sales and improveperformance. Bank account reconciliation has never been easier with our ACH transaction, Deposit, Retrieval, Chargebacks reports. Unified Payments Insights - is an online business dashboard that gives merchants a 360 degree view of their business. With Unified Payments MerchantInsights, merchants are able to compare current revenue, online reputation, and social media activity to their past performance and similar businesses in theirarea. They can also see what their customers are saying about their business across Yelp, TripAdvisor, Foursquare, OpenTable, Facebook, Twitter and manymore all in one simple, easy to use dashboard. TOT Money – Our omni-channel transactional platform and mobile payments billing system makes payment solutions possible across multiple channels. TOTMoney provides the latest mobile payment solutions including premium Short Message Service (“SMS”) billing, mobile subscriptions, direct carrier-billingand WAP billing to allow users to easily and securely pay for web or mobile content. Leveraging our extensive mobile operator relationships and marketexpertise, our transactional platform and mobile billing system offers customers a variety of mobile payment solutions through an extensive network ofmobile operator networks and any device type. TOT Money is currently utilized in our international business division. Research and Development We recognize the importance of having access to leading technology in order to develop advanced products for our customers, independent sales agents andfor our own internal use. To this end, IT development of our products is conducted in-house. We are maintaining three teams of development engineers,quality assurance professionals, programming code writers, UX and UI designers, dedicated to financial services and value-added technology business. Our representative office in Yekaterinburg, Russia employs four IT specialists engaged in Sales Central development, seven software engineers engaged inAptito development and an IT Systems Administrator. Our subsidiary office in Moscow employs three specialists primarily engaged in system development and support for TOT Money’s billing system. Our head office in North Miami Beach employs a Chief Technology Officer, (supervising all IT teams), IT Systems Administrator and an Aptito Testing &Development Engineer. 11 Intellectual Property We have several trademarks and service marks which are important to our business. The following trademarks and service marks are the subject of trademarkregistrations and are used in our financial services business: 1.Unified Payments2.Unified Payments – experience, confidence, growth3.TOT We regard our software as proprietary and attempt to protect it, where applicable, with copyrights, trade secret measures and non-disclosure agreements.Despite these protections, it may be possible for competition or users to copy aspects of our intellectual property or to obtain information that we regard astrade secrets. Existing copyright laws afford only limited practical protection for computer software. The laws of foreign countries generally do not protectour proprietary rights in our products to the same extent as the laws of the United States. In addition, we may experience more difficulty in enforcing ourproprietary rights in certain foreign jurisdictions. Patent Application number 13/471,717 was filed with United States Patent and Trademark Office on May15, 2012 for “Restaurant Communication System and Method Utilizing Digital Menus.” This application for patent was assigned to Aptito, LLC on June 26,2013. Integrated Mobile Payments and Transaction Services Our Services The following services are provided outside the United States: value-added mobile payments; mobile billing; SMS messaging and integrated mobilepayments. TOT Money is a provider of mobile messaging and mobile billing solutions in emerging markets. We offer targeted billing solutions via P-SMS,direct carrier billing, in-app purchases, WAP payments and mobile commerce. Instead of using traditional credit cards, TOT Money uses mobile devices aspayment methods and allows third-party content or services providers to charge its customers for goods and services using customers pre-paid or post-paidmobile credit. Relationships with Mobile Operators, Sponsors and Processors Mobile Operators. In order for us to provide payment and SMS messaging services to mobile subscribers and debit their accounts for payments, we need tohave contractual agreements with mobile operators, which allow us to bill its subscribers. We have direct and indirect agreements with mobile operators andmobile operator aggregators in over 40 countries. The three largest mobile operators through which we process the majority of our transactions are: MobileTeleSystems OJSC (“MTS”), MegaFon OJSC (“MegaFon”) and OJSC VimpelCom (“VimpelCom”). These contracts with mobile operators allow us tofacilitate payments using SMS, Multimedia Messaging Services (“MMS”) and WAP for their mobile phone subscribers. From time to time, we may enter intoagreements with additional mobile operators and mobile operator aggregators. Processing Vendors. We had agreements with several service processing vendors to provide us with, on a non-exclusive basis mobile gateway, carrier billing,transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. Our primary processing vendors forthe year ending December 31, 2014 for the TOT Money business was SDSP Group, which provided us with a mobile billing and support platform in theRussian Federation. During 2014, we acquired our own proprietary billing system and ceased using services provided by SDSP Group. In order for us to beable to process to bankcard transactions internationally, we entered into a partnership agreement with PAYON AG (“PAYON”). PAYON’s multi-channelpayment infrastructure system allowed us to directly connect to the banks that we had sponsorship agreements with, and to provide transactional services tothe merchants in these regions. This agreement was cancelled during 2014 as the Company launched TOT Platform, its own proprietary platform. Customers Everything we do is to ensure that our customers experience first-rate services. TOT Money’s current customers span across variety of industries and operateacross different markets. Our clients include mobile operators, merchants, content and service providers. We believe there are many ways to use TOT Money’s services, including the following: ■Mobile Operators – Mobile operators partner with us to generate revenues for incoming traffic. Mobile operators increase revenues via additionalsubscription and transactional services used by its subscribers. ■Broadcast Media – SMS billing is becoming an increasingly popular communication tool on both radio & TV. It provides interactivity for theviewer/listener through voting/polls/competitions, and can generate revenues for the stations/production companies. ■Portals/Content providers – SMS billing adds a further dimension to the offering of portals and content providers. It enables information alerts,ringtones and logos, SMS sending facility for end-users, all of which can generate revenues for the Company. ■Marketing/Sales Promotion – SMS billing is being used as a new marketing channel. Its immediacy; directness and 2-way communication lendsitself to effective measurable marketing and promotion. Integration with existing media adds a new dimension to marketing campaigns (e.g. outdoor,press, on-pack, and direct mail). Other industries using mobile messaging and mobile billing solutions include banking, retailing, brokering, tourism, transportation, gaming, and education. 12 Competition TOT Money primarily competes with other companies operating in the mobile payment processing market in Russia, which market is primarily controlled byfour companies, i-CUBE, Incore Media, iFree and TOT Money. Certain of TOT Money’s competitors have been in business longer than TOT Money and havesignificantly greater financial and other resources than TOT Money. In order to successfully increase our business in that market, we must convince contentproviders to use TOT Money’s services over competitive platforms that may already be in use. TOT Money must also retain good relations with the mobileoperators providing service. We believe that TOT Money will be able to effectively compete in the mobile payment processing market in Russia basedprimarily upon services offered, functionality and ease of use of features offered. Failure to successfully continue developing TOT Money’s paymentprocessing operations, maintain TOT Money’s existing contracts with mobile phone carriers and content providers and enter into additional contracts withcontent providers to use TOT Money’s services may harm our revenue and business prospects. Employees Our total number of employees at March 15, 2015 was 65 and 2 full time contractors. The staff in the United States is 24 full time employees and 2 full timeconsultants. Additionally, in Russia we have 39 employees consisting of 18 employees at TOT Money (mobile payments), and 9 employees at Net ElementRussia (Executives/Accounting) and 12 employees in Yekaterinburg (System Development). Regulation Various aspects of our business are subject to U.S. and non-U.S. federal, state and local regulation. The operations of our subsidiary, TOT Money, are subjectto regulation in Russia and may become subject to the laws and regulations of additional foreign jurisdictions as and when its business expands intoadditional markets. Many domestic and foreign laws and regulations that affect companies conducting business on the Internet and companies transmittinguser information and payments via text message or other electronic means are still evolving and the interpretation of such laws and regulations are oftenuncertain. Failure to comply with applicable laws and regulations may result in the suspension or revocation of licenses or registrations, the limitation,suspension or termination of services and/or the imposition of civil and criminal penalties and/or fines. The services of TOT Money to mobile phone carriersalso are subject to certain of the rules and policies of such carriers and ongoing contractual covenants with such carriers, the violation of which may result inpenalties and/or fines and possible termination of TOT Money’s services. Certain of our services are also subject to rules set by various payment networks,such as Visa and MasterCard, as more fully described below under Association and Network Rules. Laws and Rules of the Russian Federation The relationships between TOT Money and telecommunications carriers in Russia are governed by the general rules of civil law for the provision of services(Chapter 39 of the Civil Code of the Russian Federation). In addition, because the “information and entertainment services” (content services) provided byTOT Money are inextricably linked with the networks of telecommunications carriers, these services are subject to the requirements of the Rules of MobileCommunications Services Provision, approved by the Decree of the Russian Federation Government dated May 25, 2005 No. 328. These Rules govern therelationship between a customer using mobile communication services and a telecommunications carrier in respect of mobile radio communications services,mobile radiotelephone services and/or mobile satellite radio services in the public network. Although TOT Money is not a telecommunications carrier, manyrequirements of such Rules are present in TOT Money’s contracts with telecommunications carriers, and such contracts impose responsibility and liability onTOT Money for violations. TOT Money has a license for the provision of telematics services in Russia. TOT Money is considered an operator of telematic services in Russia because ithas a direct connection to equipment of telecommunications carriers and it effects electronic communications (i.e., receiving, processing and/or transmittingelectronic messages). Operators of telematics services in Russia are regulated by the Federal Law “On Communication” dated July 2, 2003 No. 126-FZ. ThisFederal Law provides the legal basis for activity in the field of communications in the Russian Federation and territories under the Russian Federationjurisdiction, defines the powers of public authorities in the field of communications, as well as the rights and responsibilities of persons involved in suchactivities or using communication services. TOT Money also is subject to the Rules of Telematics Services Provision approved by the Decree of the RussianFederation Government dated September 10, 2007 No. 575. These Rules govern the relationship between a customer or a user, on the one hand, and atelecommunications carrier providing telematic communication services, on the other hand, in the provision of telematic communication services. The activity of TOT Money to some extent is regulated by the Federal Law “On Operational and Investigative Activities” dated August 12, 1995 No. 144-FZ.This Federal Law determines the content of the operational and investigative activities in the Russian Federation, and provides for a system of guarantees inthe process of operational and investigative operations. Operational and investigative activities include activities carried out openly and secretly byoperational branches of certain government bodies in order to protect life, health, rights and freedoms of the person and the citizen, property, security of thesociety and the state from criminal attacks. In carrying out activities on the Internet in Russia, TOT Money is subject to the Federal Law “On Advertising” dated March 13, 2006 No. 38-FZ. Theobjectives of this Federal Law are the development of markets for goods and services based on the principles of fair competition, ensuring the commoneconomic space in the Russian Federation, the realization of the rights of consumers to receive fair and accurate advertising, creating favorable conditions forthe production and distribution of public service announcements, preventions of violations of the Russian Federation on advertising, as well as thesuppression of improper advertising. TOT Money’s activities on the Internet in Russia also are subject to the Federal Law “On Protection of Children fromInformation Harmful to Health” dated December 29, 2010 No. 436-FZ. This Federal Law provides regulations protecting children from information harmful totheir health and/or development. 13 Rules and Policies of and Contractual Covenants with Mobile Phone Carriers While not governmental regulation, TOT Money is subject to certain of the rules and policies of mobile phone carriers to which TOT Money providespayment processing services and ongoing contractual covenants with such mobile phone carriers. The mobile phone carriers may from time to time update orotherwise modify or supplement their rules and policies. TOT Money periodically is subject to the imposition of fines or penalties as a result of failure tocomply with such rules, policies and/or contractual covenants. TOT Money’s failure to comply with the mobile phone carriers’ respective requirements or topay the fines or penalties they impose could result in the termination of TOT Money’s services. Other Laws and Regulations Since TOT Money collects certain information from members and users on its platform, it will be subject to current and future government regulationsregarding the collection, use and safeguarding of consumer information over the Internet and mobile communication devices. These regulations and lawsmay involve taxation, tariffs, user privacy, rights of publicity, data protection, content, intellectual property, distribution, electronic contracts and othercommunications, consumer protection and electronic payment services. In many cases, it may be unclear how existing laws governing issues such as propertyownership, sales and other taxes, libel and personal privacy apply to the Internet or mobile communication services as the vast majority of these laws wereadopted prior to the advent of these technologies and do not contemplate or address the unique issues raised by the Internet and e-commerce. There are a number of legislative proposals that are anticipated or pending before the U.S. Congress, various state legislative bodies, and foreign governmentsconcerning data protection which could affect us. Many states, for example, have already passed laws requiring notification to subscribers when there is asecurity breach of personal data. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, inaddition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have an adverse effect on ourbusiness. Legislation could be passed that limits our ability to use or store information about our users. The Federal Trade Commission (the “FTC”) and various stateshave established regulatory guidelines issued under the Federal Trade Commission Act and various state acts, respectively, that govern the collection, useand storage of consumer information, establishing principles relating to notice, consent, access and data integrity and security. Our practices are designed tocomply with these guidelines. For example, we disclose that we collect a range of information about our users, such as their names, email addresses, searchhistories and activity on our platform. We also use and store such information primarily to personalize the experience on our platforms, provide customersupport and display relevant advertising. While we do not sell or share personally identifiable information with third parties for direct marketing purposes, wedo have relationships with third parties that may allow them access to user information for other purposes. We believe our policies and practices comply with the FTC privacy guidelines and other applicable laws and regulations. However, if our belief provesincorrect, or if these guidelines, laws or regulations or their interpretations change or new legislation or regulations are enacted, we may be compelled toprovide additional disclosures to our users, obtain additional consents from our users before collecting or using their information or implement newsafeguards to help our users manage our (or others’) use of their information, among other changes. Dodd-Frank Act In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law in the United States. The Dodd-Frank Act hasresulted in significant structural and other changes to the regulation of the financial services industry. Among other things, the Dodd-Frank Act establishedthe Consumer Financial Protection Bureau, or CFPB, to regulate consumer financial services, including many offered by our clients. The Dodd-Frank Act provided two self-executing statutory provisions limiting the ability of payment card networks to impose certain restrictions thatbecame effective in July 2010. The first provision allows merchants to set minimum dollar amounts (not to exceed $10) for the acceptance of a credit card(and allows federal governmental entities and institutions of higher education to set maximum amounts for the acceptance of credit cards). The secondprovision allows merchants to provide discounts or incentives to entice consumers to pay with cash, checks, debit cards or credit cards, as the merchantprefers. Separately, the so-called Durbin Amendment to the Dodd-Frank Act provided that interchange fees that a card issuer or payment network receives or chargesfor debit transactions will now be regulated by the Federal Reserve and must be “reasonable and proportional” to the cost incurred by the card issuer inauthorizing, clearing and settling the transaction. Payment network fees, such as switch fees may not be used directly or indirectly to compensate card issuersin circumvention of the interchange transaction fee restrictions. In July 2011, the Federal Reserve published the final rules governing debit interchange fees.Effective in October 2011, debit interchange rates for card issuing financial institutions with more than $10 billion of assets are capped at $0.21 pertransaction with an additional component of five basis points of the transaction’s value to reflect a portion of the issuer’s fraud losses plus, for qualifyingissuing financial institutions, an additional $0.01 per transaction in debit interchange for fraud prevention costs. The debit interchange fee would be $0.24per transaction on a $38 debit card transaction, the average transaction size for debit card transactions. In July 2013, the U.S. District Court for the District ofColumbia determined that the Federal Reserve’s regulations implementing the Durbin Amendment were invalid. The U.S. Court of Appeals for the District ofColumbia, or D.C. Circuit, reversed this decision on March 21, 2014, generally upholding the Federal Reserve’s interpretation of the Durbin Amendment andthe Federal Reserve’s rules implementing it. On August 18, 2014, the plaintiffs in this litigation filed a petition for a writ of certiorari asking the U.S. SupremeCourt to review the D.C. Circuit’s decision with respect to the interchange fee cap. We continue to monitor developments in the litigation surrounding theserules. Regardless of the outcome of the litigation, the cap on interchange fees is not expected to have a material direct impact on our results of operations. In addition, the new rules contain prohibitions on network exclusivity and merchant routing restrictions. Beginning in October 2011, (i) a card paymentnetwork may not prohibit a card issuer from contracting with any other card payment network for the processing of electronic debit transactions involving theissuer’s debit cards and (ii) card issuing financial institutions and card payment networks may not inhibit the ability of merchants to direct the routing ofdebit card transactions over any card payment networks that can process the transactions. Since April 2012, most debit card issuers have been required toenable at least two unaffiliated card payment networks on each debit card. We do not expect the prohibition on network exclusivity to impact our ability topass on network fees and other costs to our clients. These regulatory changes create both opportunities and challenges for us. Increased regulation may add tothe complexity of operating a payment processing business, creating an opportunity for larger competitors to differentiate themselves both in productcapabilities and service delivery. 14 Association and Network Rules While not legal or governmental regulation, we are subject to the network rules of Visa, MasterCard and other payment networks. The payment networksroutinely update and modify their requirements. On occasion, we receive notices of non-compliance and fines, which might be related to excessivechargebacks by a merchant or data security failures. Our failure to comply with the networks’ requirements or to pay the fines they impose could cause thetermination of our registration and require us to stop providing payment services. Federal Trade Commission Act and Other Laws Impacting our Customers’ Business All persons engaged in commerce, including, but not limited to, us and our merchant and financial institution customers are subject to Section 5 of theFederal Trade Commission Act prohibiting unfair or deceptive acts or practices, or UDAP. In addition, there are other laws, rules and or regulations, includingthe Telemarketing Sales Act, that may directly impact the activities of our merchant customers and in some cases may subject us, as the merchant’s paymentprocessor, to investigations, fees, fines and disgorgement of funds in the event we are deemed to have aided and abetted or otherwise provided the means andinstrumentalities to facilitate the illegal activities of the merchant through our payment processing services. Various federal and state regulatory enforcementagencies including the Federal Trade Commission, or FTC, and the states’ attorneys general have authority to take action against nonbanks that engage inUDAP or violate other laws, rules and regulations and to the extent we are processing payments for a merchant that may be in violation of laws, rules andregulations, we may be subject to enforcement actions and as a result may incur losses and liabilities that may impact our business. Russia Sanctions In March 2014, the Crimea region of the Ukraine was annexed by Russia. In response to this annexation and subsequent hostilities aimed at the Ukraine,other nations, including the United States and the European Union, imposed evolving economic sanctions against Russia. U.S. and European concernsrelated to the political and military conditions in the region have prompted increasing levels of economic sanctions, targeting certain Russian companies inthe finance, energy and defense industries and named Russian nationals that have been deemed to have direct involvement in destabilizing the situation inthe Ukraine, as well as imposing restrictions on trading and access to capital markets (“Russian Sanctions”). In response, Russia announced its own tradingsanctions against nations that implemented or supported the Russian Sanctions, including the United States and some European Union nations. Much of ourpresent operations are being conducted in Russia. In the event that the United States’ and the European Union’s political relationships with Russia furtherdeteriorate, it is possible that additional and even more severe sanctions could be imposed by the United States or European Union against Russia or thatRussia could impose additional retaliatory measures in response to current or future Russian Sanctions. If this should happen, our electronic paymentsoperations conducted in Russia could be scaled back or shut down, which may require additional funding to penetrate or expand alternative electronicpayments markets outside of Russia. If we are found to be in violation of Russian Sanctions, we may incur significant fines and other penalties. Seasonality Historically, we have experienced seasonal fluctuations in our revenues as a result of consumer spending patterns. Revenues have been weaker during thefirst quarter of the calendar year and stronger during the second, third and fourth quarters. We expect our business to continue experiencing seasonalfluctuations consistent with this historical pattern. Available Information We are subject to the informational requirements of the Securities Exchange Act of 1934 and file or furnish reports, proxy statements, and other informationwith the U.S. Securities and Exchange Commission, or SEC. You can read our SEC filings over the Internet at the SEC’s website at www.sec.gov. Our filingswith the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to thosereports, also are available free of charge on the investors section of our website at http://investor.netelement.com when such reports are available on theSEC’s website. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committeecharters, and code of business conduct and ethics, is also available on the investors section of our website. You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street, N.E., Room 1580, Washington, DC 20549.You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section at the SEC at 100 F Street, NE, Room 1580,Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. The contents of thewebsites referred to above are not incorporated into this filing or in any other report or document we file with the SEC, and any references to these websitesare intended to be inactive textual references only. 15 Item 1A. Risk Factors. Investing in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together withall of the other information in this Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and ourconsolidated financial statements and related notes, as well as the preceding “Business” section of this Report, before engaging in any transaction in oursecurities. Any of the following risks could materially and adversely affect our business, financial condition, results of operations and/or prospects, andcause the value of our securities to decline, which could cause you to lose all or part of your investment. Risks Related to Our Business Generally: Our financial condition creates doubt as to whether we will continue as a going concern. If we do not continue as a going concern, investors may losetheir entire investment. Since our inception, we have incurred significant operating losses. We sustained a net loss of approximately $10.2 million for the year endedDecember 31, 2014 and an accumulated deficit of approximately $129 million at December 31, 2014. While we had negative working capital ofapproximately $10.7 million at December 31, 2014, our current assets at December 31, 2014 included $3.4 million of accounts receivable and advances toaggregators. As of the date this Report was filed with the SEC, management expects that our cash flows from operations and remaining unrestricted cash willnot be sufficient to fund our current operations through 2015. We will require significant additional capital in order to continue our existing businessoperations and to fund our obligations. We currently believe that we will require an additional $6.5 million in financing to continue operations as currentlyconducted, continue our payment processing businesses and to pay for other currently anticipated capital expenditures over the next 12 months. Additional funds may be raised through debt financing and/or the issuance of equity securities, there being no assurance that any type of financingon terms satisfactory to us will be available or otherwise occur. Debt financing must be repaid regardless of whether we generate revenues or cash flows from operations and may be secured by substantially all ofour assets. Any equity financing or debt financing that requires the issuance of equity securities or warrants to the lender would cause the percentageownership by our current stockholders to be diluted, which dilution may be substantial. Also, any additional equity securities issued may have rights,preferences or privileges senior to those of existing stockholders. If such financings are not available when required or are not available on acceptable terms,we may be unable to implement our business plans or take advantage of business opportunities, any of which could have a material adverse effect on ourbusiness, financial condition, results of operations and/or prospects and may ultimately require us to suspend or cease operations, which could causeinvestors to lose the entire amount of their investment. If we cannot compete effectively, we will lose business. We believe our mobile payment processing business is positioned to be competitive in our target markets. We cannot guarantee that we will be ableto maintain or increase revenues from our existing operations, or that our proposed future operations will be implemented successfully. Our principalcompetitive considerations include: ■financial resources to allocate to proper marketing and sales efforts;■the ability to develop and maintain our operations, applications and technologies;■the ability to effectively implement our business plans and strategies;■establishing our brand name;■financial resources to support working capital needs and required capital investments; and■effects of sanctions on our business. The markets in which we operate are very competitive, and many of our competitors and potential competitors are larger, more established and bettercapitalized than we are. The markets for mobile payment processing are very competitive and have been characterized by rapid technological change. This competitioncould result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, and failure to increase, or the loss of, market shareor expected market share, any of which would likely seriously harm our business, operating results and financial condition. Some of our competitors and potential competitors are substantially larger and have greater financial, technical, marketing and other resources thanwe do. Given their capital resources, the large companies with which we compete, or may compete in the future, are in a better position to substantiallyincrease their research and development efforts or to withstand any significant reduction in orders by customers in our markets. Such larger companiestypically have broader product lines and market focus and thus are not as susceptible to downturns in a particular market. In addition, some of ourcompetitors have been in operation much longer than we have and therefore may have more long-standing and established relationships with our current andpotential domestic and foreign customers. We would be at a competitive disadvantage if our competitors bring their products to market earlier, if their products are more technologicallycapable than ours, or if any of our competitors’ products or technologies becomes preferred in the industry. Moreover, we cannot assure you that existing orpotential customers will not develop their own products, or acquire companies with products that are competitive with our products. Any of thesecompetitive threats could have a material adverse effect on our business, operating results or financial condition. The volume and amounts of the accounts receivable suitable for assignment to the lenders under our current factoring lines of credit as of the time wechoose to draw under such facilities may vary, thus potentially reducing the amounts of such draws. Any such reductions may adversely affect ourability to satisfy our working capital and other liquidity needs. Our credit facilities are currently structured as factoring lines of credit. Pursuant to these credit facilities, we assign certain (but not all) of our tradereceivables from mobile operators to our lenders. The amounts of our draws under such facilities from time to time will depend on the amounts of theaccounts receivable suitable to the lenders under such credit facilities for such assignment as of the time we choose to draw under such facility. If we requireaccess to immediate liquidity to meet our working capital requirements, our draws under our credit facilities to satisfy those needs could be potentiallyreduced (depending on the amounts of the accounts receivable suitable to the lenders as of the time of any such draw), which could adversely affect ourability to satisfy our working capital and other liquidity needs. 16 Continuing political instability in the Ukraine, sanctions against Russia, and Russia’s response to those sanctions, could materially adversely affect ourbusiness, results of operations and financial condition. In March 2014, the Crimea region of the Ukraine was annexed by Russia. In response to this annexation and subsequent hostilities aimed at theUkraine, other nations, including the United States and the European Union, imposed evolving economic sanctions against Russia. U.S. and Europeanconcerns related to the political and military conditions in the region have prompted increasing levels of economic sanctions, targeting certain Russiancompanies in the finance, energy and defense industries and named Russian nationals that have been deemed to have direct involvement in destabilizing thesituation in the Ukraine, as well as imposing restrictions on trading and access to capital markets (“Russian Sanctions”). In response, Russia announced itsown trading sanctions against nations that implemented or supported the Russian Sanctions, including the United States and some European Union nations. Much of our present operations are being conducted in Russia. In the event that the United States’ and the European Union’s political relationshipswith Russia further deteriorate, it is possible that additional and even more severe sanctions could be imposed by the United States or European Unionagainst Russia or that Russia could impose additional retaliatory measures in response to current or future Russian Sanctions. If this should happen, ourelectronic payments operations conducted in Russia could be scaled back or shut down, which may require additional funding to penetrate or expandalternative electronic payments markets outside of Russia. In addition, if sanctions imposed on Russia cause increases in interest rates in Russia, the numberor average purchase amount of transactions in Russia made using electronic payments could be negatively affected, which would have an adverse effect onour results of operations. Further, consumer purchases of discretionary items could generally decline in Russia due to the potential adverse effect sanctionsand general political instability may have on disposable income in Russia. A reduction in the amount of consumer spending in Russia could result in adecrease in our revenue and negatively affect our business prospects, financial condition and results of operations. Our management has identified continued material weaknesses in our internal controls as of December 31, 2014, which, if not properly remedied, couldresult in material misstatements in our financial statements. As of the end of the period covered by this Report, our management conducted an evaluation, under the supervision and with the participation ofour chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule15d-15(e) under the Exchange Act). Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controlsand procedures were not effective because there are a limited number of personnel employed and we cannot have an adequate segregation of duties, and dueto the material weaknesses in our internal control over financial reporting as discussed below under “Management’s Report on Internal Control OverFinancial Reporting.” Accordingly, management cannot provide reasonable assurance of achieving the desired control objective. Management works tomitigate these risks by being personally involved in all substantive transactions and attempts to obtain verification of transactions and accounting policiesand treatments involving our operations, including those overseas. We are in the process of reviewing and, where necessary, modifying controls andprocedures throughout the Company, particularly in light of our recent acquisitions and the continued integration of these businesses. We will continue toaddress deficiencies as resources permit. Acquisition activities could result in operating difficulties, dilution to our stockholders and other harmful consequences. We have built our current business primarily through acquisitions of intellectual property and other assets, and we intend to selectively pursuestrategic acquisitions in the future. On April 16, 2013, certain subsidiaries of TOT Group acquired substantially all of the business assets of Unified Payments,LLC, a Delaware limited liability company (“Unified Payments”), a provider of comprehensive turnkey, payment-processing solutions to small and mediumsize business owners (merchants) and independent sales organizations across the United States. See Note 4 to our Consolidated Financial Statements foradditional information regarding this acquisition. Subsequently, on June 24, 2013, TOT Group, through its newly formed subsidiary Aptito, LLC (“Aptito”),acquired substantially all of the business assets of Aptito.com, Inc., a New York corporation, a new generation of smart, customer engaged, patent-pendingpayments platform, mPOS, mobile commerce application and self-ordering Apple® iPad®-based kiosk. See Note 4 to our Consolidated Financial Statementsfor additional information regarding this acquisition. On March 17, 2015, Net Element announced that it will acquire payment innovator PayOnline.PayOnline enables online payments for more than 10 million active consumers and thousands of merchants in CIS, Europe and Asia. Future acquisitionscould divert management’s time and focus from operating our business. In addition, integrating an acquired company, business or technology is risky andmay result in unforeseen operating difficulties and expenditures. Foreign acquisitions also involve unique risks related to integration of operations acrossdifferent cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. We may notaccurately assess the value or prospects of acquisition candidates, and the anticipated benefits from our future or even past acquisitions may not materialize.In addition, future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our common stock, theincurrence of significant amounts of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could negatively affect ourfinancial condition. We are dependent upon certain key relationships. If any of our key relationships were to deteriorate, our business prospects, financial condition andresults of operations could be materially adversely affected. Our success, particularly the success of our payment processing business, is dependent, in part, upon industry relationships of certain of ourdirectors, including our director, Kenges Rakishev and our Chief Executive Officer Oleg Firer. If we were to lose the services of Mr. Rakishev and/or Mr. Firer,or if the industry relationships of Mr. Firer on which we rely were to deteriorate, our business prospects, financial condition and results of operations could bematerially adversely affected. To our knowledge, neither Mr. Rakishev nor Mr. Firer currently has any plans to retire or leave us in the near future, and we arenot aware of any material adverse developments in Mr. Firer’s industry relationships. We do not have “key person” insurance on the lives of Mr. Rakishevand/or Mr. Firer or any other member of our management team. If we fail to adequately protect or enforce our intellectual property rights, competitors may create and market products and services similar to ours. Inaddition, we may be subject to intellectual property litigation and infringement claims by third parties. Our ability to compete effectively is dependent in part upon the proprietary nature of our technologies and software platforms. We generally rely ona combination of trade secret, copyright, trademark and patent law to protect our proprietary rights in our intellectual properties. Although we attempt toprotect our proprietary technologies through trade secrets, trademarks, patents and license and other agreements, these may be insufficient. In addition, if welicense our software to non-U.S. countries, because of differences in foreign laws concerning proprietary rights, our intellectual properties may not receive thesame degree of protection in non-U.S. countries as they would in the United States. We may not always be able to successfully protect or enforce ourproprietary information and assets against competitors, which may materially adversely affect our business prospects, financial condition and results ofoperations. In addition, there can be no assurance that our competitors will not independently utilize existing technologies to develop products that aresubstantially equivalent or superior to ours, which also could materially adversely affect our business prospects, financial condition and results of operations. 17 In addition, although we do not believe that our intellectual properties infringe the rights of others and while to date we have not been subject tosuch claims, we may be exposed to, or threatened with, future litigation by other parties alleging that our technologies infringe their intellectual propertyrights. Any intellectual property claims, regardless of their merit, could be time consuming, expensive to litigate or settle and could divert managementresources and attention. An adverse determination in any intellectual property claim could require us to pay damages and/or stop using our technologies andother material found to be in violation of another party’s rights and could prevent us from licensing our technologies to others. In order to avoid theserestrictions, we may have to seek a license. Such a license may not be available on reasonable terms, could require us to pay significant license fees and maysignificantly increase our operating expenses. A license also may not be available to us at all. As a result, we may be required to use and/or develop non-infringing alternatives, which could require significant effort and expense. If we cannot obtain a license or develop alternatives for any infringing aspects ofour business, we may be forced to limit our technologies and may be unable to compete effectively. Any of these adverse consequences could have a materialadverse effect on our business prospects, financial condition and results of operations. Further, from time to time we may be engaged in disputes regarding the licensing of our intellectual property rights, including matters related to theterms of our licensing arrangements. These types of disputes can be asserted by our licensees or prospective licensees or by other third parties as part ofnegotiations with us or in private actions seeking monetary damages or injunctive relief or in regulatory actions. Requests for monetary and injunctiveremedies asserted in claims like these could be material and could have a significant impact on our business prospects. Any disputes with our licensees,potential licensees or other third parties could materially adversely affect our business prospects, financial condition and results of operations. Fluctuations in foreign currency exchange rates could negatively affect our financial results. We earn revenues and interest income, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar. In theyear ended December 31, 2014, we used two functional currencies - the Ukraine hryvnia and the Russian ruble - in addition to the U.S. dollar, and derivedmore than 8.6% of our total net revenues from operations outside the United States. Operations were ceased in the Ukraine in February 2015 and we have nofurther exposure to the Ukraine hryvnia after that date. Further, as of March 22, 2015, the foreign exchange rate for the Russian Ruble has deteriorated byapproximately 84% as compared to the weekly rate at January 12, 2014. Because our consolidated financial statements are presented in U.S. dollars, we musttranslate net revenues, interest income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of eachreporting period. Therefore, increases or decreases in the value of the U.S. dollar against other major currencies will affect the amounts of our net revenues,interest income, operating expenses and the value of balance sheet items, including intercompany assets and obligations. Because we have operations inRussia, our exchange rate risk is highly sensitive to the prevailing value of the U.S. dollar relative to the Russian ruble, which exchange rates have fluctuatedsignificantly in recent months as a result, in part, of the continuing instability in the Ukraine and sanctions against Russia. Fluctuations in foreign currencyexchange rates, particularly the U.S. dollar against the Russian ruble, may materially adversely affect our financial results. Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Many ofthese laws and regulations are subject to change and uncertain interpretations, and could result in claims, changes to our business practices, increasedcost of operations or declines in user growth or engagement, or otherwise harm our business. We are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet and companiestransmitting user information and payments via text message or other electronic means, many of which are still evolving and the interpretation of which areoften uncertain. Failure to comply with applicable laws and regulations may result in the suspension or revocation of licenses or registrations, the limitation,suspension or termination of services and/or the imposition of civil and criminal penalties and/or fines. The services of TOT Money to mobile phone carriersalso are subject to certain of the rules and policies of such carriers and ongoing contractual covenants with such carriers, the violation of which may result inpenalties and/or fines and possible termination of TOT Money’s services. For additional information, see “Business Description - Regulation” in Part I, Item 1of this Report. Poor perception of our brand, business or industry could harm our reputation and adversely affect our business prospects, financial condition andresults of operations. The success of our business depends in part on our reputation within our industries and with our clients and consumers. We may be the subject ofunflattering reports in blogs, video blogs and the media about our business and our business model. Any damage to our reputation could harm our ability toobtain and retain contracts with mobile phone carriers, content providers, advertisers and other customers, which could materially adversely affect our resultsof operations, financial condition and business. Our business is subject to the risks of hurricanes, floods, fires and other natural catastrophic events and to interruption by man-made problems such ascomputer viruses or terrorism. Our systems and operations are vulnerable to damage or interruption from hurricanes, floods, fires, power losses, telecommunications outages,terrorist attacks, acts of war, human errors, break-ins and similar events. Our U.S. corporate offices are located in Miami, Florida, which is an area that is athigh risk of hurricane and flood damage. In addition, acts of terrorism, which may be targeted at metropolitan areas that have higher population density thanrural areas, could cause disruptions in our business or the economy as a whole. The servers that we use through various third party service providers are notlocated in Miami, Florida but may also be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computersystems, which could lead to interruptions, delays, loss of critical data or the unauthorized disclosure of confidential information. Such service providers maynot have sufficient protection or recovery plans in certain circumstances, and our insurance may not be sufficient to compensate us for losses that may occur.As we rely heavily on our servers, computer and communications systems and the Internet to conduct our business, such disruptions could negatively impactour ability to run our business and either directly or indirectly disrupt our customers’ respective businesses, which could have an adverse effect on ourbusiness prospects, operating results and financial condition. We incur increased costs as a result of being a public company. As a public company, we currently incur significant legal, accounting and other expenses not incurred by private companies. It may be timeconsuming, difficult and costly for us to develop, implement and maintain the additional internal controls, processes and reporting procedures required byfederal statutes, SEC rules, other government regulations affecting public companies and/or stock exchange compliance requirements. We may need to hireadditional financial reporting, internal auditing and other finance staff in order to develop, implement and maintain appropriate internal controls, processesand reporting procedures, which will increase our expenses and adversely affect our operating results and financial condition. 18 Risks Related to Our Mobile Payments and Transaction Processing Business: Failure to successfully continue developing and expanding our payment processing business may harm our revenue and business prospects. We launched our mobile payment processing operations in Russia during the third quarter of 2012 through our Russian subsidiary TOT Money.Certain of TOT Money’s competitors have been in business longer than TOT Money and have significantly greater financial and other resources than TOTMoney. In addition, in order to successfully increase our business in the payment processing market in Russia and expand our payment processing businessinto other emerging markets, we must convince mobile phone carriers and content providers to use TOT Money’s services over competitive platforms thatmay already be in use. Many potential clients may worry about potential disadvantages associated with switching payment processing vendors, such as a lossof accustomed functionality, increased costs and business disruption. Failure to successfully continue developing TOT Money’s payment processingoperations, maintain TOT Money’s existing contracts with mobile phone carriers and content providers and enter into additional contracts with mobilephone carriers and content providers to use TOT Money’s services may harm our revenue and business prospects. Our future growth depends, in part, upon our continued expansion within the markets in which we currently operate, the further expansion into newmarkets, the emergence of additional markets for payment processing, and our ability to penetrate these markets. Our expansion into new markets is alsodependent upon our ability to apply our existing technology or to develop new applications to meet the particular service needs of each new market. We maynot have adequate financial or technological resources to develop effective and secure services or distribution channels that will satisfy the demands of thesenew markets. If we fail to expand into new and existing payment processing markets, we may not be able to continue to grow our revenues. Furthermore, inresponse to market developments, we may expand into new geographical markets and foreign countries in which we do not currently have any operatingexperience. We cannot assure you that we will be able to successfully expand in such markets due to our lack of experience and the multitude of risksassociated with global operations or lack of appropriate regulatory approvals. We rely on third-party processors and service providers; if they fail or no longer agree to provide their services, our merchant relationships could beadversely affected and we could lose business. We rely on agreements with several large payment processing organizations to enable us to provide card authorization, data capture, settlement andmerchant accounting services and access to various reporting tools for the merchants we serve. We also outsource to third parties other services, such asreorganizing and accumulating daily transaction data on a merchant-by-merchant and card issuer-by-card issuer basis and forwarding the accumulated data tothe relevant bankcard associations. Many of these organizations and service providers are our competitors, and we do not have long-term contracts with mostof them. Typically, our contracts with these third parties are for one-year and are subject to cancellation upon limited notice by either party. The terminationby our service providers of their arrangements with us or their failure to perform their services efficiently and effectively may adversely affect ourrelationships with the merchants whose accounts we serve and may cause those merchants to terminate their processing agreements with us. We rely on bank sponsors, which have substantial discretion with respect to certain elements of our business practices, in order to process bankcardtransactions. If these sponsorships are terminated and we are not able to secure or successfully migrate merchant portfolios to new bank sponsors, wewill not be able to conduct our business. Because we are not a bank, we are unable to belong to and directly access the Visa and MasterCard bankcard associations. Visa and MasterCardoperating regulations require us to be sponsored by a bank in order to process bankcard transactions. We are currently registered with Visa and MasterCardthrough the sponsorship of banks that are members of the card associations. The principal sponsoring bank through which we process the significant majorityof our transactions is BMO Harris Bank. If our sponsorships are terminated and we are not able to secure or successfully migrate merchant portfolios to newbank sponsors, we will not be able to conduct our business. If we or our bank sponsors fail to adhere to the standards of the Visa and MasterCard payment card associations, our registrations with theseassociations could be terminated, and we could be required to stop providing payment processing services for Visa and MasterCard. Substantially all of the transactions we process involve Visa or MasterCard. If we or our bank sponsors fail to comply with the applicablerequirements of the Visa or MasterCard payment card associations, Visa or MasterCard could suspend or terminate our registration. The termination of ourregistration or any changes in the Visa or MasterCard rules that would impair our registration could prevent us from providing transactional processingservices. We periodically experience increases in interchange and other related costs, and if we cannot pass these increases along to our merchants, our profitmargins will decline. We pay interchange fees and assessments to issuing banks through the card associations for each transaction we process using their credit and debitcards. From time to time, the card associations increase the interchange fees that they charge processors and the sponsoring banks. At their sole discretion, oursponsoring banks have the right to pass any increases in interchange fees on to us. In addition, our sponsoring banks may seek to increase their Visa andMasterCard sponsorship fees to us, all of which are based upon the dollar amount of the payment transactions we process. If we are not able to pass these feeincreases along to merchants through corresponding increases in merchant discount, our profit margins will decline. Our products and services could become less competitive or obsolete if we fail to keep pace with rapidly changing technology. The markets for our products and services are characterized by technological changes, frequent introductions of new products and services andevolving industry standards. Advances in technology may result in changing customer preferences for products and services and delivery formats and anysuch change in preferences may be rapid. Clients may choose to move or develop equivalent services in-house. If we fail to enhance our current products andservices and develop new products and services in response to changes in technology, industry standards or customer preferences, our business could rapidlybecome less competitive or obsolete. We could experience delays while developing and introducing new products and services and product and serviceenhancements, due to difficulties developing models, acquiring data or adapting to particular operating environments. Software errors or other defect errors inour products and services could affect the ability of our products and services to work with other hardware or software products, could delay the developmentor release of new products or services or new versions of our products or services and could materially adversely affect our reputation and our businessprospects, financial condition and/or results of operations. 19 To acquire and retain merchant accounts, we depend on ISGs that do not serve us exclusively. We rely on the efforts of ISGs to market our services to merchants seeking to establish a credit card processing relationship. ISGs are companies thatseek to introduce to us, as well as our competitors, newly established and existing small merchants, including retailers, restaurants and other serviceproviders. Generally, our agreements with ISGs are not exclusive and they have the right to refer merchants to other providers of transaction paymentprocessing services. Our failure to maintain our relationships with our existing ISGs and to recruit and establish new relationships with other ISGs couldadversely affect our revenues and internal growth and increase our merchant attrition. Unauthorized disclosure of data, whether through cybersecurity breaches, computer viruses or otherwise, could expose us to liability, protracted andcostly litigation and could damage our reputation. We process, store and/or transmit sensitive data, such as names, addresses, credit or debit card numbers and bank account numbers, and we may haveliability if we fail to protect this data in accordance with applicable laws and our clients’ specifications. The loss of data could result in significant fines andsanctions by our clients or governmental bodies, which could have a material adverse effect on our business, financial condition and results of operations.These concerns about security are increased when we transmit information over the Internet. Computer viruses can be distributed and spread rapidly over theInternet and could infiltrate our systems, which might disrupt our services and make them unavailable. In addition, a significant cybersecurity breach couldresult in payment networks prohibiting us from processing transactions on their networks or the loss of clients. We have been in the past and could be in thefuture, subject to breaches of security by hackers. It is possible that our encryption of data and other protective measures may not prevent unauthorizedaccess. Although we have not to date incurred material losses or liabilities as a result of those breaches, a future breach of our system may subject us tomaterial losses or liability, including payment of fines and claims for unauthorized purchases with misappropriated credit or debit card or bank accountinformation or other similar fraud claims. A misuse of such data or a cybersecurity breach could harm our reputation and deter clients from using electronicpayments generally and our services specifically, increase our operating expenses in order to correct the breaches or failures, expose us to uninsured liability,increase our risk of regulatory scrutiny, subject us to lawsuits and/or result in the imposition of material penalties and fines under applicable laws or by ourclients. We are subject to economic and political risk, the business cycles and credit risk of our clients and the overall level of consumer, business andgovernment spending, which could negatively impact our business, financial condition and results of operations. The electronic payments industry depends heavily on the overall level of consumer, business and government spending. We are exposed to generaleconomic conditions that affect consumer confidence, consumer spending, consumer discretionary income and consumer purchasing habits. Deterioration ingeneral economic conditions in the markets where we operate, or increases in interest rates in such markets, may adversely affect our results of operations byreducing the number or average purchase amount of transactions made using electronic payments. Consumer purchases of discretionary items generallydecline during recessionary periods and other periods in which disposable income is adversely affected. A reduction in the amount of consumer spendingcould result in a decrease in our revenue and negatively affect our business prospects, financial condition and results of operations. Our operating results are subject to seasonality, and, if our revenues are below our seasonal norms during our historically stronger quarters, ourfinancial results could be adversely affected. We have experienced in the past, and expect to continue to experience, seasonal fluctuations in our revenues as a result of consumer spendingpatterns. Historically, revenues have been weaker during the first quarter of the calendar year and stronger during the second, third and fourth quarters. If, forany reason, our revenues are below seasonal norms during the second, third or fourth quarter, our business, financial condition and results of operations couldbe materially adversely affected. New and potential governmental regulations designed to protect or limit access to consumer information could adversely affect our ability to provide,or the value of, the services we currently provide to our merchants. Due to the increasing public concern over consumer privacy rights, governmental bodies in the United States and abroad have adopted, and areconsidering adopting, additional laws and regulations restricting the purchase, sale and sharing of personal information about customers. For example, theGramm-Leach-Bliley Act requires non-affiliated third-party service providers to financial institutions to take certain steps to ensure the privacy and securityof consumer financial information. We believe our present activities fall under exceptions to the consumer notice and opt-out requirements contained in thislaw for third-party service providers to financial institutions. However, the laws governing privacy generally remain unsettled. Even in areas where there hasbeen some legislative action, such as the Gramm-Leach-Bliley Act and other consumer statutes, it is difficult to determine whether and how existing andproposed privacy laws or changes to existing privacy laws will apply to our business. Limitations on our ability to access and use customer information couldadversely affect our ability to provide the services we currently offer to our merchants or impair the value of these services. Several states have proposed legislation that would limit the use of personal information gathered using the Internet. Some proposals would requireproprietary online service providers and website owners to establish privacy policies. Congress has also considered privacy legislation that could furtherregulate the use of consumer information obtained over the Internet or in other ways. Our compliance with these privacy laws and related regulations couldmaterially affect our operations. Changes to existing laws or the passage of new laws could: ■create uncertainty in the marketplace that could reduce demand for our services;■restrict or limit our ability to sell certain products and services to certain customers;■limit our ability to collect and to use merchant and cardholder data; or■increase the cost of doing business as a result of litigation costs or increased operating costs; Any changes to existing laws or the passage of new laws that have effects such as those described above could have a material adverse effect on ourbusiness, financial condition and results of operations. If we are required to pay federal, state or local taxes on transaction processing, it could negatively impact our profit margins. Transaction processing companies may become subject to federal, state or local taxation of certain portions of their fees charged to merchants fortheir services. Application of these taxes is an emerging issue in our industry and taxing jurisdictions have not yet adopted uniform positions on this topic. Ifwe are required to pay such taxes and are unable to pass this tax expense through to our merchant clients, or are unable to produce increased cash flow tooffset such taxes, these taxes would negatively impact our profit margins. We are the subject of various legal proceedings which could have a material adverse effect on our business, financial condition or operating results. We are involved in various litigation matters. We may, from time to time, also be involved in or be the subject of governmental or regulatory agencyinquiries or investigations. If we are unsuccessful in our defense in the litigation matters, or any other legal proceeding, we may be forced to pay damages orfines and/or change our business practices, any of which could have a material adverse effect on our business, financial condition and results of operations.For more information about our legal proceedings, see “Legal Proceedings.” 20 Risks Related to Our Securities: We may sell or issue equity securities in the future, which would cause dilution. We may sell equity securities in the future to obtain funds for general corporate, working capital, acquisitions or other purposes. We may sell thesesecurities at a discount to the market price. Any future sales of equity securities will dilute the holdings of existing stockholders, possibly reducing the valueof their investment. We may not be able to continue to meet the continued listing requirements for The NASDAQ Capital Market. If our common stock is delisted from TheNASDAQ Capital Market, our business, financial condition, results of operations and stock price could be adversely affected, and the liquidity of ourstock reduced and our ability to obtain financing could be impaired. We are currently in compliance with all of the listing standards for listing on The NASDAQ Capital Market, but we cannot provide any assurancethat we will continue to be in compliance in the future. Any delisting of our common stock from The NASDAQ Capital Market could adversely affect ourability to attract new investors, reduce the liquidity of our outstanding shares of common stock, reduce our flexibility to raise additional capital, reduce theprice at which our common stock trades and increase the transaction costs inherent in trading such shares with overall negative effects for our stockholders. Inaddition, delisting of our common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock,and might deter certain institutions and persons from investing in our securities at all. For these reasons and others, delisting could adversely affect ourbusiness, financial condition and results of operations. Item 1B. Unresolved Staff Comments. Not applicable. Item 2. Properties. On May 10, 2013, we entered into a lease agreement, which is dated as of May 1, 2013, for approximately 5,200 square feet of office space located at 3363N.E. 163rd Street, Suites 705 through 707, North Miami Beach, Florida 33160. We moved our corporate headquarters and principal executive office to thislocation in June 2013. The term of the lease agreement is from May 1, 2013 through December 31, 2016, with monthly rent at the rates of $16,800 per month(or $134,400 for the initial eight-month period) for the period from May 1, 2013 through December 31, 2013, $17,640 per month (or $211,680 per year) forthe period from January 1, 2014 through December 31, 2014, $18,522 per month (or $222,264 per year) for the period from January 1, 2015 throughDecember 31, 2015 and $19,448 per month (or $233,377 per year) for the period from January 1, 2016 through December 31, 2016. Netlabs Systems, LLC, through its Russian representative office, currently leases 940 square feet of office space in Yekaterinburg, Russia, where it conductsAptito and Sales Central development activities, at annual rent of approximately $15,800. The current lease term expires in January 2016. Net Element Russia leases approximately 2,033 square feet of office space in Moscow, Russia at annual rent of $133,285, as well as one corporate apartmentat annual rent of $16,010. The current lease term for the office space expires on July 9, 2015 and we expect to renew this lease at that time. The current leaseterm for the corporate apartment expires on September 13, 2015. We believe that these facilities are adequate for our anticipated needs. Item 3. Legal Proceedings. First Data Corporation On July 30, 2013, TOT Payments, LLC, brought an action against First Data Corporation in the State of New York Supreme Court (Index No. 652663-2013).The amount of damages being sought is $10,000,000 per cause. In its complaint, TOT Payments claims that the defendant breached its obligations pursuantto a 2006 Marketing Agreement entered into between Money Movers of America, Inc. (MMOA) and Paymentech, Inc. (the “MMOA Agreement”) to payMMOA monthly residual income on various merchant accounts boarded with Paymentech pursuant to the MMOA Agreement. TOT Payments, through aseries of historic transactions, is the successor in interest to the rights and obligations of MMOA in the MMOA Agreement. The defendant is the successor ininterest to Paymentech. On July 15, 2013, the defendant failed to pay to TOT Payments the monthly residuals otherwise due as the defendant alleges that theMMOA Agreement was lawfully terminated in April 2012 and that the defendant had 180 days after the termination notice to move the MMOA merchants toa new platform failing which the defendant could withhold residual payments and that the defendant would own all merchant accounts boarded under theMMOA Agreement. The amount of the unpaid residuals are between $150,000 and $250,000, net of all interchange charges. TOT Payments disputesreceiving proper notice and is disputing the rights of the defendant to withhold monthly residuals due. There was an adjournment because of the motionsmade in the appellate division. Plaintiff’s opposition to Defendant’s motion to dismiss (for lack of standing) was filed on October 24, 2013. Defendant’sReply to Plaintiff’s opposition was filed October 31, 2013. Defendant’s filed both a memorandum in support and an affirmation in support to dismiss andoral argument was heard November 1, 2013. The case was subsequently dismissed and an appeal has been filed. In July 2014, Plaintiff’s and Defendant’scounsel met as part of the Appeals process to limit the scope of the Appeal and to try settle some of the claims. Independently of this, representatives ofPlaintiff and Defendant pursued discussions to attempt a settlement outside of the judicial process. Those efforts failed and legal counsel recently filed papersperfecting the Appeal. A hearing date has not yet been scheduled. 21 OOO-RM Invest A. On March 17, 2014, we were served with a lawsuit brought by OOO-RM Invest in the US District Court, Southern District of Florida. In its complaint,OOO-RM Invest claims that on or about July 11, 2012 it entered into an “oral agreement” with us allegedly agreeing: (a) to form a new entity, TOT MoneyInternational, LTD that would continue the operations of Plaintiff; (b) that the we would provide TOT Money International, LTD financing in the amount of600,000,000 Russian rubles; (c) that we would assume certain liabilities of Plaintiff; (d) that we would be responsible for all business operations of Plaintiffand TOT Money International, LTD; (e) that we would deliver DST account and stated key DST structures to TOT Money International, LTD; (f) thatPlaintiff would receive a 30% ownership stake in TOT Money International, LTD and/or receive shares of stock; (g) that Tcahai Hairullaevich Katcaev wouldhold the position of General Director of TOT Money; (h) that we would provide TOT Money International, LTD with access to Plaintiff’s operating accounts;and (i) that Plaintiff would transfer client accounts and contracts to TOT Money. Plaintiff claims that we breached our obligations pursuant to that allegedoral agreement, and is seeking, among other things, compensatory damages in excess of $50 million. We strongly deny the allegations referenced in thecomplaint and engaged legal counsel to defend our interests. A Motion to Dismiss on jurisdictional as well as substantive grounds was filed but denied bythe court. We filed multiple counterclaims against the Plaintiff and this matter is ongoing. B. On August 12, 2014, our legal counsel representing us received a Notice from the American Arbitration Association advising that the same Plaintiffs in theOOO-RM Invest case above have instituted a parallel Arbitration claim dealing with substantially the same issues as addressed in the lawsuit. As with thereferenced lawsuit, we strongly deny the allegations referenced in the arbitration proceedings. Legal counsel representing us filed a Motion to Dismiss, or inthe Alternative, Stay Arbitration in the federal court case. That Motion was denied on the basis that there is a pending Motion to Dismiss on jurisdictionalgrounds. In October 2104, our legal counsel filed a Motion to Dismiss with the Arbitrator on several grounds: (1) by filing the federal court action OOO-RMInvest waived its right to arbitrate and (2) OOO-RM Invest should not be permitted to pursue the same relief in two actions. This matter was recentlydismissed in lieu of the Federal Proceeding, where the Plaintiffs reinstituted the claims previously brought in the Arbitration. Net Element has not yet filed aresponse to these claims. Wayne Orkin On June 27, 2014, we were served with a lawsuit filed in the Superior Court in Los Angeles County, California by Wayne Orkin. Orkin is a former employeeof an entity First Business Solutions, LLC (“FBS”) that was a subsidiary of Unified Payments, LLC. The assets of Unified Payments, LLC were acquired by usin April 2013. Unified Payments, LLC is also a named defendant in this lawsuit. In his complaint, Orkin is claiming a ”unity of interest in ownership”between the Defendants and that each of the named defendants were agents, alter egos and authorized representatives of one another. Orkin claims that thedefendants breached their obligations pursuant to a verbal agreement allegedly into entered into in 2010 whereby he would allegedly be entitled tocertain royalties resulting from the sales of a payment browser technology purchased by FBS from Orkin’s entity. The Plaintiff is claiming unspecifieddamages for alleged breach of contract, breach of covenant of good faith and fair dealing, misappropriation of technology, fraud and conversion. We assertthat we never had any dealings with Orkin, and strongly deny all allegations contained in the Complaint. We engaged California counsel to represent itsinterests. On September 23, 2014, the Court upheld the Motion to set aside a default judgment previously entered against Unified Payments. On the motion to dismiss(“demurrer”), Plaintiff’s attorney advised the court they plan to amend their complaint to attempt to address the deficiencies raised by our counsel. As of thedate this Annual Report on Form 10-K was filed, no amended complaint has been filed. As the employment agreement between Orkin and FBS has anarbitration clause that is binding on Orkin in his lawsuit against Unified Payments for alleged breach of the employment agreement, the parties agreed inearly November 2014 to stipulate to arbitration in Florida and to stay the California proceedings pending the outcome of the arbitration. A Notice ofArbitration was mailed to us but we have not yet heard from the Arbitration Association that an Arbitrator has been appointed or setting out an Arbitrationdate. Gene Zell In June 2014, we, as plaintiff, commenced an action in the Miami-Dade Circuit Court, Florida against Gene Zell for defamation of the Company and its CEOand tortious interference with our business relationships. In October 2014, the court granted a temporary injunction against Zell enjoining him from postingany information about us and our CEO on any website and enjoining him from contacting our business partners or investors. Zell violated the Court Orderand the Court granted a Motion imposing sanctions against Zell. We continue to seek enforcement of the Court Order. Item 4. Mine Safety Disclosures. Not applicable. 22 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock began trading on The NASDAQ Capital Market under the symbol “NETE” on October 3, 2012. From October 22, 2010 through October 2,2012, our ordinary shares (then known as Cazador Acquisition Corporation Ltd.) traded on The NASDAQ Capital Market under the symbol “CAZA.” For theperiods indicated, the following table sets forth the high and low intraday sales prices per share of our common equity. Fiscal 2015 Fiscal 2014 Fiscal 2013 Quarter Ended High Low High Low High Low March 31, 2014 *$1.43 *$1.03 $5.35 $3.15 $4.00 $1.90 June 30, 2014 - - 3.49 1.51 6.53 2.31 September 30, 2014 - - 3.49 0.88 6.56 4.25 December 31, 2014 - - 2.48 1.06 5.01 2.12 * Through March 25, 2015 Holders As of December 31, 2014, our common stock was held by approximately 337 stockholders of record. The number of record holders was determined from therecords of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various securities brokers, dealersand registered clearing agencies. Our transfer agent is Continental Stock Transfer & Trust Company. Dividends We have not declared any dividends during the two most recent fiscal years. We have no present intention of paying any cash dividends on our commonstock in the foreseeable future, as any earnings will be used to help generate growth. The decision on the payment of dividends in the future rests within thediscretion of the Board of Directors and will depend upon, among other things, our earnings, capital requirements and financial condition, as well as otherrelevant factors. There are no restrictions in our certificate of incorporation or bylaws that restrict us from declaring dividends. Securities Authorized for Issuance Under Equity Compensation The information included under Item 12 of Part III of this Annual Report is hereby incorporated by reference into this Item 5 of Part II of this Annual Report. Recent Sales of Unregistered Securities The Company did not sell any securities during the fiscal year ended December 31, 2014 that were not registered under the Securities Act of 1933, asamended, and that have not previously been included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K. Issuer Purchases of Equity Securities In December 2012, our Board of Directors authorized, and we announced on December 10, 2012, a plan permitting our repurchase of up to $2.5 million ofissued and outstanding shares of our common stock in open market or privately negotiated transactions during the 24-month period that ended December 10,2014. Repurchases, when effectuated, were made subject to market conditions, applicable legal requirements (including federal and state securities laws aswell as rules and regulations of the Commission) and other factors. The repurchase plan did not obligate us to acquire any particular amount of commonstock. For the year ended December 31, 2014, we did not repurchase any shares of our common stock. For the year ended December 31, 2013, werepurchased 169,022 shares of our common stock for $477,936 or an average price of $2.83 per share including 137,207 shares that were repurchased in aprivate transaction outside the parameters of the publicly announced repurchase plan. Item 6. Selected Financial Data. Not Applicable. 23 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statementscontained in this Report and the discussion under “Forward-Looking Statements” on page i at the beginning of this Report and the Risk Factors set forth inPart I, Item 1A of this Report. Overview; Recent Developments As of December 31, 2014, we operate in a single operating segment, that being a provider of transactional services and mobile payment solutions in theUnited States and emerging countries, including the CIS. Payment and Transaction Processing Business On April 16, 2013, certain subsidiaries of TOT Group acquired substantially all of the business assets of Unified Payments, LLC, a Delaware limited liabilitycompany. Unified Payments provides comprehensive turnkey, payment-processing solutions to small and medium size business owners (merchants) andindependent sales organizations across the United States. For additional information, see Note 4 of the accompanying Notes to Consolidated FinancialStatements. Our subsidiary TOT Group, Inc. (“TOT Group”) is a multinational, mobile payments and transaction processing holding company, which provides a range offlexible online and offline payment solutions. Clients include wireless carriers, content providers and merchants. TOT Group delivers comprehensive, end-to-end payment solutions to enable merchants to reliably accept cashless transactions at the POS. From processing electronic payments at the POS to processingmobile commerce transactions to managing merchant terminals and providing information management services, TOT Group through its proprietarytechnology offers innovative solutions which allow its merchants to streamline their payments resources. Through TOT Group, we generate revenues fromtransaction fees, service fees, percentage of the dollar amount of each transaction and other fees associated with processing of cashless transactions at thepoints of sale. We serve merchants primarily in the retail, restaurant, supermarket, petroleum and hospitality sectors. In addition, TOT Group (through itssubsidiary TOT Money operates as our provider of carrier-integrated mobile payments solutions. TOT Money’s relationships with mobile operators gives ussubstantial geographic coverage, a strong capacity for innovation in mobile payments and messaging, and the ability to offer customers In-App, P-SMS andOnline and Carrier Billing solutions in over 49 countries. On June 24, 2013, TOT Group, through its newly formed subsidiary Aptito, LLC (“Aptito”) acquired substantially all of the business assets of Aptito.com,Inc., a New York corporation, a new generation of smart, customer engaged, patent-pending payments platform, mPOS, mobile commerce application andself-ordering Apple® iPad®-based kiosk. See Note 4 of the accompanying Notes to Consolidated Financial Statements for additional information regardingthis acquisition. Discontinuance of Entertainment Business On September 25, 2013, we entered into a Contribution Agreement (the “Divestiture Contribution Agreement”) with T1T Lab, LLC, a Florida limitedliability company (“T1T Lab”), and T1T Group, LLC, a Delaware limited liability company (“T1T Group”), pursuant to which, on September 25, 2013, wecontributed to T1T Lab all of our membership and participation interests in our subsidiaries Openfilm, LLC, Motorsport, LLC, Splinex, LLC, LegalGuru,LLC and MUSIC 1 LLC (a/k/a OOO Music1) (collectively, the “Disposed Subsidiaries”). The Disposed Subsidiaries constitute all of our interests in onlinemedia businesses and operations (referred to herein collectively as our “entertainment assets”). Immediately following the transactions effectuated pursuantto the Divestiture Contribution Agreement, we indirectly owned a minority interest in the Disposed Subsidiaries through our 10% membership interest inT1T Lab and the other 90% membership interest in T1T Lab is owned by T1T Group (which is indirectly wholly-owned by Mike Zoi, a former director andcurrent stockholder). We disposed of our entertainment assets in order to focus our business operations on mobile payments, transactional services and relatedtechnologies and to reduce the significant expenses associated with developing and maintaining the entertainment assets. During the first quarter of 2014, wefurther reduced our liabilities by divesting our remaining 10% ownership interest in T1T Lab in exchange for termination of our obligation to commitfunding of T1T Lab associated with our equity ownership. For additional information regarding the divestiture of our entertainment assets, see Note 5 of theaccompanying Notes to Consolidated Financial Statements. Since our inception, we have incurred significant operating losses (for additional information, see “Liquidity and Capital Resources” below). If we fail tomaintain our relationships with merchants, mobile phone providers, content providers, lenders and other business partners, it could harm our revenues andmaterially adversely affect our financial condition and results of operations. Additional potential risks include the need for significant additional capital,management’s potential underestimation of initial and ongoing costs, and potential delays and other problems in connection with developing ourtechnologies and operations. Critical Accounting Policies and Estimates Our significant accounting policies are described more fully in Note 1 of the accompanying Notes to Consolidated Financial Statements. The preparation offinancial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements,as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. In applying estimates, management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Thoseestimates are based on our historical experience, terms of existing contracts, the observance of trends in our industries, information provided by outsidesources, trade journals and other sources, as appropriate. 24 Revenue. We recognize revenue when the following four basic criteria have been met: (1) persuasive evidence of a sales arrangement exists; (2) performanceof services has occurred, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. We consider persuasive evidence of a salesarrangement to be the receipt of a billable transaction from aggregators or a signed contract. Collectability is assessed based on a number of factors, includingtransaction history with the customer and the credit worthiness of the customer. If it is determined that the collection is not reasonably assured, revenue is notrecognized until collection becomes reasonably assured, which is generally upon receipt of cash. We record cash received in advance of revenue recognitionas deferred revenue. Reserve for Loan Losses. We monitor all accounts receivable, notes receivable and transactions with mobile operators and aggregators on a quarterly basis toensure collectability and the adequacy of loss provisions. Considerations include payment history, business volume history, financial statements of borrower,projections of borrower and other standard credit review documentation. Management uses its best judgment to adequately reserve for future losses after allavailable information is reviewed. During 2014, TOT Money recovered $1.6 million of advances previously reserved. Due to the lawsuit filed by First Data (see Note 13 of the accompanying Notes to Consolidated Financial Statements), we recorded bad debt expense of$703,768 at December 2013. This resulted from the reserve of $2.1 million in First Data accounts receivable offset by $1.4 million of payables due to FirstData. In addition, there were additional charges to bad debts of $423,179 for net ACH rejects that occurred in the normal course of operations. During 2014the reserve, corresponding receivables and payables were written off. For 2014, we recognized $496,709 for net ACH rejects that occurred in the normalcourse of business. During 2013, we additionally reserved $1.8 million due to us by the former General Director of TOT Money in connection with a June 2013 settlementagreement. Deferred Taxes. Estimates of deferred income taxes and items giving rise to deferred tax assets and liabilities reflect management’s assessment of actual futuretaxes to be paid on items reflected in the financial statements, giving consideration to both timing and the probability of their realization. Actual incometaxes 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 taxreturns by the IRS. Results of Operations for the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013 We reported a net loss of $10,185,516 or ($0.27) per share for the year ended December 31, 2014 as compared to a net loss of $48,309,347, or ($1.70) pershare, for the year ended December 31, 2013. Loss from continuing operations (including loss attributable to the noncontrolling interest) for the year endedDecember 31, 2014 was $10,214,766 or ($0.27) per share as compared to a loss from continuing operations (including loss attributable to the noncontrollinginterest) for the year ended December 31, 2013 of $48,099,020 or ($1.65) per share. Our net loss for the years ended December 31, 2014 and 2013 primarilyresulted from our non-cash compensation, impairment of goodwill, increase in provision for loan losses and general and administrative expenses, as discussedfurther below. The following table sets forth our sources of revenues, cost of revenues and gross margins for the years ended December 31, 2014 and 2013. Twelve Twelve Months Ended Months Ended Increase / Source of Revenues December 31,2014 Mix December 31,2013 Mix (Decrease) Transaction Processing Services $19,373,877 91% $14,801,383 79% $4,572,494 Mobile Payments 1,820,584 9% 3,948,087 21% (2,127,503)Total $21,194,461 100% $18,749,470 100% $2,444,991 Cost of Revenues Transaction Processing Services $15,925,924 82% $12,094,998 82% $3,830,926 Mobile Payments (42,243) -2% 1,279,671 32% (1,321,914)Total $15,883,681 75% $13,374,669 71% $2,509,012 Gross Margin Transaction Processing Services $3,447,953 18% $2,706,385 18% $741,568 Mobile Payments 1,862,827 102% 2,668,416 68% (805,589)Total $5,310,780 25% $5,374,801 29% $(64,021) 25 Net revenues consist primarily of payment processing fees. Net revenues were $21,194,461 for the year ended December 31, 2014 as compared to$18,749,470 for the year ended December 31, 2013. The increase in net revenues is primarily a result of the purchase of portfolios, increases in merchants anda full year of credit card processing operations in 2014. This was offset by a decrease in the Mobile Payment Processing due to changes in our billing systemand changes to key personnel. Cost of revenues represents direct costs of generating revenues, including commissions, purchases of short numbers, interchange expense and processing fees.Cost of revenues for the year ended December 31, 2014 was $15,883,681 as compared to $13,374,669 for the year ended December 31, 2013. The year overyear increase in cost of revenues of $2,509,012 is primarily a result of a full year of credit card processing operations in 2014, offset by certain refunds in theMobile payment processing division. Gross Margin for the year ended December 31, 2014 was $5,310,780 (25%) as compared to $5,374,801 (29%) for the year ended December 31, 2013. Thereason for the decrease in the margin percentage was mainly due to a change in business mix and portfolio composition. Our business mix had more creditcard processing business in the year ended December 31, 2014 versus 2013. Total operating expenses were $12,558,233 for the year ended December 31, 2014, as compared to total operating expenses of $50,121,253 for the yearended December 31, 2013. Total operating expenses for the year ended December 31, 2014 consisted of general and administrative expenses of $11,353,244,recovery of loan losses of ($1,153,147), and depreciation and amortization of $2,358,136. For the year ended December 31, 2013, operating expensesconsisted of general and administrative expenses of $28,166,387, provision for loan losses of $7,640,008, goodwill impairment of $11,200,000, intangibleassets impairment of $872,354 and depreciation and amortization of $2,242,504. The components of our general and administrative expenses are discussedbelow. General and administrative expenses were $11,353,244 for the year ended December 31, 2014 as compared to $28,166,387 for the year ended December 31,2013. General and administrative expenses for the years ended December 31, 2014 and 2013 consisted of operating expenses not otherwise delineated in ourCondensed Consolidated Statements of Operations and Comprehensive Loss, including non-cash compensation expense, salaries and benefits, professionalfees, rent, filing fees and other expenses required to run our business, as follows: Category Twelve monthsended December 31,2014 Twelve monthsended December 31,2013 Increase / (Decrease)$ % Non-cash compensation expense $4,267,334 $16,549,820 $(12,282,486) -74.2%Salaries, benefits, taxes and contractor payments 3,209,996 4,331,580 (1,121,584) -25.9%Professional fees 2,262,453 4,003,850 (1,741,397) -43.5%Rent 459,798 624,674 (164,876) -26.4%Business development 68,735 64,438 4,297 6.7%Travel expense 303,293 742,105 (438,812) -59.1%Filing fees 52,905 115,901 (62,996) -54.4%Transaction (gains) losses (44,127) 599,689 (643,816) -107.4%Other expenses 772,857 1,134,330 (361,473) -31.9% Total $11,353,244 $28,166,387 $(16,813,143) Non-cash compensation expense from share-based compensation was $4,267,334 for the year ended December 31, 2014 compared to $16,549,820 for theyear ended December 31, 2013. The non-cash compensation expenses were higher for the year ended December 31, 2013 primarily due to the value of stockissued to employees pursuant to the acquisition of the 10% noncontrolling interest in TOT Group. (See Note 4 of the accompanying Notes ConsolidatedFinancial Statements). Salaries, benefits, taxes and contractor payments were $3,209,996 for the year ended December 31, 2014 as compared to $4,331,580 for the year endedDecember 31, 2013, representing a decrease of $1,121,584 as follows: Group Salaries and benefitsfor the twelvemonths endedDecember 31, 2014 Salaries andbenefits for thetwelve monthsended December 31,2013 Increase / (Decrease) % Net Element (Corporate) $1,190,850 $921,138 $269,712 29.3%NetLab 200,739 926,301 (725,562) -78.3%Music 1 - 203,644 (203,644) -100.0%TOT Group 1,493,557 1,716,509 (222,952) -13.0%OOO Net Element Russia 324,850 563,988 (239,138) -42.4%Total $3,209,996 $4,331,580 $(1,121,584) The primary reason for the decrease in salaries was the decrease in salaries in NetLabs engineering for $725,562 due to reduction in staff with the divesture ofentertainment websites. The Music 1 website was divested in September 2013 and TOT Group salaries were lower by $222,952 due to staff reductions. Professional fees were $2,262,453 for the year ended December 31, 2014 as compared to $4,003,850 for the year ended December 31, 2013, representing adecrease of $1,741,397 as follows: Professional Fee Twelve monthsended December 31,2014 Twelve monthsended December 31,2013 Increase / (Decrease)$ % General Legal $237,936 $746,490 $(508,554) -68.1%SEC Compliance Legal Fees 228,872 401,143 (172,271) -42.9%Accounting and Auditing 473,507 1,125,486 (651,979) -57.9%Tax Compliance and Planning 68,700 71,400 (2,700) -3.8%Consulting 1,253,438 1,659,331 (405,893) -24.5%Total $2,262,453 $4,003,850 $(1,741,397) 26 The most significant decreases in professional fees were attributable to general legal of $508,554, accounting / auditing fees of $651,979 and consultingservices of $405,893. General legal expenses decreased $508,554 during the year ended December 31, 2014 versus the year ended December 31, 2013primarily due to a settlement of fees for amounts less than accrued in prior periods. During the year ended December 31, 2013 we also used additional outsidelegal counsel to assist in the reorganization of the Company after our merger transaction with Net Element. Accounting and auditing fees were $651,979lower because we changed auditors from a national firm to a regional firm that reduced our audit fees and there were additional fees in 2013 related todiscontinued operations. Other general and administrative expenses were $1,613,461 for the year ended December 31, 2014 as compared to $3,281,137 for the year ended December31, 2013, representing a decrease of $1,667,676. Other expenses for the year ended December 31, 2014 are made up of performance bonuses, general officeexpenses and expenses related to communications. Other expenses in 2013 were primarily attributed to acquisition of TOT Payments in 2013. We recorded a recovery of bad debts of $1,153,147 for the year ended December 31, 2014, compared to a provision for bad debts and unrecoverable advancesof $7,640,008 for the year ended December 31, 2013. For the twelve months ended December 31, 2013, we recorded a loss provision which was primarilycomprised of a $4,528,759 loss on advances to aggregators, a $1,834,302 loss on notes receivable and $703,768 from reserving revenue and costs related tothe First Data lawsuit and $423,179 from net ACH rejects in the normal course of operations. During the year ended December 31, 2014, we did not recognize any goodwill impairment. During the year ended December 31, 2013 we recognized$11,200,000 of non-cash, goodwill impairment losses relating to the goodwill from the Unified Payments acquisition. In connection with that acquisition, werecorded goodwill of approximately $17 million. As part of our financial statement closing processes, as well as our review of our valuation of the UnifiedPayments business combination, we determined that the reported goodwill of our TOT Payments reporting unit was impaired at December 31, 2013. Depreciation and amortization expense consists primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, clientacquisition costs, capitalized software expenses and employee non-compete agreements. Depreciation and amortization expense was $2,358,136 for the yearended December 31, 2014 as compared to $2,242,504 for the year ended December 31, 2013. The $115,632 increase in depreciation and amortizationexpense was primarily due to increases in merchant portfolio amortization and amortization of client acquisition costs. Interest expense was $3,705,694 for the year ended December 31, 2014 as compared to $2,979,102 for the year ended December 31, 2013, representing anincrease of $726,592 as follows: Funding Source Twelve monthsended December 31,2014 Twelve monthsended December 31,2013 Increase / (Decrease)$ % Alfa Bank $273,083 $819,214 $(546,131) -66.7%Capital Sources NY 212,750 258,750 (46,000) -17.8%Crede CG III, Ltd. 1,043,844 1,043,844 - Georgia Notes LLC 1,302,149 1,194,891 107,258 9.0%MBF Note 443,414 158,160 285,254 180.4%RBL Note 382,462 474,433 (91,971) -19.4%Other 47,992 73,654 (25,662) -34.8%Total $3,705,694 $2,979,102 $726,592 Interest expense for 2014 consisted primarily of $1,302,149 from the September 15, 2014 repayment of the Georgia Notes LLC note payable. In addition,there was a $1,043,844 charge resulting from the amortization of the Crede CG III, Ltd note that was converted to equity on September 15, 2014. Interestexpense of $212,750 related to the Capital Sources note payable which was repaid on September 15, 2014. Interest expense of $178,843 is related to ourcurrent RBL note. Interest expense of $203,619 was related to two RBL notes which were repaid on April 7, 2014. Interest expense of $443,414 is related tothe MBF note which was repaid in July 2014. Interest expense of $273,083 was related to our factoring line for Russian operations with Alfa-Bank, and$47,992 was for other miscellaneous interest charges. 27 During 2013, interest expense, net of $2,979,102 was primarily due to TOT Group’s assumption of $20.6 million of indebtedness in connection with itsacquisition of the business operations of Unified Payments, which resulted in interest expense of $2,137,852 the year ended December 31, 2013. This chargeincludes $942,961 of interest expense on $9.9 million of notes payables and $1,194,891 of interest for the $11.1 million loan payable to Georgia Notes, LLC(see Note 12 of the accompanying Notes to Consolidated Financial Statements). Interest expense for the year ended December 31, 2013 also includes$819,214 of interest on our factoring line that TOT Money has with Alfa Bank. During 2014, we recorded a gain on the change in fair value on the beneficial conversion derivative in the amount of $5,569,158, as a result of theconversion of the Cayman Invest loan to common stock. This was offset by a loss on debt payoff of the Cayman Invest loan in the amount of ($3,962,406)primarily due to the write-off of the remaining debt discount on the loan. There was no intangible asset impairment during 2014. During 2013, the Company recognized intangible assets impairment of $872,354 due to the write offof the First Data Portfolio. The net loss attributable to noncontrolling interests amounted to $29,250 for the year ending December 31, 2014 as compared to $1,129,319 for year endingDecember 31, 2013. The $1,100,069 decrease was primarily attributed to TOT Group which previously had a 10% noncontrolling interest (See Note 4 of theaccompanying Notes to Consolidated Financial Statements). The noncontrolling interest reflects the results of operations of subsidiaries that are allocable toequity owners other than us. Since our inception, we have incurred significant operating losses. We incurred net losses totaling $10.2 million and $48.3 million for the years endedDecember 31, 2014 and 2013, respectively. We had a working capital deficit of approximately $0.7 million and an accumulated deficit of $129 million atDecember 31, 2014. These conditions raise substantial doubt about our ability to continue as a going concern. The independent auditors’ report on ourconsolidated financial statements for the year ended December 31, 2014 contains an explanatory paragraph expressing substantial doubt as to our ability tocontinue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unableto continue as a going concern. See also “Liquidity and Capital Resources” below. Liquidity and Capital Resources Our total assets at December 31, 2014 were $14,322,669 compared to $22,508,725 at December 31, 2013. The year over year change in total assets isprimarily attributable to the $6.9 million decrease in the Company’s Russian mobile operator receivables and $0.9 million decrease in advances toaggregators as of December 31, 2014 compared to December 31, 2013. This decrease resulted from the reorganization of the TOT Money mobile paymentsbusiness concurrent with the change in key management and billing system late in 2013 and early in 2014. The business has been rebuilding steadily,however our ability to sustain rapid growth could be impacted by our ability to use our existing credit facilities to finance the accounts receivable frommobile operators. Our two credit facilities are factoring lines of credit in which TOT Money could assign to the bank certain (but not all) of its accountsreceivable suitable to the lender under such facilities as security for financing. Accordingly, the amounts of our draws under such facilities from time to timewill depend on the amounts of the accounts receivable suitable for such assignment as of the time we choose to draw under such facilities. At December 31, 2014, we had total current assets of $4,883,214 including $503,343 of cash, $3,417,173 of accounts receivable, $18,455 of advances toaggregators and $944,243 of prepaid expenses and other assets. At December 31, 2013, we had total current assets of $12,689,171 including $126,319 ofcash, $10,619,289 of accounts receivable, $1,109,538 of advances to aggregators and $834,025 of prepaid expenses and other assets. As of the date this Report was filed with the Commission, management expects that our cash flows from operations will not be sufficient to fully execute ourbusiness plan through 2015. We expect to have a significant increase in our capital requirements during the 2015 fiscal year due to our expanding oftransactional processing operations and acquisitions. We currently believe that we will require an additional $6.5 million to purchase recurring revenues currently payable to our sales agents and fund workingcapital requirements as discussed in previous paragraph. We will also require financing to continue operations as currently conducted and to pay for othercurrently anticipated capital expenditures and acquisitions over the next 12 months. Additional funds may be raised through debt financing and/or theissuance of equity securities, there being no assurance that any type of financing on terms satisfactory to us will be available or otherwise occur. Debtfinancing must be repaid regardless of whether we generate revenues or cash flows from operations and may be secured by substantially all of our assets. Anyequity financing or debt financing that requires the issuance of equity securities or warrants to the lender would cause the percentage ownership by ourcurrent stockholders to be diluted, which dilution may be substantial. Also, any additional equity securities issued may have rights, preferences or privilegessenior to those of existing stockholders. If such financings are not available when required or are not available on acceptable terms, we may be unable toimplement our business plans or take advantage of business opportunities, any of which could have a material adverse effect on our business, financialcondition, results of operations and/or prospects and may ultimately require us to suspend or cease operations, which could cause investors to lose the entireamount of their investment. Operating activities provided $2.3 million of cash for the twelve months ended December 31, 2014 as compared to using $10.8 million of cash for the twelvemonths ended December 31, 2013. Positive operating cash flow for the twelve months ended December 31, 2014 was primarily due to thecollection/reduction of mobile operator receivables and aggregator advances in Russia. The net change in accounts receivable and aggregator advances was$9.8 million offset by $1.8 million in working capital used for prepaid expenses, accounts payable and accrued expenses. The net loss for the twelve monthsended December 31, 2014 was $10.2 million compared to $48.3 million for the twelve months ended December 31, 2013. The $10.2 million net loss for 2014included the following non-cash items: Item Amount (in millions) Non-cash compensation $4.3 Depreciation and amortization 2.4 Crede gain on derivative offset by loss on debt extinguishment (3.3)Gain on MBF debt restructure (1.6)Loss on Cayman Invest debt conversion 4.0 Recovery of loan losses (1.6)Amortization of Georgia Notes debt discount 1.6 Other non-cash adjustments 0.1 Total non-cash adjustments to net income $5.9 28 The loss for 2013 included $11.2 million of goodwill impairment from the Unified acquisition, $0.9 million of intangible impairment, $16.5 million of non-cash compensation expense relating to equity issued for various services, $2.2 million in depreciation and amortization and $7.6 million of provision for baddebts mainly related to loss provision for advances to aggregators. Additional sources of operating cash included $2.0 million decrease in prepaid expensesand other assets, a $2.7 million increase in accounts payable and accrued expenses. Additionally, there was an increase of $3.3 million in advances toaggregators and an increase in accounts receivable of $0.6 million. Investing activities used $1.8 million of cash for the year ended December 31, 2014 as compared to $4.1 million of cash provided for the year endedDecember 31, 2013. The increase in cash used by investing activities in the year ended December 31, 2014 was primarily attributable to a $1 millionpurchase of several credit card portfolios during 2014. During 2013 cash provided from investing activities consisted of $4.9 million of collections from net notes receivable. Net cash used in investing activitiesincluded $0.4 million for the acquisition of intangible assets and $0.5 million for the acquisition of Aptito. Financing activities used $73,602 during the year ending December 31, 2014 primarily from $10 million provided by the Cayman Invest loan proceeds,offset by $3.1 million attributable to the payoff of the RBL notes and a $7.3 million repayment to the Alfa Bank credit facility. Financing activities provided $3.1 million of cash during the year ended December 31, 2013. The activity for the year ended December 31, 2013 consisted ofa $2.0 million source of cash from the elimination of restricted cash created in 2012 and $2.0 million from K1 Holdings note payable proceeds offset by $0.5million use of cash to repurchase shares and $0.3 million repayment of borrowings. The changes in restricted cash were due to the establishment of the AlfaBank credit facility in 2012 and repayment of same during the year ended December 31, 2013. The Company often deals with transactions in foreign currencies, such as Russian Rubles. The effect of exchange rate changes on cash amounted to ($0.1)million for the twelve months ended December 31, 2014 as compared to $0.1 million for the twelve months ended December 31, 2013. In connection with its acquisition of the business assets of Unified Payments on April 16, 2013, the Company assumed several long-term debt obligationswith an aggregate outstanding amount of $20.6 million which were subsequently paid off in 2014. Such long-term debt included notes that bore interest atrates ranging from 9.75% to 15.635% and had maturity dates ranging from October 2014 until January 2016. In addition, pursuant to the ContributionAgreement entered into by the Company on April 16, 2013 with Unified Payments, TOT Group, Oleg Firer and Georgia Notes 18 LLC, on January 1, 2014,the preferred membership interest in Unified Payments plus payable in kind interest accrued thereon was converted into a 8% interest only loan (interestcompounding annually with a balloon payment due on January 1, 2017) and, upon such conversion, such loan was assumed by a subsidiary of TOT Group.This convertible preferred membership interest was classified as long term debt with a December 31, 2013 balance of $11,098,066 in the accompanyingconsolidated balance sheets. For additional information, see Notes 4 and 12 of the accompanying notes to our Consolidated Financial Statements. On April 7, 2014 the Company paid off and satisfied its debts with RBL Capital corp., which consisted of two notes: one note with a remaining principalbalance as of March 31, 2014 of $1,416,926 and one note with a principal balance as of March 31, 2014 of $934,030. The note with the principal balance of $1,416,926 provided for the payoff of restructuring interest in the amount of $92,239. The loan pay off also providedfor pro rata interest in the amount of $16,020 and a prepayment premium in the amount of $42,508 which was also charge to interest expense. The totalpayoff for this note amounted to $1,567,693. We accrued monthly payments of $77,560 in principal and interest at 15.636%, plus an additional 5% inrestructuring interest from January 2013 through March 2014 for a total of $106,856 which was included in the pay off. The note with the principal balance of $934,030 provided for the payoff of restructuring interest accrued in the amount of $90,615. The loan payoff alsoprovided for pro rata interest in the amount of $9,505. The total payoff of this note amounted to $1,034,150. We made monthly payments of $84,584 inprincipal and interest plus accrued an additional 5% restructuring interest from January 2013 through March 2014 for a total of $116,533. 29 In September 2013, we entered into a letter agreement with Oleg Firer, Steven Wolberg, Georgia Notes 18, LLC and Vladimir Sadovskiy, pursuant to whichwe agreed, subject to approval of the Company’s shareholders, to issue such number of shares of Common Stock equal to 10% of the Company’s issued andoutstanding Common Stock as of the date of issuance of such shares in exchange for our acquisition of the outstanding 10% minority interest in our 90%-owned subsidiary, TOT Group, Inc. Pursuant to this agreement, we were obligated to issue to Mr. Firer (who is our Chief Executive Officer and a director)4.5% of our issued and outstanding Common Stock as of the date of issuance of such shares, and to Mr. Wolberg (who is our Chief Legal Officer andSecretary) 2% of the Company’s issued and outstanding Common Stock as of the date of issuance of such shares. The agreement was subject to shareholderapproval which occurred in December 2013. We recorded a compensation charge of $13,305,817, representing the value of the shares issued to Messrs. Firerand Wolberg. Effective June 30, 2014, the parties to the letter agreement executed Amendment No. 1. Prior to the date of this Amendment No. 1 (June 30,2014), the parties calculated the number of shares to be issued was to reflect shares that constitute a 10% interest in the Company on the pre-share issuancebasis. Effective with Amendment No. 1 (June 30, 2014), the parties agreed that the number of shares to be issued was to be calculated to reflect shares thatconstitute a 10% ownership in the Company on a post-share issuance basis. As a result of this amendment, we recorded an additional compensation charge of$617,093 for the issuance of 323,085 additional shares at June 30, 2014. Pursuant to this letter agreement, as amended, we issued to Mr. Firer (who is ChiefExecutive Officer and a director of the Company) 1,411,135 restricted shares of Common Stock representing 4.5% of our issued and outstanding CommonStock as of the date of issuance of such shares, and to Mr. Wolberg (who is Chief Legal Officer and Secretary of the Company) 627,171 restricted shares ofCommon Stock representing 2% of our issued and outstanding Common Stock as of the date of issuance of such shares. On September 25, 2013, the Company entered into a Contribution Agreement with T1T Lab, LLC, a Florida limited liability company (“T1T Lab”), and T1TGroup, LLC, a Delaware limited liability company, pursuant to which, on September 25, 2013, the Company contributed to T1T Lab all of its membershipand participation interests in its subsidiaries Openfilm, LLC, Motorsport, LLC, Splinex, LLC, LegalGuru, LLC and MUSIC 1 LLC (a/k/a OOO Music1)(collectively, the “Disposed Subsidiaries”). The Disposed Subsidiaries constitute all of the Company’s interests in online media businesses and operations(referred to herein collectively as the Company’s “entertainment assets”). Pursuant to the Contribution Agreement, the Company contributed to T1T Lab allof its membership and participation interests in the Disposed Subsidiaries and agreed to make an initial capital contribution to T1T Lab in the amount of$1,259,000, a portion of which may be paid in the form of future services provided by the Company. In exchange for such contributions, the Company wasissued a 10% membership interest in T1T Lab and T1T Lab assumed $2,162,158 in liabilities (including $2,000,000 owed by the Company to K 1 HoldingLimited pursuant to a promissory note dated May 13, 2013) related to the Disposed Subsidiaries. In addition, all intercompany loans payable by the DisposedSubsidiaries to the Company, on the one hand, and by the Company to the Disposed Subsidiaries, on the other hand, were forgiven by the Company and T1TLab (as applicable). Total intercompany loans forgiven by the Company, net of the total intercompany loans forgiven by the Disposed Subsidiaries, was$9,254,725. The remaining 90% membership interest in T1T Lab is owned by T1T Group, LLC, which is wholly-owned by Enerfund, LLC (which is wholly-owned by Mike Zoi). On December 5, 2013, the Board submitted and the shareholders approved the Net Element International, Inc. 2013 Equity Incentive Plan (the “2013 Plan”).The purpose of the 2013 Plan is to encourage and enable employees, independent contractors and directors of the Company and its subsidiaries to acquire aproprietary interest in the Company through the ownership of the Company’s Common Stock and other rights with respect to the Company’s Common Stock.Such ownership is intended to provide such employees, independent contractors and directors with a more direct stake in the future welfare of the Company.It is also expected that the 2013 Plan will encourage qualified persons to seek and accept employment with the Company and its subsidiaries and to becomeand remain directors of the Company. Awards under the 2013 Plan may be granted in any one or all of the following forms: (i) incentive stock options(“Incentive Stock Options”) meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”); (ii) non-qualifiedstock options (“Non-Qualified Stock Options”) (unless otherwise indicated, references to “Options” include both Incentive Stock Options and Non-QualifiedStock Options); (iii) stock appreciation rights (“Stock Appreciation Rights”), which may be awarded either in tandem with Options (“Tandem StockAppreciation Rights”) or on a stand-alone basis (“Nontandem Stock Appreciation Rights”); (iv) shares of Common Stock that are restricted (“RestrictedShares”); (v) units representing shares of Common Stock (“Performance Shares”); (vi) units that do not represent shares of Common Stock but which may bepaid in the form of Common Stock (“Performance Units”); and (vii) shares of Common Stock that are not subject to any conditions to vesting (“UnrestrictedShares”). The maximum aggregate number of shares of Common Stock available for award under the 2013 Plan is 5,630,000, subject to adjustment asprovided for in the 2013 Plan. Shares of Common Stock issued pursuant to the 2013 Plan may be either authorized but unissued shares or issued sharesreacquired by the Company. In the event that prior to the end of the period during which Options may be granted under the 2013 Plan, any Option or anyNontandem Stock Appreciation Right under the 2013 Plan expires unexercised or is terminated, surrendered or cancelled (other than in connection with theexercise of Stock Appreciation Rights) without being exercised in whole or in part for any reason, or any Restricted Shares, Performance Shares orPerformance Units are forfeited, or if such awards are settled in cash in lieu of shares of Common Stock, then such shares will be available for subsequentawards under the 2013 Plan. The 2013 Plan will be administered by the compensation committee. The compensation committee will have the power andauthority to, among other things: (i) grant Options and determine the purchase price of the Common Stock covered by each Option, the term of each Option,the number of shares of Common Stock to be covered by each Option and any performance objectives or vesting standards applicable to each Option; (ii)designate Options as Incentive Stock Options or Non-Qualified Stock Options and determine which Options, if any, will be accompanied by Tandem StockAppreciation Rights; (iii) grant Tandem Stock Appreciation Rights and Nontandem Stock Appreciation Rights and determine the terms and conditions ofsuch rights; (iv) grant Restricted Shares and determine the terms of the restricted period and other conditions and restrictions applicable to such shares; (v)grant Performance Shares and Performance Units and determine the performance objectives, performance periods and other conditions applicable to suchshares or units; (vi) grant Unrestricted Shares; and (vii) determine the employees, independent contractors and directors to whom, and the time or times atwhich, Options, Stock Appreciation Rights, Restricted Shares, Performance Shares, Performance Units and Unrestricted Shares will be granted. Awards may bemade to all employees, independent contractors (including persons other than individuals) and directors of the Company or any of its subsidiaries. Indetermining the employees, independent contractors and directors to whom awards will be granted and the number to be covered by each award, thecompensation committee will take into account the nature of the services rendered by such employees, independent contractors and directors, their presentand potential contributions to the success of the Company and its subsidiaries and such other factors as the compensation committee deems relevant. 30 On May 14, 2013, the Company executed and delivered to K 1 Holding Limited (“K1 Holding”) a promissory note, dated May 13, 2013, in the principalamount of $2 million, in connection with a loan in such amount made by K1 Holding to the Company. Proceeds from the loan are required to be used forgeneral business purposes of the Company. Since there is no interest stated on this note, the Company used the effective interest method to calculate imputedinterest at an effective rate of 13.25 %. The Company recognized a discount on the loan of $463,358, resulting in an initial present value of $1,536,642. Thisdiscount will be amortized over the life of the loan as interest expense. K1 Holding is an affiliate of Igor Yakovlevich Krutoy. Mr. Krutoy, through K1Holding, owns a 33 % interest in the Company’s former subsidiary OOO Music1. At the time the K1 Note was entered into by the Company and the relatedloan made by K1 Holding to the Company, the Company was negotiating a letter agreement dated May 13, 2013 with TGR Capital, LLC and K1 Holding.The draft of that letter agreement at that time provided that, as a condition to K1 Holding making the foregoing loan to the Company and to K1 Holdingentering into an agreement to provide certain business development consulting services to the Company, (i) the Company would issue to K1 Holding anumber of restricted shares of common stock of the Company equal to 2% of the total issued and outstanding shares of common stock of the Company at thetime of issuance and (ii) TGR Capital, LLC would transfer to K1 Holding such number of restricted shares of common stock of the Company as is needed tobring K1 Holding’s and Mr. Krutoy’s aggregate beneficial ownership of common stock of the Company to 10% of the total issued and outstanding shares ofcommon stock of the Company at the time of such transfer. TGR Capital, LLC is an affiliate of Mike Zoi. The foregoing letter agreement was not finalized norentered into by the parties at that time. On September 25, 2013, the K1 Note was assumed by T1T Lab in connection with divesture of entertainment assets on that date. At that time, the partiescontinued negotiating that letter agreement and agreed in principal that, pursuant to that letter agreement, (i) the Company would issue to K1 Holding anumber of restricted shares of common stock of the Company equal to 4% (instead of 2% as initially contemplated) of the total issued and outstanding sharesof common stock of the Company at the time of issuance and (ii) TGR Capital, LLC would transfer to K1 Holding such number of restricted shares ofcommon stock of the Company as is needed to bring K1 Holding’s and Mr. Krutoy’s aggregate beneficial ownership of common stock of the Company to10% of the total issued and outstanding shares of common stock of the Company at the time of such transfer (decreasing the amount of shares required to betransferred by TGR Capital, LLC to K1 Holding from 8% to 6% of the total issued and outstanding shares of common stock of the Company). On December 5, 2013, the Company entered into (i) a letter agreement (the “K1 Agreement”) with TGR Capital, LLC and K 1 Holding and (ii) a ServicesAgreement with K1 Holding (the “Services Agreement”). The K1 Agreement requires the Company to issue to K1 Holding a number of restricted shares ofcommon stock of the Company equal to 4% of the total issued and outstanding shares of common stock of the Company at the time of issuance. Mr. Krutoy,through K1 Holding, owns a 33% equity interest in MUSIC 1 LLC (a/k/a OOO Music1), a former subsidiary of the Company. Further, the K1 Agreementrequires TGR Capital, LLC to transfer to K1 Holding such number of restricted shares of common stock of the Company as is needed to bring K1 Holding’sand Mr. Krutoy’s aggregate beneficial ownership of common stock of the Company to 10% of the total issued and outstanding shares of common stock of theCompany at the time of such transfer. The issuance and transfer of such shares of common stock to K1 Holding is consideration for the services to be providedpursuant to the Services Agreement (as described below) and for making a $2 million loan to the Company that was made on May 14, 2013 (the relatedpromissory note was subsequently assumed by T1T Lab, LLC in connection with the Company’s disposition of its online media subsidiaries to T1T Lab,LLC on September 25, 2013). T1T Lab, LLC is an affiliate of Mike Zoi. The issuance by the Company of any shares of its common stock to K1 Holdingpursuant to the K1 Agreement was approved by the Company’s shareholders at the 2013 annual meeting of shareholders of the Company. The ServicesAgreement provides that K1 Holding will provide investor relations services for the Company and its affiliates outside the United States and that K1 Holdingwill assist the Company and its affiliates with future negotiations and maintaining their relationship with Mobile TeleSystems OJSC, MegaFon OJSC, OJSCVimpelCom (a/k/a Beeline) and their respective affiliates (collectively, the “Mobile Carriers”). The Company’s subsidiary, TOT Money, has agreements toprovide mobile payment processing services for electronic payments using SMS (short message services, which is a text messaging service) and MMS(multimedia message services) initiated by the mobile phone subscribers of each of the Mobile Carriers in Russia. The term of the Services Agreement expireson December 5, 2015. Off-balance sheet arrangements At December 31, 2014, we did not have any off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K. Recently Issued Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Revenue fromContracts with Customers (Topic 606). Under ASU 2014-09, an entity should recognize revenue to depict the transfer of promised goods or services tocustomers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will beeffective for the Company for annual reporting periods beginning after December 15, 2016. The Company is evaluating ASU 2014-09 to determine if thisguidance will have a material impact on the Company’s consolidated financial statements. In November 2014, the FASB issued Accounting Standards Update 2014-16 (“ASU 2014-16), Derivatives and Hedging (Topic 815): Determining Whetherthe Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging IssuesTask Force). ASU 2014-16 does not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybridfinancial instrument is required, but clarifies how current GAAP should be interpreted in the evaluation of the economic characteristics and risks of a hostcontract in a hybrid financial instrument that is issued in the form of a share, reducing existing diversity in practice. The Company is evaluating ASU 2014-09 to determine if this guidance will have a material impact on the Company’s consolidated financial statements. 31 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not Applicable. Item 8. Financial Statements and Supplementary Data. The Consolidated Financial Statements and notes thereto and the reports of the independent registered public accounting firms set forth on pages F-2 throughF-7 are filed as part of this Report and incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed orsubmitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chiefexecutive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures. As of the end of the period covered by this Report, our management conducted an evaluation, under the supervision and with the participation of our chiefexecutive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e)under the Exchange Act). Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls andprocedures were not effective because there are a limited number of personnel employed and we cannot have an adequate segregation of duties, and due tothe material weaknesses in our internal control over financial reporting as discussed below under “Management’s Report on Internal Control Over FinancialReporting.” Accordingly, management cannot provide reasonable assurance of achieving the desired control objective. Management works to mitigate theserisks by being personally involved in all substantive transactions and attempts to obtain verification of transactions and accounting policies and treatmentsinvolving our operations, including those overseas. We are in the process of reviewing and, where necessary, modifying controls and procedures throughoutthe Company, particularly in light of our recent acquisitions and the continued integration of these businesses. We will continue to address deficiencies asresources permit. Management’s Report on Internal Control over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f)under Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control overfinancial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflectthe transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financialstatements. We recognize that because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies and procedures may deteriorate. Management of the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31,2014, based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission in 1992 (the “COSO Framework”). Based on management’s assessment in accordance with the criteria in the COSO Framework, our managementconcluded that our internal control over financial reporting was not effective as of December 31, 2014. Management is aware of the following material weaknesses (a material weakness is a deficiency, or a combination of deficiencies, in internal control overfinancial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not beprevented or detected and corrected on a timely basis) in the Company’s internal control over financial reporting: 32 Control Environment ■Inadequate Policies and Procedures: Based on management’s review of key accounting policies and procedures, our management determined thatsuch policies and procedures were inadequate as of December 31, 2014. Management identified certain policies and procedures as inadequateregarding the design of the control and formal written documentation. ■Segregation of Duties: We did not maintain adequate segregation of duties related to job responsibilities for initiating, authorizing, and recording ofcertain transactions as of December 31, 2014 due to the small size of our US and Russian accounting teams. We do not have sufficient personnel toprovide adequate risk assessment functions. ■New Board of Director Members: A changing organizational structure provided challenges to ensure a sound control environment with appropriatetone, authority, responsibilities, and high ethical values. We established an audit committee as of December 31, 2012; however, due to changes inboard membership, executive management and the composition of Company subsidiaries, there has been insufficient time to provide board trainingand establish adequate Best of Practice procedures. An effective audit committee working closely with the executive management team mitigates the risks that significant transactions are entered intowithout approval by those charged with governance. We are currently engaged in providing best practices training to our audit committee. ■Advances to Aggregators: We did not maintain appropriate control surrounding the billing and advances to aggregators in our TOT Money Russianoperation during 2013. As a result, we replaced key management and migrated our billing system from SDSP Group to TOT Platform, ourproprietary system, during 2014 to mitigate this control risk. Control Activities ■Testing of Internal Controls: The Company’s accounting staff is relatively small and the Company does not have all the required infrastructure formeeting the demands of being a U.S. public company. As a result we have identified deficiencies in our internal controls within our key businessprocesses, particularly with respect to the design of quarterly accounting, financial statements close, consolidation, and external financial reportingprocedures. Management believes there are control procedures that are effective in implementation within our key business processes. However,certain of these processes could not be formally tested because of lack of design, or being inadequate documentation, and lack of financial resources. Information and Communication ■Adequacy of Financial Information: We concluded that our internal controls were not effective as of December 31, 2013 due to the lack of generalcomputer controls surrounding the billing and financial reporting system in one of our Russian subsidiaries. As a result, we migrated our billing andfinancial reporting system to our own proprietary system during 2014 to mitigate this problem. Additionally, we did not have adequate segregationof duties in the recording of transactions and we did not have adequate written procedures. Monitoring ■Internal Control Monitoring: As a result of our limited financial personnel and ineffective controls (both preventative and detective) management’sability to monitor the design and operating effectiveness of our internal controls is limited. Accordingly, management’s ability to timely detect,prevent and remediate deficiencies and potential fraud risks is inadequate. These material weaknesses impede the ability of management to adequately oversee our internal control over financial reporting on a consistent basis.Management intends to continue focusing its remediation efforts in the near term on providing best practices training to our audit committee. In addition, wewill endeavor to design revised accounting and financial reporting policies and procedures that will help ensure that adequate internal controls over financialreporting are met. Additionally, these revised procedures will be formally documented and procedures will focus on transaction processing, period-endaccount analyses and providing for additional review and monitoring procedures and periodically assessing the need for additional accounting resources asthe business develops and resources permit. Management also is committed to taking further action and implementing enhancements or improvements asresources permit. We recognize that, due to the size and early stage of development of our business, implementation of additional measures may takeconsiderable time. Notwithstanding the material weaknesses discussed above, our management has concluded that the financial statements included in this Report fairly presentin all material respects our financial condition, results of operations and cash flows for the periods presented in conformity with generally acceptedaccounting principles. Except as specifically described above in this Item 9A, there was no change in our internal control over financial reporting during our fourth fiscal quarter of2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 33 Item 9B. Other Information During 2014, the Company renewed its lease for a corporate apartment in Moscow. The Lease Agreement provides for a base rent of $16,010 per year and thelease expires in January 2016. PART III Item 10. Directors, Executive Officers and Corporate Governance. Directors and Executive Officers The directors and executive officers of the Company and their respective ages, and positions with the Company and certain business experience as of March31, 2015 are set forth below. There are no family relationships among any of the directors or executive officers. Name Age PositionOleg Firer 37 Chief Executive Officer & DirectorSteven Wolberg 55 Chief Legal Officer & SecretaryJonathan New 54 Chief Financial OfficerKenges Rakishev 35 ChairmanWilliam Healy 50 DirectorDrew Freeman 56 DirectorDavid P. Kelley II 57 DirectorJames Caan 75 Director 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 andqualified. Executive officers serve at the discretion of the Board of Directors. Oleg Firer, Chief Executive Officer and Director. Mr. Firer has served as Chief Executive Officer and a director of the Company since April 16, 2013.Previously, Mr. Firer served as Executive Chairman of Unified Payments, LLC from January 2011 until its acquisition by the Company’s subsidiary, TOTGroup, Inc., on April 16, 2013. From July 2004 until December 2012, Mr. Firer served as President, Chief Executive Officer and Secretary (and from May2006 until December 2012 as Treasurer and from May 2008 until December 2012 as Chief Financial Officer) of Acies Corporation, a provider of paymentprocessing solutions to small and medium size merchants across the United States. Mr. Firer also served as a director of Acies Corporation from May 2005until December 2012. Mr. Firer served as the President of GM Merchant Solution, Inc. (from August 2002) and Managing Partner of GMS Worldwide, LLC(from August 2003) until their assets were acquired by Acies Corporation in June 2004. From November 2002 to December 2003, Mr. Firer served as theChief Operating Officer of Digital Wireless Universe, Inc. From December 2001 to November 2002, Mr. Firer served as the Managing Partner ofCELLCELLCELL, LLC. From March 1998 to December 2001, Mr. Firer served as Vice President of SpeedUS Corp. Mr. Firer studied Computer Science atNew York Technical College from 1993 to 1995. Mr. Firer currently serves as a member of Star Capital Management, LLC and Star Equities, LLC, Florida-based investment group. In addition, Mr. Firer serves as a board member of InList, RealConnex and several non-for-profit organizations. The Companybelieves that Mr. Firer’s leadership roles in various payment processing companies makes him qualified to serve as a director of the Company. Steven Wolberg, Chief Legal Officer and Secretary. Mr. Wolberg has been Chief Legal Officer and Secretary of the Company since April 16, 2013.Previously, Mr. Wolberg served in various capacities with Acies Corporation from approximately January 2009 until December 2012, including as aconsultant from approximately January 2009 until October 2009, as a director from October 30, 2009 until December 2012 and as Chief Strategy Officer fromMarch 1, 2010 until December 2012. Mr. Wolberg currently operates a solo law practice in Newton, Massachusetts, Attorney Steven Wolberg, which he hasoperated since January 1997. Mr. Wolberg served as Chief Counsel and Vice President of Corporate Development for Mascot Networks in Cambridge,Massachusetts from January 2000 to September 2001. Since September 1996, Mr. Wolberg has served as president of Oakland Properties, Inc., a real estatedevelopment company. From February 1993 to December 1994, Mr. Wolberg served as an attorney in the real estate and corporate divisions of Brown andRudnick in Boston, Massachusetts. From March 1988 to November 1991, Mr. Wolberg was a partner with the law firm of Jordaan and Wolberg inJohannesburg, South Africa. From January 1986 to February 1988, Mr. Wolberg was employed as an attorney with Goodman and North in Johannesburg,South Africa. Mr. Wolberg also currently owns and serves as the Managing Member of Prime Portfolios, LLC, which holds a private investment portfolio ofpayment processing companies. Mr. Wolberg received his Bachelor of Arts from the University of Witwatersrand in Johannesburg, South Africa, hisBachelors of Laws from the University of Witwatersrand, in Johannesburg, South Africa, and his Juris Doctorate from the New England School of Law inBoston, Massachusetts. Mr. Wolberg is a member of the Massachusetts Bar Association. 34 Jonathan New, Chief Financial Officer. Mr. New has been Chief Financial Officer of the Company since October 2, 2012. Mr. New was Chief FinancialOfficer of the Company’s predecessor, Net Element, from March 10, 2008 until October 2, 2012. From 2001 to 2003, Mr. New was Chief Operating Officer ofEner1, Inc. From 2004 until it was sold in 2006, Mr. New owned and operated Wholesale Salon Furniture Corp.com, which imported and distributed salonequipment. Thereafter, until joining Net Element, Mr. New provided services to public companies on a variety of corporate accounting, reporting and auditrelated issues. Prior to joining Ener1, Inc. in 2001, Mr. New held finance manager and chief financial officer positions with companies including Häagen-Dazs, Virtacon (a web development company), RAI Credit Corporation (private label credit card company) and Prudential of Florida. Mr. New obtained hisBS in Accounting from Florida State University and began his career with Accenture. He is a member of the Florida Institute of Certified Public Accountantsand the American Institute of Certified Public Accountants. Kenges Rakishev, Chairman. Mr. Rakishev has been a director of the Company and Chairman of the Company’s Board of Directors since October 2, 2012.Mr. Rakishev served as a director of the Company’s predecessor, Net Element, from April 23, 2012 until October 2, 2012. Mr. Rakishev is one of the ForbesTop 15 wealthiest, most influential and progressive business leaders of the Republic of Kazakhstan with significant investments in banking, finance,insurance, information technology, oil & gas, mining, manufacturing and retail business sectors worldwide. Mr. Rakishev is a large shareholder and memberof the board of the largest bank in Kazakhstan, Kazkommertsbank (KASE: KKGB), with over US$250 billion in total assets, large shareholder and Chairmanof SAT & Company (KASE: SATC), a diversified industrial holding, among his numerous other investments. Throughout his career, Kenges has served inseveral notable positions in the public sector including Vice-President of the Union of Chambers of Commerce of the Republic of Kazakhstan, Vice-Presidentof The Boxing Association of Republic of Kazakhstan and Vice-President of the Asian Boxing Confederation. Mr. Rakishev holds a B.A. (Law) from theKazakh State Law Academy and a B.A. (International Economics) from the Kazakh Economic University. Mr. Rakishev also has an AMP Diploma fromOxford University. We believe that Mr. Rakishev’s international business leadership and relationships, combined with his extensive knowledge and uniqueperspectives of global business opportunities, qualifies him to serve as a Director of the Company. William Healy, Director. Mr. Healy is an accomplished financial services industry veteran with more than 24 years of merchant financing and electronicpayments industry experience. Mr. Healy is currently the President of Funds4Growth, a leading investment firm focused on financing of payment serviceproviders in the United States. Since launching Funds4Growth, Mr. Healy has successfully structured and financed in excess of $150 million in merchantbase loans. Prior to his tenure at Funds4Growth, Mr. Healy founded MBF Leasing, LLC in November of 2003, where he was responsible for strategic planningalong with the financial and operational management of MBF Leasing. Prior to that, Mr. Healy spent 13 years with the CIT Group, Inc., where he was thePresident of CIT’s Lease Finance Group out of Chicago, Illinois, overseeing more than 150 employees involved in over 225,000 leasing transactions, and inexcess of $125 million in merchant base financings. Prior to joining CIT, Mr. Healy held several senior level positions with NewCourt Financial, includingChief Operating Officer of the Specialty Finance Division. He is a graduate of the University of Notre Dame with a Bachelor’s degree in Accounting. Webelieve that Mr. Healy’s extensive knowledge in the payments industry qualifies him to serve as a director of the Company. Drew J. Freeman, Director. Mr. Freeman is an accomplished industry veteran with more than 30 years of electronic payments industry experience. Mr.Freeman is currently the President of Freeman Consulting, Inc., a payments consulting firm that works with private equity and ISOs. Prior to that, Mr. Freemanserved as President of Merchant Data Systems from 2009 to 2013, Group Executive at Chase Paymentech from 2006 to 2007, and Executive Vice President atJP Morgan Chase-First Data JV (Chase Merchant Services) from 2000 to 2006. Mr. Freeman earned a business degree from the University of Miami in 1980.We believe that Mr. Freeman’s extensive knowledge in the payments industry qualifies him to serve as a director of the Company. David P. Kelley II, Director. Mr. Kelley has served as a director of the Company since August 2010. Mr. Kelley is a partner of Zenith Capital Partners, LLC,a private equity firm located in New York, where he has served since 2006, and a founding partner of Andover Partners Strategic Security Solutions, LLC (AP-S3, LLC), a security and intelligence consulting firm, where he has served since December 2009. From 1985 to 1988, Mr. Kelley was a tax lawyer in the lawfirm of Brown and Wood located in New York. From 1988 to 1991, Mr. Kelley worked at Merrill Lynch in New York, where he was promoted to a Director ofthe Global Swap Group. From 1991 to 1994, Mr. Kelley was a Managing Director at UBS Securities in New York, in charge of the U.S. Structured ProductsGroup. From 1994 to 1998, Mr. Kelley was a Managing Director and Head of the Global Structured Products Group at Deutsche Bank Securities in New York.From 1998 to 2006, Mr. Kelley was a Managing Director of Integrated Capital Associates, a private equity firm located in New York. Mr. Kelley is currently aDirector of the Apex-Guotai Junan Greater China Fund, headquartered in Hong Kong. Mr. Kelley graduated from Emory University with a BA degree in 1979.He graduated with a J.D. degree from Temple University School of Law in 1983, and he received an L.L.M. in Taxation from New York University School ofLaw in 1985. We believe that Mr. Kelley’s experience as a consultant and member of multiple different oversight bodies, provides him with the necessaryskills to be qualified to serve as a director of the Company. James Caan, Director. Mr. Caan has been a director of the Company since October 2, 2012. Mr. Caan served as a director of the Company’s predecessor, NetElement, from January 1, 2011 until October 2, 2012. Mr. Caan also has been Chairman of the Advisory Board of Openfilm since October 12, 2009. Pursuantto Mr. Caan’s advisory agreement with Openfilm, Mr. Zoi and Mr. Kozko are obligated to vote their shares in the Company in favor of Mr. Caan as a directorof the Company until December 14, 2013. Mr. Caan is an actor and director, having worked in the film and television industries for over 40 years, and he isone of the entertainment industry’s most renowned talents, having starred in over 80 films. We believe that Mr. Caan’s position with Openfilm, as well as histenure working as an actor and director in the film and television industry, qualifies him to serve as a director of the Company. 35 Audit Committee Our Board of Directors has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act, whichis currently comprised of David P. Kelley II (audit committee chairman), William Healy, James Caan and Drew Freeman. The Board of Directors hasdetermined that the audit committee’s current member composition satisfies the rules of NASDAQ that govern audit committee composition, including therequirements that each audit committee member must (i) be an “independent director” as defined under NASDAQ Listing Rule 5605(a)(2), (ii) meet thecriteria for independence set forth in Rule 10A-3(b)(1) under the Exchange Act, (iii) not have participated in the preparation of the financial statements of theCompany or any current subsidiary of the Company at any time during the past three years, and (iv) be able to read and understand fundamental financialstatements, including a company’s balance sheet, income statement and cash flow statement. Further, the Board of Directors has determined that David P.Kelley II is financially sophisticated as described in NASDAQ Listing Rule 5605(c)(2) and qualifies as an “audit committee financial expert” as defined inItem 407(d)(5) of Regulation S-K. Director Recommendations We have not adopted procedures by which security holders may recommend nominees to the Board of Directors. Code of Ethics We have adopted a Code of Ethics and Business Conduct that applies to all directors, officers and employees of the Company, including our principalexecutive officer and our principal financial and accounting officer. A copy of our Code of Ethics and Business Conduct has been posted to the “CorporateGovernance” section of our Internet website at http://www.netelement.com. We will provide a copy of our Code of Ethics and Business Conduct to anyperson without charge, upon written request to the Company’s Chief Financial Officer, 3363 NE 163rd Street, Suite 705, North Miami Beach, FL 33160, faxnumber (305) 358-7876, e-mail address investors@netelement.com. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires our directors and officers and persons who beneficially own more than ten percent of aregistered class of our equity securities to file with the Commission initial reports of ownership and reports of change in ownership of common stock andother equity securities of the Company. Directors, officers and greater than ten percent stockholders are required by Commission regulations to furnish uswith copies of all Section 16(a) forms they file. To our knowledge, the following persons have failed to file on a timely basis the identified reports required bySection 16(a) of the Exchange Act during the most recent fiscal year: Name and Relationship Number of late reports Transactions not timelyreported Known failures to file arequired formMike Zoi, 10% owner 2 6 0Oleg Firer, Chief Executive Officer & Director 1 1 0Steven Wolberg, Chief Legal Officer andSecretary 1 1 0Dmitry Kozko, former President & formerDirector 1 2 0James Caan, Director 1 1 0William Healy, Director 1 1 0David P. Kelley II, Director 1 1 0Felix Vulis, former Director 2 2 0Kenges Rakishev, Director and 10% owner 1 1 0 Item 11. Executive Compensation. Summary Compensation Table The following table sets forth information for the fiscal years ended December 31, 2014 and 2013 with respect to all compensation paid to or earned by ourChief Executive Officer and our two most highly compensated executive officers other than our Chief Executive Officer who were serving as executiveofficers at the end of the last completed fiscal year. We refer to these individuals as the “named executive officers.” Name and Principal Position Year Salary ($) Bonus ($) StockAwards ($) Option Awards ($) All Other Compensation ($) Total ($) Oleg Firer, Chief 2014 $300,000 $300,000 $2,175,970 $- $29,722 $2,805,692 Executive Officer of Net Element 2013 $170,125 $212,500 $- $- $57,521 $440,146 Steven Wolberg, Chief Legal Officer and 2014 $200,000 $- $222,026 $- $11,722 $433,748 Secretary of Net Element 2013 $114,328 $- $- $- $8,126 $122,454 Irina Bukhanova, Chief Financial Officer 2014 $136,286 $4,536 $156,087 $- $- $296,909 of Russia 2013 $97,446 $5,116 $- $- $- $102,562 Outstanding equity awards at December 31, 2014 consists of 1,563,509 shares of restricted stock granted to key executives for 2014 and 2015 base stockawards. We will record a compensation charge of $3,739,159 throughout 2015 and 2016 as the 1,563,509 shares vest each quarter. Director Compensation Effective as of November 26, 2012, the Board of Directors authorized the Company to pay the audit committee chairman an annual retainer of $30,000, eachother member of the audit committee an annual retainer of $5,000, the chairman of any other committee an annual retainer of $15,000 and each other memberof any other committee an annual retainer of $2,500. The Board of Directors also authorized the Company to grant each independent director 15,000 sharesof common stock per year (pro-rated for any partial calendar year for which a director serves), which shares will vest on a quarterly basis during the year ofservice. The Company also reimburses each of its directors for all reasonable out-of-pocket expenses incurred in connection with their attendance atmeetings of the Board of Directors and any committees thereof, including, without limitation, travel, lodging and meal expenses. Other than reimbursementof out-of-pocket expenses, a director who is an employee or officer does not receive compensation of any kind for service as a director. 36 2014 Director Compensation Table The following table further summarizes the compensation paid to the Company’s directors for service as a director during 2014: Director Name Fees earned or paid in cash ($) Stock awards ($) Option awards ($) Non-equityincentive plancompensation ($) Non-qualifieddeferredcompensationearnings ($) All othercompensation ($) Total ($) Kenges Rakishev $11,250 $52,050 $- $- $- $- $63,300 David P. Kelley II $53,750 $52,050 $- $- $- $- $105,800 James Caan $7,500 $52,050 $- $- $- $- $59,550 Felix Vulis (resigned May 21,2014) $2,083 $13,013 $- $- $- $- $15,096 William Healy $5,000 $26,025 $- $- $- $- $31,025 Drew J. Freeman $2,917 $30,363 $- $- $- $- $33,280 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The table below contains information regarding the beneficial ownership of our common stock as of March 25, 2015 by (i) each person who is known tous to beneficially own more than 5% of our common stock, (ii) each of our directors, (iii) each of our named executive officers and (iv) all of our directors andnamed executive officers as a group. Except as otherwise noted below, each person or entity named in the following table has the sole voting and investmentpower with respect to all shares of our common stock that he, she or it beneficially owns. Unless otherwise indicated, the address of each beneficial ownerlisted below is c/o Net Element, Inc., 3363 NE 163rd Street, Suite 705, North Miami Beach FL 33160. Name and address of beneficial owner Amount and nature of beneficialownership (number of shares ofcommon stock beneficially owned) Percentof class (1) Mike Zoi 4100 NE 2nd Ave, Suite 302, Miami, FL 33137 6,437,663 (2) 13.56%MZ Capital, LLC (Delaware) 4100 NE 2nd Ave, Suite 302, Miami, FL 33137 1,102,029 (2) 2.32%TGR Capital, LLC 4100 NE 2nd Ave, Suite 302, Miami, FL 33137 3,558,146 (2) 7.50%MTZ Fund, LLC 4100 NE 2nd Ave, Suite 302, Miami, FL 33137 1,777,344 (2) 3.74%Kenges Rakishev c/o SAT & Company 241 Mukanova Street Almaty Kazakhstan 050008 7,677,835 (3) 16.18%Novatus Holding PTE. Ltd. 22B Duxton Hill Singapore 089605, Republic ofSingapore 7,320,751 (3) 15.43%Oleg Firer c/o Net Element, Inc. 3363 NE 163rd Street, Suite 705, North Miami Beach, Florida 33160 3,380,655 7.12%Steven Wolberg c/o Net Element, Inc. 3363 NE 163rd Street, Suite 705, North Miami Beach, Florida 33160 892,862 1.88%James Caan 2791 Hutton Drive Beverly Hills, CA 90210 150,131 0.32%Jonathan New c/o Net Element, Inc. 3363 NE 163rd Street, Suite 705, North Miami Beach, Florida 33160 266,137 (4) 0.56%David P. Kelley II 64 Horseshoe Road Darien, CT 06820 37,750 (5) 0.08%William Healy 16W281 83rd Street, Suite B Burr Ridge, IL 60527 75,200 0.16%Drew Freeman 2542 Nassau Lane Fort Lauderdale. FL 33312 - 0.00%Beno Distribution, Ltd. P.O. Box 146, Road Town, Tortola, British Virgin Islands VG1110 4,538,737 (6) 9.56%Cayman Invest S.A. A Little Denmark Complex 147 Main Street P.O. Box 4473 Road Town, Tortola, D8 VG 1110 5,569,158 (7) 11.73%K1 Holding Limited P.O. Box 146, Road Town, Tortola, British Virgin Islands VG1110 2,518,688 (8) 5.31%All directors and executive officers as agroup (8 persons) 12,480,570 26.30% 37 * Less than 1%. (1)Applicable percentage ownership is based on 47,460,032 shares of common stock outstanding as of March 25, 2015, together with securities exercisableor convertible into shares of common stock within 60 days of March 25, 2015 for each stockholder. Beneficial ownership is determined in accordancewith the rules of the Commission and generally includes voting or investment power with respect to securities. The shares issuable pursuant to theexercise or conversion of such securities are deemed outstanding for the purpose of computing the percentage of ownership of the security holder, butare not treated as outstanding for the purpose of computing the percentage of ownership of any other person. (2)All information regarding shares that may be beneficially owned by Mr. Zoi is based on information disclosed in Forms 3 and 4 filed by Mr. Zoi.Represents: (i) 144 shares of common stock held directly by Mr. Zoi; (ii) 1,102,029 shares of common stock held by MZ Capital, LLC (Delaware); (iii)3,558,146 shares of common stock held by TGR Capital, LLC; and (iv) 1,777,344 shares of common stock held by MTZ Fund, LLC. Mr. Zoi shares witheach of Enerfund, LLC, TGR Capital, LLC, MZ Capital LLC (Delaware) and MTZ Fund, LLC the power to vote or direct the vote, and to dispose ordirect the disposition of, the respective shares of common stock beneficially owned by those entities. (3)All information regarding shares that may be beneficially owned by Kenges Rakishev is based on information disclosed in a Schedule 13D/A filedjointly by Mr. Rakishev, Mark Global Corporation and Novatus Holding PTE. Ltd. with the Commission and on the information available to us. Mr.Rakishev may be deemed to have beneficial ownership of 7,677,835 shares of Common Stock consisting of (i) 357,084 shares of Common Stock helddirectly by Mr. Rakishev and (ii) 7,320,751 shares of common stock held directly by Novatus Holding PTE. Ltd. Mr. Rakishev has sole voting powerand sole dispositive power over 357,084 shares of common stock and shared voting power and shared dispositive power over 7,320,751 shares ofcommon stock. (4)Includes 5,749 shares of Common Stock held by Mr. New’s spouse and 10,749 shares of common stock held by Mr. New’s son. (5)Includes (a) 23,750 shares of common stock for serving as a director of the Company; and (b) 14,000 shares of common stock issuable upon exercise ofwarrants with an exercise price of $7.50 per share and an expiration date of October 2, 2017. (6)Mr. Nurlan Abduov may be deemed to share beneficial ownership of the security held by Beno Distribution, Ltd. by virtue of his status as the soleshareholder of Beno Distribution, Ltd. All information regarding shares that may be beneficially owned by Mr. Abduov is based on informationdisclosed in Schedule 13D filed jointly by Mr. Abduov, Beno Distribution, Ltd. and K 1 Holding Limited. Mr. Abduov disclaimed beneficialownership of such shares, except to the extent of his pecuniary interest therein. (7)Mrs. Anashkhan Gabbazova may be deemed to share beneficial ownership of the security held by Cayman Invest S.A. by virtue of her status as the soledirector and shareholder of Cayman Invest S.A. (8)Mr. Mr. Nurlan Abduov may be deemed to share beneficial ownership of the security held by K 1 Holding Limited by virtue of his status as the soleshareholder of K 1 Holding Limited. All information regarding shares that may be beneficially owned by Mr. Abduov is based on information disclosedin Schedule 13D filed jointly by Mr. Abduov, Beno Distribution, Ltd. and K 1 Holding Limited. Mr. Abduov disclaimed beneficial ownership of suchshares, except to the extent of his pecuniary interest therein. 38 Securities Authorized for Issuance Under Equity Compensation Plans The following table shows information with respect to each equity compensation plan under which the Company’s common stock is authorized for issuanceas of the fiscal year ended December 31, 2014. EQUITY COMPENSATION PLAN INFORMATION Outstanding Equity Awards at Fiscal Year End Stock Awards Name Number of SharesThat Have NotVested (#) Market Value ofShares That HaveNot Vested ($) Oleg Firer 1,424,892 $1,610,128 Steven Wolberg 265,691 $300,231 Irina Bukhanova 80,000 $90,400 Amounts reported in table above are based upon the closing price of the Company's stock at year-end, which was $1.13 per share. Stock Vested in 2014 Stock Awards Name Number of SharesAcquired onVesting (#) Value Realized onVesting ($) Oleg Firer 544,628 $1,731,916 Steven Wolberg - $- Irina Bukhanova 116,483 $156,087 The amounts reported in the table above are based on the closing price of the Company's Common Stock on the date the stock award vested. Item 13. Certain Relationships and Related Transactions, and Director Independence. Certain Relationships and Related Transactions On September 25, 2013, the Company entered into a contribution agreement with T1T Lab and T1T Group, LLC, pursuant to which, on September 25, 2013,the Company contributed to T1T Lab all of its membership and participation interests in its subsidiaries Openfilm, LLC, Motorsport, LLC, Splinex, LLC,LegalGuru, LLC and MUSIC 1 LLC (aka OOO Music1) (collectively, the “Disposed Subsidiaries”). The Disposed Subsidiaries constitute all of theCompany’s interests in online media businesses and operations (referred to herein collectively as the Company’s “entertainment assets”). Pursuant to thecontribution agreement, the Company agreed to make an initial capital contribution to T1T Lab in the amount of $1,259,000, payable in full or ininstallments when requested by T1T Lab but in no event later than within the 12-month period after September 25, 2013 (unless such period is mutuallyextended in writing by the Company and T1T Group, LLC). Subject to T1T Lab’s prior written approval, a portion of the Company’s initial capitalcontribution could have been made in the form of future services provided by the Company, with the value of such services to be agreed upon in writingbetween the Company and T1T Group, LLC prior to providing such services. The amount of the Company’s initial capital contribution is a negotiatedamount required for T1T Lab to acquire the Disposed Subsidiaries. In exchange for such contributions, the Company was issued a 10% membership interestin T1T Lab and T1T Lab assumed $2,162,158 in liabilities (including $2,000,000 owed by the Company to K 1 Holding Limited pursuant to a promissorynote dated May 13, 2013) related to the Disposed Subsidiaries. In addition, all intercompany loans payable by the Disposed Subsidiaries to the Company, onthe one hand, and by the Company to the Disposed Subsidiaries, on the other hand, were forgiven by the Company and by T1T Lab (as applicable). Totalintercompany loans forgiven by the Company (net of the total intercompany loans forgiven by the Disposed Subsidiaries) was approximately $9,864,602.Such intercompany loans forgiveness did not have an impact of the profit and loss of the Company. Further, pursuant to the contribution agreement, T1TGroup, LLC agreed to contribute to T1T Lab from time to time when requested by T1T Lab such services and/or cash as determined by T1T Group, LLC in itssole and absolute discretion in order to manage and operate the Disposed Subsidiaries and their respective businesses. In exchange for such contributions,T1T Group, LLC was issued a 90% membership interest in T1T Lab. From September 25, 2013 to February 11, 2014, the Company indirectly owned aminority interest in the Disposed Subsidiaries through its 10% membership interest in T1T Lab, LLC. On February 11, 2014, the Company executed anAssignment of Membership Interest in favor of T1T Group, LLC. Pursuant to such assignment, the Company transferred to T1T Group, LLC all of theCompany’s Interests in T1T Lab in consideration for the Company being released from all of its obligations to T1T Lab (including the obligations to makecapital contributions to T1T Lab. Upon such assignment, the Company has no further interests or obligations to T1T Lab, and T1T Group, LLC now owns a100% membership interest in T1T Lab. Oleg Firer, previously appointed as an “Executive” of T1T LAB, LLC, resigned his position with that entity effectiveFebruary 11, 2014. 39 As a result of the Company’s contribution of the Disposed Subsidiaries, the Company now has only one reportable business segment, consisting of mobilecommerce and payment processing. The Company disposed of its entertainment assets in order to focus its business operations on mobile payments,transactional services and related technologies and to reduce the significant expenses associated with developing and maintaining the entertainment assets.T1T Group, LLC is wholly-owned by Enerfund, LLC (which is wholly-owned by Mike Zoi, a stockholder of the Company). In September 2012, TOT Money entered into a factoring agreement with Alfa-Bank. Pursuant to the agreement, as amended (as amended and supplementedprior to the date hereof by supplement agreements, the “Factoring Credit Facility”), TOT Money assigned to Alfa-Bank its accounts receivable as security forfinancing for up to 300 million Russian rubles (approximately $9.8 million in U.S. dollars at time of signing). The amount loaned by Alfa-Bank pursuant tothe Factoring Credit Facility with respect to any particular account receivable is limited to 80% of the amount of the account receivable assigned to Alfa-Bank. Pursuant to the Factoring Credit Facility, Alfa-Bank is required to track the status of TOT Money’s accounts receivable, monitor timeliness of paymentof such accounts receivable and provide related services. Interest on the factoring arrangement ranged from 9.70% to 11.95% annually of the amountsborrowed, with servicing fees ranging from 10 Russian rubles (approximately $0.33 in U.S. dollars) to 100 Russian rubles (approximately $3.28 million inU.S. dollars) per account receivable. TOT Money’s obligations under the Factoring Credit Facility also are secured by a guarantee given by AO SAT &Company. AO SAT & Company is an affiliate of Kenges Rakishev, who is the Chairman of the Board of Directors of the Company and a shareholder. TheFactoring Credit Facility expired on April 20, 2014 and was repaid. On September 17, 2014, TOT Money entered into the Supplement Agreement No. 14 and the Supplement Agreement No. 15 with Alfa-Bank (“AmendmentNo. 15”), which renewed and amended the Factoring Credit Facility. Pursuant to such amendments, the Factoring Credit Facility was renewed and will expireon June 30, 2016, the maximum aggregate limit of financing (secured by TOT Money’s accounts receivable) to be provided by Alfa-Bank to TOT Moneyunder the Factoring Credit Facility was increased to 415 million Russian rubles (approximately US$ 10,814,614 based on the currency exchange rate onSeptember 17, 2014), Alfa-Bank’s compensation fees (commissions) for providing financing to TOT Money was amended to be computed as a financing ratethat ranges from 13.22% to 14.50% of the amounts borrowed, depending upon the number of days in the period from the date financing is provided until thedate the applicable account receivable is paid, and the maximum amount of financing on account of the monetary claim assigned by TOT Money to debtorwas increased from 80% to 100% of the assigned amount of monetary claim against which the financing is affected. This financing is a factoring facility inwhich TOT Money could assign to the bank certain (but not all) of its accounts receivable suitable to the lender under such facility as security for financing. Accordingly, the amounts of our draws under such facility from time to time will depend on the amounts of the accounts receivable suitable for suchassignment as of the time we choose to draw under such facility. We have not drawn any funds under such credit facility. In August 2012, TOT Money entered into a Credit Agreement with Alfa-Bank. Pursuant to the Credit Agreement, Alfa-Bank agreed to provide a line of creditto TOT Money with the credit line limit set at 300 million Russian rubles (approximately $9.8 million in U.S. dollars). The interest rate on the initial amountborrowed of 53.9 million rubles (approximately $1.8 million in U.S. dollars) under the Credit Agreement is 3.55% per annum. The loan was secured by 55.0million rubles of restricted cash (approximately $1.8 million in U.S. dollars). Alfa-Bank had the unilateral right to change the interest rate on amountsborrowed under the Credit Agreement from time to time in the event of changes in certain market rates or in Alfa-Bank’s reasonable discretion, provided thatthe interest rate may not exceed 14% per annum. Interest must be repaid on a monthly basis on the 25th of each month. Amounts borrowed under the CreditAgreement must be repaid within six months of the date borrowed. TOT Money’s obligations under the Credit Agreement are secured by a pledge of TOTMoney’s deposits in its deposit account with Alfa-Bank and by a guarantee given by AO SAT & Company. The line of credit expired on May 20, 2014 andwe did not renew this Credit Agreement. On November 24, 2014, TOT Money entered into a financing agreement with Bank Otkritie, one of Russia’s largest private listed banks. This financing iscomplementary to the Company’s Alfa-Bank factoring facility and provides additional flexibility and capacity to expand our presence in Russia’stransactional services market. In conjunction with the Alfa-Bank factoring agreement, TOT Money will have approximately $15 million of available credit tohelp fund its growth. Per the three-year Agreement, TOT Money will assign to Bank Otkritie its accounts receivable as security for financing in an aggregateamount of up to 200 million Russian rubles (approximately USD $4.2 million based on the currency exchange rate as of the close of business November 17,2014) provided by Bank Otkritie to TOT Money. Included in this Agreement, Moscow-based Bank Otkritie will track the status of TOT Money’s accountreceivables, monitor timeliness of payment of such accounts receivable, and provide related services. Oleg Firer, our Chief Executive Officer, has personallyguaranteed our financing agreement with Bank Otkritie. This financing is a factoring facility in which TOT Money could assign to the bank certain (but notall) of its accounts receivable suitable to the lender under such facility as security for financing. Accordingly, the amounts of our draws under such facilityfrom time to time will depend on the amounts of the accounts receivable suitable for such assignment as of the time we choose to draw under such facility. We have not drawn any funds under such credit facility. Oleg Firer, our Chief Executive Officer, has personally guaranteed this loan. Director Independence The Board of Directors currently includes five nonemployee, independent members – David P. Kelley II, Kenges Rakishev, Drew Freeman, William Healy andJames Caan. Each of Messrs. Kelley, Rakishev, Freeman, Healy and Caan is an “independent director” as defined under NASDAQ Listing Rule 5605(a) (2). Amajority of our Board members are independent directors, as five out of the six members of the Board qualify as independent under the NASDAQ listingstandards and the rules of the Commission. No director is considered independent unless the Board affirmatively determines that the director has no materialrelationship with the Company (directly, or as a partner, stockholder or officer of an organization that has a relationship with the Company) that wouldinterfere with the exercise of independent judgment in carrying out the responsibilities of a director. Also, all members of the Board’s audit, compensationand nominating committees are independent directors. 40 Item 14. Principal Accountant Fees and Services. Audit Fees. The aggregate fees, including expenses, billed by our principal accountant for the audit of our annual financial statements and review offinancial statements included in our quarterly reports on Form 10-Q and other services that are normally provided in connection with statutory and regulatoryfilings or engagements during the fiscal years ended December 31, 2014 and 2013 were $315,000 and $628,000, respectively. Audit-Related Fees. The aggregate fees, including expenses, billed by our principal accountant for assurance and related services that are reasonably relatedto the performance of the audit or review of our financial statements not reported under “Audit Fees” above during the fiscal years ended December 31, 2014and 2013 were $16,575 and $0, respectively. Tax Fees. The aggregate fees, including expenses, billed by our principal accountant for services rendered for tax compliance, tax advice and tax planningduring the fiscal years ended December 31, 2014 and 2013 were $0. All Other Fees. The aggregate fees, including expenses, billed for all other products and services provided by our principal accountant during the fiscal yearsended December 31, 2014 and 2013 were $0. Audit Committee Pre-Approval Policy Our audit committee is responsible for approving in advance the engagement of our independent accountant for all audit services and non-audit services,based on independence, qualifications and, if applicable, performance, and approving the fees and other terms of any such engagement. The audit committeemay in the future establish pre-approval policies and procedures pursuant to which our independent accountant may provide certain audit and non-auditservices to us without first obtaining the audit committee’s approval, provided that such policies and procedures (i) are detailed as to particular services, (ii)do not involve delegation to management of the audit committee’s responsibilities described in this paragraph and (iii) provide that, at its next scheduledmeeting, the audit committee is informed as to each such service for which the independent accountant is engaged pursuant to such policies and procedures.In addition, the audit committee may in the future delegate to one or more members of the audit committee the authority to grant pre-approvals for suchservices, provided that the decisions of such member(s) to grant any such pre-approval must be presented to the audit committee at its next scheduledmeeting. All audit and audit related services performed by our principal accountants during the fiscal years ended December 31, 2014 and 2013 were pre-approved byour Board of Directors or audit committee. PART IV Item 15. Exhibits and Financial Statement Schedules. Documents filed as part of this Report. 1.The following consolidated financial statements of Net Element, Inc. and subsidiaries and notes thereto and the reports of the independentregistered public accounting firms thereon are set forth on pages F-2 through F-32 and are filed as part of this Report: Reports of Independent Registered Public Accounting Firms Audited Consolidated Balance Sheets as of December 31, 2014 and 2013 Audited Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2014 and 2013 Audited Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2014 and 2013 Audited Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013 Notes to Consolidated Financial Statements 2.Exhibits. A list of the exhibits filed as a part of this Report is set forth on the Exhibit Index that follows page F-32 of this Report and is incorporatedherein by reference. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. Net Element, Inc. March 30, 2015By:/s/ Oleg Firer Oleg Firer Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated. March 30, 2015By:/s/ Oleg Firer Oleg Firer Chief Executive Officer and Director (PrincipalExecutive Officer) March 30, 2015By:/s/ Jonathan New Jonathan New Chief Financial Officer(Principal Financial Officerand Principal Accounting Officer) March 30, 2015By:/s/ Kenges Rakishev Kenges Rakishev Director March 30, 2015By:/s/ Drew Freeman Drew Freeman Director March 30, 2015By:/s/ David P. Kelley II David P. Kelley II Director March 30, 2015By:/s/ James Caan James Caan Director March 30, 2015By:/s/ William Healy William Healy Director 42 NET ELEMENT, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReports of Independent Registered Public Accounting FirmsF-2 Consolidated Balance Sheets as of December 31, 2014 and 2013F-4 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2014 and 2013F-5 Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2014 and 2013F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013F-7 Notes to Consolidated Financial StatementsF-8 F-1 Report of Independent Registered Public Accounting Firm To the Board of Directors andStockholders of Net Element, Inc.Miami, Florida We have audited the accompanying consolidated balance sheet of Net Element, Inc. (the “Company”) at December 31, 2014, and the related consolidatedstatements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for the year ended December 31, 2014. The Company’smanagement is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statementsbased on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditprovides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Net Element, Inc. atDecember 31, 2014, and the results of its operations and its cash flows for the year ended December 31, 2014, in conformity with accounting principlesgenerally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note3 to the consolidated financial statements, the Company has sustained recurring losses from operations and has working capital and accumulated deficits thatraise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 3. Theconsolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified withrespect to this matter. Fort Lauderdale, Florida/s/ Daszkal Bolton LLPMarch 30, 2015 F-2 Report of Independent Registered Public Accounting Firm Board of Directors and StockholdersNet Element, Inc.Miami, Florida We have audited the accompanying consolidated balance sheet of Net Element, Inc. (formerly known as Net Element International, Inc.) as of December 31,2013 and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ deficit, and cash flows for the year then ended.These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statementsbased on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal controlover financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinionon the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonablebasis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Net Element, Inc.(formerly known as Net Element International, Inc.) at December 31, 2013 and the results of its operations and its cash flows the year then ended, inconformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note3 to the consolidated financial statements, the Company has suffered recurring losses from operations and has used substantial amounts of cash to fund itsoperating activities that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are alsodescribed in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Ouropinion is not modified with respect to this matter. Miami, Florida/s/ BDO USA, LLPApril 15, 2014Certified Public Accountants F-3 NET ELEMENT, INC.CONSOLIDATED BALANCE SHEETS December 31, 2014 December 31, 2013 ASSETS Current assets: Cash $503,343 $126,319 Accounts receivable, net 3,417,173 10,619,289 Advances to aggregators, net 18,455 1,109,538 Prepaid expenses and other assets 944,243 834,025 Total current assets 4,883,214 12,689,171 Fixed assets, net 70,918 137,267 Intangible assets, net 2,492,050 2,964,424 Goodwill 6,671,750 6,671,750 Other long term assets 204,737 - Investment in affiliate - 46,113 Total assets $14,322,669 $22,508,725 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $2,698,257 $3,190,215 Deferred revenue 472,482 239,398 Accrued expenses 2,351,885 3,484,963 Short term loans - 8,478,810 Notes payable (current portion) 98,493 3,816,093 Due to related parties - 1,451,357 Total current liabilities 5,621,117 20,660,836 Note payable (non-current portion) 3,216,507 17,255,531 Total liabilities 8,837,624 37,916,367 STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock ($.01 par value, 1,000,000 shares authorized and no shares issued and outstanding) - - Common stock ($.0001 par value, 200,000,000 shares authorized and 45,881,523 and 32,273,298 shares issued and outstanding at December 31, 2014 and2013, respectively) 4,589 3,229 Paid in capital 136,689,629 103,486,144 Stock subscription receivable (1,111,130) 329,406 Accumulated other comprehensive loss (1,251,461) (170,550)Accumulated deficit (129,116,344) (118,930,828)Noncontrolling interest 269,762 (125,043)Total stockholders' equity (deficit) 5,485,045 (15,407,642)Total liabilities and stockholders' equity (deficit) $14,322,669 $22,508,725 See accompanying notes to the consolidated financial statements F-4 NET ELEMENT, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Twelve months ended December 31, 2014 2013 Net revenues $21,194,461 $18,749,470 Costs and expenses: Cost of revenues 15,883,681 13,374,669 General and administrative (includes $4,267,334 and $16,549,820 of share based compensation for the twelve months ended December 31, 2014 and 2013 respectively) 11,353,244 28,166,387 (Recovery of) provision for loan losses (1,153,147) 7,640,008 Goodwill impairment charge - 11,200,000 Intangible assets impairment charge - 872,354 Depreciation and amortization 2,358,136 2,242,504 Total costs and operating expenses 28,441,914 63,495,922 Loss from operations (7,247,453) (44,746,452)Interest expense, net (3,705,694) (2,979,102)Gain on change in fair value and settlement of beneficial conversion derivative 5,569,158 - Loss on debt extinguishment (6,184,219) - Gain on debt restructure 1,596,000 - Loss from asset disposal (87,151) - Other expense (155,407) (160,182)Loss from continuing operations before income taxes (10,214,766) (47,885,736)Income taxes - (213,284)Loss from continuing operations (10,214,766) (48,099,020)Net loss attributable to the noncontrolling interest 29,250 1,129,319 Net loss from continuing operations attributable to Net Element, Inc. (10,185,516) (46,969,701)Discontinued operations: Loss from operations of discontinued entities - (1,018,003)Loss on disposition of assets pertaining to discontinued operations - (321,643)Net loss (10,185,516) (48,309,347)Foreign currency translation (1,080,911) (449,115)Comprehensive loss $(11,266,427) $(48,758,462) Loss per share - basic and diluted $(0.27) $(1.65)Loss per share - basic and diluted discontinued operations - (0.05)Total loss per share $(0.27) $(1.70) Weighted average number of common shares outstanding - basic and diluted 37,255,052 28,470,169 See accompanying notes to the consolidated financial statements F-5 NET ELEMENT, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) Common Stock Paid in Stock Comprehensive Non-controlling Accumulated Equity(Deficiency) Shares Amount Capital Subscription Income interest Deficit in Assets Balance December 31, 2012 (Restated) 28,303,659 $2,830 $87,452,060 $- $278,565 $(103,437) $(70,621,481) $17,008,537 Non cash compensation related to TOTGroup stock exchange 2,812,771 281 12,197,823 - - 1,107,713 - 13,305,817 Non cash compensation- other 1,265,109 129 3,243,874 - - - - 3,244,003 Cash paid for repurchase of commonshares (175,953) (17) (482,400) - - - - (482,417)Note Payable and other assumed byT1T Lab, net of contributionspayable - - 685,449 - - - - 685,449 Shares issued pursuant to purchaseagreement 67,712 6 389,338 - - - - 389,344 Unissued shares pursuant to purchaseagreement - - - 329,406 - - - 329,406 Foreign currency exchange - - - - (449,115) - - (449,115)Net loss - - - - - (1,129,319) (48,309,347) (49,438,666)Balance Dec 31, 2013 32,273,298 $3,229 $103,486,144 $329,406 $(170,550) $(125,043) $(118,930,828) $(15,407,642) Share based compensation 1,755,749 176 3,677,937 - - - - 3,678,113 Shares issued and issuable foracquisitions 57,288 6 329,400 (329,406) - - - - Shares issued to acquire non-controlling interest 323,085 32 617,060 - - 424,055 - 1,041,147 Shares issued in connection with debtconversion 5,569,158 556 10,636,537 (1,111,130) - - - 9,525,963 Shares issued in connection with debtrestructuring 100,000 10 203,990 - - - - 204,000 Shares issued in connection with noteconversion 5,802,945 580 16,711,901 - - - - 16,712,481 Extinguishment of T1T obligation - - 1,086,968 - - - - 1,086,968 NASDAQ share registration fees - - (60,308) - - - - (60,308)Net loss - - - - - (29,250) (10,185,516) (10,214,766)Comprehensive loss - foreigncurrency translation - - - - (1,080,911) - - (1,080,911) Balance Dec 31, 2014 45,881,523 $4,589 $136,689,629 $(1,111,130) $(1,251,461) $269,762 $(129,116,344) $5,485,045 See accompanying notes to the consolidated financial statements F-6 NET ELEMENT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Twelve Months Ended December 31, 2014 2013 Cash flows from operating activities: Net loss $(10,185,516) $(48,309,347)Loss from discontinued operations - 321,643 Adjustments to reconcile net loss to net cash used in operating activities: Non controlling interest 394,286 (1,129,319)Non cash compensation 4,267,334 16,549,820 Deferred revenue 233,084 - Note receivable (current portion) - - Depreciation and amortization 2,358,136 2,242,504 Impairment of Goodwill - 11,200,000 Intangible assets impairment - 872,354 Amortization of debt discount 1,644,626 - (Recovery of ) provision for loan losses (1,649,858) 7,640,008 Loss on disposal of fixed assets 16,137 - Gain on disposal of derivative (5,569,158) - Loss on debt extinguishment 6,184,219 - Gain on MBF debt restructure (1,596,000) - Changes in assets and liabilities, net of acquisitions and the effect of consolidation of equity affiliates Account receivable 6,974,701 (562,294)Advances to aggregators 934,816 (3,267,679)Prepaid expenses and other assets (445,555) 1,952,570 Accounts payable (338,618) 2,268,233 Accrued expenses (968,609) 429,556 Adjustments for operating activities of continuing operations 12,439,541 38,195,753 Adjustments for operating activities of discontinued operations - (1,018,003)Total Adjustment Net cash provided by (used in) operating activities 2,254,025 (10,809,954) Cash flows from investing activities- net of acquisitions: Purchase of portfolio and client acquisition costs (1,039,752) - Note receivable (2,650) 4,920,510 Acquisition of intangible assets - (380,025)Acquisition of Aptito - (458,747)Investment in subsidiary - (46,113)(Purchase) disposal of fixed and other assets (750,936) 67,266 Net cash (used in) provided by investing activities (1,793,338) 4,102,891 Cash flows from financing activities- net of acquisitions: Proceeds from indebtedness 10,088,870 2,000,000 Repayment of indebtedness. (10,433,367) (272,103)Change in restricted cash - 1,978,527 Cash paid for shares and warrants - (482,417)Related party advances (payments) 418,099 (75,000)Net cash provided by financing activities 73,602 3,149,007 Effect of exchange rate changes on cash (157,265) 137,588 Net increase (decrease) in cash 377,024 (3,420,468) Cash at beginning of period 126,319 3,546,787 Cash at end of period $503,343 $126,319 Supplemental disclosure of cash flow information Cash paid during the period for: Interest $1,109,731 $1,635,360 Taxes $38,993 $196,425 Issuance of stock upon conversion of indebtedness $25,233,473 $- Issued and outstanding common stock (10% of TOT Group's common stock) $- $609,000 Assumed debt - 20,631,000 Total value of consideration for Unified Payments acquisition $- $21,240,000 Stock subscription in connection with acquisition of Aptito $- $718,750 Transfer of K1 note liability to T1T Lab, LLC in connection with divesture of OOO Music 1 $- $2,000,000 See accompanying notes to the consolidated financial statements F-7 NET ELEMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2014 AND 2013 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation Net Element International, Inc. (the “Company”) was incorporated on April 20, 2010 as a Cayman Islands exempted company with limited liability under thename Cazador Acquisition Corporation Ltd. (“Cazador”). Cazador was a blank check company incorporated for the purpose of effecting a merger, sharecapital exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more operating businesses or assets. On October 2, 2012, the Company completed a merger (the “Merger”) with Net Element, Inc., a Delaware corporation (“Net Element”), which was a companywith businesses in the online media and mobile commerce payment processing markets. Immediately prior to the effectiveness of the Merger, the Company(then known as Cazador Acquisition Corporation Ltd.) changed its jurisdiction of incorporation by discontinuing as an exempted company in the CaymanIslands and continuing and domesticating as a corporation incorporated under the laws of the State of Delaware. Effective upon consummation of the Merger,(i) Net Element was merged with and into the Company, resulting in Net Element ceasing to exist and the Company continuing as the surviving company inthe Merger, and (ii) the Company changed its name to Net Element International, Inc. Pursuant to the Merger, the Company issued 24,543,826 shares of itscommon stock to the former stockholders of Net Element, which shares amount to approximately 86.7% of the post-Merger issued and outstanding shares ofcommon stock of the Company. Following the Merger, the Company’s business consists of the former business of Net Element. For financial reportingpurposes, the Merger was accounted for as a recapitalization of Net Element and the financial statements reflect the historical financial information of NetElement. The assets and liabilities of the Company were recognized and measured in accordance with ASC Topic 805, Business Combinations. Therefore, foraccounting purposes, the shares recorded as issued in the Merger are the 3,793,355 shares owned by Cazador shareholders prior to Merger. On December 15,2013, the Company changed its name to Net Element, Inc. See Note 4 for additional information regarding the Merger. The Company is a global technology-driven group that focuses on mobile commerce and payment processing for electronic commerce. On September 25,2013, the Company divested its entertainment and culture Internet destinations (websites). The Company’s subsidiary TOT Group, Inc. (“TOT Group”) is a multinational, mobile payments and transaction processing holding company, whichprovides a range of flexible online and offline payment solutions. Clients include wireless carriers, content providers and merchants. TOT Group deliverscomprehensive, end-to-end payment solutions to enable merchants to reliably accept cashless transactions at the point of sale (“POS”). From processingelectronic payments at the POS to processing mobile commerce transactions to managing merchant terminals and providing information managementservices, TOT Group through its proprietary technology offers innovative solutions which allow its merchants to streamline their payments resources.Through TOT Group, the Company generates revenues from transaction fees, service fees, percentage of the dollar amount of each transaction and other feesassociated with processing of cashless transactions at the points of sale. The Company serves merchants primarily in the retail, restaurant, supermarket,petroleum and hospitality sectors. In addition, TOT Group (through its subsidiary OOO TOT Money (“TOT Money”)) operates the Company’s provider ofcarrier-integrated mobile payments solutions. TOT Money’s relationships with mobile operators give the Company substantial geographic coverage, a strongcapacity for innovation in mobile payments and messaging, and the ability to offer customers In-App, P-SMS and Online and Carrier Billing solutions. During the third quarter of 2012, the Company’s subsidiary, TOT Money, launched operations as a provider of carrier-integrated mobile payments solutionsin Russia. Since then, TOT Money has continued seeking to expand its carrier-integrated mobile payments business primarily in the Commonwealth ofIndependent States (CIS) countries (comprised of participating states of the former Soviet Union) and other emerging markets. During the second half of2012, TOT Money entered into contracts with the three largest mobile phone operators in Russia, Mobile TeleSystems OJSC, MegaFon OJSC and OJSCVimpelCom, to facilitate payments using SMS and MMS for their mobile phone subscribers in Russia. On April 16, 2013, certain subsidiaries of TOT Group acquired substantially all of the business assets of Unified Payments, LLC, a Delaware limited liabilitycompany (“Unified Payments”). Unified Payments provides comprehensive turnkey, payment-processing solutions to small and medium size business owners(merchants) and independent sales organizations across the United States. See Note 4 for additional information regarding this acquisition. On June 24, 2013, TOT Group, through its newly formed subsidiary Aptito, LLC (“Aptito”) acquired substantially all of the business assets of Aptito.com,Inc, a New York corporation. Aptito is a new generation of smart, customer engaged, patent-pending payment platforms, mobile Point of Sale (“mPOS”),mobile commerce application and self-ordering Apple® iPad®-based kiosk. Through its disruptive, cloud-based payments platform Aptito offers merchantsan innovative, socially driven, all-in-one digital software solution that offers a complete package of features for the food-service industry. Aptito’s RestaurantmPOS solution provides restaurants with tools to increase sales, productivity, and customer loyalty. Aptito’s suite of fully linked tools enables inventorymanagement, complete payroll, staff scheduling, patron reservations and digital menus. More capable and less costly than traditional restaurant POS systems,Aptito’s system does not have the steep learning curve associated with typical POS products. F-8 The Company previously owned several popular content monetization verticals (i.e., interests in online media businesses and operations) that were divestedduring the quarter ended September 30, 2013 (see Note 5 for additional information regarding this divestiture). As a result of this divestiture, the Companyhas one reportable business segment consisting of payment processing and mobile payment solutions. Operations of the divested businesses are presented asdiscontinued operations in the accompanying consolidated statements of operations and comprehensive loss. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management tomake estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balancesheet date and the reported amounts of expenses for the period presented. Actual results could differ from those estimates. Significant estimates include (i) the valuation of acquired merchant portfolios (ii) the recoverability of long-lived assets, (iii) the remaining useful lives oflong-lived assets, and (iv) the sufficiency of merchant, legal, and other reserves. On an ongoing basis, the Company evaluates the sufficiency and accuracy ofits estimates. Actual results could differ from those estimates. Cash and Cash Equivalents The Company maintains its U.S. dollar-denominated cash in several non-interest bearing bank deposit accounts. All U.S. non-interest bearing transactionaccounts are insured up to a maximum of $250,000, at all FDIC insured institutions. The bank balances did not exceed FDIC limits at December 31, 2014 and2013. The Company maintains $318,416 in un-insured Russian and Cayman Islands bank accounts at December 31, 2014. Accounts Receivable Receivables are stated net of allowance for doubtful accounts. The Company estimates its allowance based on experience with its service providers and itsjudgment as to the likelihood of their ultimate payment. The Company also considers collection experience and makes estimates regarding collectabilitybased on trends in aging. In Russia, the service providers are large telecommunication companies and we do not reserve for these receivables given theirfinancial strengths and our experience with these service providers. Other Current Assets The Company maintains an inventory of terminals, which it uses to service both merchants and independent sales agents. If the terminals are sold for a fee,the Company expenses the cost of these terminals, plus any set up fees at the time of the sale. Many times, the Company will provide the terminals as anincentive to stay with the Company for an average of three year period. In this case the cost of the terminal plus any set up fees will be amortized over threeyears, which is the average length of a merchant contract. If the merchants leave before the end of their contract, they are obligated to either return theterminal or pay for the terminal. The Company has $532,315 and $446,658 in terminals and IPADS and related equipment acquired as of December 31, 2014and 2013 respectively, of which $292,718 and $170,378 has been placed with merchants during 2014 and 2013 respectively. Amortization of these terminalsamounted to $200,987 and $13,093 for the years ended December 31, 2014 and 2013. Fixed Assets The Company depreciates its furniture, servers, software and equipment over a term of three to ten years. Computers and software are depreciated over termsbetween two and five years. Leasehold improvements are depreciated over the shorter of the economic life or term of each lease. All of our assets aredepreciated on a straight-line basis for financial statement purposes. Expenditures for repairs and maintenance are charged to operating expense as incurred. Expenditures that increase the value or productive capacity of assetsare capitalized. At the time of retirements, sales, or other dispositions of property and equipment, the original cost and related accumulated depreciation areremoved from the respective accounts, and the gains or losses are presented as other expenses. Intangible Assets Included in the Company’s intangible assets are merchant portfolios, which represent the net book value of an acquired merchant customer base, and areamortized on a straight-line basis over their respective useful lives, generally three to five years. Merchant portfolios are assessed for impairment if events orcircumstances indicate that their respective carrying values are not recoverable from the future anticipated undiscounted net cash flows attributable to suchassets. In such cases, the amount of any potential impairment would be measured as the excess, if any, of carrying value over the fair value of such assets. OnJuly 30, 2013, TOT Payments, LLC, brought an action against First Data Corporation (“FDR”). In its complaint, TOT Payments claims that the defendantbreached its obligations pursuant to a 2006 Marketing Agreement. Because the FDR case was dismissed, management has decided that the possibility ofrecovering fees was remote and therefore wrote off the remaining net asset value of the FDR Portfolio, for an impairment charge of $872,354 during the yearended December 31, 2013. F-9 The Company also capitalizes direct expenses associated with filing of patents and patent applications and amortizes the capitalized intellectual propertycosts over five years beginning when the patent is approved. Additionally, the Company capitalizes the fair value of intangible assets acquired in business combinations. The Company performs valuations of assetsacquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of each acquired business to itsrespective net tangible and intangible assets. Acquired intangible assets include: merchant portfolios, trade names, non-compete agreements, customerrelationships and technology. Capitalized Customer Acquisition Costs, Net Capitalized customer acquisition costs consist of up-front cash payments made to certain Independent Sales Organizations (“ISO’s”) for the establishment ofnew merchant relationships. Capitalized customer acquisition costs represent incremental, direct customer acquisition costs that are recoverable throughgross margins associated with merchant contracts. The up-front payment to the ISO is based on the estimated gross margin for the first year of the merchantcontract. The deferred customer acquisition cost asset is recorded at the time of payment and the capitalized acquisition costs are primarily amortized on astraight-line basis over a period of three years. Management evaluates the capitalized customer acquisition cost for impairment at each balance sheet date by comparing, on a pooled basis by vintagemonth of origination, the expected future net undiscounted cash flows from underlying merchant relationships to the carrying amount of capitalizedcustomer acquisition costs. If the estimated future net cash flows are lower than the recorded carrying amount, indicating an impairment of the carrying valueof the capitalized customer acquisition costs, the impairment loss is charged to operations. During the years ended December 31, 2014 and 2013, the Company recorded $347,204 and $368,602, respectively, in additional capitalized customeracquisition costs, and $85,769 and $200,988 respectively, in related additional amortization. The balance of customer acquisition costs was $526,728 and$380,511 at December 31, 2014 and 2013, respectively, and is reflected in intangible assets in the accompanying consolidated balance sheets. Accrued Residual Commissions The Company pays commissions to ISO’s and independent sales agents or to the Company’s direct sales force based on the processing volume of themerchants enrolled. The commission payments are based on varying percentages of the volume processed by the Company on behalf of the merchants.Percentages vary based on the program type and transaction volume of each merchant. The Company reports commission payments as a cost of revenues inthe accompanying consolidated statement of operations and comprehensive loss. As of December 31, 2014 and 2013 the residual commission payable toISO’s and independent sales agents was $514,252 and $451,374 respectively. The Company pays commission on annual fees and amortizes the feerecognition over twelve months. The Company pays its agents commissions which are included in the $514,242 and $451,374 in advance of recognizing therevenue. Therefore the Company deferred $272,000 and $115,700 of commissions on annual fees for the twelve months ended December 31, 2014 and 2013respectively, which are included in prepaid expenses in the accompanying consolidated balance sheet and will recognize the deferred fees over the nexttwelve months. Commission payables are included in accounts payable in the accompanying consolidated balance sheets. Processing Liabilities and ISO Deposits The majority of the Company’s processing liabilities include potential losses associated with bankcard and check processing. In addition, the Companymaintains deposits from ISO’s to offset potential liabilities from merchant chargeback processing. Disputes between a cardholder and a merchant periodicallyarise due to the cardholder’s dissatisfaction with merchandise quality or merchant’s services, and the disputes may not always be resolved in the merchant’sfavor. In some of the cases the transaction is “charged back” to the merchant and the purchase price is refunded to the cardholder by the credit card-issuinginstitution. If the merchant is unable to fund the refund, the Company is liable for the full amount of the transaction. The Company’s obligation to standready to perform is minimal because the Company maintains a deposit from certain ISO’s as an offset to potential contingent liabilities that are theresponsibility of such merchants. The Company evaluates its ultimate risk and records an estimate of potential loss for chargebacks related to merchant fraudbased upon an assessment of actual historical fraud loss rates compared to recent bankcard processing volume levels. The amount recorded as of December 31, 2014 and 2013 for the processing liability was $0 and $107,669, respectively, and is included in long-term debt inthe accompanying consolidated balance sheets. F-10 Fair Value Measurements The Company’s financial instruments consist primarily of cash, accounts receivables, merchant portfolios, notes receivable, trade payables and debtinstruments. The carrying values of cash and cash equivalents, accounts receivable and trade payables are considered to be representative of their respectivefair values due to the short-term nature of these instruments. The carrying amount of the long-term debt of $3.3 million as of December 31, 2014approximates fair value because the Company’s current borrowing rate does not materially differ from market rates for similar bank borrowings. The long-term debt is classified as a Level 2 item within the fair value hierarchy. The Company measures certain nonfinancial assets and liabilities at fair value on a nonrecurring basis. Fair value is defined as the exchange price that wouldbe received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderlytransaction between market participants at the measurement date. The Company uses a three-level fair value hierarchy to prioritize the inputs used to measurefair value and maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value areas follows: Level 1 — Quoted market prices in active markets for identical assets or liabilities as of the reporting date Level 2 — Observable market based inputs or unobservable inputs that are corroborated by market data Level 3 — Unobservable inputs that are not corroborated by market data These non-financial assets and liabilities include intangible assets and liabilities acquired in a business combination as well as impairment calculations,when necessary. The fair value of the assets acquired and liabilities assumed in connection with the Unified Payments acquisition, as discussed in Note 4,were measured at fair value by the Company at the acquisition date. The fair values of the Company’s merchant portfolios are primarily based on Level 3inputs and are generally estimated based upon independent appraisals that include discounted cash flow analyses based on the Company’s most recent cashflow projections, and, for years beyond the projection period, estimates based on assumed growth rates. Assumptions are also made regarding appropriatediscount rates, perpetual growth rates, and capital expenditures, among others. In certain circumstances, the discounted cash flow analyses are corroboratedby a market-based approach that utilizes comparable company public trading values, and, where available, values observed in private market transactions.The inputs used by management for the fair value measurements include significant unobservable inputs, and therefore, the fair value measurementsemployed are classified as Level 3. The goodwill impairment was primarily based on observable inputs using company specific information and is classifiedas Level 3. Concentrations The Company’s total revenue was $21,194,461 for the year ended December 31, 2014. Of this, $19,373,877 was derived from processing of Visa®,MasterCard®, Discover® and American Express® card transactions and $1,820,584 was derived from processing of mobile electronic payments. The credit card processing revenues were from merchant customer transactions, which are processed primarily by three “third-party” processors. For the yearended December 31, 2014, the Company processed 63% of its total revenue with Cynergy Data, 24% with National Processing Company (NPC). The mobile electronic payment revenues were from merchant customer transactions, which are processed primarily by two mobile operators. For the yearended December 31, 2014, the Company processed 3.4% of its total revenue with Beeline (OJSC Vimpelcom), and 3.5% with MTS (Mobile TeleSystemsOJSC). The Company’s total revenue was $18,749,470 for the year ended December 31, 2013. Of this, $14,798,488 was derived from processing ofVisa®, MasterCard®, Discover® and American Express® card transactions and $3,948,087 was derived from processing of mobile electronicPayments. The credit card processing revenues were derived from merchant customer transactions, which are processed primarily by three “third-party” processors. Forthe year ended December 31, 2013, the Company processed 25% of its total revenue with Cynergy Data, 32% with National Processing Company (NPC) and19% with First Data. The mobile electronic payment revenues were derived from merchant customer transactions, which are processed primarily by two mobile operators. For theyear ended December 31, 2013, the Company processed 9% of its total revenue with Beeline (OJSC Vimpelcom), and 8% with MTS (Mobile TeleSystemsOJSC). Foreign Currency Transactions The Company is subject to exchange rate risk in its foreign operations in Russia, the functional currency of which is Russian Ruble, where the Companygenerates service fee revenues and interest income and incurs product development, engineering, website development, and general and administrative costsand expenses. The Russian engineering operations pay a majority of their operating expenses in their local currencies, exposing the Company to exchangerate risk. The Company does not engage in any currency hedging activities. F-11 Revenue Recognition The Company recognizes revenue when the following four basic criteria have been met: (1) persuasive evidence of a sales arrangement exists; (2)performance of services has occurred, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. The Company considerspersuasive evidence of a sales arrangement to be the receipt of a billable transaction from aggregators, signed contract or the processing of a credit cardtransaction. Collectability is assessed based on a number of factors, including transaction history with the customer and the credit worthiness of the customer.If it is determined that the collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generallyupon receipt of cash. The Company records cash received in advance of revenue recognition as deferred revenue. Our revenues for the year ended December 31, 2014 and 2013 are principally derived from the following sources: Service Fees. Service fees are generated primarily from TOT Payments, LLC, TOT Money’s payment processing and service fees. The Company has multiple element arrangements that include bundled transactions with merchants encompassing annual PCI (payment cardindustry) fees, annual membership fees, and monthly processing fees. The Company adopted accounting standard update No 2009-13, “Multiple–Deliverable Revenue Arrangements” (ASU 2009-13). ASU 2009-13requires the use of the relative selling price method of allocating total consideration to units of accounting in a multiple element arrangement andeliminates the residual method. This accounting principle requires an entity to allocate revenue in an arrangement using estimated selling pricedeliverables if it does not have vendor specific objective evidence (VSOE) or third party evidence (TPE) of selling price. VSOE is the price charged when the same or similar product or service is sold separately. The Company defines VSOE as a median price of recentstand-alone transactions that are priced within a narrow range. TPE is determined based on the prices charged by our competitors for a similardeliverable when sold separately. The Company evaluates each deliverable in its arrangements to determine whether it represents a separate unit of accounting. A deliverableconstitutes a separate unit of accounting when it has stand-alone value to our customers. The Company’s products (i.e., terminals) and servicesqualify as separate units of accounting under ASU 2009-13. The Company’s payment processing division derives revenues primarily from the electronic processing of services including credit, debit andelectronic benefits transfer card processing authorized and captured through third party networks, check conversion and guarantee, electronic giftcertificate processing, and equipment leasing and sales. These revenues are recorded as bankcard and other processing transactions when processed. Typically, fees charged to merchants for these processing services are based on a variable percentage of the dollar amount of each transaction and insome instances, additional fees are charged for each transaction. Merchant customers may also be charged miscellaneous fees, including statementfees, annual fees, monthly minimum fees, fees for handling chargebacks, gateway fees, and fees for other miscellaneous services. The fair value for annual fees is based on the annual contract renewal price and is deemed to represent stand-alone selling price based upon VSOE.The fair value for processing is based on prices charged by our competitors for similar deliverables when sold separately and is deemed to representstand-alone selling price based upon TPE. Deferred revenue represents primarily amounts received in advance for annual fee billings and are recognized on a pro rata basis over the serviceperiod. Generally, the Company (i) is the primary obligor in its arrangements with its merchant customers, (ii) has latitude in establishing the price of itsservices, (iii) has the ability to change the product and perform parts of the services, (iv) has discretion in supplier selection, (v) has latitude indetermining the product and service specifications to meet the needs of its merchant customers, and (vi) assumes credit risk. In such cases, theCompany reports revenues as gross of fees deducted by its sponsoring member banks, as well as fees deducted from card-issuing member banks andcard associations (Visa/MasterCard) on behalf of its sponsoring member banks for interchange and assessments. These fees charged by the cardassociations to process the credit card transactions are recorded separately as cost of sales and interchange fees in the accompanying consolidatedstatement of operations. Revenues from TOT Money are recognized as a percentage of amounts billed to mobile operators. Revenue is recognized when TOT Money’sbilling system is able to create a billable transaction for a mobile operator. Billable transactions are created and submitted to TOT Money by contentaggregators. F-12 Each month, mobile operators provide TOT Money with detail supporting the transactions received by the mobile operator. TOT Money reconcilesthe data provided by the mobile operator to its internal billing system. Pursuant to the mobile operator agreements, any total billing difference under5% is considered immaterial and TOT Money accepts the mobile operator data as accurate. Any differences from content providers that exceed 5%of the amount billed are researched, reconciled and addressed with the mobile operator. Funds received by TOT Money from mobile operators include amounts due to aggregators for supplying billable transactions from contentproviders. Revenues are presented net of aggregator payments on the financial statements of TOT Money as the payments are considered to beagency fees. TOT Money serves as agent to the mobile operators performing a service for a fee. Cost of services for TOT Money is comprised primarily of fees for short numbers provided by the mobile operators that are used to provide trafficfrom content providers. Cost of services for TOT Payments is comprised primarily of processing fees paid to third parties attributable to providing transaction processing andother services to the Company’s merchant customers. Interchange fees and cost of services are recognized as incurred, which generally occurs in thesame period in which the corresponding revenue is recognized. Interchange fees are set by the card networks, and are paid to the card-issuing bank.Interchange fees are calculated as a percentage of the dollar volume processed plus a per transaction fee. The Company also pays Visa® andMasterCard® network dues. Net Loss per Share Basic net loss per common share is computed by dividing net loss applicable to common stockholders by the weighted-average number of common sharesoutstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding duringthe period, adjusted for the dilutive effect of common stock equivalents, consisting of shares issuable upon exercise of common stock options or warrants. Inperiods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusionwould have an anti-dilutive effect. At December 31, 2014 and 2013, the Company had 8,938,900 warrants and 119,194 incentive stock options issued andoutstanding that are anti-dilutive in effect. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes indicate that the carrying amount of an asset or group of assets maynot be recoverable. During the year ended December 31, 2014, there was no impairment of goodwill and intangible assets. As described in Note 4, during theyear ended December 31, 2013, the Company recognized charges for impairment of goodwill and intangible assets amounting to approximately $11,200,000and $872,000, respectively. Income Taxes We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected futuretax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on thebasis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includesthe enactment date. We recognize net deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, weconsider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income,tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of theirnet recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is toevaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will besustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amountthat is more than 50% likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent thatthe Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized and recorded asnecessary in the provision for income taxes. The Company’s evaluation of uncertain tax positions was performed for the tax years ended December 31, 2010and forward, the tax years which remain subject to examination as of December 31, 2014. Please see Note 17 for discussion of the Company’s uncertain taxpositions. Recently Issued and Adopted Accounting Guidance In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Revenue fromContracts with Customers (Topic 606). Under ASU 2014-09, an entity should recognize revenue to depict the transfer of promised goods or services tocustomers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will beeffective for the Company for annual reporting periods beginning after December 15, 2016. The Company is evaluating ASU 2014-09 to determine if thisguidance will have a material impact on the Company’s consolidated financial statements. F-13 In November 2014, the FASB issued Accounting Standards Update 2014-16 (“ASU 2014-16), Derivatives and Hedging (Topic 815): Determining Whetherthe Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging IssuesTask Force). ASU 2014-16 does not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybridfinancial instrument is required, but clarifies how current GAAP should be interpreted in the evaluation of the economic characteristics and risks of a hostcontract in a hybrid financial instrument that is issued in the form of a share, reducing existing diversity in practice. The Company is evaluating ASU 2014-09 to determine if this guidance will have a material impact on the Company’s consolidated financial statements. NOTE 2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION Following the consolidation principles promulgated by U.S. GAAP, the consolidated financial statements of the Company include the assets, liabilities,results of operations, and cash flows of the following subsidiaries: Continuing Operations: The following entities make up our continuing operations: (1) TOT Group, Inc. (“TOT Group”), a 100% owned subsidiary formed in Delaware; (2) NetlabSystems, LLC (“Netlab”), a wholly owned subsidiary formed in Florida; (3) NetLab Systems IP, LLC, a wholly owned subsidiary formed in Florida; (4) OOONet Element Russia (“Net Element Russia”), a wholly owned subsidiary formed in Russia (5) Net Element Services, LLC, a wholly owned subsidiary formedin Florida. The subsidiaries listed above are the parent companies of several other subsidiaries, which hold the Company’s underlying investments or operating entities. TOT Group is the parent company of TOT Payments, LLC, (TOT Payments) a wholly owned subsidiary formed in Florida, Aptito, LLC, a 80 % ownedsubsidiary formed in Florida (acquired June 18, 2013), TOT Group Cyprus, a wholly owned subsidiary formed in Cyprus, TOT Group Europe LTD, a whollyowned subsidiary formed in the United Kingdom, TOT Group Kazakhstan, LLC, a wholly owned subsidiary we are currently forming in Kazakhstan, andOOO TOT Group Russia, a wholly owned subsidiary formed in Russia. ·TOT Payments, LLC is the parent company of: ·Process Pink, LLC, a wholly owned subsidiary formed in Florida; ·TOT HPS, LLC, a wholly owned subsidiary formed in Florida; ·TOT FBS, LLC, a wholly owned subsidiary formed in Florida; ·TOT New Edge, LLC, a wholly owned subsidiary formed in Florida; and ·TOT BPS, LLC, a wholly owned subsidiary formed in Florida. ·OOO TOT Group Russia, is the parent company of its wholly owned OOO TOT Money (a company formed in Russia) ( 30 % of TOT Money wasowned by Net Element Russia until September 15, 2013 when this interest was transferred to OOO TOT Group Russia). ·Netlab Systems, LLC is the parent company of Tech Solutions LTD. ·A&R Music Holdings (f/k/a Music1) was the parent company of A&R Music Live, LLC (“A&R Music Live”) (operations discontinued January31, 2013). ·Net Element Russia is the parent company of OOO TOT Group and OOO Music1 (Russia) (operations discontinued September 25, 2013). NetElement Russia owned 30 % of OOO TOT Money until September 15, 2013 when this interest was transferred to OOO TOT Group Russia. Discontinued Operations: The following entities make up our discontinued operations: (1) OOO Music1 (formerly a subsidiary of NETE Russia and divested on September 25, 2013),(2) Ya Talant (divested on September 25, 2013), (3) Splinex (also the parent company of IT Solutions, LTD and also divested on September 25, 2013), (4)MotorSport (also the parent of Motorsport.com, Inc. also divested on September 25, 2013), (5) Openfilm, LLC. (also the parent of Openfilm Studios, LLC(company closed June 2013) and Openfilm, Inc. (divested September 25, 2013)) and (6) Zivos, LLC (Ukraine) (divested September 25, 2013). In addition, the consolidated statements of operations and comprehensive loss and statements of cash flows contain activity through September 25, 2013 fordiscontinued operations of our on-line media businesses. On September 25, 2013, the Company entered into a Contribution Agreement with T1T Lab, LLC(“T1T Lab”), a Florida limited liability company, and T1T Group, LLC (“T1T Group”), a Delaware limited liability company, pursuant to which onSeptember 25, 2013, the Company contributed to T1T Lab all of its membership and participation interests in its subsidiaries Openfilm, LLC, Motorsport,LLC, Splinex, LLC, LegalGuru, LLC and MUSIC 1 LLC (a/k/a OOO Music1) in exchange for a 10% interest in T1T Lab and T1T Lab assumed $2,162,158 inliabilities (including $2,000,000 owed by the Company to K1 Holding Limited pursuant to a promissory note dated May 13, 2013) related to the DisposedSubsidiaries. F-14 On February 11, 2014, we agreed to transfer to T1T Group our 10% interest in T1T Lab in consideration for us being released from our obligations to T1TLab (including the obligations to make capital contributions to T1T Lab). There are no amounts reported on the consolidated balance sheet for the discontinued entities at December 31, 2014 given the divesture occurred onSeptember 25, 2013. All material intercompany accounts and transactions have been eliminated in this consolidation. The Company is subject to various legal proceedings, many involving routine litigation incidental to our business. The outcome of any legal proceeding isnot within our complete control, is often difficult to predict and is resolved over very long periods of time. Estimating probable losses associated with anylegal proceedings or other loss contingencies are very complex and require the analysis of many factors including assumptions about potential actions bythird parties. Loss contingencies are disclosed when there is at least a reasonable possibility that a loss has been incurred and are recorded as liabilities in theconsolidated financial statements when it is both (1) probable or known that a liability has been incurred and (2) the amount of the loss is reasonablyestimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded asa liability. If a loss contingency is not probable or cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. NOTE 3. GOING CONCERN CONSIDERATIONS The Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and thesettlement of liabilities and commitments in the normal course of business. The Company had a net loss of $10.2 million for the year ended December 31,2014, an accumulated deficit of $129 million and negative working capital of $0.7 million at December 31, 2014. These conditions raise substantial doubtabout the Company’s ability to continue as a going concern. Failure to successfully continue developing the Company’s payment processing operations and maintain contracts with merchants, mobile phone carriers andcontent providers to use TOT Group’s services could harm the Company’s revenues and materially adversely affect its financial condition and results ofoperations. The Company faces all of the risks inherent in a new business, including the need for significant additional capital, management’s potentialunderestimation of initial and ongoing costs, and potential delays and other problems in connection with developing the Company’s technologies andoperations. The Company is continuing with its plan to further grow and expand its payment processing operations in emerging markets, particularly in Russia andsurrounding countries. Management believes that its current operating strategy will provide the opportunity for the Company to continue as a going concernas long as we are able to obtain additional financing; however, there is no assurance this will occur. The accompanying consolidated financial statements donot include any adjustments that might be necessary if the Company is unable to continue as a going concern. The independent auditors’ reports on the Company’s consolidated financial statements for the years ended December 31, 2014 and 2013 contain explanatoryparagraphs expressing substantial doubt as to the Company’s ability to continue as a going concern. NOTE 4. ACQUISITION TRANSACTIONS Unified Payments Acquisition On April 16, 2013, we entered into a Contribution Agreement (the “Contribution Agreement”) with Unified Payments, LLC, a Delaware limited liabilitycompany, TOT Group, Oleg Firer, individually, and Georgia Notes 18 LLC, a Florida limited liability company. Pursuant to the Contribution Agreement, onApril 16, 2013, certain subsidiaries of TOT Group, which were formed for the purpose of effectuating the transactions contemplated by the ContributionAgreement, acquired substantially all of the business assets of Unified Payments. Unified Payments provides comprehensive turnkey, payment-processingsolutions to small and medium size business owners (merchants) and independent sales organizations across the United States. As consideration for UnifiedPayments’ and its subsidiaries’ contribution of their assets to TOT Group subsidiaries, (a) we contributed to a subsidiary of TOT Group 70% of the equityinterests in our subsidiary, OOO TOT Money (through which we operate our mobile commerce payment processing business); (b) TOT Group issued toUnified Payments 10% of TOT Group’s issued and outstanding common stock which was valued at approximately $600,000 (valued based on a discountedcash flow analysis of TOT Group adjusted for a lack of marketability discount); and (c) TOT Group assumed approximately $20.6 million in liabilities ofUnified Payments and its subsidiaries. Had the acquisition occurred on January 1, 2013, revenue and net loss from operations would have increased by$5,662,740 and $1,081,218, respectively, for the fiscal year ended December 31, 2013. F-15 The following table summarizes the fair value of consideration paid and the allocation of purchase price to the fair value of tangible and intangible assets andliabilities, including the estimated useful lives of acquired assets: April 16th, 2013 Purchase Consideration: (in Millions) Assumption of Debt $20.6 Issuance of TOT Group Stock (10%) 0.6 Total Consideration Transferred $21.2 Purchase Price Allocation to Identifiable assets acquired and liabilities assumedCurrent Assets $0.9 Merchant Portfolios 4.4 Other Intangible Assets 1.0 Currrent Liabilities (2.1)Total Identifiable Net Assets 4.2 Goodwill 17.0 Total Purchase Price Allocation $21.2 Intangible assets and merchant portfolios will be amortized in a manner consistent with the pattern in which the related benefits are expected to be consumed.Goodwill arising from the acquisition represents the estimated value of Unified Payments’ presence in key high growth markets, its assembled workforce, itsmanagement team’s industry-specific project management expertise and synergies expected to be achieved from the combined operations of UnifiedPayments and TOT Money. As part of its June 30, 2013 financial statement closing process, as well as the Company’s review of the independent valuation performed in connection withthe Unified Payments business combination, the Company determined that the reported goodwill of its TOT Payments unit as of June 30, 2013 was impaired.The carrying amount of this reporting unit was negative as of June 30, 2013, thus the Company performed Step 2 of the goodwill impairment test as of June30, 2013. The fair value of the reporting unit was determined based on a combination of the income approach (discounted cash flow analysis) and marketapproach. The result of the Step 2 analysis indicated that the TOT Payments reporting unit’s goodwill was impaired by approximately $11.2 million as ofJune 30, 2013. The Company recorded a non-cash, goodwill impairment charge of approximately $11.2 million for the three months ended June 30, 2013. AtDecember 31, 2013, the Company performed its impairment test again and determined that no impairment was necessary. On September 4, 2013, the Company entered into a letter agreement, dated as of August 28, 2013, with Oleg Firer, Steven Wolberg, Georgia Notes 18 LLCand Vladimir Sadovskiy, pursuant to which the Company agreed, subject to approval of the Company’s shareholders, to issue such number of shares ofCommon Stock of the Company equal to 10% of the Company’s issued and outstanding Common Stock as of the date of issuance of such shares in exchangefor the Company’s acquisition of the outstanding 10% minority interest in the Company’s 90%-owned subsidiary, TOT Group, Inc. Pursuant to thisagreement, the Company is obligated to issue to Mr. Firer (who is Chief Executive Officer and a director of the Company) 4.5% of the Company’s issued andoutstanding Common Stock as of the date of issuance of such shares, and to Mr. Wolberg (who is Chief Legal Officer and Secretary of the Company) 2% ofthe Company’s issued and outstanding Common Stock as of the date of issuance of such shares. Effective June 30, 2014, we executed Amendment No. 1 to the August 28, 2013 letter agreement with Oleg Firer, Steven Wolberg, Georgia Notes 18, LLC andVladimir Sadovskiy to clarify the computation of 10% of our issued and outstanding Common Stock for purposes of the August 28, 2013 letter agreement.Prior to the date of this Amendment No. 1, the parties calculated the number of shares of our common stock (the “Shares”) to be issued as 10% ownershipinterest in the Company on a pre-share issuance basis. As and with effect from June 30, 2014, the parties agreed that the number of Shares to be issuedpursuant to the Exchange Agreement shall be calculated to reflect Shares that constitute a 10% ownership interest in the Company on a post-shareissuance basis. Pursuant to this agreement, as amended, we issued to Mr. Firer (who is Chief Executive Officer and a director of the Company) 1,411,135restricted shares of Common Stock representing 4.5% of our issued and outstanding Common Stock as of the date of issuance of such shares, and to Mr.Wolberg (who is Chief Legal Officer and Secretary of the Company) 627,171 restricted shares of Common Stock representing 2% of our issued andoutstanding Common Stock as of the date of issuance of such shares. At June 30, 2014, the number of shares, market price and total value for the 10% interest issued by the Company for the acquisition of the 10% minorityinterest of TOT Group, Inc. were 3,135,856 shares, $4.28 weighted average per share and $13,415,197, respectively. We recorded a non-cash compensationcharge for this transaction of $13,922,910, which consists of the $13,415,197 total value of the shares issued, the negative book value of the 10%noncontrolling interest in TOT Group, Inc. of $1,107,713, less the fair value of the 10% TOT Group stock of $600,000. F-16 Aptito Acquisition On June 18, 2013, Aptito, an indirect subsidiary, entered into an Asset Purchase Agreement with Aptito.com, Inc., a New York corporation (“Seller”), pursuantto which Aptito acquired on such date substantially all of the business assets of Seller. The business assets sold to Aptito by Seller include the development,implementation and sales of an all-in-one, cloud-based, digital POS software and customer relations management and payments platform, including theRestaurant mPOS, a tablet-based POS solution that combines traditional POS functionality with mobile ordering, payments, social media, intelligent offers,mobile applications, loyalty and transactional data all in one solution using Seller’s (and now Aptito’s) cloud-based payments platform. As consideration for the acquired business assets, (a) Aptito assumed and simultaneously repaid $145,000 of outstanding indebtedness (with an originalprincipal balance totaling $200,000); and (b) we issued to Seller 125,000 restricted shares of our common stock, which shares vested quarterly over 12months (valued at $718,750). The total purchase consideration was $918,750 and ascribed to goodwill. At December 31, 2014, 125,000 shares with a valueof $718,750 have been vested. Our subsidiary, TOT Group, which owns an 80% membership interest in Aptito, has an option to purchase Seller’s 20% membership interest in Aptito at anytime after December 31, 2014 or at any time upon a change of control (as defined in Aptito’s limited liability company agreement) of Aptito, with thepurchase price based on the fair market value of Aptito as of the end of the calendar month immediately preceding TOT Group’s request for a valuation inaccordance with the terms of the option, payable in cash, cancellation of indebtedness, shares of common stock or a combination of the foregoing. Revenue and net loss from operations for Aptito from the date of acquisition through the year ended December 31, 2013 was $32,784 and ($406,376),respectively. Unaudited Pro Forma Information - Acquisitions The following unaudited supplemental pro forma results of operations include the results of operations of each of the companies acquired in the secondquarter of 2013 described above as if each had been consolidated as of January 1, 2013, and have been provided for illustrative purposes only and do notpurport to be indicative of the actual results that would have been achieved by the combined companies for the periods presented or that may be achieved bythe combined companies in the future. Future results may vary significantly from the results reflected in the following pro forma financial informationbecause of future events and transactions, as well as other factors, many of which are beyond the Company’s control. Additionally, GMM MotorsportsMedia was divested on September 25, 2013 (see Note 5). The unaudited pro forma combined results of operations for the year ended December 31, 2013 was prepared by adjusting the historical results of theCompany to include the historical results of the acquisitions described above as if they occurred January 1, 2013. The pro forma results of operations do notinclude any adjustments to eliminate the impact of acquisition related costs or any cost savings or other synergies that may result from these acquisitions. Asnoted above, the pro forma results of operations do not purport to be indicative of the actual results that would have been achieved by the combinedcompany for the periods presented or that may be achieved by the combined company in the future and certain entities have been divested (see Note 5). Net ElementConsolidated Proforma Statement of Operations December 31, 2013 NET Revenues $25,378,495 Net Loss from continuing operations $(41,948,056) NOTE 5. DISCONTINUED OPERATIONS On September 25, 2013, the Company entered into a Contribution Agreement (the “Divestiture Contribution Agreement”) with T1T Lab, LLC, a Floridalimited liability company (“T1T Lab”), and T1T Group, LLC, a Delaware limited liability company (“T1T Group”), pursuant to which, on September 25,2013, the Company contributed to T1T Lab all of its membership and participation interests in its subsidiaries Openfilm, LLC, Motorsport, LLC, Splinex,LLC, LegalGuru, LLC and MUSIC 1 LLC (a/k/a OOO Music1) (collectively, the “Disposed Subsidiaries”). The Disposed Subsidiaries constitute all of theCompany’s interests in online media businesses and operations (referred to herein collectively as the Company’s “entertainment assets”). As describedfurther below, following the transactions effectuated pursuant to the Divestiture Contribution Agreement, the Company indirectly owned a minority interestin the Disposed Subsidiaries through its 10% membership interest in T1T Lab. The Company disposed its entertainment assets in order to focus its businessoperations on mobile payments, transactional services and related technologies and to reduce the significant expenses associated with developing andmaintaining the entertainment assets. Pursuant to the Divestiture Contribution Agreement, the Company contributed to T1T Lab all of its membership and participation interests in the DisposedSubsidiaries and agreed to make an initial capital contribution to T1T Lab in the amount of $1,259,000 (recorded as part of Due to related Parties (currentportion) on the consolidated balance sheet for 2013), payable in full or in installments when requested by T1T Lab but in no event later than within the 12-month period after September 25, 2013 (unless such period is mutually extended in writing by the Company and T1T Group). F-17 Subject to T1T Lab’s prior written approval, a portion of the Company’s initial capital contribution may be made in the form of future services provided bythe Company, with the value of such services to be agreed upon in writing between the Company and T1T Group prior to providing such services. Theamount of the Company’s initial capital contribution is a negotiated amount required for T1T Lab to acquire the Disposed Subsidiaries. In exchange for suchcontributions, the Company was issued a 10% membership interest in T1T Lab and T1T Lab assumed $2,162,158 in liabilities (including $2,000,000 owedby the Company to K 1 Holding Limited pursuant to a promissory note dated May 13, 2013) related to the Disposed Subsidiaries. In addition, allintercompany loans payable by the Disposed Subsidiaries to the Company, on the one hand, and by the Company to the Disposed Subsidiaries, on the otherhand, were forgiven by the Company and by T1T Lab (as applicable). The investment, which amounted to $46,113, is accounted for under the cost methodsince the Company owns 10% of T1T Lab, LLC and does not influence the operations of T1T Lab, LLC. On February 11, 2014, the Company agreed to transfer to T1T Group all of the Company’s interest in T1T Lab, LLC in consideration for the Company beingreleased from its obligations to T1T LAB, LLC (including the obligations to make capital contributions to T1T LAB, LLC). T1T Group is wholly-owned by Enerfund, LLC (which is wholly-owned by Mike Zoi, a stockholder of the Company). Based on the foregoing, and in conformity with applicable accounting guidance, the Disposed Subsidiaries qualify as a discontinuedoperation. Accordingly, financial results of the Disposed Subsidiaries have been reported as discontinued operations in the consolidated statements ofoperations and comprehensive loss for all periods presented. Summarized results of the Company’s discontinued operations are as follows: Year ended December 31, 2013 Revenues $14,484 Loss Before Income taxes (1,339,646) Income Tax Benefit - Net Loss from Discontinued Operations $(1,339,646) As of December 31, 2014 or 2013, there were no assets or liabilities of discontinued operations because the entities were divested on September 25, 2013. NOTE 6. NOTES RECEIVABLE As of December 31, 2014 and 2013 the Company had net notes receivable of $0. On July 12, 2012, the Company’s Russian subsidiary, TOT Money, entered into a loan agreement pursuant to which it agreed to loan RM Invest up to amaximum of 200 million Russian rubles (approximately $7.0 million in U.S. dollars). The interest rate on the loan was 10 % from the date of advance to thedate of scheduled repayment on October 31, 2012. TOT Money would earn interest income on this loan at approximately a 40 % annual rate if the loan wasrepaid timely given interest earned was 10% of the outstanding balance with a term of approximately three months. On August 16, 2012, the loan wasincreased to 300 million Russian rubles (approximately $9.8 million in U.S. dollars). The original stated maturity date of the loan was October 31, 2012 andon February 25, 2013 the Company renegotiated the loan with RM Invest and extended the maturity date until October 1, 2013 with no further interest to becharged. As of June 30, 2013, the loan was fully satisfied. Infratont On November 26, 2012, the Company entered into a loan agreement with Infratont Equities, Inc. (“Infratont”), pursuant to which the Company loaned$1,791,475 to Infratont for the purpose of providing the borrower with working capital and funding of business development in general. The loan had astated maturity of November 15, 2013 and accrued interest at a rate of 1.75 % per month, payable quarterly commencing in March 2013. The effect of theloan was to defer a repayment obligation of Tcahai Hairullaevich Katcaev to Mr. Polyanovskiy pursuant to an unrelated loan not involving the Company.Mr. Katcaev is the former general director of the Company’s subsidiary, TOT Money, and he owned a 20 % interest in RM Invest, a payment processingbusiness in Russia. During the year ended December 31, 2013, the Company determined the Infratont loan was uncollectible and wrote off the outstandingbalance against the corresponding allowance. Former General Director TOT Money During the second quarter of 2013, our new CEO and newly appointed management of TOT Group Russia completed its analysis of its aggregator and mobileoperator relationships. As part of this review, management determined that the former general director of TOT Money provided advances to aggregators,which exceeded the future processing volumes to be provided by these aggregators. As a result, management concluded that a significant portion of theseadvanced amounts would not be recoverable in the form of future business from the aggregators. The former general director assumed responsibility for acertain amount of these advances and entered into a settlement agreement for $7.8 million, which was discounted and then fully reserved. The settlementagreement was deemed uncollectible on February 10, 2014 when the former general director resigned. F-18 NOTE 7. ACCOUNTS RECEIVABLE AND ADVANCES TO AGGREGATORS Accounts receivable consist of amounts due from processors and Russian mobile operators. Total accounts receivable amounted to $3,417,173 and$10,619,289 at December 31, 2014 and 2013 respectively, consisting primarily of $1,346,118 and $9,118,849 of amounts due from Russian mobile operatorsand $2,071,053 and $1,498,620 of credit card processing receivables at December 31, 2014 and 2013 respectively. The $2,071,053 and $1,498,620 of merchant receivables are presented net of a $103,030 and $2,111,303 allowance for doubtful accounts, respectively.There were additional charges to provision for loan losses for the year ended December 31, 2014 for $496,712 for ACH rejects in the normal course ofoperations and a ($1,649,858) recovery as a result of an adjustment to the allowance for bad debts for our Russian operations. The cycle of the TOT Payments processing business begins when TOT Payments charges merchants for processing services, based on a variable percentage ofthe dollar amount of each transaction and in some instances, additional fees are charged for each transaction. Merchant customers also may be chargedmiscellaneous fees, including statement fees, annual fees monthly minimum fees, fees for handling chargebacks, gateway fees, and fees for othermiscellaneous service. The cycle of the Russian TOT Money mobile payment processing business begins with TOT Money advancing funds to aggregators for data traffic to beprovided to mobile operators. Aggregators provide transactions to TOT Money for processing and billing to contract mobile operators. The mobile operatorcontracts and associated receivables are with the three largest mobile telecommunications companies in Russia: Mobile TeleSystems OJSC, MegaFon OJSCand OJSC VimpelCom. We do not reserve for these accounts receivable given payment history that the Company has with each mobile operator and the sizeof each mobile operator company. The collection cycle with mobile operators is approximately 45 days. We monitor all accounts receivable and transactions with mobile operators and aggregators on a monthly basis to ensure collectability and the adequacy ofloss provisions. Considerations include payment history, business volume history, financial statements of borrower, projections of borrower and otherstandard credit review documentation. Management uses its best judgment to adequately reserve for future losses after all available information is reviewed. NOTE 8. FIXED ASSETS Fixed assets are stated at cost less accumulated depreciation and amortization as follows: Useful life(in years) December 31, 2014 December 31, 2013 Furniture and equipment 3 - 10 $132,228 $236,432 Computers 2 - 5 61,369 254,280 Total 193,597 490,712 Less: Accumulated depreciation (122,679) (353,445)Total fixed assets, net $70,918 $137,267 Depreciation expense for the years ended December 31, 2014 and 2013 was $84,488 and $142,237, respectively. NOTE 9. INTANGIBLE ASSETS Merchant Portfolios Merchant Portfolios consisted of portfolios purchased by us and earn future streams of income for the foreseeable future. The remaining useful lives of theseportfolios ranged from 15 months to 36 months at the time of acquisition. At December 31, 2014 and 2013 the net value of these portfolios were $1,082,731and $1,698,421 respectively. The useful lives of merchant portfolios represent management’s best estimate over which the Company will recognize the economic benefits of theseintangible assets. F-19 The Company impaired the net asset value of the First Data portfolio (see Note 13 – Litigation) and has written off the portfolio value (net of accumulatedamortization) in the amount of $872,354 at December 31, 2013. The Company has recognized this charge as a loss from impairment of portfolios in theaccompanying statement of operations and comprehensive loss for 2013. The Company capitalizes software development costs that add value to or extend the useful of the related software it develops for internal use and licensing.Costs for routine software updates are expensed as incurred. Capitalized costs are amortized over 36 months on a straight-line basis. Impairment is reviewedquarterly to ensure only viable active costs are capitalized. During 2014, the Company capitalized $371,992 of development costs as part of developing for:point of sale software ($243,341), payment processing software ($100,782) and mobile payments billing software ($27,869). There were no capitalizedsoftware development costs at December 31, 2013. During the year ended December 31, 2013, two key executives signed covenants not to compete. These covenants have a three-year life and have anestimated fair market value $361,667 and $641,667 as of December 31, 2014 and 2013, respectively. The Company had $2,492,050 and $2,964,424 at December 31, 2014 and 2013, respectively. Shown below are the details of intangible assets as of December31, 2014 and 2013: DomainName IP Software Portfolios ClientAcquisitionCosts Covenant Notto Compete CapitalizedPatent Cost Total Balance at December 31, 2012 $73,751 $- $- $- $- $37,919 $111,670 Additions - 258,748 4,370,000 466,280 840,000 - 5,935,028 Amortization - (14,923) (1,799,225) (85,769) (198,333) (2,017) (2,100,267)Impairment - - (872,354) - - - (872,354)Divested (73,751) - - - - (35,902) (109,653)Balance at December 31, 2013 $- $243,825 $1,698,421 $380,511 $641,667 $- $2,964,424 Additions - 371,992 1,151,000 343,331 - - 1,866,323 Amortization - (94,893) (1,766,690) (197,114) (280,000) - (2,338,697)Impairment - - - - - - - Balance at December 31, 2014 $- $520,924 $1,082,731 $526,728 $361,667 $- $2,492,050 Amortization expense for the year ended December 31, 2014 was $2,338,697, of which, $2,273,648 was included in depreciation and amortization and$65,049 was included in cost of goods sold, and was $2,100,267 for the year ended December 31, 2013. The following table presents the estimated aggregate amortization expense of other intangible assets for the next five years ending December 31, 2015 -2019. Year Amortization Expense 2015 $1,184,284 2016 807,888 2017 499,878 2018 - 2019 - Total $2,492,050 NOTE 10. SHORT TERM LOANS Alfa-Bank Factoring Agreement At December 31, 2013, we had $8,478,810 in short term loans payable under a factoring agreements with Alfa-Bank that was entered into by our Russiansubsidiary, TOT Money. The Company chose to self-finance during 2014 and the balance of this facility was zero at December 31, 2014. In September 2012, TOT Money entered into a factoring agreement with Alfa-Bank. Pursuant to the agreement, as amended (as amended and supplementedprior to the date hereof by supplement agreements, the “Factoring Credit Facility”), TOT Money assigned to Alfa-Bank its accounts receivable as security forfinancing for up to 300 million Russian rubles (approximately $9.8 million in U.S. dollars at time of signing). The amount loaned by Alfa-Bank pursuant tothe Factoring Credit Facility with respect to any particular account receivable is limited to 80% of the amount of the account receivable assigned to Alfa-Bank. Pursuant to the Factoring Credit Facility, Alfa-Bank is required to track the status of TOT Money’s accounts receivable, monitor timeliness of paymentof such accounts receivable and provide related services. Interest on the factoring arrangement ranged from 9.70% to 11.95% annually of the amountsborrowed, with servicing fees ranging from 10 Russian rubles (approximately $0.33 in U.S. dollars) to 100 Russian rubles (approximately $3.28 million inU.S. dollars) per account receivable. TOT Money’s obligations under the Factoring Credit Facility also are secured by a guarantee given by AO SAT &Company. AO SAT & Company is an affiliate of Kenges Rakishev, who is the Chairman of the Board of Directors of the Company and a shareholder. TheFactoring Credit Facility expired on April 20, 2014 and was repaid. F-20 On September 17, 2014, TOT Money entered into the Supplement Agreement No. 14 and the Supplement Agreement No. 15 with Alfa-Bank (“AmendmentNo. 15”), which renewed and amended the Factoring Credit Facility. Pursuant to such amendments, the Factoring Credit Facility was renewed and will expireon June 30, 2016, the maximum aggregate limit of financing (secured by TOT Money’s accounts receivable) to be provided by Alfa-Bank to TOT Moneyunder the Factoring Credit Facility was increased to 415 million Russian rubles (approximately US $10.8 million based on the currency exchange rate onSeptember 17, 2014), Alfa-Bank’s compensation fees (commissions) for providing financing to TOT Money was amended to be computed as a financing ratethat ranges from 13.22% to 14.50% of the amounts borrowed, depending upon the number of days in the period from the date financing is provided until thedate the applicable account receivable is paid, and the maximum amount of financing on account of the monetary claim assigned by TOT Money to debtorwas increased from 80% to 100% of the assigned amount of monetary claim against which the financing is affected. This financing is a factoring facility inwhich TOT Money could assign to the bank certain (but not all) of its accounts receivable suitable to the lender under such facility as security for financing. Accordingly, the amounts of our draws under such facility from time to time will depend on the amounts of the accounts receivable suitable for suchassignment as of the time we choose to draw under such facility. We have not drawn any funds under such credit facility and the balance was zero atDecember 31, 2014. Alfa-Bank Credit Agreement In August 2012, TOT Money entered into a Credit Agreement with Alfa-Bank. Pursuant to the Credit Agreement, Alfa-Bank agreed to provide a line of creditto TOT Money with the credit line limit set at 300 million Russian rubles (approximately $9.8 million in U.S. dollars). The interest rate on the initial amountborrowed of 53.9 million rubles (approximately $1.8 million in U.S. dollars) under the Credit Agreement is 3.55% per annum. The loan was secured by 55.0million rubles of restricted cash (approximately $1.8 million in U.S. dollars). Alfa-Bank had the unilateral right to change the interest rate on amountsborrowed under the Credit Agreement from time to time in the event of changes in certain market rates or in Alfa-Bank’s reasonable discretion, provided thatthe interest rate may not exceed 14% per annum. Interest must be repaid on a monthly basis on the 25th of each month. Amounts borrowed under the CreditAgreement must be repaid within six months of the date borrowed. TOT Money’s obligations under the Credit Agreement are secured by a pledge of TOTMoney’s deposits in its deposit account with Alfa-Bank and by a guarantee given by AO SAT & Company. The line of credit expired on May 20, 2014 andwe did not renew this Credit Agreement. There was no balance outstanding at December 31, 2014. Bank Otkritie Credit Agreement On November 14, 2014, TOT Money entered into a factoring services agreement (together with related and ancillary agreements, collectively, the“Agreement”), dated as of November 5, 2014, with Open Joint-Stock Company “Bank Otkritie Financial Corporation” (“Bank Otkritie”). Pursuant to the Agreement, TOT Money will assign to Bank Otkritie its accounts receivable as security for financing in an aggregate amount of up to 200million Russian rubles (or approximately US $4,237,288 based on the currency exchange rate as of the close of business on November 17, 2014) provided byBank Otkritie to TOT Money. Pursuant to the Agreement, Bank Otkritie is required to track the status of TOT Money’s account receivables, monitortimeliness of payment of such accounts receivable, and provide related services. The term of the agreement is from November 5, 2014 until November 5,2017. Bank Otkritie’s compensation pursuant to the Agreement for providing services for the administrative management of accounts receivable is 50 Russianrubles per account receivable. Bank Otkritie’s compensation pursuant to the Agreement for providing financing to TOT Money is calculated as a financingrate that ranges from 14.25% to 15.65% of the amounts borrowed, depending on the number of days in the period from the date financing is provided untilthe date the applicable account receivable is paid; provided, however, Bank Otkritie has the unilateral right to change such financing rates upon notice toTOT Money. If there is a delay in payment by TOT Money of any sums due to Bank Otkritie under the Agreement, Bank Otkritie has the right to demand that TOT Moneypay a penalty in the amount of 0.3% of the outstanding debt for each day of delay. The Agreement may be terminated by Bank Otkritie and the financialobligations of TOT Money under the Agreement may be accelerated in certain circumstances, including, without limitation: (i) if TOT Money violates itsobligations under the Agreement; (ii) if insolvency or involuntary liquidation proceedings are initiated with respect to TOT Money; (iii) if TOT Money’sfinancial condition deteriorates, including unprofitable activity that leads to a 25% or more reduction of TOT Money’s net assets; (iv) if TOT Money makesamendments to the contracts that are the subject of the assigned accounts receivable without the consent of Bank Otkritie, (v) if TOT Money’s legal statuschanges, (vi) if TOT Money assigns any invalid or non-existing account receivable to Bank Otkritie, or (vii) if certain other conditions exist as specified inthe Agreement. This financing is a factoring facility in which TOT Money could assign to the bank certain (but not all) of its accounts receivable suitable tothe lender under such facility as security for financing. Accordingly, the amounts of our draws under such facility from time to time will depend on theamounts of the accounts receivable suitable for such assignment as of the time we choose to draw under such facility. We have not drawn any funds undersuch credit facility and the balance was zero at December 31, 2014. Oleg Firer, our Chief Executive Officer, has personally guaranteed our financing agreement with Bank Otkritie. F-21 NOTE 11. ACCRUED EXPENSES At December 31, 2014 and December 31, 2013, accrued expenses amounted to $2,351,885 and $3,484,963, respectively. Accrued expenses representexpenses that are owed at the end of the period and have not been billed by the provider or are estimates of services provided. The following table details theitems comprising the balances outstanding as of December 31, 2014 and December 31, 2013. December 31, 2014 December 31, 2013 Accrued professional fees $295,144 $711,340 Short term loan advances - 240,000 Promotional expense 75,346 261,311 Accrued interest - 196,396 Accrued payroll 70,463 282,804 Accrued bonus 1,409,131 1,265,597 Accrued foreign taxes 189,690 350,743 Other accrued expenses 312,111 176,772 $2,351,885 $3,484,963 Accrued performance bonuses of $1,409,131 and $1,265,597 at December 31, 2014 and 2013 is attributed to the TOT Group subsidiaries, consisting ofbonuses that were owed at the date of the Unified Payments acquisition, plus a discretionary bonus accrual. NOTE 12. LONG TERM DEBT Long term debt consisted of the Following: December 31, December 31, 2014 2013 MBF Merchant Capital LLC $- 5,000,584 RBL Capital Group, LLC 3,315,000 2,565,306 Capital Sources - 2,300,000 Georgia Notes - 11,098,066 Other - 107,668 Less Current Portion (98,493) (3,816,093)Long Term Debt $3,216,507 $17,255,531 MBF Merchant Capital, LLC Our note payable to MBF Merchant Capital, LLC (“MBF”) was restructured in May 2014 and repaid in July 2014. The restructuring in May 2014 exchanged$5.0 million in notes payable for (i) a $3.0 million note with a stated interest rate of 12.0% maturing on August 2018 (ii) 100,000 shares of our common stockand (iii) a cash payment of $400,000. The terms of the note restructuring required monthly principal and interest payments of $79,001 commencingSeptember 10, 2014 and ending August 10, 2018. For the first three months of the loan, we were only required to make interest-only payments in the amountof $30,000 per month commencing on June 10, 2014 and ending August 10, 2014. In connection with the MBF loan restructuring, we agreed to make acontingent payment to MBF in the amount of $500,000 in the event that we exercise our right to redeem the warrants outstanding. The restructuring wasaccounted for as an extinguishment, and the $1,800,000 decrease in the loan principal, resulted in a $1,596,000 gain on the debt restructure and is reported inthe Statements of Operations and Comprehensive Loss for the twelve months ended December 31, 2014. On July 17, 2014 the note balance of the $3,000,000was refinanced by a facility issued by RBL Capital Group. F-22 RBL Capital Group, LLC and Cayman Invest, S.A. Effective July 17, 2014 we entered into an agreement with RBL Capital Group whereby we repaid the remaining balance of the above mentioned MBF loan.The new loan required a $65,000 loan fee and provided the Company with an additional $239,150 in additional loan proceeds. The loan provides for interestonly payments at 13.90% interest through January 2015, commencing on August 20, 2014 then monthly interest and principal payments of $90,421 throughJanuary 2019. The note balance was determined as follows: MBF Loan Payoff $3,000,000 Additional Loan Proceeds 239,150 Loan cost 65,000 Prorated interest costs 10,850 Total RBL Capital Note $3,315,000 Effective June 30, 2014, TOT Group, Inc. and its subsidiaries as co-borrowers, TOT Payments, LLC, TOT BPS, LLC, TOT FBS, LLC, Process Pink, LLC, TOTHPS, LLC and TOT New Edge, LLC, entered into a Loan and Security Agreement with RBL Capital Group, LLC (“RBL”), as lender (the “RBL LoanAgreement”). Pursuant to the RBL Loan Agreement, RBL agreed to extend to the co-borrowers a credit facility under which such co-borrowers may borrow upto $10,000,000 from RBL during the period of 18 months from the closing of this credit facility. Prior to maturity of the loan, the principal amount of theborrowings under the credit facility will carry a fixed interest rate of the higher of 13.90% per annum or the prime rate plus 10.65%. After maturity of the loan,until all borrowings are paid in full, with respect to the advances under the credit facility, an additional three percent per annum would be added to suchinterest rate, and for any other amounts, obligations or payments due to RBL, an annual default rate will not to exceed the lesser of (i) the prime rate plus 13%per annum and (ii) 18.635% per annum. The $3,315,000 loan described above was drawn down from the line of credit and subsequently rolled into the abovenote. At December 31, 2014 the Company had $6,685,000 available on its credit line. The co-borrowers’ obligations to RBL pursuant to the RBL Loan Agreement are secured by a first priority security interest in all of the co-borrowers’ tangibleand intangible assets, including but not limited to their merchants, merchant contracts and proceeds thereof, and all right title and interest in co-borrowers’processing contracts, contract rights, and portfolio cash flows with all processors of co-borrowers. On April 7, 2014 we repaid the two notes payables to RBL, with a combined aggregate principal balance of $2,350,956 ($2,601, 842 inclusive of interest andprepayment fees totaling $250,886). The note with the principal balance of $1,416,926 provided for the payoff of restructuring interest in the amount of $92,239. The loan pay off also providedfor pro rata interest in the amount of $16,020 and a prepayment premium in the amount of $42,508 which was also charge to interest expense. The totalpayoff for this note amounted to $1,567,693. We accrued monthly payments of $77,560 in principal and interest at 15.636%, plus an additional 5% inrestructuring interest from January 2013 through March 2014 for a total of $106,856 which was included in the pay off. The note with the principal balance of $934,030 provided for the payoff of restructuring interest accrued in the amount of $90,615. The loan payoff alsoprovided for pro rata interest in the amount of $9,505. The total payoff of this note amounted to $1,034,150. We made monthly payments of $84,584 inprincipal and interest plus accrued an additional 5% restructuring interest from January 2013 through March 2014 for a total of $116,533. On April 21, 2014, we entered into a Secured Convertible Senior Promissory Note (the “Note”) with Cayman Invest, S.A. (“CI”). Pursuant to the Note, CIagreed to loan $11,200,000 to us. No interest accrued under the Note; provided, however, that upon a default under the Note, the Note would accrue simpleinterest at 12% per annum. Prior to March 31, 2015, effective upon a first financing closing after the date of the Note, in which we receive financing of at least$10 million from a third party (the “Qualified Financing”), the entire principal amount of the Note would be automatically converted into common sharesequal to 15% of the then outstanding shares of the Company. Effective upon an equity financing after the date of this Note in which we issue stock, (otherthan a Qualified Financing) or at any time before or after March 31, 2015, at the option of CI, the entire principal amount of the Note could be converted intocommon shares equal to 15% of the then outstanding shares of the Company. Unless converted, the outstanding amount under the Note would be due andpayable on the earlier of March 31, 2015 and the closing of a sale of a majority of the ownership of the Company or any voluntary or involuntary liquidation,dissolution, or winding up of the Company. Under the Note, we agreed to take all actions to have the obligations under the Note positioned as a seniorsecurity interest secured by all of the Company’s assets and by those payment processing portfolios owned as of the date of the Note. On June 30, 2014, as aresult of the closing of the credit facility under the RBL Loan Agreement, the entire principal amount of the CI Note was converted into 5,569,158 shares ofcommon stock constituting 15% of the then outstanding shares of common stock the Company. Accordingly, the CI Note is no longer outstanding. During 2014, we recorded a gain on the change in fair value on the beneficial conversion derivative in the amount of $5,569,158 as a result of the conversionof the Cayman Invest loan to common stock. This was offset by a loss on debt payoff of the Cayman Invest loan in the amount of ($3,962,406) primarily dueto the write-off of the remaining debt discount on the loan. F-23 Capital Sources of New York and Georgia Notes LLC The unsecured $2,300,000 note payable to Capital Sources of New York (“CSNY”) originally required interest-only payments at 15.0% through February 1,2014, followed by 24 equal principal and interest installments of $111,519. On April 17, 2014 we restructured the note with CSNY, whereby the interest rateon outstanding indebtedness was reduced from 15.0% to 12.0%, with interest-only payments for a 24-month period commencing, April 1, 2014, followed by$108,268 principal and interest payments for the following 24 months commencing May 2016. In January 2014, the preferred membership interests in Unified Payments plus accrued payment in kind (PIK) interest thereon was converted to an 8% interest-only loan with a face value of approximately $13.3 million (known as Georgia Notes 18, LLC Note). The loan matures on January 1, 2017. On September 15, 2014 we completed a debt exchange program with Crede Capital, LLC, which eliminated both the Capital Sources and Georgia Notes debtobligations. In addition the transaction eliminated certain unamortized related accrued interest and debt discount. On September 15, 2014, we entered into aMaster Exchange Agreement with Crede CG III, Ltd., an exempted company incorporated under the laws of Bermuda (“Crede”). Prior to entering into theAgreement, Crede acquired two existing promissory notes that had been previously issued by us, one with $2,343,500 principal amount outstanding plusinterest due to Capital Sources of New York and the other with $13,533,360 principal amount outstanding plus interest due to Georgia Notes 18, LLC.Pursuant to the Agreement, we and Crede agreed to exchange, in whole or in part, these promissory notes for such number of shares of our common stock asdetermined under the Agreement based upon 80% of the volume-weighted average trading price of our Common Stock for a specified period of time (up to90 trading days) subsequent to each exchange (the “True-Up Period”). Crede elected to exchange the entire amount of both promissory notes on September 15, 2014. The “exchange price” for this initial exchange was $5.70.Accordingly, on September 15, 2014, we exchanged 125% of the principal and interest under both promissory notes into 3,481,768 shares of our CommonStock. As this number of shares is subject to adjustments over the True-Up Period following this exchange, we issued to Crede an additional 2,321,177 forsuch adjustments. The number of shares was determined by dividing the aggregate amount of the promissory notes by 80% of the volume-weighted averagetrading price of the Common Stock during the True-Up Period. The transaction was recorded with a $2,462,987 loss which is included in loss on debt extinguishment the Consolidated Statements of Operations andComprehensive Loss. The effects of the transaction were as follows: Total Shares Provided 5,802,945 Market Price Sept 15, 2014 $2.88 Value of Stock Issued $16,712,482 Georgia Notes (13,268,000)Accrued interest (345,360)Discount on Georgia Notes 1,663,865 Capital Sources (2,300,000)Loss on Debt Extinguishment $2,462,987 Scheduled Debt Principal Repayment Scheduled principal maturities on RBL indebtedness at December 31, 2014 is as follows: Year ended December 31, 2015 $606,567 Year ended December 31, 2016 755,512 Year ended December 31, 2017 867,484 Year ended December 31, 2018 996,051 Year ended December 31, 2018 89,386 Balance as of December 31, 2014 $3,315,000 F-24 NOTE 13. COMMITMENTS AND CONTINGENCIES On May 10, 2013, we entered into a new lease agreement, which is dated as of May 1, 2013, for approximately 5,200 square feet of office space located at3363 N.E. 163rd Street, Suites 705 through 707, North Miami Beach, Florida 33160. We moved our corporate headquarters and principal executive office tothis location in June 2013. The term of the lease agreement is from May 1, 2013 through December 31, 2016, with monthly rent at the rates of $16,800 permonth (or $134,400 for the initial eight-month period) for the period from May 1, 2013 through December 31, 2013, $17,640 per month (or $211,680 peryear) for the period from January 1, 2014 through December 31, 2014, $18,522 per month (or $222,264 per year) for the period from January 1, 2015 throughDecember 31, 2015 and $19,448.10 per month (or $233,377.20 per year) for the period from January 1, 2016 through December 31, 2016. Until May 31, 2013 we leased approximately 6,500 square feet of office space in Miami, Florida at annual rent of $201,695. Beginning in January 2013 untilthe lease term expired, Enerfund, LLC, which is wholly owned by our stockholder, Mike Zoi, used part of this office space and paid a pro-rata amount of therent in an amount equal to $8,500 per month (or $102,000 per year). The lease term expired May 31, 2013 and we relocated to Unified Payments’ office inNorth Miami Beach (described in the preceding paragraph) upon the expiration of the lease. Netlabs Systems, LLC, through its Russian representative office, currently leases 650 square feet of office space in Yekaterinburg, Russia, where it conductsAptito and Sales Central development activities, at annual rent of approximately $11,000. This lease expired January 10, 2015 and we moved to a largeroffice in the same building which is 940 square feet at annual rent of approximately $15,800. The current lease term expires January 2016. The previousfacility was too small for our current needs given we have moved the development of Aptito POS system in-house and our team of developers grew from 7 to14 in October 2014. Net Element Russia leases approximately 2,033 square feet of office space in Moscow, Russia at annual rent of $133,285, as well as one corporate apartmentat annual rent of $16,010. The current lease term for the office space expires on July 9, 2015 and we expect to renew this lease at that time. The current leaseterm for corporate apartment expires on September 13, 2015. We believe that these facilities are adequate for our anticipated needs. Litigation First Data Corporation On July 30, 2013, TOT Payments, LLC, brought an action against First Data Corporation in the State of New York Supreme Court (Index No. 652663-2013).The amount of damages being sought is $10,000,000 per cause. In its complaint, TOT Payments claims that the defendant breached its obligations pursuantto a 2006 Marketing Agreement entered into between Money Movers of America, Inc. (MMOA) and Paymentech, Inc. (the “MMOA Agreement”) to payMMOA monthly residual income on various merchant accounts boarded with Paymentech pursuant to the MMOA Agreement. TOT Payments, through aseries of historic transactions, is the successor in interest to the rights and obligations of MMOA in the MMOA Agreement. The defendant is the successor ininterest to Paymentech. On July 15, 2013, the defendant failed to pay to TOT Payments the monthly residuals otherwise due as the defendant alleges that theMMOA Agreement was lawfully terminated in April 2012 and that the defendant had 180 days after the termination notice to move the MMOA merchants toa new platform failing which the defendant could withhold residual payments and that the defendant would own all merchant accounts boarded under theMMOA Agreement. The amount of the unpaid residuals, are between $150,000 and $250,000 net of all interchange charges. TOT Payments disputesreceiving proper notice and is disputing the rights of the defendant to withhold monthly residuals due. There was an adjournment because of the motionsmade in the appellate division. Plaintiffs’ opposition to Defendant’s motion to dismiss (for lack of standing) was filed on October 24, 2013. Defendant’sReply to Plaintiff’s opposition was filed October 31, 2013. Defendants filed both a memorandum in support and an affirmation in support to dismiss and oralargument was heard November 1, 2013. The case was subsequently dismissed and an appeal has been filed. In July 2014, Plaintiffs and Defendants counselmet as part of the Appeals process to limit the scope of the Appeal and to try settle some of the claims. Independently of this, representatives of Plaintiff andDefendant pursued discussions to attempt a settlement outside of the judicial process. Those efforts failed and legal counsel recently filed papers perfectingthe Appeal. A hearing date has not yet been scheduled. OOO-RM Invest A. On March 17, 2014, we were served with a lawsuit brought by OOO-RM Invest in the US District Court, Southern District of Florida. In its complaint,OOO-RM Invest claims that on or about July 11, 2012 it entered into an “oral agreement” with us allegedly agreeing: (a) to form a new entity, TOT MoneyInternational, LTD that would continue the operations of Plaintiff; (b) that we would provide TOT Money International, LTD financing in the amount of600,000,000 Russian rubles; (c) that we would assume certain liabilities of Plaintiff; (d) that we would be responsible for all business operations of Plaintiffand TOT Money International, LTD; (e) that we would deliver DST account and stated key DST structures to TOT Money International, LTD; (f) thatPlaintiff would receive a 30% ownership stake in TOT Money International, LTD and/or receive shares of our stock; (g) that Tcahai Hairullaevich Katcaevwould hold the position of General Director of TOT Money; (h) Plaintiff would provide TOT Money International, LTD with access to Plaintiff’s operatingaccounts; and (i) Plaintiff would transfer client accounts and contracts to TOT Money. Plaintiff claims that we breached our obligations pursuant to thatalleged oral agreement, and is seeking, among other things, compensatory damages in excess of $50 million. We strongly deny the allegations referenced inthe complaint and engaged legal counsel to defend its interests. A Motion to Dismiss on jurisdictional as well as substantive grounds was filed but denied bythe court. We filed multiple counterclaims against the Plaintiff and this matter is ongoing. B. On August 12, 2014, legal counsel representing Net Element, Inc. received a Notice from the American Arbitration Association advising that the samePlaintiffs in the RMV Invest case above have instituted a parallel Arbitration claim dealing with substantially the same issues as addressed in the lawsuit. Aswith the referenced lawsuit, we strongly deny the allegations referenced in the arbitration proceedings. Legal counsel representing us filed a Motion toDismiss, or in the Alternative, Stay Arbitration in the federal court case. That Motion was denied on the basis that there is a pending Motion to Dismiss onjurisdictional Grounds. In October 2104, legal counsel filed a Motion to Dismiss with the Arbitrator on several grounds: (1) by filing the federal court actionRM Invest waived its right to arbitrate and (2) RM Invest should not be permitted to pursue the same relief in two actions. The Arbitration case was recentlydismissed in view of the pending Federal Court action. F-25 Wayne Orkin On June 27, 2014, we were served with a lawsuit filed in the Los Angeles County of the Superior Court of California by Wayne Orkin. Orkin was a formeremployee of an entity First Business Solutions, LLC (“FBS”) that was a subsidiary of Unified Payments, LLC. The assets of Unified Payments, LLCwere acquired by us in April 2013. Unified Payments, LLC is also a named defendant in this lawsuit. In his complaint, Orkin is claiming a ”unity of interestin ownership” between the Defendants and that each of the named defendants were agents, alter egos and authorized representatives of one another. Orkinclaims that the defendants breached its obligations pursuant to a verbal agreement allegedly into entered into in 2010 whereby he would allegedly beentitled to certain royalties resulting from the sales of a payment browser technology purchased by FBS from Orkin’s entity. The Plaintiff is claimingunspecified damages for alleged breach of contract, breach of covenant of good faith and fair dealing, misappropriation of technology, fraud and conversion.We assert that we never had any dealings with Orkin and strongly deny all allegations contained in the Complaint. We have engaged California counselto represent our interests. On September 23, 2014, The Court upheld the Motion to set aside a default judgment previously entered against Unified Payments. On the motion to dismiss(“demurrer”), Plaintiffs attorney advised the court they are planning to amend their complaint to attempt to address the deficiencies raised by our counsel. Asat the time of this update, no amended complaint has been filed. As the employment agreement between Orkin and FBS has an arbitration clause that isbinding on Orkin in his lawsuit against Unified Payments for alleged breach of the employment agreement, the parties agreed in early November 2014 tostipulate to arbitration in Florida and to stay the California proceedings pending the outcome of the arbitration. A Notice of Arbitration was mailed to us butwe have not yet heard from the Arbitration Association that an Arbitrator has been appointed or setting out an Arbitration date. Aptito.com, Inc. Our subsidiary (Aptito, LLC) filed a lawsuit against Aptito.com, Inc. and the shareholders of Aptito.com, Inc., in state court in the 11th Judicial Circuit in andfor Miami-Dade County. This is an interpleader action in regards to 125,000 shares of stock. Aptito, LLC acquired Aptito.com, Inc. in exchange for, amongother things, 125,000 shares of Net Element, Inc. stock. There has been disagreement among the Aptito.com, Inc. shareholders as to proper distribution of the125,000 shares. To avoid any liability in regards to improper distribution, Aptito, LLC filed the interpleader action so as to allow the Defendants to litigateamongst themselves as to how the shares should be distributed. We are in the process of attempting service on all defendants. Gene Zell In June 2014, we, as plaintiff, commenced an action in the Miami-Dade Circuit Court, Florida against Gene Zell for defamation of our Company and CEO andtortious interference with our business relationships. In October 2014, the court granted a temporary injunction against Zell enjoining him from posting anyinformation about our Company and CEO on any website and enjoining him from contacting our business partners or investors. Zell violated the Court Orderand the Court granted a Motion imposing sanctions against Zell. We continue to seek enforcement of the Court Order. Other Legal Proceedings We also are involved in certain legal proceedings and claims, which arise in the ordinary course of business. In our opinion, based on consultations withoutside counsel, the results of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on its resultsof operations, financial condition, or cash flows. As more information becomes available, if we should determine that an unfavorable outcome is probable onsuch a claim and that the amount of such probable loss that it will incur on that claim is reasonably estimable, we will record a reserve for the claim inquestion. If and when we record such a reserve, it could be material and could adversely impact its results of operations, financial condition, and cash flows. F-26 NOTE 14. RELATED PARTY TRANSACTIONS In September 2013, we entered into a Contribution Agreement with T1T Lab and T1T Group, LLC, pursuant to which we contributed all of our membershipand participation interests in our subsidiaries Openfilm, LLC, Motorsport, LLC, Splinex, LLC, LegalGuru, LLC and MUSIC 1 LLC (a/k/a OOO Music1)(collectively, the “Disposed Subsidiaries”) to T1T Lab. The Disposed Subsidiaries constituted all of the Company’s interests in online media businesses andoperations (referred to herein collectively as our “entertainment assets”). Pursuant to the Contribution Agreement, we contributed to T1T Lab all of ourmembership and participation interests in the Disposed Subsidiaries and agreed to make contributions to T1T Lab in the amount of $1,259,000. In exchangefor such contributions, we received a 10% membership interest in T1T Lab, and T1T Lab assumed $2,162,158 in liabilities (inclusive of $2,000,000 owed byus to K1 Holding Limited pursuant to a promissory note dated May 13, 2013) related to the Disposed Subsidiaries. In addition, all intercompany loanspayable and receivable between the Disposed Subsidiaries to us were extinguished by us and T1T Lab (as applicable). Total intercompany loans forgiven us,net of the total intercompany loans forgiven by the Disposed Subsidiaries, was $9,254,725. The remaining 90% membership interest in T1T Lab was ownedby T1T Group, LLC, an entity wholly-owned by Enerfund, LLC (an entity wholly-owned by Mike Zoi, a stockholder of the Company). In February 2014, weexecuted an Assignment of Membership Interest in favor of T1T Group, LLC. Pursuant to such assignment, we transferred our 10% Interests in T1T Lab toT1T Group, LLC in consideration for us being released from all of its obligations to T1T Lab (including the obligations to make capital contributions to T1TLab). Oleg Firer, previously appointed as an Executive of T1T Lab, resigned his position with T1T Lab. In September 2013, we entered into a letter agreement, dated as of August 28, 2013, with Oleg Firer, Steven Wolberg, Georgia Notes 18, LLC and VladimirSadovskiy, pursuant to which we agreed, subject to approval of our shareholders, to issue such number of shares of Common Stock equal to 10% of our issuedand outstanding Common Stock as of the date of issuance of such shares in exchange for our acquisition of the outstanding 10% noncontrolling interest inTOT Group, Inc. Pursuant to this agreement, we are obligated to issue to Mr. Firer (who is Chief Executive Officer and a director of the Company) 4.5% of ourissued and outstanding Common Stock as of the date of issuance of such shares, and to Mr. Wolberg (who is Chief Legal Officer and Secretary of theCompany) 2% of our issued and outstanding Common Stock as of the date of issuance of such shares. In December 2013, we entered into a Services Agreement with K1 Holding (the “Services Agreement”). K1 Holding is an affiliate of Igor Yakovlevich Krutoy.Mr. Krutoy, through K1 Holding, owns a 33% interest in our former subsidiary OOO Music1. The Services Agreement provides for K1 Holding to provideinvestor relations services outside the United States, and for K1 Holding to assist with future negotiations and relationships with Mobile TeleSystems OJSC,MegaFon OJSC, OJSC VimpelCom (a/k/a Beeline) and their respective affiliates (collectively, the “Mobile Carriers”). The term of the Services Agreementexpires on December 5, 2015. In connection with the agreement, we are required to issue to K1 Holding a number of restricted shares of common stock equalto 4% of the total issued and outstanding shares of common stock of the Company at the time of issuance. On June 30, 2014, we issued 1,140,809 shares toK1 Holding representing approximately 4% of the total issued and outstanding shares on that date. On September 11, 2014, per recommendation of the Compensation Committee of the Board of Directors of the Company, the Board of Directors approvedand authorized the issuance to Oleg Firer, the Chief Executive Officer of the Company, 1,438,137 restricted shares of common stock of the Company tocompensate for Oleg Firer’s efforts and results of effectuating the Company’s debt and equity financings in the first half of 2014. At December 31, 2014, we had $0 due to related parties. At December 31, 2013, we had $1,451,357 due to related parties, consisting primarily of$1,149,391 due to T1T Lab, and $301,966 due to Enerfund. Pursuant to a letter agreement dated June 10, 2014, we agreed to pay Enerfund $77,128 andEnerfund agreed to forgive amounts due in excess of this amount. As a result, we recorded a gain of $241,173 for the quarter ended September 30, 2014 whenwe adjusted our related party payable from Enerfund from $301,966 to $77,128. The $77,128 due to Enerfund was paid in October 2014. F-27 NOTE 15. STOCKHOLDERS’ EQUITY On December 9, 2014, our shareholders approved the increase in authorized common stock to 200,000,000 from 100,000,000. K1 Agreement On December 5, 2013, we entered into (i) a letter agreement (the “K1 Agreement”) with TGR Capital, LLC and K 1 Holding Limited (“K1 Holding”) and (ii) aServices Agreement with K1 Holding (the “Services Agreement”). The K1 Agreement required us to issue to K1 Holding a number of restricted shares ofcommon stock equal to 4% of the total issued and outstanding shares of our common stock at the time of issuance or 1,125,109 shares. Mr. Krutoy, throughK1 Holding, owns a 33% equity interest in MUSIC 1 LLC (a/k/a OOO Music1), a former subsidiary. We recorded a compensation charge of $2,587,749 forthe year ended December 31, 2013. Further, the K1 Agreement requires TGR Capital, LLC to transfer to K1 Holding such number of restricted shares of ourcommon stock as is needed to bring K1 Holding’s and Mr. Krutoy’s aggregate beneficial ownership of common stock of the Company to 10% of the totalissued and outstanding shares of common stock at the time of such transfer. The issuance and transfer of such shares of common stock to K1 Holding isconsideration for the services to be provided pursuant to the Services Agreement (as described below) and for making a $2 million loan to us that was madeon May 14, 2013 (the related promissory note was subsequently assumed by T1T Lab, LLC in connection with our disposition of its online mediasubsidiaries to T1T Lab, LLC on September 25, 2013). Each of TGR Capital, LLC and T1T Lab, LLC is an affiliate of our then director and majorityshareholder, Mike Zoi. The Services Agreement provides that K1 Holding will provide investor relations services for us outside the United States and that K1 Holding will assist uswith future negotiations and maintaining their relationship with Mobile TeleSystems OJSC, MegaFon OJSC, OJSC VimpelCom (a/k/a Beeline) and theirrespective affiliates (collectively, the “Mobile Carriers”). Our subsidiary, TOT Money, has agreements to provide mobile payment processing services forelectronic payments using SMS (short message services, which is a text messaging service) and MMS (multimedia message services) initiated by the mobilephone subscribers of each of the Mobile Carriers in Russia. The term of the Services Agreement expires on December 5, 2015. Share Repurchase Program During December 2012, our Board of Directors authorized, and announced a plan permitting the repurchase of up to $2.5 million of issued and outstandingshares of our common stock in open market or privately negotiated transactions during the 24-month period ending December 10, 2014. We did notrepurchase any stock during the year ended December 31, 2014. For the year ended December 31, 2013, we repurchased 169,022 shares of our common stockfor $477,936 or an average price of $2.83 per share including 137,207 shares that were repurchased by us in a private transaction outside the parameter of thepublicly announced repurchase plan. Purchase of Noncontrolling Interest in TOT Group, Inc. In September 2013, we entered into a letter agreement with Oleg Firer, Steven Wolberg, Georgia Notes 18, LLC and Vladimir Sadovskiy, pursuant to whichwe agreed, subject to shareholder approval, to issue such number of shares of Common Stock equal to 10% of our issued and outstanding Common Stock asof the date of issuance of such shares in exchange for our acquisition of the outstanding 10% minority interest in our 90%-owned subsidiary, TOT Group, Inc.Pursuant to this agreement, we were obligated to issue to Mr. Firer (who is our Chief Executive Officer and a director) 4.5% of our issued and outstandingCommon Stock as of the date of issuance of such shares, and to Mr. Wolberg (who is our Chief Legal Officer and Secretary) 2% of our issued and outstandingCommon Stock as of the date of issuance of such shares. The agreement was subject to shareholder approval which occurred in December 2013. We recordeda compensation charge of $13,305,817, representing the value of the shares issued to Messrs. Firer and Wolberg. Effective June 30, 2014, the parties to theletter agreement executed Amendment No. 1. Prior to the date of this Amendment No. 1 (June 30, 2014), the parties calculated the number of shares to beissued is to reflect shares that constitute a 10% interest on the pre-share issuance basis. Effective the date of this Amendment No. 1 (June 30, 2014), the partiesagree that the number of shares to be issued is to be calculated to reflect shares that constitute a 10% ownership in on the post-share issuance basis. As a resultof this amendment, we recorded an additional compensation charge of $617,093 for the issuance of 323,085 additional shares at June 30, 2014. Pursuant tothis letter agreement, as amended, we issued to Mr. Firer 1,411,135 restricted shares of Common Stock representing 4.5% of our issued and outstandingCommon Stock as of the date of issuance of such shares, and to Mr. Wolberg (who is Chief Legal Officer and Secretary) 627,171 restricted shares of CommonStock representing 2% of our issued and outstanding Common Stock as of the date of issuance of such shares. We recorded a compensation charge of$13,305,817 for the year ended December 31, 2013. On September 25, 2013, we entered into a Contribution Agreement with T1T Lab, LLC, a Florida limited liability company (“T1T Lab”), and T1T Group,LLC, a Delaware limited liability company, pursuant to which, on September 25, 2013, the Company contributed to T1T Lab all of its membership andparticipation interests in its subsidiaries Openfilm, LLC, Motorsport, LLC, Splinex, LLC, LegalGuru, LLC and MUSIC 1 LLC (a/k/a OOO Music1)(collectively, the “Disposed Subsidiaries”). The Disposed Subsidiaries constitute all of our interests in online media businesses and operations (referred toherein collectively as our “entertainment assets”). Pursuant to the Contribution Agreement, we contributed to T1T Lab all of its membership andparticipation interests in the Disposed Subsidiaries and agreed to make an initial capital contribution to T1T Lab in the amount of $1,259,000, a portion ofwhich may be paid in the form of future services provided by us. In exchange for such contributions, we were issued a 10% membership interest in T1T Laband T1T Lab assumed $2,162,158 in liabilities (including $2,000,000 owed by us to K 1 Holding Limited pursuant to a promissory note dated May 13,2013) related to the Disposed Subsidiaries. In addition, all intercompany loans payable by the Disposed Subsidiaries to us, on the one hand, and by us to theDisposed Subsidiaries, on the other hand, were forgiven. Total intercompany loans forgiven by us, net of the total intercompany loans forgiven by theDisposed Subsidiaries, was $9,254,725. The remaining 90% membership interest in T1T Lab is owned by T1T Group, LLC, which is wholly-owned byEnerfund, LLC (which is wholly-owned by Mike Zoi). On February 11, 2014, we executed an Assignment of Membership Interest in favor of T1T Group,LLC. Pursuant to such assignment, we transferred to T1T Group all of our Interests in T1T LAB, LLC in consideration for us being released from allobligations to T1T LAB, LLC (including the obligations to make capital contributions to T1T LAB, LLC). We previously owned ten percent (10%) of themembership interest in T1T LAB, LLC. Upon such assignment, we have no further interests or obligations to T1T LAB, LLC. On February 11, 2014, we executed an Assignment of Membership Interest in favor of T1T Group, LLC (“T1T Group”). Pursuant to such assignment, theCompany transferred to T1T Group all of our Interests in T1T LAB, LLC in consideration for us being released from all obligations to T1T LAB, LLC(including the obligations to make capital contributions to T1T LAB, LLC). We previously owned ten percent (10%) of the membership interest in T1T LAB,LLC. Upon such assignment, we have no further interests or obligations to T1T LAB, LLC. Oleg Firer, previously appointed as an “Executive” of T1T LAB,LLC, resigned his position with that entity effective February 11, 2014. F-28 Equity Incentive Plan On December 5, 2013, the Board submitted and the shareholders approved the Net Element International, Inc. 2013 Equity Incentive Plan (the “2013 Plan”).The purpose of the 2013 Plan is to encourage and enable Company employees, independent contractors and directors of us to acquire a proprietary interest inthe Company through the ownership of our Common Stock and other rights with respect to our Common Stock. Such ownership is intended to provide suchemployees, independent contractors and directors with a more direct stake in the future welfare of the Company. It is also expected that the 2013 Plan willencourage qualified persons to seek and accept employment with us and our subsidiaries and to become and remain directors of the Company. Awards underthe 2013 Plan may be granted in any one or all of the following forms: (i) incentive stock options (“Incentive Stock Options”) meeting the requirements ofSection 422 of the Internal Revenue Code of 1986, as amended (the “Code”); (ii) non-qualified stock options (“Non-Qualified Stock Options”) (unlessotherwise indicated, references to “Options” include both Incentive Stock Options and Non-Qualified Stock Options); (iii) stock appreciation rights (“StockAppreciation Rights”), which may be awarded either in tandem with Options (“Tandem Stock Appreciation Rights”) or on a stand-alone basis (“NontandemStock Appreciation Rights”); (iv) shares of Common Stock that are restricted (“Restricted Shares”); (v) units representing shares of Common Stock(“Performance Shares”); (vi) units that do not represent shares of Common Stock but which may be paid in the form of Common Stock (“Performance Units”);and (vii) shares of Common Stock that are not subject to any conditions to vesting (“Unrestricted Shares”). The maximum aggregate number of shares ofCommon Stock available for award under the 2013 Plan is 5,630,000, subject to adjustment as provided for in the 2013 Plan. Shares of Common Stock issuedpursuant to the 2013 Plan may be either authorized but unissued shares or issued shares reacquired by the Company. In the event that prior to the end of theperiod during which Options may be granted under the 2013 Plan, any Option or any Nontandem Stock Appreciation Right under the 2013 Plan expiresunexercised or is terminated, surrendered or cancelled (other than in connection with the exercise of Stock Appreciation Rights) without being exercised inwhole or in part for any reason, or any Restricted Shares, Performance Shares or Performance Units are forfeited, or if such awards are settled in cash in lieu ofshares of Common Stock, then such shares will be available for subsequent awards under the 2013 Plan. The 2013 Plan will be administered by thecompensation committee. The compensation committee will have the power and authority to, among other things: (i) grant Options and determine thepurchase price of the Common Stock covered by each Option, the term of each Option, the number of shares of Common Stock to be covered by each Optionand any performance objectives or vesting standards applicable to each Option; (ii) designate Options as Incentive Stock Options or Non-Qualified StockOptions and determine which Options, if any, will be accompanied by Tandem Stock Appreciation Rights; (iii) grant Tandem Stock Appreciation Rights andNontandem Stock Appreciation Rights and determine the terms and conditions of such rights; (iv) grant Restricted Shares and determine the terms of therestricted period and other conditions and restrictions applicable to such shares; (v) grant Performance Shares and Performance Units and determine theperformance objectives, performance periods and other conditions applicable to such shares or units; (vi) grant Unrestricted Shares; and (vii) determine theemployees, independent contractors and directors to whom, and the time or times at which, Options, Stock Appreciation Rights, Restricted Shares,Performance Shares, Performance Units and Unrestricted Shares will be granted. Awards may be made to all employees, independent contractors (includingpersons other than individuals) and directors of the Company or any of its subsidiaries. In determining the employees, independent contractors and directorsto whom awards will be granted and the number to be covered by each award, the compensation committee will take into account the nature of the servicesrendered by such employees, independent contractors and directors, their present and potential contributions to the success of the Company and itssubsidiaries and such other factors as the compensation committee deems relevant. On September 11, 2014, per recommendation of our Compensation Committee of the Board of Directors, the Board of Directors approved and authorized theissuance to Oleg Firer, the Chief Executive Officer of the Company, 1,438,137 restricted shares of common stock of the Company to compensate for OlegFirer’s efforts and results of effectuating the Company’s debt and equity financings in the first half of 2014. On December 10, 2014, the Compensation Committee of the Board of Directors of the Company approved and authorized the issuance to various employees,1,807,921 restricted shares of common stock of the Company and 119,194 incentive stock options of the Company for services performed during 2013 –2015 and recorded a compensation charge of $1,684,534 for the 2013 – 2014 portion of these grants. An additional $897,800 of non-cash compensationexpense will be recorded during 2015 as the 670,000 restricted shares granted for 2015 vest ratably during the year. During 2014 and 2013, we issued common stock to the members of our Board of Directors and recorded compensation charges of $225,550 and $300,004respectively. F-29 Stock Issuances On December 5, 2013, shareholders approved the issuance of 75,000 shares to Curtis Wolfe. On May 10, 2013, we entered into a Settlement, SeparationAgreement and General Release (the “Separation Agreement”) with Curtis Wolfe. Mr. Wolfe is a former employee and the former Secretary of the Companyand the Chief Executive Officer and Chairman of our 70%-owned subsidiary, LegalGuru LLC. Pursuant to the Separation Agreement, we agreed, subject tothe approval of shareholders at the annual meeting, to issue to Mr. Wolfe 75,000 shares of Common Stock as severance and compensation for his service as anemployee. We recorded a compensation charge of $356,250 for the year ended December 31, 2013. The note payable to MBF Merchant Capital, LLC (“MBF”) was restructured in May 2014, whereby the outstanding 9.75% note payable balance ofapproximately $5.0 million was exchanged for (i) a $3.0 million note with a stated interest rate of 12.0% maturing on April 2018, (ii) 100,000 shares of ourcommon stock and (iii) a cash payment of $400,000. Effective June 30, 2014, we executed Amendment No. 1 with Oleg Firer, Steven Wolberg, Georgia Notes 18, LLC and Vladimir Sadovskiy. Prior to the date ofthis Amendment No. 1, the parties intended that the number of shares of common stock (the “Shares”) to be issued would be calculated to reflect Shares thatconstituted a 10% ownership interest in the Company on a pre-share issuance basis. As and with effect from the Effective Date, the parties agree that thenumber of Shares to be issued pursuant to the Exchange Agreement shall be calculated to reflect Shares that constitute a 10% ownership interest in theCompany on the post-share issuance basis. As a result of this amendment, we recorded an additional compensation charge of $617,093 for the issuance of323,085 additional shares at June 30, 2014. On June 30, 2014, as a result of the closing of the credit facility under the RBL Loan Agreement, the entire principal amount of the CI Note (see Note 12) wasconverted into 5,569,158 shares of common stock constituting approximately 15% of the then outstanding shares of common stock the Company.Accordingly, the CI Note no longer remains outstanding. On September 15, 2014, we entered into a Master Exchange Agreement, (the “Agreement”) with Crede. Prior to entering into the Agreement, Crede acquiredtwo existing promissory notes that had been previously issued by the Company, one with $2,343,500 principal amount outstanding plus interest due toCapital Sources of New York and the other with $13,533,360 principal amount outstanding plus interest due to Georgia Notes 18, LLC. Pursuant to theAgreement, the Company and Crede agreed to exchange, these promissory notes for such number of shares of the Company’s common stock, as determinedunder the Agreement based upon 80% of the volume-weighted average trading price of the Common Stock for a specified period of time (up to 90 tradingdays) subsequent to each exchange (the “True-Up Period”). The initial number of shares of Common Stock issuable upon exchange was determined by dividing (i) 125% of the principal and interest under thepromissory note(s) to be exchanged, as well as any other amounts owed by the Company to Crede with respect to such promissory note(s) to be exchanged by(ii) an “exchange price” determined as the closing bid price of the Common Stock on the date of the applicable exchange (provided, however, that theAgreement provides that the “exchange price” for the initial exchange (described further below) is $5.70), in each case subject to adjustments over the True-Up Period following the exchange as set forth in the Agreement. Crede elected to exchange the entire amount of both promissory notes on September 15, 2014. The “exchange price” for this initial exchange was $5.70.Accordingly, on September 15, 2014, the Company exchanged 125% of the principal and interest under both promissory notes into 3,481,768 shares ofCommon Stock. As this number of shares was subject to adjustments over the True-Up Period following this exchange, the Company issued to Crede anadditional 2,321,177 shares to finalize the transaction. The entire 5,802,945 issued shares was calculated at the end of the True-Up Period to by dividing theaggregate amount of the promissory notes by 80% of the volume-weighted average trading price of the Common Stock during the True-Up Period. F-30 NOTE 16. WARRANTS AND OPTIONS At December 31, 2014, we had 8,938,900 warrants outstanding (as a result of 1,100 warrants exercised during 2012) with a weighted average exercise price of$7.50 and a weighted average contract term of 3.75 years. These warrants have no value at December 31, 2014 and 2013. On January 22, 2013, we filed a post-effective amendment on Form S-3 to its registration statement on Form S-4 (File No. 333-182076), as subsequentlyamended, in order to register the issuance and sale of up to 4,600,000 shares of common stock upon the exercise of warrants that were originally issued by theCompany (then known as Cazador Acquisition Corporation Ltd.) in connection with its initial public offering, which warrants became exercisable upon theconsummation of the transactions contemplated by the Merger Agreement between the Company and Net Element dated June 12, 2012. Each warrant entitlesthe holder thereof to purchase one share of common stock upon payment of the exercise price of $7.50 per share. The post-effective amendment was declaredeffective by the Commission on September 17, 2014. On February 12, 2013, we filed a registration statement on Form S-3 (File No. 333-186621), as subsequently amended, in order to register (i) the resale fromtime to time by the selling security holders identified therein of up to 4,340,000 warrants that were originally issued by the Company (then known asCazador Acquisition Corporation Ltd.) to Cazador Sub Holdings Ltd. in connection with a private placement prior to our initial public offering and thatbecame exercisable beginning on April 2, 2013 , and (ii) the issuance and sale of up to 4,340,000 shares of common stock upon exercise of such warrants.Each warrant entitles the holder thereof to purchase one share of common stock upon payment of the exercise price of $7.50 per share. The registrationstatement was declared effective by the Commission on October 14, 2014. Of the 4,340,000 warrants issued, Francesco Piovanetti (the former Chief Executive Officer and a former director) and David P. Kelley II (a current director)own 3,609,631 and 14,000 warrants, respectively, to purchase an aggregate of 3,623,631 shares of our common stock. In addition, 6,538,544 shares of additional stock was registered under this registration statement on Form S-3 (File No. 333-186621) for the following sellingsecurityholders: TGR Capital LLC, MTZ Fund, LLC and MZ Capital LLC, each controlled by Mike Zoi. Mr. Zoi served as a director of the Company untilhis resignation effective June 10, 2014. Mr. Zoi was Chief Executive Officer and Chairman of the board of directors of Net Element’s legacy company from2007 until October 2, 2012. At December 31, 2014, we had 119,194 incentive stock options outstanding with a weighted average exercise price of $1.34 and a weighted average contractterm of 9.94 years. These options have no value as of December 31, 2014 and there were no options outstanding at December 31, 2013. NOTE 17. INCOME TAXES The components of income (loss) before income tax provision are as follows: December 31, December 31, 2014 2013 United States $(11,024,546) $(38,963,263)Foreign 809,780 (8,922,473) $(10,214,766) $(47,885,736) There was no U.S. current or deferred income tax provision for the years ended December 31, 2014 and 2013. There was a current foreign tax provision of$154,036 for the year ended December 31, 2014. The following is a reconciliation of the effective income tax rate with the U.S. federal statutory income tax rate at December 31, 2014 and December 31,2013: December 31, December 31, 2014 2013 U. S. Federal statutory income tax rate 34.0% 34.0%State income tax, net of federal tax benefit 3.3% 1.7%Debt Extinguishment -8.4% 0.0%Currency translation adjustment 3.7% 0.0%Compensation related permanent differences 0.0% -11.8%Nondeductible provision for loan losses 0.0% -4.5%Change in uncertain tax liabilities -1.4% -0.4%Difference in foreign tax rates -0.6% -0.9%Change in valuation allowance -32.0% -18.5%Effective income tax rate -1.4% -0.4% The effective tax rate on operations of -1.4% at December 31, 2014 varied from the statutory rate of 34%, primarily due to the permanent difference related todebt extinguishment and the increase in our valuation allowance. The effective rate on operations of -0.4% at December 31, 2013 varied from the statutoryrate of 34% primarily due to the permanent difference related to non-cash compensation, provision for loan losses and the increase in our valuationallowance. F-31 Significant components of our deferred tax assets and liabilities as of December 31, 2014 and December 31, 2013 are as follows: December 31, December 31, 2014 2013 Deferred tax assets: Net operating loss carry forwards $14,590,807 $12,343,403 Basis difference in goodwill 3,488,850 3,917,676 Basis difference in fixed assets 11,815 648,940 Basis difference in intangible assets 1,286,862 480,515 Valuation allowance for deferred tax assets (19,378,334) (17,371,908)Total deferred tax assets - 18,626 Deferred tax liabilities: Basis difference in fixed assets - (18,626)Basis difference in intangible assets - - Total deferred tax liabilities - (18,626) Net deferred taxes $- $- Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts of assets and liabilities used for income tax purposes. At December 31, 2014 and December 31, 2013, we had cumulative federaland state net operating losses (“NOLs”) carry forwards of approximately $38.8 million and $32.4 million, respectively. We also have $9.2 million and $10.1in foreign NOLs as of December 31, 2014 and 2013, respectively. The valuation allowance was increased by $2.0 million in fiscal year 2014. The fiscal 2014increase was primarily related to additional operating loss incurred, and difference in tax and book basis of goodwill and other intangible assets. We haveconsidered all the evidence, both positive and negative, that the NOLs and other deferred tax assets may not be realized and have recorded a valuationallowance for $19.4 million. The federal and state NOLs begin to expire in December 2025 while the foreign NOLs begin to expire in 2023. The timing and manner in which we will be able to utilize some of its NOLs is limited by Section 382 of the Internal Revenue Code of 1986, as amended(IRC). IRC Section 382 imposes limitations on a corporation’s ability to use its NOLs when it undergoes an “ownership change.” Generally, an ownershipchange occurs if one or more shareholders, each of whom owns 5% or more in value of a corporation’s stock, increase their percentage ownership, in theaggregate, by more than 50% over the lowest percentage of stock owned by such shareholders at any time during the preceding three-year period. Because onJune 10, 2014, we underwent an ownership change as defined by IRC Section 382, the limitation applies to us. The losses generated prior to the ownershipchange date (pre-change losses) are subject to the Section 382 limitation. The pre-change losses may only become available to be utilized by the Company atthe rate of $2.4 million per year. Any unused losses can be carried forward, subject to their original carryforward limitation periods. In the year 2014,approximately $1.3 million in the pre-change losses was released from the Section 382 loss limitation. The Company can still fully utilize the NOLsgenerated after the change of the ownership, which was approximately $2.9 million. Thus, the total of approximately $4.2 million as of December 31, 2014 isavailable to offset future income. NOTE 18. SEGMENT INFORMATION We previously owned several content monetization verticals (i.e., interests in online media businesses and operations) that were divested during the quarterended September 30, 2013 (see Note 5 for additional information regarding this divestiture). As a result of this divestiture, we now have now has only onereportable business segment, consisting of mobile commerce and payment processing. Operations of the divested businesses are presented as discontinuedoperations in the accompanying consolidated statements of operations and comprehensive loss. NOTE 19. SUBSEQUENT EVENTS On March 16, 2015, TOT Group Europe, Ltd. (“TOT Group Europe”), one of our subsidiaries, entered into a Binding Offer Letter (the "Offer") with MaglentaEnterprises Inc. and Champfremont Holding Ltd. to acquire all of the issued and outstanding equity interests of the PayOnline group of companies(collectively, “PayOnline”) to be named in the course of preparation of a legally binding acquisition agreement. PayOnline’s business includes the operationof a protected payment processing system to accept bank card payments for goods and services. The consideration for all of the equity interests of PayOnline will be a combination of cash and restricted shares, payable in five installments. The Offer setsforth the determination of the value of such shares based on the closing sales price on the date before each applicable payment date and provides certainadditional restrictions on trading of our common stock. The first installment will be payable upon closing of the PayOnline acquisition and will consist of$3.6 million in cash and the restricted shares of our common stock with a value of $3.6 million. The other four installments will be payable after the end ofeach applicable quarter for which the installment is calculated, and will consist of a combination of cash and the restricted shares of our common stock, ineach case equal to the earn-out. The earn out will be calculated based on PayOnline EBITDA for certain post-closing periods, multiplied by 1.35. Pursuant tothe Offer, the aggregate valuation of PayOnline on a debt-free basis will be $8,482,000, and the purchase price will not exceed such amount. At the end of the 12-month period following the issuance of our restricted shares of common stock to the Sellers (“Guarantee Period”), TOT Group Europewill guaranty that the value of such stock then not sold by the sellers of PayOnline equity interests (the “Sellers”) will not be less than the value of such at thedate of the issuance of such stock. Subject to certain conditions, if at the end of the Guarantee Period the value of the any such remaining stock is less thanthe value of such stock at the date of the issuance of such stock, TOT Group Europe will pay a cash amount equaling the difference between such values. Ifany party terminates the Offer, it will be subject to $400,000 penalty. F-32 EXHIBIT INDEX ExhibitNo. Description of Exhibit2.1 Agreement and Plan of Merger, dated as of June 12, 2012, by and between Cazador Acquisition Corporation Ltd. and Net Element, Inc.(incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 12, 2012) 2.2 Contribution Agreement, dated April 16, 2013, among Net Element International, Inc., Unified Payments, LLC, TOT Group, Inc., OlegFirer, and Georgia Notes 18 LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with theCommission on April 17, 2013. 2.3 Term Sheet, dated May 20, 2013, among TOT Group, Inc., Net Element International, Inc. and Aptito.com, Inc. (incorporated by referenceto Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 22, 2013) 2.4 Asset Purchase Agreement, dated June 18, 2013, between Aptito, LLC and Aptito.com, Inc. (incorporated by reference to Exhibit 2.1 to theCompany’s Current Report on Form 8-K filed with the Commission on June 24, 2013) 2.5 Contribution Agreement, dated September 25, 2013, among T1T Lab, LLC, Net Element International, Inc. and T1T Group, LLC(incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 25,2013) 2.6 Assignment of Membership Interest, dated February 11, 2014, among T1T Group, LLC, Net Element, Inc., and T1T LAB, LLC(incorporated by reference to Exhibit 2.7 to the Company’s Annual Report on Form 10-K filed with the Commission on April 15, 2014) 2.7 Binding Offer Letter, dated March 16, 2015, among TOT Group Europe Ltd., Maglenta Enterprises Inc. and Champfremont Holding Ltd. (incorporated by reference to Exhibit 2.1 to Net Element’s Current Report on Form 8-K/A filed with the Commission on March 20, 2015) 3.1 Certificate of Corporate Domestication of Cazador, filed with the Secretary of State of the State of Delaware on October 2, 2012(incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on October 5, 2012) 3.2 Amended and Restated Certificate of Incorporation of Net Element International, Inc., a Delaware corporation, filed with the Secretary ofState of the State of Delaware on October 2, 2012 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-Kfiled with the Commission on October 5, 2012) 3.3 Amended and Restated Bylaws of Net Element International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.3 to theCompany’s Current Report on Form 8-K filed with the Commission on October 5, 2012) 3.4 Certificate of Merger, filed with the Secretary of State of the State of Delaware on October 2, 2012 (incorporated by reference to Exhibit3.4 to the Company’s Current Report on Form 8-K filed with the Commission on October 5, 2012) 3.5 Certificate of Amendment to Amended and Restated Certificate of Incorporation, dated December 5, 2013, changing the Company’s namefrom Net Element International, Inc. to Net Element, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report onForm 8-K filed with the Commission on December 6, 2013) 4.1 Specimen Common Stock Certificate of Net Element International, Inc. (incorporated by reference to Exhibit 4.2 to the RegistrationStatement on Form S-4 filed by the Company with the Commission on August 31, 2012) 4.2 Warrant Certificate of Cazador Acquisition Corporation Ltd. (incorporated by reference to Exhibit 4.3 to the Registration Statement onForm F-1 filed by the Company with the Commission on September 3, 2010) 4.3 Registration Rights Agreement by and between Cazador Acquisition Corporation Ltd., Cazador Sub Holdings Ltd. and Others(incorporated by reference to Exhibit 10.5 to the Registration Statement, as amended, on Form F-1/A filed by the Company with theCommission on October 6, 2010) 43 4.4 Warrant Agreement by and between Cazador Acquisition Corporation Ltd. and Continental Stock Transfer & Trust Company(incorporated by reference to Exhibit 4.4 to the Registration Statement, as amended, on Form F-1/A filed by the Company with theCommission on October 6, 2010) 4.5 Secured Convertible Senior Promissory Note dated April 21, 2014 between the Company and Cayman Invest, S.A. (incorporated byreference to Exhibit 4.1 to Net Element’s Current Report on Form 8-K filed with the Commission on April 22, 2014) 10.1 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form F-1 filed by theCompany with the Commission on September 3, 2010) 10.2 Memorandum of Understanding, dated March 23, 2012, by and between Cazador Acquisition Corporation Ltd. and Cazador Sub-HoldingsLtd. (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011,filed with the Commission on March 30, 2012) 10.3 Membership Interest Purchase Agreement (Motorsport) dated as of February 1, 2011 between Enerfund, LLC and the Company(incorporated by reference to Exhibit 10.29 to the Company’s Transition Report on Form 10-KT/A filed with the Commission on February3, 2011) 10.4 Joint Venture Agreement, dated April 6, 2012, between Net Element, Inc. and Igor Yakovlevich Krutoy (incorporated by reference toExhibit 10.1 to Net Element’s Current Report on Form 8-K filed with the Commission on April 12, 2012) 10.5 Loan Agreement, dated July 4, 2012, between OOO Sat-Moscow and OOO Net Element Russia (incorporated by reference to Exhibit 10.1to Net Element’s Current Report on Form 8-K filed with the Commission on July 10, 2012) 10.6 Credit Agreement, dated August 17, 2012, between Alpha-Bank and OOO TOT Money (incorporated by reference to Exhibit 10.1 to NetElement’s Current Report on Form 8-K filed with the Commission on August 23, 2012) 10.7 Agreement of Property Rights Pledge, dated August 17, 2012, between Alpha-Bank and OOO TOT Money (incorporated by reference toExhibit 10.2 to Net Element’s Current Report on Form 8-K filed with the Commission on August 23, 2012) 10.8 General Agreement No. TR-0672 on General Conditions of Financing against Assignment of Monetary Claim (Factoring) within Russia,dated September 19, 2012, between Alpha-Bank and OOO TOT Money (including related supplementary agreements) (incorporated byreference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on October 10, 2012) 10.9 Supplemental Agreements dated September 19, 2012, which amend the General Agreement No. TR-0672 on General Conditions ofFinancing against Assignment of Monetary Claim (Factoring) within Russia, dated September 19, 2012, between Alpha-Bank and OOOTOT Money (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K filed with the Commission onApril 12, 2013) 10.10# Management and Consulting Services Agreement, dated October 24, 2012, between Bond Street Management LLC and Net ElementInternational Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission onOctober 30, 2012) 10.11 Agreement on transfer of rights and obligations, dated July 1, 2012, among Mobile Telesystems OJSC, OOO RM-Invest and OOO TOTMoney, with respect to Contract No. D0811373, dated July 1, 2008, between Mobile Telesystems OJSC and OOO RM-Invest (Net ElementInternational, Inc. is requesting confidential treatment of certain information which has been omitted from this Agreement. The omittedinformation has been separately filed with the SEC.) (incorporated by reference to Exhibit 10.33 to the Company’s Current Report onForm 8-K filed with the Commission on November 19, 2012) 10.12 Contract No. D0811373, dated July 1, 2008, between Mobile Telesystems OJSC and OOO RM-Invest (including material supplementaryagreements related thereto) (Net Element International, Inc. is requesting confidential treatment of certain information which has beenomitted from Contract No. D0811373 and certain of the material supplementary agreements related thereto. The omitted information hasbeen separately filed with the SEC.) (incorporated by reference to Exhibit 10.34 to the Company’s Current Report on Form 8-K filed withthe Commission on November 19, 2012) 10.13 Contract No. CPA-86, dated September 1, 2012, between OJSC Megafon and OOO TOT Money (Net Element International, Inc. isrequesting confidential treatment of certain information which has been omitted from Contract No. CPA-86. The omitted information hasbeen separately filed with the SEC.) (incorporated by reference to Exhibit 10.35 to the Company’s Current Report on Form 8-K filed withthe Commission on November 19, 2012) 44 10.14 Contract No. 0382, dated September 20, 2012, between OJSC VimpelCom and OOO TOT Money (including Supplementary AgreementNo. 1 thereto) (Net Element International, Inc. is requesting confidential treatment of certain information which has been omitted fromContract No. 0382 and Supplementary Agreement No. 1 thereto. The omitted information has been separately filed with the SEC.)(incorporated by reference to Exhibit 10.35 to the Company’s Current Report on Form 8-K filed with the Commission on November 19,2012) 10.15 Loan Agreement, dated November 26, 2012, between Net Element International, Inc. and Infratont Equities Inc. (incorporated by referenceto Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on November 30, 2012) 10.16 Term Sheet, dated March 8, 2013, between Unified Payments, LLC and Net Element International, Inc. (incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 12, 2013) 10.17 Loan Agreement, dated March 8, 2013, among Net Element International, Inc., Unified Payments, LLC, Oleg Firer and Georgia Notes 18LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on March 12,2013) 10.18 Form of Secured Revolving Note made by Unified Payments, LLC and payable to Net Element International, Inc. (incorporated byreference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on March 12, 2013) 10.19 Non-Recourse Guaranty, dated March 8, 2013, by Oleg Firer and Georgia Notes 18 LLC for the benefit of Net Element International, Inc.(incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on March 12, 2013) 10.20 Pledge Agreement, dated March 8, 2013, among Oleg Firer, Georgia Notes 18 LLC and Net Element International, Inc. (incorporated byreference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Commission on March 12, 2013) 10.21 Loan Agreement, dated July 12, 2012, between OOO TOT Money and OOO RM Invest, as amended on July 30, 2012, August 17, 2012and February 25, 2013 (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K filed with theCommission on April 12, 2013) 10.22 Termination Agreement for Management and Consulting Agreement, dated April 15, 2013, between Net Element International, Inc. andBond Street Management LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with theCommission on April 17, 2013) 10.23 Form of Indemnification Agreement for executive officers, entered into between Net Element International, Inc. and each of Jonathan New,Dmitry Kozko, and Francesco Piovanetti (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q forthe quarterly period ended March 31, 2013, filed with the Commission on May 15, 2013) 10.24 Contract No. CPA/ML-17, dated March 1, 2013, between ZAO MegaLabs and OOO TOT Money (incorporated by reference to Exhibit10.9 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, filed with the Commission on May15, 2013) (Net Element, Inc. is requesting confidential treatment of certain information which has been omitted from Contract No.CPA/ML-17. The omitted information has been separately filed with the Commission.) 10.25 Commercial Lease, dated May 1, 2013, between BGC LLC and Net Element International, Inc. (incorporated by reference to Exhibit 10.4to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013, filed with the Commission on August 19,2013) 10.26 Promissory Note, dated May 13, 2013, in the original principal amount of $2 million made by Net Element International, Inc. and payableto K1 Holding Limited (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarterlyperiod ended June 30, 2013, filed with the Commission on August 19, 2013) 10.27# Letter Agreement, dated January 14, 2013, among OOO TOT Money, Tcahai Hairullaevich Katcaev and Varwood Holdings Limited(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013,filed with the Commission on August 19, 2013) 45 10.28# Letter Agreement, dated July 1, 2013, among OOO TOT Money, OOO NETE, Net Element International, Inc. and Tcahai HairullaevichKatcaev (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June30, 2013, filed with the Commission on August 19, 2013) 10.29# Settlement, Separation Agreement and General Release, dated May 10, 2013, between Net Element International, Inc. and Curtis Wolfe(incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013,filed with the Commission on August 19, 2013) 10.30 Letter Agreement, dated August 28, 2013, among Net Element International, Inc., Oleg Firer, Steven Wolberg, Vladimir Sadovskiy,Georgia Notes 18, LLC, Kenges Rakishev and Mike Zoi (incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K filed with the Commission on September 10, 2013) 10.31 Services Agreement, dated December 5, 2013, between Net Element International, Inc. an K 1 Holding Limited (incorporated by referenceto Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 6, 2013) 10.32 Letter Agreement, dated December 5, 2013, among TGR Capital, LLC, Net Element International, Inc. and K 1 Holding Limited(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on December 6,2013) 10.33* Form of Incentive Stock Option Award Agreement Under the Net Element, Inc. 2013 Equity Incentive Plan 10.34* Form of Non-Qualified Stock Option Award Agreement Under the Net Element, Inc. 2013 Equity Incentive Plan 10.35* Form of Restricted Share Award Agreement Under the Net Element, Inc. 2013 Equity Incentive Plan 10.36 Assignment of Membership Interest, dated February 11, 2014, between Net Element, Inc. and T1T Group, LLC (incorporated by referenceto Exhibit 10.1 to Net Element’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, filed with theCommission on May 15, 2014) 10.37 Loan and Security Agreement, dated June 30, 2014, among RBL Capital Group, LLC, as lender, and TOT Group, Inc., TOT Payments,LLC, TOT BPS, LLC, TOT FBS, LLC, Process Pink, LLC, TOT HPS, LLC and TOT New Edge, LLC, as co-borrowers (incorporated byreference to Exhibit 10.1 to Net Element’s Current Report on Form 8-K filed with the Commission on July 2, 2014) 10.38 Amendment No. 1 effective June 30, 2014 between the Company and Oleg Firer, Steven Wolberg, Georgia Notes 18, LLC and VladimirSadovskiy (incorporated by reference to Exhibit 10.2 to Net Element’s Quarterly Report on Form 10-Q for the quarterly period ended June30, 2014, filed with the Commission on August 14, 2014) 10.39 Master Exchange Agreement, dated as of September 15, 2014 between the Company and Crede CG III, Ltd. (incorporated by reference toExhibit 10.1 to Net Element’s Current Report on Form 8-K filed with the Commission on September 15, 2014) 10.40 Supplement Agreement No. 14, dated May 21, 2014 (but executed by OOO TOT Money on September 17, 2014), to the GeneralAgreement No. TR-0672 on General Conditions of Financing against Assignment of Receivables (Factoring) within Russia, datedSeptember 19, 2012, between JSC Alpha-Bank and OOO TOT Money (incorporated by reference to Exhibit 10.1 to Net Element’s CurrentReport on Form 8-K filed with the Commission on September 24, 2014) 10.41 Supplement Agreement No. 15, dated September 17, 2014, to the General Agreement No. TR-0672 on General Conditions of Financingagainst Assignment of Receivables (Factoring) within Russia, dated September 19, 2012, between JSC Alpha-Bank and OOO TOT Money(incorporated by reference to Exhibit 10.2 to Net Element’s Current Report on Form 8-K filed with the Commission on September 24,2014) 10.42 General Agreement No. 09969-HP on General Conditions of Factoring Services under “Liquidity” Program, dated as of November 5, 2014,between Bank Otkritie Financial Corporation and TOT Money Limited Liability Company (incorporated by reference to Exhibit 10.1 toNet Element’s Current Report on Form 8-K filed with the Commission on November 19, 2014) 10.43 Additional Agreement on Factoring Services under “Finance” Program to General Agreement on General Conditions of Factoring Servicesunder “Liquidity” Program No. 09969-HP as of November 5, 2014 (incorporated by reference to Exhibit 10.2 to Net Element’s CurrentReport on Form 8-K filed with the Commission on November 19, 2014) 46 10.44 Equity Distribution Agreement between the Company and Revere Securities, LLC (incorporated by reference to Exhibit 10.1 to NetElement’s Current Report on Form 8-K filed with the Commission on January 28, 2015) 16.1 Letter regarding change in certifying accountant from Daszkal Bolton LLP to the Securities and Exchange Commission, dated November21, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission onNovember 26, 2012) 21.1* List of Subsidiaries 23.1* Consent of Independent Registered Public Accounting Firm (Daszkal Bolton LLP) 23.2* Consent of Independent Registered Public Accounting Firm (BDO USA, LLP) 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934 32.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. § 1350 101* The following financial information from the Annual Report on Form 10-K for the fiscal year ended December 31, 2014, formatted inXBRL (eXtensible Business Reporting Language), is filed electronically herewith: (i) Consolidated Balance Sheets as of December 31,2014 and 2013; (ii) Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2014 and 2013;(iii) Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2014 and 2013; (iv)Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013; and (v) Notes to Consolidated FinancialStatements.____________________# Indicates management contract or compensatory plan or arrangement.* Filed herewith. 47  Exhibit 10.33 FORM OFINCENTIVE STOCK OPTION AWARD AGREEMENTUNDER THENET ELEMENT, INC.2013 EQUITY INCENTIVE PLAN This Incentive Stock Option Award Agreement (“Agreement”) is between Net Element, Inc. (“Company”) and [________________________] (the“Optionee”), and is effective as of the [____] day of [_____________], 20[__] (“Grant Date”). RECITALS A. The Board of Directors of the Company (“Board”) has adopted, and the shareholders of the Company have approved, the Plan to promote theinterests and long-term success of the Company and its shareholders by providing an incentive to attract, retain and reward persons performing services forthe Company and by motivating such person to contribute to the continued growth and profitability of the Company. B. The Compensation Committee of the Board of the Company (the “Committee”) has approved the granting of Incentive Stock Options to theOptionee pursuant to Article 5 of the Plan. C. To the extent not specifically defined in this Agreement, all capitalized terms used in this Agreement shall have the meaning set forth in the Plan. AGREEMENT In consideration of the mutual covenants and conditions hereinafter set forth and for other good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, the Company and the Optionee agree as follows: 1. Grant of Option. Subject to the terms of this Agreement and Article 5 of the Plan, the Company grants to the Optionee the right and option topurchase from the Company all or any part of an aggregate of [_________] shares of Stock (“Option”). The delivery of any document evidencing the Optionis subject to the provisions of Section 5.9 of the Plan. The Option granted under this Agreement is intended to be an “incentive stock option” (“ISO”) underSection 422 of the Internal Revenue Code of 1986, as amended (the “Code”). 2. Purchase Price. The purchase price under this Agreement is $[________] per share of Stock, as determined by the Committee, which shall not beless than the closing price of the Common Stock on, the date of this grant; provided, however, that in the case of ISO granted to a 10% Stockholder, thepurchase price per share shall not be less than 110% of the closing price of the Common Stock on the date of the grant; and provided further that, in allevents, the purchase price per share under each option shall be no less that the par value of the Common Stock ($0.0001). 3. Vesting of Option. The Option shall vest and be exercisable according to the following schedule: [FOR OPTIONS VESTING IMMEDIATELY, INSERT: Vests immediately upon grant.] [FOR OPTIONS VESTING PER VESTING SCHEDULE, INSERT: Quarterly, starting on January 1, 2015. For example: an employee was awarded anannual grant of 1,000 Options on 1st of January 2015:a)vesting event 1st of April 2015 for 250 Optionsb)vesting event 1st of July 2015 for 250 Optionsc)vesting event 1st of October 2015 for 250 Optionsd)vesting event 1st of January 2016 for 250 Options.] 4. Exercise of Option. This Option may be exercised, to the extent vested (under Section 3 above), in whole or in part at any time before the Optionexpires by delivery of a written notice of exercise (pursuant to Section 5 below) and payment of the purchase price. The purchase price may be paid in cash orsuch other method permitted by the Committee under Section 5.6 of the Plan and communicated to the Optionee before the date the Optionee exercises theOption. 5. Method of Exercising Option. Subject to the terms of this Agreement, the Option may be exercised by timely delivery to the Company of writtennotice, which notice shall be effective on the date received by the Company. The notice shall state the Optionee’s election to exercise the Option and thenumber of underlying shares in respect of which an election to exercise has been made. Such notice shall be signed by the Optionee, or if the Option isexercised by a person or persons other than the Optionee because of the Optionee’s death, such notice must be signed by such other person or persons andshall be accompanied by proof acceptable to the Company of the legal right of such person or persons to exercise the Option.  6. Term of Option. The Option granted under this Agreement expires, unless sooner terminated, ten (10) years from the Grant Date, through andincluding the normal close of business of the Company on the tenth (10th) anniversary of the Grant Date (“Expiration Date”). 7. Termination of Employment. (a) If the Optionee Terminates Employment for any reason other than death or Disability, the Optionee may at any time within the 90-dayperiod after the date of his or her Termination of Employment exercise the Option to the extent that the Optionee was entitled to exercise the Option at thedate of termination, provided that in no event shall the Option be exercisable after the Expiration Date. (b) If the Optionee Terminates Employment by reason of his death or Disability, Sections 8.2 and 8.3, respectively, of the Plan will govern. 8. Nontransferability. The Incentive Stock Options granted by this Agreement shall not be transferable by the Optionee or any other person claimingthrough the Optionee, either voluntarily or involuntarily, except by will or the laws of descent and distribution or as otherwise provided by the Committee(See Article 7 of the Plan). 9. Continuation of Employment. This Agreement shall not be construed to confer upon the Optionee any right to continue employment with theCompany and shall not limit the right of the Company, in its sole and absolute discretion, to terminate Optionee’s employment at any time. 10. Administration. This Agreement shall at all times be subject to the terms and conditions of the Plan and the Plan shall in all respects beadministered by the Committee in accordance with the terms of and as provided in the Plan. The Committee shall have the sole and complete discretion withrespect to all matters reserved to it by the Plan and decisions of the majority of the Committee with respect thereto and to this Agreement shall be final andbinding upon the Optionee and the Company. In the event of any conflict between the terms and conditions of this Agreement and the Plan, the provisions ofthe Plan shall control. 11. Waiver and Modification. The provisions of this Agreement may not be waived or modified unless such waiver or modification is in writing andsigned by a representative of the Committee. 12. Adjustments. The number of shares of Stock issued to Optionee pursuant to this Agreement shall be adjusted by the Committee pursuant toArticle 14 of the Plan, as the Committee shall deem appropriate, in the event of a change in the Company’s capital structure. 13. Securities Act. The Company shall not be required to deliver any shares of Stock pursuant to the vesting of Options if, in the opinion of counselfor the Company, such issuance would violate the Securities Act of 1933, as amended, or any other applicable federal or state securities laws or regulations. 14. Voting and Other Shareholder Related Rights. The Optionee will have no voting rights or any other rights as a shareholder of the Companywith respect to any Incentive Stock Options until exercised by the Optionee. 15. Copy of Plan. By the execution of this Agreement, the Optionee acknowledges receipt of a copy of the Plan. 16. Governing Law. This Agreement shall be interpreted and administered under the laws of the State of Delaware. 17. Amendments. This Agreement may be amended only by a written agreement executed by the Company and the Optionee. MANY OF THE PROVISION OF THIS AWARD AGREEMENT ARE SUMMARIES OF SIMILAR PERTINENT PROVISIONS OF THE PLAN. TO THEEXTENT THAT THIS AGREEMENT IS SILENT ON AN ISSUE OR THERE IS A CONFLICT BETWEEN THE PLAN AND THIS AGREEMENT, THE PLANPROVISIONS SHALL CONTROL. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized representative and Optionee has signedthis Agreement, and this Agreement shall be effective as of the day and year first written above. Net Element, Inc. By: Name: Date Title: Optionee  Exhibit 10.34 FORM OFNON-QUALIFIED STOCK OPTION AWARD AGREEMENTUNDER THENET ELEMENT, INC.2013 EQUITY INCENTIVE PLAN This Non-Qualified Stock Option Award Agreement (“Agreement”) is between Net Element, Inc. (“Company”) and [________________________](the “Optionee”), and is effective as of the [____] day of [_____________], 20[___] (“Grant Date”). RECITALS A. The Board of Directors of the Company (“Board”) has adopted, and the shareholders of the Company have approved, the Plan to promote theinterests and long-term success of the Company and its shareholders by providing an incentive to attract, retain and reward persons performing services forthe Company and by motivating such person to contribute to the continued growth and profitability of the Company. B. The Compensation Committee of the Board (the “Committee”) has approved the granting of Non-Qualified Stock Options to the Optioneepursuant to Article 5 of the Plan. C. To the extent not specifically defined in this Agreement, all capitalized terms used in this Agreement shall have the meaning set forth in the Plan. AGREEMENT In consideration of the mutual covenants and conditions hereinafter set forth and for other good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, the Company and the Optionee agree as follows: 1. Grant of Option. Subject to the terms of this Agreement and Article 5 of the Plan, the Company grants to the Optionee the right and option topurchase from the Company all or any part of an aggregate of [______] shares of Stock (“Option”). The delivery of any document evidencing the Option issubject to the provisions of Section 5.9 of the Plan. The Option granted under this Agreement is not intended to be an “Incentive Stock Option” underSection 422 of the Internal Revenue Code of 1986, as amended (the “Code”). 2. Purchase Price. The purchase price under this Agreement is $[_________] per share of Stock; which shall not be less than the closing price of theCommon Stock on, the date of this grant; provided, however, that the purchase price per share under each option shall be no less that the par value of theCommon Stock ($0.0001). 3. Vesting of Option. The Option shall vest and be exercisable according to the following schedule: [FOR OPTIONS VESTING IMMEDIATELY, INSERT: Vests immediately upon grant.] [FOR OPTIONS VESTING PER VESTING SCHEDULE, INSERT: Quarterly, starting on January 1, 2015. For example: an employee was awarded anannual grant of 1,000 Options on 1st of January 2015: a)vesting event 1st of April 2015 for 250 Optionsb)vesting event 1st of July 2015 for 250 Optionsc)vesting event 1st of October 2015 for 250 Optionsd)vesting event 1st of January 2016 for 250 Options.] 4. Exercise of Option. This Option may be exercised, to the extent vested (under Section 3 above), in whole or in part at any time before the Optionexpires by delivery of a written notice of exercise (under Section 5 below) and payment of the purchase price. The purchase price may be paid in cash or suchother method permitted by the Committee under Section 5.6 of the Plan and communicated to the Optionee before the date the Optionee exercises theOption. 5. Method of Exercising Option. Subject to the terms of this Agreement, the Option may be exercised by timely delivery to the Company of writtennotice, which notice shall be effective on the date received by the Company. The notice shall state the Optionee’s election to exercise the Option and thenumber of underlying shares in respect of which an election to exercise has been made. Such notice shall be signed by the Optionee, or if the Option isexercised by a person or persons other than the Optionee because of the Optionee’s death, such notice must be signed by such other person or persons andshall be accompanied by proof acceptable to the Company of the legal right of such person or persons to exercise the Option.  6. Term of Option. The Option granted under this Agreement expires, unless sooner terminated, ten (10) years from the Grant Date, through andincluding the normal close of business of the Company on the tenth (10th) anniversary of the Grant Date (“Expiration Date”). 7. Termination of Employment. (a) If the Optionee Terminates Employment for any reason other than death or Disability, the Optionee may at any time within the 90-dayperiod after the date of his or her Termination of Employment exercise the Option to the extent that the Optionee was entitled to exercise the Option at thedate of termination, provided that in no event shall the Option be exercisable after the Expiration Date. (b) If the Optionee Terminates Employment by reason of his death or Disability, If the Optionee Terminates Employment by reason of hisdeath or Disability, Sections 8.2 and 8.3, respectively, of the Plan will govern. 8. TAX WITHHOLDING. THE OPTIONEE SHALL SATISFY ANY FEDERAL, STATE, LOCAL OR FOREIGN EMPLOYMENT OR INCOMETAXES DUE UPON THE VESTING OF OPTIONS (OR OTHERWISE) BY (I) PERSONAL CHECK OR OTHER CASH EQUIVALENT ACCEPTABLE TO THECOMPANY, (II) PERMITTING THE OPTIONEE TO EXECUTE A SAME DAY SALE OF STOCK PURSUANT TO PROCEDURES APPROVED BY THECOMPANY, OR (III) SUCH OTHER METHOD AS APPROVED BY THE COMMITTEE, ALL IN ACCORDANCE WITH APPLICABLE COMPANYPOLICIES AND PROCEDURES AND APPLICABLE LAW. 9. Nontransferability. The Options granted by this Agreement shall not be transferable by the Optionee or any other person claiming through theOptionee, either voluntarily or involuntarily, except by will or the laws of descent and distribution or as otherwise provided by the Plan’s Committee (SeeArticle 7 of the Plan). 10. Continuation of Employment. This Agreement shall not be construed to confer upon the Optionee any right to continue employment with theCompany and shall not limit the right of the Company, in its sole and absolute discretion, to terminate Optionee’s employment at any time. 11. Nonstatutory Stock Option. The Options granted hereunder are nonstatutory (non-qualified) stock options, and are not “incentive stock options”pursuant to the Code. 12. Administration. This Agreement shall at all times be subject to the terms and conditions of the Plan and the Plan shall in all respects beadministered by the Committee in accordance with the terms of and as provided in the Plan. The Committee shall have the sole and complete discretion withrespect to all matters reserved to it by the Plan and decisions of the majority of the Committee with respect thereto and to this Agreement shall be final andbinding upon the Optionee and the Company. In the event of any conflict between the terms and conditions of this Agreement and the Plan, the provisions ofthe Plan shall control. 13. Waiver and Modification. The provisions of this Agreement may not be waived or modified unless such waiver or modification is in writing andsigned by a representative of the Committee. 14. Adjustments. The number of shares of Stock issued to Optionee pursuant to this Agreement shall be adjusted by the Committee pursuant toArticle 14 of the Plan, as the Committee shall deem appropriate, in the event of a change in the Company’s capital structure. 15. Securities Act. The Company shall not be required to deliver any shares of Stock pursuant to the vesting of Options if, in the opinion of counselfor the Company, such issuance would violate the Securities Act of 1933, as amended, or any other applicable federal or state securities laws or regulations. 16. Voting and Other Shareholder Related Rights. The Optionee will have no voting rights or any other rights as a shareholder of the Companywith respect to any Options until the Options are exercised by the Optionee. 17. Copy of Plan. By the execution of this Agreement, the Optionee acknowledges receipt of a copy of the Plan. 18. Governing Law. This Agreement shall be interpreted and administered under the laws of the State of Delaware. 19. Amendments. This Agreement may be amended only by a written agreement executed by the Company and the Optionee. MANY OF THE PROVISION OF THIS AWARD AGREEMENT ARE SUMMARIES OF SIMILAR PERTINENT PROVISIONS OF THE PLAN. TO THEEXTENT THAT THIS AGREEMENT IS SILENT ON AN ISSUE OR THERE IS A CONFLICT BETWEEN THE PLAN AND THIS AGREEMENT, THE PLANPROVISIONS SHALL CONTROL.  IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized representative and Optionee has signedthis Agreement, and this Agreement shall be effective as of the day and year first written above. Net Element, Inc. By: Name: Date Title: Optionee  Exhibit 10.35 FORM OFRESTRICTED SHARE AWARD AGREEMENTUNDER THENET ELEMENT, INC.2013 EQUITY INCENTIVE PLAN THIS RESTRICTED SHARE AWARD AGREEMENT (this “Agreement”) is entered into pursuant to the Net Element, Inc. 2013 Equity IncentivePlan (the “Plan”). This Agreement is made effective as of December ____, 2014 (the “Date of Grant”) by and between Net Element, Inc., a Delawarecorporation (the “Company”), and _____________________________ (the “Grantee”). 1. Defined Terms. Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to such terms in thePlan. 2. Grant of Stock. Subject to the terms and conditions of this Agreement and Article 9 of the Plan, the Company hereby awards Grantee___________________Restricted Shares. 3. Vesting of Restricted Shares. (a) General Rule. The Restricted Shares granted pursuant to Section 2 above shall become vested and nonforfeitable as follows: (a)_________________ Restricted Shares shall vest on _______________________, (b) _________________ Restricted Shares shall vest on_______________________, and (c) _________________ Restricted Shares shall vest on _______________________. Each such vesting period shall bereferred to here as a “Vesting Date.” (b) Death, Disability, Termination without Cause. Notwithstanding Section 3(a) above, all of the Restricted Shares (to the extent notpreviously vested), shall become vested and nonforfeitable on the first to occur of Grantee’s termination of employment without Cause prior to a VestingDate, or his death or Disability prior to a Vesting Date. For purposes of this Agreement, the term “Cause” means: (i) Grantee’s conviction, or plea of guilty ornolo contendere to the commission of a felony; or (ii) Grantee’s commission of any fraud or misappropriation which causes demonstrable injury to theCorporation or a Subsidiary. (c) Change in Control. Notwithstanding Section 3(a) or 3(b) above, all of the Restricted Shares (to the extent not previously vested), shallbecome vested and nonforfeitable if a Change in Control occurs prior to a Vesting Date. 4. Stockholder Rights. Grantee will have all rights of the stockholder with respect to the Restricted Shares as of the Date of Grant; provided,however, that the Restricted Shares that have not become vested and nonforfeitable may not be transferred or assigned by Grantee or by operation of law,other than by will or by the laws of descent and distribution. For the avoidance of doubt, Grantee shall have the right to receive dividends with respect to theRestricted Shares. 5. Right to Terminate Service. Nothing contained in this Agreement shall create a contract of employment (or service) or give Grantee a right tocontinue in the employ (or service) of the Company or any Subsidiary, or restrict the right of the Grantee to terminate his employment at any time or theCompany or a Subsidiary to terminate the employment (or service) of Grantee at any time. 6. Adjustments. Upon the occurrence of certain events relating to the Company’s Common Stock as contemplated by Article 14 of the Plan, anadjustment shall be made to the Restricted Shares granted hereby as the Committee, in its sole discretion, deems equitable or appropriate to prevent dilutionor enlargement of the rights of Grantee. 7. Additional Restrictions on Transfer. The Restricted Shares issued hereunder shall be subject to any additional restrictions on transfer then ineffect pursuant to the certificate of incorporation or by-laws of the Company. 8. Withholding. Pursuant to Section 17.1 of the Plan, the Company may require Grantee to remit to the Company the minimum amount necessary tosatisfy all applicable income and employment taxes required to be withheld by the Company in connection with this Agreement. 9. Section 83(b). The Grantee understands that Section 83 of the Code taxes as ordinary income the difference between the amount paid, if any, forthe Restricted Shares and the fair market value of the Restricted Shares on each Vesting Date. The Grantee understands that he may elect, pursuant to Section83(b) of the Code, to be taxed at the time the Restricted Shares are granted rather than when and as the Restricted Shares vest by filing a Section 83(b)election with the Internal Revenue Service within 30 days from the date the Restricted Shares are transferred to Grantee. Grantee understands that failure tomake this filing timely shall result in the recognition of ordinary income by the Grantee on the fair market value of the Restricted Shares as the RestrictedShares become vested and nonforfeitable. GRANTEE ACKNOWLEDGES THAT IT IS GRANTEE’S SOLE RESPONSIBILITY, AND NOT THE COMPANY’STO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF GRANTEE REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKETHIS FILING ON GRANTEE’S BEHALF.  10. Plan. This Agreement and all rights of Grantee under this Agreement are subject to all of the terms and conditions of the Plan, which areincorporated herein by reference. In the event of a conflict or inconsistency between the terms and conditions of this Agreement and the Plan, the terms andconditions of the Plan shall govern. Grantee agrees to be bound by the terms of the Plan and this Agreement. Grantee acknowledges having read andunderstood the Plan and this Agreement. Unless otherwise expressly provided in other sections of this Agreement, provisions of the Plan that conferdiscretionary authority on the Board or the Committee do not (and shall not be deemed to) create any rights in Grantee unless such rights are expressly setforth herein or are otherwise in the sole discretion of the Board or the Committee so conferred by appropriate action of the Board or the Committee under thePlan after the date hereof. 11. Entire Agreement. This Agreement and the Plan together constitute the entire agreement and supersede all prior understandings and agreements,written or oral, of the parties hereto with respect to the subject matter hereof. This Agreement may be amended only by a written agreement executed by theCompany and Grantee. 12. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original butall of which together shall constitute one and the same instrument. 13. Section Headings. The section headings of this Agreement are for convenience of reference only and shall not be deemed to alter or affect anyprovision hereof. 14. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware withoutregard to conflict of law principles thereunder. BY EXECUTING THIS AGREEMENT, GRANTEE ACCEPTS PARTICIPATION IN THE PLAN, ACKNOWLEDGES THAT HE HAS READ ANDUNDERSTANDS THE PROVISIONS OF THIS AGREEMENT AND THE PLAN, AND AGREES THAT THIS AGREEMENT AND THE PLAN SHALLGOVERN THE TERMS AND CONDITIONS OF THIS AWARD. IN WITNESS WHEREOF, the Company and Grantee have duly executed this Agreement effective as of the Date of Grant set forth above. NET ELEMENT, INC. By:_________________________________Print Name: __________________________Its: ________________________________ GRANTEE ___________________________________Signature___________________________________Print Name  Exhibit 21.1 LIST OF SUBSIDIARIES Name Jurisdiction of Incorporation or OrganizationAptito, LLCA&R Music Holding, LLC FloridaFloridaNet Element Services, LLC FloridaNetLab Systems IP LLC FloridaNetlab Systems, LLC FloridaOOO Net Element Russia RussiaOOO TOT Group RussiaOOO TOT Group Russia RussiaOOO TOT Money RussiaTech Solutions LTD Cayman IslandsTOT Group, Inc. DelawareTOT Group Europe LTDTOT Group CyprusTOT Group Kazakhstan LLCTOT Group Ukraine LLC U.K.CyprusKazakhstanUkraineTOT Payments, LLC FloridaProcess Pink, LLC FloridaTOT HPS, LLC FloridaTOT FBS, LLC FloridaTOT New Edge, LLC FloridaTOT BPS, LLC FloridaUnified Portfolios, LLC Florida  Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Net Element, Inc.Miami, Florida We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-186621, No. 333- 182076 and No. 333-199432)and Form S-8 (333-195476) of Net Element, Inc. of our report dated March 30, 2015, relating to the consolidated financial statements, at and for the yearended December 31, 2014, which appear in this Form 10-K. Our report contains an explanatory paragraph regarding the Company’s ability to continue as agoing concern. /s/ DASZKAL BOLTON LLPFort Lauderdale, Florida March 30, 2015  Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Net Element, Inc.Miami, Florida We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-182076 No. 333-186621 and No. 333-199432) andForm S-8 (No. 333-195476) of Net Element, Inc. of our report dated April 15, 2014, relating to the consolidated financial statements, as of and for the yearended December 31, 2013, which appear in this Form 10-K. Our report contains an explanatory paragraph regarding the Company’s ability to continue as agoing concern. /s/ BDO USA, LLPCertified Public AccountantsMiami, Florida March 30, 2015  Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, Oleg Firer, certify that: 1.I have reviewed this annual report on Form 10-K of Net Element, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. March 30, 2015By:/s/ Oleg Firer Date Oleg Firer Chief Executive Officer (Principal Executive Officer)  Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, Jonathan New, certify that: 1.I have reviewed this annual report on Form 10-K of Net Element, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. March 30, 2015By:/s/ Jonathan New Date Jonathan New Chief Financial Officer (Principal Financial Officer andPrincipal Accounting Officer)  Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Annual Report on Form 10-K of Net Element International, Inc. for the year ended December 31, 2014, each of theundersigned hereby certifies pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the undersigned’sknowledge: (i) such Annual Report on Form 10-K of Net Element International, Inc. for the year ended December 31, 2014 fully complies with therequirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) the information contained in such Annual Report on Form 10-K of NetElement International, Inc. for the year ended December 31, 2014 fairly presents, in all material respects, the financial condition and results of operations ofNet Element International, Inc. March 30, 2015By:/s/ Oleg Firer Date Oleg Firer Chief Executive Officer (Principal Executive Officer) March 30, 2015By:/s/ Jonathan New Date Jonathan New Chief Financial Officer (Principal Financial Officer andPrincipal Accounting Officer) A signed original of this written statement required by Section 906 has been provided to Net Element International, Inc. and will be retained by Net ElementInternational, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 

Continue reading text version or see original annual report in PDF format above