Net Element, Inc.
Annual Report 2015

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, 2015 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 163rd 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, 2015 was approximately $15,248,991 (based upon the reported closing price of $0.3893 per share on June 30, 2015). The registrant had 113,045,246 shares of common stock outstanding as of March 30, 2016. DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Part III of this Annual Report on Form 10-K is incorporated by reference herein from the registrant's Definitive ProxyStatement for its 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the registrant's fiscal year ended December31, 2015.  Forward-Looking Statements This Annual Report on Form 10-K (this “Report”), including the section entitled “Management’s Discussion and Analysis of Financial Conditions andResults of Operation” and “Risk Factors”, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended. You should not rely upon forward-looking statements as predictions of future events.The events and circumstances reflected in the forward-looking statements may not be achieved or occur. All statements other than statements of historicalfact, including, statements regarding our future results of operations and financial position, our business strategy and plans, our objectives for futureoperations, and any statements of a general economic or industry specific nature, are forward-looking statements. You can identify forward-lookingstatements by the fact that they do not relate strictly to historical or current facts. 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 suchterms and similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events andtrends that we believe, based on information currently available to our management, may affect our financial condition, results of operations, businessstrategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks,uncertainties and assumptions, including those described in the "Risk Factors" section in Part I, Item 1A of this Report. Moreover, we operate in a verycompetitive and rapidly changing environment. 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 “SEC” or the “Commission”)) materialize, or if the assumptions underlying any of these statements proveincorrect, the Company’s actual results may be materially different from those expressed or implied by such statements. We undertake no obligation topublicly revise any forward-looking statement to reflect circumstances or events after the date of this Report to reflect the occurrence of unanticipated events.You should, however, review the factors and risks described in the reports we file from time-to-time with the SEC after the date of this Report. These factorsinclude, 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 SEC)materialize, or if the assumptions underlying any of these statements prove incorrect, the Company’s actual results may be materially different from thoseexpressed or implied by such statements. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or eventsafter the date of this Report to reflect the occurrence of unanticipated events. You should, however, review the factors and risks described in the reports wefile 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. 2  TABLE OF CONTENTS PagePART I Item 1.Business.4 Item 1A.Risk Factors.22 Item 1B.Unresolved Staff Comments.30 Item 2.Properties.30 Item 3.Legal Proceedings.30 Item 4.Mine Safety Disclosures.32 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.32 Item 6.Selected Financial Data.33 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.33 Item 7A.Quantitative and Qualitative Disclosures About Market Risk.41 Item 8.Financial Statements and Supplementary Data.41 Item 9.Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.41 Item 9A.Controls and Procedures.41 Item 9B.Other Information.43 PART III Item 10.Directors, Executive Officers and Corporate Governance.43 Item 11.Executive Compensation.43 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.43 Item 13.Certain Relationships and Related Transactions, and Director Independence.43 Item 14.Principal Accountant Fees and Services.43 PART IV Item 15.Exhibits and Financial Statement Schedules.43 Signatures 45 3  PART I Item 1. Business. Net Element, Inc., (“Net Element”) a Delaware corporation, is a holding company that conducts its operations through its subsidiaries. Net Element and itssubsidiaries are referred to collectively as the “Company,” “Net Element,” “we,” “us,” or “our,” unless the context requires otherwise. Company Overview Net Element is a global transaction processing technology and value-added solutions company that enables its clients to meet their transaction processingneeds through various integrated technology platforms, including in omni-channel environments that span across point-of-sale (“POS”), e-commerce andmobile devices. The Company operates in three operating segments as a provider of North America Transaction Solutions, Mobile Payment Solutions, OnlinePayment Solutions, and Corporate Overhead. We enable merchants of all sizes to accept and process credit, debit and prepaid payments and provide them value-added services and technologies, such asPOS solutions, security solutions and fraud management, information solutions and analytical tools. We provide a range of solutions to our clients across the value chain of commerce-enabling services and technologies. We create our value-added solutionsfrom a suite of proprietary technology products, software, cloud-based applications, processing services, security offerings, and customer support programsthat we configure to meet our clients’ individual needs. We provide additional services including: ·POS solutions and other adjacent business services throughout the United States provided by TOT Payments doing business as Unified Payments;·Proprietary cloud-based POS platform for the hospitality industry and small to medium sized businesses “SMB” merchants through Aptito andRestoactive;·Proprietary integrated e-commerce and mobile payments processing platform and fraud management system through PayOnline;·Integrated payment processing solutions to the travel industry, which includes integrations with various Global Distribution Systems (“GDS”) suchas Amadeus®, Galileo®, Sabre®, additional geo filters and passenger name record (PNR) through Pay-Travel service offered by PayOnline;·Integrated direct-carrier, mobile operator billing solution for small ticket content providers and merchants throughout selected emerging marketsprovided by Digital Provider. We have operations and offices located within the United States (U.S.) (domestic) and outside of the U.S. (international) where sales, customer service and/oradministrative personnel are based. Through U.S. based subsidiaries, the Company generates revenues from transactional services, valued-added paymentservices and technologies for small and medium-sized businesses (referred to as “Small and Midsized Businesses,” or “SMB”). Through internationalsubsidiaries, the Company operates its international business with a focus on transactional services, mobile payment transactions, online paymenttransactions and value-added payment services and technologies in emerging countries including Europe, Asia, Russian Federation and the Commonwealthof Independent States (“CIS”). Our subsidiaries Digital Provider and PayOnline hold market leadership positions in mobile and online payments segments inRussian Federation and CIS. Our total bankcard processing volume for the year ended December 31, 2015 was $1.8 billion, a 213% increase from processing volume processed duringyear ended December 31, 2014. Transactions processed for the year ended December 31, 2015 and 161 million, a 104% increase from transactions processedduring year ended December 31, 2014. Our business is characterized by transaction related fees, multi-year contracts, and diverse client base, which allows us to grow alongside our clients. Ourmulti-year contracts allow us to achieve a high level of recurring revenues with the same clients. While the contracts typically do not specify fixed revenuesto be realized thereunder, they do provide a framework for revenues to be generated based on volume of services provided during such contract’s term. 4  Recent Developments In 2015, 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 2015 were as follows: ·Digital Provider (formerly TOT Money), exceeded 3 million recurring mobile subscribers and experienced 171% subscriber growth from January2015 to October 2015. We also re-branded mobile payments from TOT Money to Digital Provider and began providing our own branded contentwhich we expect will increases future revenues significantly. Branded content is reported at the transaction amount billed to the mobile subscriber.·PayOnline expanded into Kyrgyzstan and signed a leading e-commerce company, Daroy.net·Digital Provider expanded into Kazakhstan by creating partnership agreements with VimpelCom and Kcell to provide mobile payment services tomillions of subscribers and capitalize on Kazakhstan's high growth mobile payments market.·Launched payment processing in Kazakhstan through partnership with Kazkommertsbank ("KAZKOM") and as a result signed premier online eventsticket operator, Kassir.com·Launched joint venture to focus on Gulf Cooperation Council states and India.·Expanded our Aptito service offerings to over 100 payment methods.·Product Launches:oLaunched Restoactive, a comprehensive mobile restaurant solution.oPayOnline launched "Pay-Travel" to automate payments for the travel industry including integration with GDS.oPayOnline launched new mobile payment solutions for iOS to existing Windows and Android processing capabilities.oDigital Provider launched proprietary Trinity Platform.oAptito added Europay, MasterCard® and Visa® “EMV” and mobile payments acceptance including Android Pay®, Apple Pay® andSamsung Pay® to its POS offering. 2015 Acquisition In May 2015, we completed the acquisition of PayOnline for a total consideration of up to $8.4 million ($3.6 million was paid in cash and $3.6 million waspaid in Company’s stock), additional consideration from earn-out incentives can be up to $1.282 million and payable 50% in cash and 50% in Company’sstock based on the performance of PayOnline. We funded the cash component of the acquisition with cash on hand obtained via issuances of preferred stock.PayOnline is a proprietary integrated e-commerce and mobile payments processing platform and fraud management system, which enables online paymentacceptance for multinational corporations looking to conduct business globally. Outlook For the year 2016, we will focus on strategic partnerships and innovative products that will further expand our services so that we are a convenient one-stopshop for payment services to a global merchant community. Our Mission and Vision Our mission is to power global commerce and allow our clients to conduct business globally. We believe that by understanding the consumer behavior andthe needs of our merchants is the most effective and, ultimately, the most profitable means to accomplish our mission and create long-term value for allstakeholders. We drive client growth through our in-depth knowledge of global transactional services and related value-added service offerings which separate us from thecompetition. Our vision is to set the standard for omni-channel payments acceptance and value-added service offerings with focus on creation of unified global transactionacceptance ecosystem. In order to achieve this vision, we seek to further develop single on-boarding, global transaction acceptance ecosystem. Manifesting this vision requiresscaling our direct and indirect connectivity to multiple payment and mobile networks internationally. By operationalizing this vision, we believe that wewill be able to provide centralized, global omni-channel transactional platform to our clients internationally. Our Strategy Our strategy is informed by our mission to power global commerce. To continue to grow our business, our strategy is to focus on providing merchants withthe ability to process a variety of electronic transactions across multiple channels. We seek to leverage the adoption of, and transition to, card, electronic anddigital-based payments by expanding share in our existing markets through our distribution channels and service innovation, as well as through acquisitionsto improve our offerings and scale, while also seeking to enter new markets through acquisitions around the world. We intend to continue to invest in andleverage our technology infrastructure and our people to increase our penetration in existing markets. 5  Key elements of our business strategy include: ·Continued investment in our core technology and new product offerings;·Allocation of resources and expertise to grow in commerce and payments segments;·Grow and control our distribution by adding new merchants and partners;·Leverage technology and operational advantages throughout our global footprint;·Expansion of our cardholder and mobile subscriber customer base;·Continue to develop seamless multinational solutions for our clients;·Increase monetization while creating value for our clients;·Focus on continued improvement and operation excellence; and·Pursue potential domestic and international acquisitions of, investments in, and alliances with companies that have high growth potential,significant market presence or key technological capabilities. With our existing infrastructure and supplier relationships, we believe that we can accommodate expected portfolio 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. 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. In addition, consumers are also beginning to use card-based and other electronic payment methods for purchases at an earlier age in life, and increasingly forsmall dollar amount purchases. Given these advantages of card-based payment systems to merchants and consumers, favorable demographic trends, and theresulting proliferation 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. 6  Business Segments North AmericaTransaction SolutionsMobileSolutionsOnline Solutions Clients:Businesses of all types and sizes. Currentfocus on SMB merchantsMobile customers, Digital merchantssuch as: social networks, gamedevelopers, online magazines, mobileapplications and digital mediaoperatorsOnline businesses and mobileapplications of all type and sizes Goals:To help business grow commerce at theretail, online and m- POSTo help digital merchants monetizetheir content in a mobile environmentTo help business transact businessonline with ease and security KeySolutions:· Merchant Acquiring· Value-added Services· Aptito POS technology· Business software· Marketing / Loyalty· Integrated mobile billing solutions· Content monetization· Content management· Merchant Acquiring· Electronic commerce· Security / Risk Management· Marketing / Loyalty 2015 SegmentRevenue:$27.4M, up 41% from 2014$9.0M, up 385% from 2014$3.8M (acquired May 20, 2015) We operate three reportable business operating segments: (i) North America Transaction Solutions, (ii) Mobile Solutions, and (iii) Online Solutions. Oursegments are designed to establish lines of businesses that support our client base and further globalize our solutions while working seamlessly with ourgeographic teams across our regions: United States and Canada (North America); Europe, Middle East, and Africa (EMEA); Asia Pacific (APAC) and the CIS.Management determines the reportable segments based on the internal reporting used by our Chief Operating Decision Maker to evaluate performance and toassess where to allocate resources. The principal revenue stream for all segments came from service and transaction related fees during 2015. Prior to May 20, 2015, we had a single reportable business segment: payment processing for electronic commerce. On May 20, 2015, we obtained financialand operational control of PayOnline, a provider of online payment processing of online transactions in emerging markets. Additionally, we rebranded ourmobile payments business to Digital Provider and began reporting gross revenues for mobile payments where we provide access to branded content. Giventhe size of assets and revenues from PayOnline and Digital Provider, we began reporting segment information for three operating segments during the thirdquarter of 2015. Comparative segment revenues and related financial information pertaining to our segments for the years ended December 31, 2015 and 2014 are presentedin the tables in Note 16, Segment Information, to our consolidated financial statements (the “Consolidated Financial Statements”), which are includedelsewhere in this Report. ·North America Transaction Solutions – This segment provides technology and services that businesses require to accept cashless transaction forretail card-present (or “swipe”), e-commerce or card-not-present mail order / telephone order (“MOTO”) transactions (referred to as “MerchantAcquiring”) as well as next-generation offerings such as mobile payment services, merchant performance analytical tools, merchant back officereporting, and our cloud-based Aptito POS platform, which includes hospitality, mobile POS (“m-POS”) and SMB retail point-of-sale applications(referred to as “Value-added Services”). ·Mobile Solutions – This segment provides a state-of-the-art, integrated mobile billing and mobile commerce solution for digital merchants, such as:social networks, game developers, online magazines, mobile applications and digital media operators to monetize their content in a mobileenvironment. Our mobile billing platform is positioned in the center of the mobile commerce for digital goods with billing checkout and offersvarious mobile payment solutions for web services and mobile applications. We provide mobile users with a simple, secure and fast way to pay forpurchases via mobile device, interactive device or web without a credit card or a bank account. Our mobile campaign tools allow for the delivery ofscalable mobile campaigns on behalf of our content partners. ·Online Solutions – This segment provides a wide range of value-added solutions utilizing our fully-integrated, processor agnostic electroniccommerce platform that simplifies complex enterprise online transaction processing challenges from payment acceptance and processing throughrisk prevention and payment security via point-to-point encryption and tokenization solutions. Our proprietary software-as-a-service (“SaaS”) suiteof solutions for electronic and mobile commerce gateway and payment processing platform is compliant at Level 1 of Payment Card Industry(“PCI”) Data Security Standards (“DSS”) streamlines the order-to-cash process, improves electronic payment acceptance and reduces the scope ofburden of PCI DSS compliance. North America Transaction Solutions Segment The following table presents North America Transaction Solutions segment information as a percentage of total revenue: 2015 2014 Segment revenue 68% 91% 7  North America Transaction Solutions Operations. Our largest segment, North America Transaction Solutions, where through our subsidiary TOT Payments,LLC, doing business as Unified Payments, we provide businesses of all sizes and types with a wide range of solutions at the point sale, including MerchantAcquiring, e-commerce, mobile commerce, POS and other business solutions. Our largest service in this segment is Merchant Acquiring, which facilitates theacceptance of cashless transactions at the POS, whether a retail transaction at a physical business location, a mobile commerce transaction through a mobileor tablet device, which includes m-POS acceptance, Android Pay™, Apple Pay™ and Samsung Pay or an electronic commerce transaction over the web.Geographical presence for this segment is North America. Our North America Transaction Solutions segment revenues are primarily derived from processing credit and debit card transactions for SMB merchants andincludes fees for providing processing, loyalty and software services, and sales and leases of POS devices. Revenues are generated from a variety of sources,including: ·Discount fees charged to a merchant for processing of a transaction. The discount fee is typically either a percentage of the purchase amount or aninterchange fee plus a fixed dollar amount or percentage;·Processing fees charged to merchants for processing of a transaction;·Processing fees charged to our sales partners who have outsourced their transaction processing to us;·Sales and leases of POS devices;·Fees from providing reporting and other services;·Software license fees for Aptito POS platform, which includes hospitality and SMB retail point-of-sale application;·PCI compliance fees charged to a merchant for providing PCI compliance on annual basis; and·Business software license fees for merchant analytics and back office reporting. For example, in a transaction using a Visa or MasterCard card, the allocation of funds resulting from a $100 transaction follows. * Does not include agent commission payments. We typically provide our services as part of a broader payment acceptance solution to our business clients across multiple channels, including: ·Retail Merchants – physical businesses or storefront locations, such as retailers, supermarkets, restaurants, hotels and other brink and mortarfacilities, which we refer to as Retail. We supply our Retail merchants with POS terminals from leading manufacturers, which are Europay®,MasterCard®, and Visa® (commonly referred to as “EMV” or “Chip”) compliant and Near Field Communication (“NFC”) capable, accepting allcard brands and products, as well as alternative payment forms, such as Android Pay™, Apple Pay™ and Samsung Pay.·Mobile Merchants – physical businesses with remote or wireless storefront locations, such as small retail and service providers that use mobiledevices with POS capabilities to accept electronic payments, which we refer to as Mobile; and·Online – online businesses or website locations, such as retailers, digital content providers, and mobile application developers with Internet-basedstorefronts that can be accessed through a personal computer or a mobile device, where we refer to as e-commerce. North America Transaction Solutions Marketing. We employ a variety of go-to-market strategies in our North America Transaction Solutions segment. Wemostly partner with indirect non-bank sales forces (“Sales Partners”), such as independent sales agents, independent sales groups (“ISG”), independentsoftware vendors (“ISV”), value added resellers (“VAR”), and payment services providers (“PSP”) to sell our payment solutions to SMB merchants. Webelieve that this sales approach provides us with access to an experienced sales force to market our services with limited investment in sales infrastructure andmanagement time. We believe our focus on the unique needs of SMB allows us to develop compelling offerings for our sales channels to bring to prospectivemerchants and provides us with a competitive advantage in our target market. 8  Sales & Marketing Support – Among the services and capabilities, we provide are rapid application response time, merchant application acceptance by fax oron-line submission, superior customer service, merchant reporting and robust analytics. In addition, by controlling the underwriting process we believe weoffer the ISGs more rapid and consistent review of merchant applications than may be available from other service providers. Additionally, in certaincircumstances, we offer our sales organizations tailored compensation programs and unique technology applications to assist them in the sales process. Wekeep an open dialogue with our sales partners to address their concerns as quickly as possible and work with them in investigating chargebacks or potentiallysuspicious activity with the aim of ensuring our merchants do not unduly suffer downtime or the unnecessary withholding of funds. Sales & Marketing Compensation – As compensation for their referral of merchant accounts, we pay our Sales Partners an agreed-upon recurring commission,or percentage of the income we derive from the transactions we process from the merchants they refer to us. The amount of the recurring commissions we payto our Sales Partners varies on a case-by-case basis and depends on several factors, including but not limited to the number and type of merchants each grouprefers to us. We provide additional incentives to our sales partners, including, from time to time, advances and merchant acquisition bonuses that are securedby income earned from the referred merchant and repayable from future compensation that may be earned by the groups in respect to the merchants they havereferred to us. For the year ended December 31, 2015 and 2014, we had provided merchant acquisition incentives to Sales Partners in an aggregate amount of$0.87 million and $0.34 million, respectively. Our organic growth plan calls for future incentives to be funded to our Sales Partners for referred merchants. Sales & Marketing Pilot – In 2015, we have launched a pilot direct sales program for North America Transaction Solutions segment focusing on marketingour key products and services directly to the potential clients – merchants. Sales leads are generated primarily by our digital marketing efforts, such as searchengines, social media and paid advertisement on other websites. We maintain fully automated and paperless process of client acquisition, where potentialclients complete merchant application online, are certified by electronic signature, data received electronically with underwriting and boarding performed inour Sales Central platform. North America Transaction Solutions. Our solutions are designed to help SMB merchants accept cashless payments in an omni-channel paymentenvironment, which spans across POS, e-commerce and mobile devices. Aptito POS Platform – We acquired Aptito, an integrated POS platform developed on Apple’s® iOS mobile operating system for the hospitality industry, inJune 2013 and invested in the technology to significantly enhance and expand its capabilities and features. Our goal with Aptito is to create an easy to usePOS and business management solution, which incorporates everything a small business needs to help streamline every-day management, operations andpayment acceptance. We have expanded the family of Aptito products to include Aptito Hospitality POS, Aptito Retail POS and Restoactive. §Aptito Hospitality POS – proprietary, fully integrated cloud-based POS and restaurant management system developed on Apple’s® iOS mobileoperating system is designed to be used as a stand-alone all digital POS or be extended to include: m-POS, self ordering kiosk, digital menus, pay atthe table EMV and NFC ready card readers, cash drawers, receipt and kitchen printers. The need for uptime in a hospitality environment isparamount and as such our Aptito Hospitality POS local server allows our merchants to remain online, even if the Internet connection to the cloud islost. Our local server solution is automatically synchronized with the cloud, providing 99.99% uptime. ·Aptito Retail POS – cloud-based POS solution is available on Apple® iOS and Android® mobile operating platforms and allows retailers to focus ontheir business and improve the in-store experience. Retailers are able to customize Aptito Retail POS based on their environment. Peripherals forAptito Retail POS include a fully integrated cash drawer, thermal receipt printer, barcode scanner, barcode printer and EMV-compliant point of saleacceptance terminal. This allows retailers the ability to customize their POS solution based on their unique needs. The need for uptime in a retailenvironment is paramount and as such our Aptito Retail POS local server allows our merchants to remain online, even if the Internet connection tothe cloud is lost. Our local server solution is automatically synchronized with the cloud, providing 99.99% uptime. ·Restoactive – utilizing Aptito POS Platform architecture, we have developed and launched Restoactive, which seamlessly plugs into a currentrestaurant environment through integrations with some of the biggest POS and restaurant management platforms such as: MICROS®, POSitouch®,Aloha® and Symphony®. By integrating into the leading POS and restaurant management platforms, Restoactive is now accessible by over 500,000restaurants in the United States. We believe Restoactive to be the first of its kind integrated platform, which introduces all-in-one digital menu, kioskand m-POS application into an existing POS environment without the need to displace existing restaurant management platforms. In addition to enhancing our ability to drive core merchant acquiring sales, Aptito allows us to earn incremental revenue from business clients. Currently, theAptito revenue model is based on a SaaS fee, which we bill on a per station basis and additional services fee, which we bill for additional applications weoffer. We also believe Aptito can help enhance client retention because we believe it will become core to our client’ businesses and position us as a value-addedpartner. For example, business owners may use Aptito business management tools to manage their employees’ work schedules, payroll, patron reservations,operate customer loyalty programs, manage inventory, and provide analytics on their business. 9  Other POS Platforms – We act as an authorized dealer for various POS manufacturers and POS software providers and deploy these systems where ourproprietary products are not the best fit. Systems we offer are fully integrated with our payment acceptance capabilities. Merchant Management Platform – We have developed Sales Central, a proprietary cloud-based merchant management platform. Designed to enhanceresponsiveness of our sales partners and improve sales efficiency. The cloud-based solution provides to both Sales Partners and merchants an integratedtoolkit to more effectively manage a variety of sales, operations, reporting and accounting functions. The system is designed to improve conversion rates,technology advisory functions and to reduce deployment time for merchants. It also allows troubleshooting of merchant issues in real-time. Sales Central iscurrently one of the few cloud-based systems nationwide that allows Sales Partners to onboard and monitor merchants on multiple processing platformsthrough a single interface. ·Sales Central for Sales Partners – allows Sales Partners to onboard merchants on multiple processing platforms available in the U.S. Its merchantunderwriting and boarding process is seamless and paperless. Merchant Library allows Sales Partners to safely store and retrieve any agreement, formor contract, related to merchants. Sales Partners that utilize the system are equipped with merchant pricing, residual calculations and riskmanagement modules, which allow easier management of most of their day-to-day operations. Sales Partners compensation and merchantprofitability can be managed using multi-level, single-click, drill-down navigation to pricing, detail, summary and statement information. ·Sales Central On the Go – fully integrated, digital onboarding interface designed for Sales Partners and merchants, streamlines and automatesmerchant account sign-up process, delivers real-time decisions and paperless boarding approval from online and mobile devices. Mobile boardingcapability facilitates API-driven, instant boarding to multiple payment processing platforms and provides new merchants with a modular approachfor providing their personal and business information. The platform manages underwriting, risk assessment, merchant ID assignments and iscompliant with banking standards such as Know Your Customer regulations. ·Sales Central for Merchants – integrated reporting, accounting and analytics back office solution for SMB merchants. A variety of reporting toolsalong with easy to understand charts enables merchants to analyze sales and improve performance. The ticket system allows merchants directcommunication with Company’s service and technical support designed to improve the customer service experience. ·Unified Insights – the integrated Unified Insights module is a business dashboard focused on “Big Data” that gives merchants a 360-degree view oftheir business in a more usable formats. With Unified Insights, merchants can compare current revenue, online reputation, and social media activityto their past performance and to similar business in their area. North America Transaction Solutions Competition. Many large and small companies compete with us in providing payment processing services and relatedservices to a wide range of merchants. Many of our current and prospective competitors have substantially greater financial, technical and marketingresources, larger customer bases, longer operating histories, more developed infrastructures, greater name recognition and/or more established relationships inthe industry than we have. Because of this our competitors may be able to adopt more aggressive pricing policies than we can, develop and expand theirservice offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisitionsand other opportunities more readily, achieve greater economies of scale, and devote greater resources to the marketing and sale of their services. There arealso many smaller transaction processors that provide various services to small and medium sized merchants. See “Risk Factors - Risks Related to OurBusiness and Operations - The markets in which we operate are very competitive, and many of our competitors and potential competitors are larger, moreestablished 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 indirect non-bank sales forces, gives us a competitive advantage over larger competitors, which have a broadermarket perspective and priorities. We also believe that we have a competitive advantage over competitors of a similar or smaller size that may lack ourextensive experience, value-added product offering and resources. North America Transaction Solutions Industry Mix and Geography. In the United States, we have developed significant expertise in industries that webelieve present relatively low risks as the customers are generally present and the products or services are generally delivered at the time the transaction isprocessed. These include: ·Restaurants·Schools and educational services·Brick and mortar retailers·Convenience and liquor stores·Professional service providers·Hotel and lodging establishments 10  Merchants we served during 2015 processed an average of $12,757 each month in credit card transactions and had an average transaction value of $36.40 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. Out total North America Transaction processing volume for the year ended December 31, 2015 was $1 billion, a 73% increase over processing during the yearended December 31, 2014. Transactions processed for the year ended December 31, 2015 was 51.5 million, a 45.5% increase from transactions processedduring the year ended December 31, 2014. As of December 31, 2015, approximately 47.9% of our SMB merchants were restaurants and 15.9% were schools and educational services. The highconcentration in restaurants reflects the efforts of our sales team actively targeting our Aptito product line. The following table reflects the percentageconcentration of our merchant base by class: 2015 2014 Restaurants 47.9% 44.34%Schools & Educational Services 15.9% 17.59%Retail 6.0% 5.15%Convenience, Fast Food & Liquor 5.7% 4.75%Professional Services 3.8% 3.16%Lodging 1.2% 1.54%Other 19.5% 23.47% In December 2015, SMB merchants located in the following states represented the following percentage of our SMB card processing volume: New Yorkrepresented 25.5%, New Jersey represented 7.2%, North Carolina represented 6.7%, California represented 6.5% and Florida represented 6.0%, respectively.No other state represented more than 3.7% of our total SMB card processing volume. Our geographic concentration trends to reflect states where we maintainstronger sales force. We believe that the loss of any single SMB merchant would not have a material adverse effect on our financial condition or results ofoperations. North America Transaction Solutions Risk Management. In the United States, we focus our sales efforts on low-risk bankcard merchants and have developedsystems and procedures designed to minimize our exposure to potential merchant losses. Effective risk management helps us minimize merchant losses for the mutual benefit of our merchants, Independent Sales Groups and ourselves. OurUnderwriting and Risk Management Policy and procedures help to protect us from fraud perpetrated by our merchants. We believe our knowledge andexperience in dealing with attempted fraud has resulted in our development and implementation of effective risk management and fraud prevention systemsand procedures. In 2015, we experienced losses of .008% of our SMB card processing volume. We employ the following systems and procedures to minimize our exposure to merchant and transaction fraud: ·Merchant Application 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 the Company 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 and this 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, 2015, our reservebalance was $350,596. The reserve is replenished as required by funding 0.03% of bankcard processing volume. This reserve is accounted for on ourbalance 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, 2015, our total reserve deposits were approximately $570,253. 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. 11  North America Transaction Solutions Sponsoring Banks and Data Processors. Because we are not a “member bank” as defined by Visa, MasterCard,American Express and Discover (“Card Associations”), in order to authorize and settle payment transactions for merchants, we must be sponsored by afinancial institution that holds member bank status with Card Association (“Sponsorship Bank”) and various third-party vendors (“Data Processors”) to assistus with these functions. Card Association rules restrict us from performing funds settlement or accessing merchant settlement funds and require that thesefunds be in the possession of a Sponsorship Bank until the merchant is funded. Sponsoring Bank. We have agreements with several banks that sponsor us for membership in the Visa, MasterCard, American Express and Discover cardassociations and settle card transactions for our merchants. The principal Sponsoring Bank through which we process the majority of our transaction in theUnited States is BMO Harris Bank. In addition, in February 2016, we entered into a bank identification (“BIN”) sponsorship agreement with Esquire Bank,N.A. From time to time, we may enter into agreements with additional banks. See “Risk Factors – Risks Related to Our Business and Operations – We rely onbank sponsors, which have substantial discretion with respect to certain elements of our business practices, in order to process bankcard transactions. If thesesponsorships are terminated and we are not able to secure or successfully migrate merchant portfolios to new bank sponsors, we will not be able to conductour business.” Data Processor. We have agreements with several Data Processors to provide us with, on a non-exclusive basis, transaction processing and transmittal,transaction authorization and data capture, and access to various reporting tools. Our primary processing vendor in the United States is Priority PaymentSystems, LLC (“Priority”), which provides us with the processing conduit to Total System Services, Inc. (“TSYS”) and First Data Resources, LLCauthorization and settlement network. We have entered into several service agreements with Priority. Each of the Priority service agreements may beterminated by Priority if, among other things, (i) certain insolvency events occur with respect to us or (ii) we fail to maintain our good standing with CardAssociations. We may terminate each of the agreements if, among other things, (i) certain insolvency events occur with respect to Priority, (ii) Prioritymaterially breaches any of the terms, covenants or conditions of the agreements and fails to cure such breach within 30 days following receipt of writtennotice thereof, or (iii) under certain circumstances, Priority 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 payment transaction. There are four mainparticipants, the Merchant, the Service Provider (Unified Payments), the Sponsoring Bank and the Data Processor. Merchants are primarily business ownersthat accept credit card payment in exchange for their merchandise and services. Mobile Solutions Segment The following table presents Mobile Solutions Segment information as a percentage of total revenue: 2015 2014 Segment revenue 22% 9% Mobile Solutions Operations. In emerging markets, especially Russian Federation and the CIS, where we hold leadership position, through our subsidiaryDigital Provider, we enable mobile payment acceptance utilizing direct billing access to mobile network operators (“MNO”). In Russian Federation throughstrategic direct agreements and integrations with marketing companies owned by the top 3 MNOs such as Mobile TeleSystem (MTS), MegaFon andVimpelCom, we enable mobile payments acceptance for networks that serve a combined 390 million mobile users. In January 2016, we have reached a company milestone by exceeding 3 million recurring mobile payment subscribers. As of December 31, 2015, our mobilepayments subscriber base consisted of more than 2.4 million recurring mobile payments subscribers. Our total Mobile Solutions transactions processed for the year ended December 31, 2015 was 90 million, a 106% increase from transactions processed duringthe year ended December 31, 2014. Our mobile billing platform is positioned in the center of the mobile commerce for digital goods with billing checkout and offers various mobile paymentsolutions for web services and mobile applications. We provide mobile users with a simple, secure and fast way to pay for purchases via mobile device,interactive device or web without a credit card or a bank account. Utilizing the source of funds that carriers have already integrated into every mobile phone(a monthly bill for post paid phones and stored credit for prepaid phones), merchants won’t need to collect any customer credit card or bank information tocomplete their sale. Our mobile campaign tools allow for the delivery of scalable mobile campaigns on behalf of our content partners. 12  Digital Provider’s current customers span across variety of industries and operate across different markets. Our clients include mobile operator designatedcompanies, merchants, content and service providers. Our platform is used by over a thousand merchants. Our Mobile Solutions segment revenues are primarily derived from processing of a mobile transactions for digital merchants, such as: social networks, gamedevelopers, online magazines, mobile applications and other digital media operators to monetize their content in a mobile environment and includes fees forproviding processing, content management and distribution, and software services. In addition, in 2015, we began offering mobile users our Digital Providerbranded content, which we acquire from multiple content providers. Revenues are generated from a variety of sources, including: ·Fees charged for Digital Provider branded content;·Discount fees charged to a merchant for processing of a transaction. The discount fee is a percentage of the purchase;·Processing fees charged to merchants for processing of a transaction; and·Software license fees for Trinity Mobile Billing Platform. For example, in a transaction using a mobile device as a form of payment, the allocation of funds resulting from a $10 transaction from our branded contentfollows. Mobile Solutions Marketing. We employ a variety of go-to-market strategies in our Mobile Solutions segment. We mostly partner with mobile operators,broadcast media networks, internet portals and content providers, and marketing and sales promotion partners. ·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 Networks – Mobile operator billing is becoming an increasingly popular communication tool on both radio & TV. It providesinteractivity for the viewer/listener through voting/polls/competitions, and can generate revenues for the stations/production companies.·Internet Portals and Content Providers – Mobile operator billing adds a further dimension to the offering of portals and content providers. Itenables information alerts, ringtones and logos, Short Messaging Service (“SMS”) sending facility for end-users, all of which can generate revenuesfor the Company.·Marketing and Sales Promotion Partners – Mobile operator billing is being used as a new marketing channel. Its immediacy; directness and 2-waycommunication lends itself to effective measurable marketing and promotion. Integration with existing media adds a new dimension to marketingcampaigns (e.g. outdoor, press, on-pack, and direct mail). Other industries using mobile messaging and mobile billing solutions include banking, retailing, brokering, tourism, transportation, games, and education. Mobile Solutions. Our solutions are designed to help digital merchants accept mobile payments transactions utilizing direct billing access to MNOs inemerging markets. Trinity Mobile Billing Platform – We have developed, Trinity Platform, proprietary high-performance mobile acceptance, billing and content aggregationplatform for value-added services (“VAS”). With the help of Trinity Platform, our partners can aggregate mobile traffic utilizing the most popular methods ofmonetization on the VAS market. ·One-Click – Securely identify and validate subscriber handsets automatically with no additional input required from consumers. One-Click providessubscribers a seamless cross channel shopping and registration experience across personal computers, tablets, smartphones, and other web-enableddevices. One-Click is available for both recurring subscriptions and one-time transactions. ·PIN Submit – Securely authenticates mobile subscribers by generating a one-time secure Personal Identification Number (“PIN”), which is sent tomobile users via SMS. ·Optimized Checkout – Payment conversion with carrier billing is currently ten times higher than with credit cards due to a much simpler check-outflow. We have taken this one step further as the Trinity Platform automatically recognizes the device being used and optimizes the checkoutwindow to provide the best purchase experience possible on any device. 13  ·In-App Payments – Industry-leading native in-app purchasing SDK enables application developers to integrate direct-carrier billing intoapplications with ease. One integration process works across multiple smartphone and tablet devices. ·Reporting and Analytics – Trinity Platform’s powerful dashboard provides our digital merchants and content providers with a real-time overview ofrevenue and reports on processed transactions: which countries have the biggest number of users, how much these users are paying and whichcontent is more popular. This data helps our digital merchants and content providers fine-tune their monetization strategy. Mobile Solutions Competition. Digital Provider primarily competes with other companies operating in the mobile payment processing market in emergingmarkets. Certain competitors have been in business longer than Digital Provider and have significantly greater financial and other resources than DigitalProvider. In order to successfully increase our business in that market, we must convince content providers to use Digital Provider’s services over competitiveplatforms that may already be in use. Digital Provider must also retain good relations with MNOs providing service. We believe that Digital Provider will beable to effectively compete in the mobile payment processing market in Russia based primarily upon services offered, functionality and ease of use offeatures offered. Failure to successfully continue developing Digital Provider’s payment processing operations, maintain Digital Provider’s existing contractswith MNOs and content providers and enter into additional contracts with content providers to use Digital Provider’s services may harm our revenue andbusiness prospects. Mobile Solutions Risk Management. We are responsible for content compliance and merchant underwriting and are subject to chargebacks for the full valueof the transaction. If any such chargebacks arise we pass these chargebacks to our merchants, in the event we are unsuccessful in passing these charges to themerchant we are responsible for these chargebacks. In 2015 we had no losses from our mobile payments processing volume as all chargebacks were collectedfrom content partners and aggregators. Mobile Solutions Licensing and Certifications. The relationships between Digital Provider and telecommunications carriers in Russia are governed by thegeneral rules of civil law for the provision of services (Chapter 39 of the Civil Code of the Russian Federation). In addition, because the “information andentertainment services” (content services) provided by Digital Provider are inextricably linked with the networks of telecommunications carriers, theseservices are subject to the requirements of the Rules of Mobile Communications Services Provision, approved by the Decree of the Russian FederationGovernment dated May 25, 2005 No. 328. These Rules govern the relationship between a customer using mobile communication services and atelecommunications carrier in respect of mobile radio communications services, mobile radiotelephone services and/or mobile satellite radio services in thepublic network. Although Digital Provider is not a telecommunications carrier, many requirements of such rules are present in Digital Provider’s contractswith telecommunications carriers, and such contracts impose responsibility and liability on Digital Provider for violations. Digital Provider has a license to provide telematics services in Russia. Digital Provider is considered an operator of telematics services in Russia because ithas a direct connection to equipment of telecommunications carriers and it affects 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. Digital Provider also is subject to the Rules of Telematics Services Provision approved by the Decree of theRussian Federation 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 telematics communication services, on the other hand, in the provision of telematics communication services. Mobile Solutions Mobile Network Operators. In order for us to provide payment and SMS messaging services to mobile subscribers and debit their accountsfor payments, we need to have contractual agreements with marketing subsidiaries of mobile operators, which allow us to bill mobile subscribers. We havedirect and indirect agreements with mobile operators and mobile operator aggregators in over 40 countries. The three largest mobile operators through whichwe process the majority of our transactions are: Mobile TeleSystem OJSC (“MTS”), MegaFon OJSC (“MegaFon”) and OJSC VimpelCom (“VimpelCom”).These contracts with mobile operator subsidiaries, allow us to facilitate payments using SMS, Multimedia Messaging Services (“MMS”) and WAP for theirmobile phone subscribers. From time to time, we may enter into agreements with additional mobile operators and mobile operator aggregators. In addition,we also have contracts and our platform is integrated with various mobile operator aggregators, which give us access to mobile operator networks inapproximately 50 countries. As an example of processing a mobile transaction, the below diagram illustrates the participants involved in a mobile payment transaction. There are six mainparticipants, the Mobile User, the Mobile Operator, the Transaction Processor (Digital Provider), the Merchant, the Processing Platform (Trinity Platform)and the Mobile Applications. Merchants are primarily content or digital goods providers such as: social networks, games and online magazines. 14  Online Solutions Segment The following table presents Online Solutions Segment information as a percentage of total revenue: 2015 2014Segment revenue 10% 0% Acquired May 20, 2015 Online Solutions Operations. Through our subsidiary, PayOnline, we provide a wide range of value-added solutions utilizing our fully-integrated, platformagnostic electronic commerce offering that simplifies complex enterprise online transaction processing challenges from payment acceptance and processingthrough risk prevention and payment security via point-to-point encryption and tokenization solutions. Our proprietary software-as-a-service (“SaaS”) suiteof solutions for electronic and mobile commerce gateway and payment processing platform is compliant at Level 1 of Payment Card Industry (“PCI”) DataSecurity Standards (“DSS”) streamlines the order-to-cash process, improves electronic payment acceptance and reduces the scope of burden of PCI DSScompliance. PayOnline holds the leadership position in the Russian Federation as the largest Internet Payment Services Provider (“IPSP”). Our Online Solutions segment revenues are primarily derived from processing credit and debit card transactions for online merchants and includes fees forproviding processing, loyalty and software services. Revenues are generated from a variety of sources, including: ·Discount fees charged to a merchant for processing of a transaction. The discount fee is typically a percentage of the purchase amount; ·Processing fees charged to merchants for processing of a transaction; ·Processing fees charged to our sales partners who have outsourced their transaction processing to us; ·Fees from providing reporting and other services; ·Software license fees for PayOnline White-label platform; and ·Business software license fees for merchant analytics and back office reporting. There are other possible configurations of transactions that result in us receiving multiple fees for a transaction, depending on the role we play. For example, in a transaction using a Visa or MasterCard card, the allocation of funds resulting from a $100 transaction follows. * Excludes commissions Approximately 20% of leading e-commerce merchants in Russia use the PayOnline platform to accept payment transactions in Russia, Europe and Asia. Online Transaction Solutions Marketing. The vast majority of PayOnline sales are direct sales, through our marketing efforts and fully automated leadsmanagement system. The marketing department of PayOnline consists of 5 specialists, responsible for product pricing, company branding and positioning,monitoring of competitors and technological developments, public relations and web marketing activities. Our marketing mix includes, but not limited to: 15  ·Search Engine Optimization – PayOnline is in the top 10 results with most frequently used keywords in Google.ru and Yandex search engines.·Social Media – PayOnline social media channels include Facebook, Vkontakte, Twitter, YouTube.·Corporate Blog – Our corporate blog featured on popular developer communities like HabraHabr and GeekTimes is consistently in the Top 10.·Industry Research – Every year PayOnline specialists prepare and publish over 120+ research papers on popular e-commerce and IT developmentforums.·RUNET – PayOnline is a payment processing provider for RUNET-ID (Russia’s largest Internet professionals’ social platform), Russian InternetForum and Russian Interactive Week.·Conferences – Every year our experts participate in 30+ trade shows and professional conferences.·Education – Our senior managers are frequently invited by top Russian Federation universities and business schools as lecturers. Our sales department consists of 25 specialists who are responsible for managing the leads, execution of the client agreements, client boarding, customizationof the solutions, implementation of the payment acceptance solutions and post-sale client relationship. In 2015 we have attracted 380 new clients, of which89% were in Russian Federation / CIS and 11% in Europe and Asia. Online Solutions. Our solutions combine payment processing, online shopping cart tools, web site design, web hosting and web related services which enablebusinesses to establish a presence and commercial capability on the Internet in a quick and simple fashion. PayOnline Platform – We have developed the PayOnline Platform, a proprietary technology platform serving large and fast growing internet-ledmultinationals with complex payment needs, supported by our vertical expertise. Our reliable and secure proprietary technology platform enables merchantsto accept a vast array of payment types, across multiple channels, anywhere in the world. Utilizing PayOnline Platform we have built easy and convenientsuite of payment products that serve multiple channels and include: ·Pay-Start – Turn-key, out of the box solution for fast payment acceptance.·Pay-Standard – Individually customized solutions with anti-fraud system and maximum conversion rate.·Pay-Travel – Fully-integrated payment processing solutions to the travel industry, which includes integrations with various Global DistributionSystems (“GDS”) such as Amadeus®, Galileo®, Sabre®, additional geo filters and passenger name record (PNR).·Pay-Mobile – Mobile payments solution, which enables card acceptance from applications developed on Apple iOS, Android and Microsoft mobileplatforms.·Pay-Foreign – Complete payment solution for international electronic commerce merchants. Payments from Start to Finish. PayOnline Platform reduces the payment integration time for merchants, banks and SaaS providers to just a few minutes withits PayOnline Application Program Interface (“API”) service. Easy, easier, easiest: PayOnline integration service simplifies complex payment integrationwhen using APIs and makes the laborious task of adapting payment processes obsolete. A complete, modular system of web-based services gives our merchants the flexibility to add more options as and when required - without costly or lengthyIT projects. Anti-Fraud System – We have developed and continue to improve our proprietary fraud-monitoring system. It includes more than 150 different filters at thepresent moment. To ensure the highest security level, our anti-fraud system is operating in tight connection with our internal 3-D Secure MPI module.Proprietary fraud filters and anti-fraud BIN monitoring allows disabling and filtering acceptance of virtual pre-paid cards. Online Solutions Competition. PayOnline primarily competes with other companies operating in the online payment processing market in emerging markets.In our key geographical market – Russian Federation, we compete primarily with the acquiring banks and payment processors (including paymentaggregators). PayOnline cannot compete with acquiring banks or payment processors on pricing. Our major advantages relate to our robust, paymentprocessor agnostic solution that simplifies complex enterprise online payment processing challenges from payment acceptance and processing through torisk prevention and payment security via tokenization solutions. Our competitive advantages include: ·Suite of individually tailored e-commerce solutions·Payment conversion management·Seamless client payment acceptance implementation·Quick development and implementation of custom payment acceptance solutions·Multiple integrated payment acceptance methods·Wide geography of payment acceptance·26 currencies accepted worldwide·Proprietary PayOnline Anti-Fraud System 16  Online Solutions Industry Mix and Geography. We have developed significant expertise in industries that we believe present opportunities for growth.These include: ·Internet stores·Professional service providers·Travel services·Telecommunications·Social media networks·Financial services·Utilities and government services·Digital content providers Merchants we served during 2015 processed an average of $40,600 each month in credit card transactions and had an average transaction value of $25.00 pertransaction. The following table reflects the percentage concentration of our merchant base by class: 2015 2014 Internet Stores 31.2% 29.6%Professional Service 21.1% 20.3%Travel Services 11.0% 15.2%Telecommunications 8.2% 8.1%Social Media Networks 8.1% 6.8%Financial Services 7.7% 11.3%Utilities and Government Services 6.3% 5.1%Digital content providers 5.3% 3.6%Other 1.1% – Online Solutions Risk Management. In the emerging markets, we focus our sales efforts on electronic commerce merchants and have developed systems andprocedures designed to minimize our exposure to potential merchant losses. Effective risk management helps us minimize merchant losses for the mutual benefit of our merchants and ourselves. Our Anti-Fraud System allows us toidentify and prevent up to 99.9% of potential fraud related to bankcard processing in the electronic commerce environment. Our Underwriting and RiskManagement Policy and procedures help to protect us from fraud perpetrated by our merchants. 150 different fraud filters allow our clients to maintain highlevel or payment conversion, averaging at 99.2%, while maintaining chargeback related losses as low as 0.02%. Our risk management is conducted in both manual and automatic modes. Manual Risk Management involves specialists of our Underwriting and Risk Management Department, who are responsible for the following: ·Analysis of risks and underwriting of our partners, i.e. acquiring banks, financial companies and payment processors·Analysis of potential risks and underwriting of our potential clients, i.e. merchants accepting payments over internet·Manual validation of disputed payments·Advising of our potential and current clients on how to correctly setup up fraud monitoring methods and tools·Future development of our fraud monitoring and prevention systems, based on the client needs and recent trends in e-commerce and m-commercemarketplace and regulations PayOnline Anti-Fraud System is our proprietary Fully Automated Risk Management system. The system is based on the latest know-how of the informationaland financial security aspects of the payment processing industry, as well as rules and recommendations of Visa and MasterCard on fraud prevention inelectronic commerce. Major components of PayOnline Anti-Fraud System include but are not limited to: ·Advance monitoring of the bank card transaction in automated mode, using 150 filters, individually tuned for each client, where each transaction isevaluated by key parameters, such as country where bank card is issued, country from where the payment is requested, amount of payment, amountof all payments by this card in the past 24 hours/month, IP address, etc.·Additional validation of the bankcard by using 3-D Secure protocol or validation by charging random amount on the card.·Monitoring of the transactions by specialists of the Underwriting and Risk Management Department. Online Solutions Licensing and Certifications. In order to perform services at the highest level of safety and quality of service, PayOnline holds variousindustry certifications and licenses. ·PCI DSS 3.1 Level 1 – PayOnline is certified to Payment Card Industry Data Security Standard (“PCI DSS”) Level 1 standard version 3.1 PCI DSS.Certificate received by PayOnline October 31, 2014, allows the company to process online payment transactions.·SDP / CISP – PayOnline has passed international certification by Visa and MasterCard and is involved in MasterCard Site Data Protection (“SDP”)program and the Visa Cardholder Information Security Program (“CISP”).·MasterCard – Since 2009, PayOnline is accredited as the official international Service Provider of MasterCard Worldwide, participates in theMasterCard SDP program, in additional has the status of MasterCard DataStorage Entity.  17  ·Visa –Since 2009, PayOnline is accredited as the official Service Provider of Visa International payment system, participates in the Visa CISPprogram and holds the status of Visa Third Party Processor (“TPP”).·Cryptographic Transport Layer Security (“TLS”) Protocol – Data exchange between the enterprise e-commerce and PayOnline is made via securechannels, using the HTTPS protocol. TLS cryptographic protocol uses asymmetric cryptography for authentication, symmetric encryption forconfidentiality and authenticity of the message codes to preserve the integrity of messages.·Qualys – PayOnline regularly passes ASV-scan procedure (automated external security audit) in accordance with the requirements of internationalpayment systems to companies with certified PCI DSS. Provider ASV-scanning service is the company Qualys. 50 companies from the Forbes Global100 list uses Qualys to secure their business. Online Solutions Sponsoring Banks and Data Processors. Because we are not a “member bank” or a licensed financial services institution as defined byVisa, MasterCard, American Express and Discover (“Card Associations”), in order to authorize and settle payment transactions for merchants, we must bepartner with a financial institution that holds member bank status with Card Association (“Partner Bank”) and various third-party vendors (“Data Processors”)to assist us with these functions. Card Association rules restrict us from performing funds settlement or accessing merchant settlement funds and require thatthese funds be in the possession of a Partner Bank until the merchant is funded. Partner Bank. Since 2008, PayOnline has been working to increase the number of partnership agreements and platform integrations with different banks,financial institutions and payment processors. Our worldwide expansion requires a broader range of regions and currencies covered by such partnershipagreements, enabling us to provide international payment processing. Our key partnerships and integrations in Russian Federation include: ·Bank of Moscow·QIWI Bank·VTB 24·WebMoney·Raiffesenbank·Yandex.Money Our key partnerships and integrations in Europe, Asia and United States include: ·Latvijas Pasta Banka·Kyrgyzkommertsbank·Rietumu Bank·Paysafe·Wirecard Bank·Authorize.net·Kazkommertsbank·Skrill·Kazkommertsbank Tajikistan·PayPal As an example of processing an electronic payment, the below diagram illustrates the participants involved in a payment transaction. There are four mainparticipants, the Merchant, the Service Provider (PayOnline), the Partner Bank and the Data Processor (PayOnline). Merchants are primarily business ownersthat accept credit card payment in exchange for their merchandise and services. Research and Development We recognize the importance of having access to the leading technology in order to develop advanced products for our customers, independent sales agents,consumers and for our own internal use. To this end, development of our products is conducted in-house. We are maintaining three development centers andfour development teams of IT engineers, quality assurance professionals, programming code writers, Apple® iOS, Android®, and Windows Phone® mobileplatform engineers, UX and UI designers, dedicated to financial services and value-added technology business. Our IT development center is headquartered in North Miami Beach, Florida (U.S.), where we employ a Chief Technology Officer (“CTO”), (supervising all ITdevelopment centers and teams), IT Systems Administrator and POS products Testing & Development Engineer. Our Moscow (Russia) IT development center employs two divisional CTOs, managing Digital Provider and PayOnline platform development teamsrespectively. Our representative office in Yekaterinburg (Russia) employs two team leaders managing Sales Central and our POS platforms development teamsrespectively. Divisions IT HeadcountNet Element (U.S.) 2Net Element (Russia) 1Digital Provider 2PayOnline 20NetLabs 19Total IT Employees as of December 31, 2015 44 18  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: ·Net Element·Restoactive·Unified Payments·TOT·Unified Payments·Digital Provider experience, confidence, growth·PayOnline·Sales Central·Payonline.ru·Aptito·Process Pink 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. Employees Our total number of staff as of December 31, 2015 was 152 full-time employees and 1 consultant. The staff in the United States is 25 employees and 1consultant. Additionally, in Russia we have 127 employees consisting of 16 employees at Digital Provider (mobile payments), and 18 employees at NetElement Russia (Executives/Accounting), 74 employees at PayOnline (online payments) and 19 employees in Yekaterinburg (System Development). Corporate History 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, which was a company with businesses in the online media and mobile commercepayment processing markets. Immediately prior to the effectiveness of the Merger, the Company (then known as Cazador) changed its jurisdiction ofincorporation by discontinuing as an exempted company in the Cayman Islands and continuing and domesticating as a corporation incorporated under thelaws of the State of Delaware. Effective upon consummation of the Merger, (i) Net Element, Inc. was merged with and into the Company, resulting in NetElement ceasing to exist and the Company continuing as the surviving company in the Merger, and (ii) the Company changed its name to Net ElementInternational, Inc. In 2013, the Company divested its non-core entertainment assets. In December 2013, the Company changed its name to Net Element, Inc.We entered the mobile payments business through the launch of Tot Money (renamed Digital Provider in 2015) in Russia in 2012. We entered the financialtechnology and value-added transactional service business through the acquisitions of Unified Payments in April 2013 and Aptito in June 2013. We enteredthe online payment business with our acquisition of PayOnline in May 2015. Our principal office is located at 3363 NE 163rd Street, Suite 705, North MiamiBeach, Florida 33160, and our main telephone number is (305) 507-8808. 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, Digital Provider, aresubject to regulation in non-U.S. markets it operates in and may become subject to the laws and regulations of additional foreign jurisdictions as and when itsbusiness expands into additional markets. Many domestic and foreign laws and regulations that affect companies conducting business on the Internet andcompanies transmitting user information and payments via text message or other electronic means are still evolving and the interpretation of such laws andregulations are often 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 Digital Provider tomobile phone carriers also are subject to certain of the rules and policies of such carriers and ongoing contractual covenants with such carriers, the violationof which may result in penalties and/or fines and possible termination of Digital Provider’s services. Certain of our services are also subject to rules set byvarious payment networks, such as Visa and MasterCard, as more fully described below under “Association and Network Rules”. Association and Network Rules. While not legal or governmental regulation, we are subject to the network rules of Visa, MasterCard and other paymentnetworks. In order to provide processing services, a number of our subsidiaries are registered with Visa and/or MasterCard as service providers for memberinstitutions. Various subsidiaries of ours are also processor level members of numerous networks or are otherwise subject to various network rules inconnection with processing services and other services we provide. As such, we are subject to applicable card association, networks and national scheme rulesthat could subject us to fines or penalties. The payment networks routinely update and modify their requirements. On occasion, we receive notices of non-compliance and fines, which might be related to excessive chargebacks by a merchant or data security failures. Our failure to comply with the networks’requirements or to pay the fines they impose could cause the termination of our registration and require us to stop providing payment services. 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. TheDodd-Frank Act has resulted in significant structural and other changes to the regulation of the financial services industry. Among other things, the Dodd-Frank Act established the 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. 19  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. Federal Trade Commission Act and Other Laws Impacting our Customers’ Business. All persons engaged in commerce, including, but not limited to, us andour merchant and financial institution customers are subject to Section 5 of the Federal Trade Commission Act prohibiting unfair or deceptive acts orpractices, or UDAP. In addition, there are other laws, rules and or regulations, including the Telemarketing Sales Act, that may directly impact the activities ofour merchant customers and in some cases may subject us, as the merchant’s payment processor, to investigations, fees, fines and disgorgement of funds in theevent we are deemed to have aided and abetted or otherwise provided the means and instrumentalities to facilitate the illegal activities of the merchantthrough our payment processing services. Various federal and state regulatory enforcement agencies including the Federal Trade Commission, or FTC, andthe states’ attorney general have authority to take action against nonbanks that engage in UDAP or violate other laws, rules and regulations and to the extentwe are processing payments for a merchant that may be in violation of laws, rules and regulations, we may be subject to enforcement actions and as a resultmay incur losses and liabilities that may impact our business. Rules and Policies of and Contractual Covenants with Mobile Phone Carriers. While not governmental regulation, Digital Provider is subject to certain ofthe rules and policies of mobile phone carriers to which Digital Provider provides payment processing services and ongoing contractual covenants with suchmobile phone carriers. The mobile phone carriers may from time to time update or otherwise modify or supplement their rules and policies. Digital Providerperiodically is subject to the imposition of fines or penalties as a result of failure to comply with such rules, policies and/or contractual covenants. DigitalProvider’s failure to comply with the mobile phone carriers’ respective requirements or to pay the fines or penalties they impose could result in thetermination of Digital Provider’s services. Laws and Rules of the Russian Federation. The relationships between Digital Provider (formerly known as TOT Money) and telecommunications carriers inRussia 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 by Digital Provider are inextricably linked with the networks oftelecommunications carriers, these services are subject to the requirements of the Rules of Mobile Communications Services Provision, approved by theDecree of the Russian Federation Government dated May 25, 2005 No. 328. These Rules govern the relationship between a customer using mobilecommunication services and a telecommunications carrier in respect of mobile radio communications services, mobile radiotelephone services and/or mobilesatellite radio services in the public network. Although Digital Provider is not a telecommunications carrier, many requirements of such Rules are present inDigital Provider’s contracts with telecommunications carriers, and such contracts impose responsibility and liability on Digital Provider for violations. Digital Provider has a license for the provision of telematics services in Russia. Digital Provider is considered an operator of telematics services in Russiabecause it has a direct connection to equipment of telecommunications carriers and it affects electronic communications (i.e., receiving, processing and/ortransmitting electronic messages). Operators of telematics services in Russia are regulated by the Federal Law “On Communication” dated July 2, 2003 No.126-FZ. This Federal Law provides the legal basis for activity in the field of communications in the Russian Federation and territories under the RussianFederation jurisdiction, defines the powers of public authorities in the field of communications, as well as the rights and responsibilities of persons involvedin such activities or using communication services. Digital Provider also is subject to the Rules of Telematics Services Provision approved by the Decree ofthe Russian Federation Government dated September 10, 2007 No. 575. These Rules govern the relationship between a customer or a user, on the one hand,and a telecommunications carrier providing telematics communication services, on the other hand, in the provision of telematics communication services. 20  The activity of Digital Provider 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 ofguarantees in the process of operational and investigative operations. Operational and investigative activities include activities carried out openly andsecretly by operational branches of certain government bodies in order to protect life, health, rights and freedoms of the person and the citizen, property,security of the society and the state from criminal attacks. In carrying out activities on the Internet in Russia, Digital Provider 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. Digital Provider’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. Concerning relations with Federal communication service providers, Digital Provider can be involved in regulation of personal data of subscribers. In case oftransferring by Federal communication service providers’ information which includes personal data Digital Provider has to take measures to protect such dataas the operator of personal data must take. The list of such measures is described in Federal Law “On Personal Data” dated 27.07.2006 No 152. This FederalLaw and Federal Law “On Communication” establish rules of usage of personal data of subscribers. Taking into account that this regulation is to be appliedonly in case of transferring information with personal data from Federal communication service providers it is important to clarify that common execution ofcontracts with these providers do not stipulate transferring of personal data. Other Laws and Regulations Since we collect certain information from members and users on our platform, it will be subject to current and future government regulations regarding thecollection, use and safeguarding of consumer information over the Internet and mobile communication devices. These regulations and laws may involvetaxation, tariffs, user privacy, rights of publicity, data protection, content, intellectual property, distribution, electronic contracts and other communications,consumer protection and electronic payment services. In many cases, it may be unclear how existing laws governing issues such as property ownership, salesand other taxes, libel and personal privacy apply to the Internet or mobile communication services as the vast majority of these laws were adopted prior to theadvent 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. 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. 21  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 SEC. You can read our SEC filings over the Internet at the SEC’s website at www.sec.gov. Our filings with the SEC, including our Annual Report onForm 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, also are available free of charge on theinvestors section of our website at http://investor.netelement.com when such reports are available on the SEC’s website. Further corporate governanceinformation, including our certificate of incorporation, bylaws, governance guidelines, board committee charters, and code of business conduct and ethics, isalso 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. 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 with all of theother 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 and Operations 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 lose theirentire investment. Since our inception, we have incurred significant operating losses. We sustained a net loss of approximately $13.3 million for the year ended December 31,2015 and an accumulated deficit of approximately $144.0 million at December 31, 2015. While we had negative working capital of approximately $3.1million at December 31, 2015, our current assets at December 31, 2015 included $5.2 million of accounts receivable and advances to aggregators. As of thefiling date of this Report with the SEC, management expects that our cash flows from operations and remaining unrestricted cash will not be sufficient to fundour current operations through 2016. We will require additional capital in order to continue our existing business operations and to fund our obligations. Wecurrently believe that we will require an additional $3.6 million in financing to continue operations as currently conducted, continue our payment processingbusinesses 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 financing on termssatisfactory 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 of our assets.Any equity 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. 22  Global economic, political, and other conditions may adversely affect trends in consumer, business, and government spending, which may adversely impactthe demand for our services and our revenue and profitability. Financial services, payments, and technology industries in which we operate depend heavily upon the overall level of consumer, business, and governmentspending. A sustained deterioration in the general economic conditions (including distress in financial markets, turmoil in specific economies around theworld, and additional government intervention), particularly in the United States or Europe, or increases in interest rates in key countries in which we operatemay adversely affect our financial performance by reducing the number or average purchase amount of transactions involving payment cards. A reduction inthe amount of consumer spending could result in a decrease of our revenue and profits. The current threats to global economic growth include geopoliticalinstability in Russia, Ukraine, the Middle East and other oil producing countries. Instability in these regions could affect economic conditions in theEurozone and the U.S.Adverse economic trends may accelerate the timing, or increase the impact of, risks to our financial performance. Such trends may include, but are not limitedto, the following: ·Declining economies, foreign currency fluctuations, and the pace of economic recovery can change consumer spending behaviors, such as cross-border travel patterns, on which a significant portion of our revenues are dependent.·Low levels of consumer and business confidence typically associated with recessionary environments and those markets experiencing relativelyhigh unemployment, may cause decreased spending by cardholders.·Budgetary concerns in the United States and other countries around the world could affect the United States and other specific sovereign creditratings, impact consumer confidence and spending, and increase the risks of operating in those countries.·Emerging market economies tend to be more volatile than the more established markets we serve in the United States and Europe, and adverseeconomic trends may be more pronounced in such emerging markets.·Financial institutions may restrict credit lines to cardholders or limit the issuance of new cards to mitigate cardholder defaults.·Uncertainty and volatility in the performance of our clients' businesses may make estimates of our revenues, rebates, incentives, and realization ofprepaid assets less predictable.·Our clients may decrease spending for value-added services.·Government intervention, including the effect of laws, regulations, and /or government investments in our clients, may have potential negativeeffects on our business and our relationships with our clients or otherwise alter their strategic direction away from our products. A weakening in the economy could also force some retailers to close, resulting in exposure to potential credit losses and declines in transactions, and reducedearnings on transactions due to a potential shift to large discount merchants. Additionally, credit card issuers may reduce credit limits and become moreselective in their card issuance practices. Changes in economic conditions could adversely impact our future revenues and profits and result in a downgradeof our debt ratings, which may lead to termination or modification of certain contracts and make it more difficult for us to obtain new business. Any of thesedevelopments could have a material adverse impact on our overall business and results of operations. Our ability to anticipate and respond to changing industry trends and the needs and preferences of our clients and consumers may affect ourcompetitiveness or demand for our products, which may adversely affect our operating results. Financial services, payments, and technology industries are subject to rapid technological advancements, new products and services, including mobilepayment applications, evolving competitive landscape, developing industry standards, and changing client and consumer needs and preferences. We expectthat new services and technologies applicable to the financial services, payments, and technology industries will continue to emerge. These changes intechnology may limit the competitiveness of and demand for our services. Also, our clients and their customers continue to adopt new technology forbusiness and personal uses. We must anticipate and respond to these changes in order to remain competitive within our relative markets. For example, ourability to provide innovative POS technology to our merchant clients could have an impact on our North America Transaction Solutions segment. Failure to develop value-added services that meet the needs and preferences of our clients could have an adverse effect on our ability to compete effectivelyin our industry. Furthermore, clients' and their customers' potential negative reaction to our products and services can spread quickly through social mediaand damage our reputation before we have the opportunity to respond. If we are unable to anticipate or respond to technological changes or evolvingindustry standards on a timely basis, our ability to remain competitive could be materially adversely affected. Substantial and increasingly intense competition worldwide in the financial services, payments, and technology industries may materially and adverselyaffect our overall business and operations. Financial services, payments, and technology industries are highly competitive and our payment solutions compete against all forms of financial services andpayment systems, including cash and checks, and electronic, mobile, and e-commerce payment platforms. If we are unable to differentiate ourselves from ourcompetitors, drive value for our clients and/or effectively align our resources with our goals and objectives, we may not be able to compete effectively. Ourcompetitors may introduce their own value-added or other services or solutions more effectively than we do, which could adversely impact our growth. Wealso compete against new entrants that have developed alternative payment systems, e-commerce payment systems, and payment systems for mobile devices.Failure to compete effectively against any of these competitive threats could have a material adverse effect on us. In addition, the highly competitive natureof our industry could lead to increased pricing pressure which could have a material impact on our overall business and results of operations. Potential changes in the competitive landscape, including disintermediation from other participants in the payments value chain, could harm our business. We expect that the competitive landscape will continue to change, including: 23  ·Rapid and significant changes in technology, resulting in new and innovative payment methods and programs that could place us at a competitivedisadvantage and that could reduce the use of our products.·Competitors, clients, governments, and other industry participants may develop products that compete with or replace our value-added products andservices.·Participants in the financial services, payments, and technology industries may merge, create joint ventures, or form other business combinationsthat may strengthen their existing business services or create new payment services that compete with our services.·New services and technologies that we develop may be impacted by industry-wide solutions and standards related to migration to EMV chiptechnology, tokenization, or other safety and security technologies. Failure to compete effectively against any of these competitive threats could have a material adverse effect on us. The market for our electronic commerce services is evolving and may not continue to develop or grow rapidly enough for us to maintain and increase ourprofitability. If the number of electronic commerce transactions does not continue to grow or if consumers or businesses do not continue to adopt our services, it couldhave a material adverse effect on the profitability of our business, financial condition, and results of operations. We believe future growth in the electroniccommerce market will be driven by the cost, ease-of-use, and quality of products and services offered to consumers and businesses. In order to consistentlyincrease and maintain our profitability, consumers and businesses must continue to adopt our services, including our merchant suite, Aptito and PayOnlinesolutions. 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 able tomaintain 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. 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 and merchantaccounting services and access to various reporting tools for the merchants we serve. We also outsource to third parties other services, such as reorganizingand accumulating daily transaction data on a merchant-by-merchant and card issuer-by-card issuer basis and forwarding the accumulated data to the relevantbankcard associations. Many of these organizations and service providers are our competitors, and we do not have long-term contracts with most of them.Typically, our contracts with these third parties are for one-year and are subject to cancellation upon limited notice by either party. The termination by ourservice providers of their arrangements with us or their failure to perform their services efficiently and effectively may adversely affect our relationships withthe 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, we willnot 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 MasterCard operatingregulations require us to be sponsored by a bank in order to process bankcard transactions. We are currently registered with Visa and MasterCard through thesponsorship of banks that are members of the card associations. The principal sponsoring bank through which we process the significant majority of ourtransactions is BMO Harris Bank. If our sponsorships are terminated and we are not able to secure or successfully migrate merchant portfolios to new banksponsors, 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 these associationscould 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 applicable requirements of theVisa or MasterCard payment card associations, Visa or MasterCard could suspend or terminate our registration. The termination of our registration or anychanges in the Visa or MasterCard rules that would impair our registration could prevent us from providing transactional processing services. 24  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 debit cards.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 and evolvingindustry standards. Advances in technology may result in changing customer preferences for products and services and delivery formats and any such changein preferences may be rapid. Clients may choose to move or develop equivalent services in-house. If we fail to enhance our current products and services anddevelop new products and services in response to changes in technology, industry standards or customer preferences, our business could rapidly become lesscompetitive or obsolete. We could experience delays while developing and introducing new products and services and product and service enhancements,due to difficulties developing models, acquiring data or adapting to particular operating environments. Software errors or other defect errors in our productsand services could affect the ability of our products and services to work with other hardware or software products, could delay the development or release ofnew products or services or new versions of our products or services and could materially adversely affect our reputation and our business prospects, financialcondition and/or results of operations. To acquire and retain merchant accounts, we depend on independent non-bank sales force 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 that seek tointroduce to us, as well as our competitors, newly established and existing small merchants, including retailers, restaurants and other service providers.Generally, our agreements with ISGs are not exclusive and they have the right to refer merchants to other providers of transaction payment processingservices. Our failure to maintain our relationships with our existing ISGs and to recruit and establish new relationships with other ISGs could adversely affectour 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 and costlylitigation 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 have liabilityif we fail to protect this data in accordance with applicable laws and our clients’ specifications. The loss of data could result in significant fines and sanctionsby our clients or governmental bodies, which could have a material adverse effect on our business, financial condition and results of operations. Theseconcerns 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. Our operating results are subject to seasonality, and, if our revenues are below our seasonal norms during our historically stronger quarters, our financialresults 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 spending patterns.Historically, revenues have been weaker during the first quarter of the calendar year and stronger during the second, third and fourth quarters. If, for anyreason, our revenues are below seasonal norms during the second, third or fourth quarter, our business, financial condition and results of operations could bematerially adversely affected. New and potential governmental regulations designed to protect or limit access to consumer information could adversely affect our ability to provide, orthe 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 are consideringadopting, additional laws and regulations restricting the purchase, sale and sharing of personal information about customers. For example, the Gramm-Leach-Bliley Act requires non-affiliated third-party service providers to financial institutions to take certain steps to ensure the privacy and security of consumerfinancial information. We believe our present activities fall under exceptions to the consumer notice and opt-out requirements contained in this law for third-party service providers to financial institutions. However, the laws governing privacy generally remain unsettled. Even in areas where there has been somelegislative action, such as the Gramm-Leach-Bliley Act and other consumer statutes, it is difficult to determine whether and how existing and proposedprivacy 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. 25  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 our business,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 for theirservices. Application of these taxes is an emerging issue in our industry and taxing jurisdictions have not yet adopted uniform positions on this topic. If weare 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 to offsetsuch taxes, these taxes would negatively impact our profit margins. 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 our abilityto 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 potentiallyreduced (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. 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 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. In addition, if sanctions imposed on Russia cause increases in interest rates in Russia, the number or average purchaseamount of transactions in Russia made using electronic payments could be negatively affected, which would have an adverse effect on our results ofoperations. Further, consumer purchases of discretionary items could generally decline in Russia due to the potential adverse effect sanctions and generalpolitical instability may have on disposable income in Russia. A reduction in the amount of consumer spending in Russia could result in a decrease in ourrevenue 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, 2015, 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 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. 26  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 pursue strategicacquisitions in the future. On April 16, 2013, certain subsidiaries of TOT Group acquired substantially all of the business assets of Unified Payments, LLC, aDelaware limited liability company (“Unified Payments”), a provider of comprehensive turnkey, payment-processing solutions to small and medium sizebusiness 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, m-POS, mobile commerce application and self-ordering Apple® iPad®-based kiosk. On May 20, 2015, our subsidiaries TOT GroupEurope, Ltd. and TOT Group Russia LLC, entered into an agreement to acquire all of the assets and liabilities that comprise PayOnline. PayOnline’s businessincludes the operation of a protected payment processing system to accept bank card payments for goods and services. See Note 4 to our ConsolidatedFinancial Statements for additional information regarding this acquisition. Future acquisitions could divert management’s time and focus from operating ourbusiness. In addition, integrating an acquired company, business or technology is risky and may result in unforeseen operating difficulties and expenditures.Foreign acquisitions also involve unique risks related to integration of operations across different cultures and languages, currency risks and the particulareconomic, political and regulatory risks associated with specific countries. We may not accurately assess the value or prospects of acquisition candidates, andthe anticipated benefits from our future or even past acquisitions may not materialize. In addition, future acquisitions or dispositions could result inpotentially dilutive issuances of our equity securities, including our common stock, the incurrence of significant amounts of debt, contingent liabilities oramortization expenses, or write-offs of goodwill, any of which could negatively affect our financial 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 our directors,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 theindustry 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 on acombination 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 ofoperations. 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.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 to such claims,we may be exposed to, or threatened with, future litigation by other parties alleging that our technologies infringe their intellectual property rights. Anyintellectual property claims, regardless of their merit, could be time consuming, expensive to litigate or settle and could divert management resources andattention. An adverse determination in any intellectual property claim could require us to pay damages and/or stop using our technologies and other materialfound to be in violation of another party’s rights and could prevent us from licensing our technologies to others. In order to avoid these restrictions, we mayhave to seek a license. Such a license may not be available on reasonable terms, could require us to pay significant license fees and may significantly increaseour 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 of our business, we may beforced to limit our technologies and may be unable to compete effectively. Any of these adverse consequences could have a material adverse effect on ourbusiness 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 the terms ofour licensing arrangements. These types of disputes can be asserted by our licensees or prospective licensees or by other third parties as part of negotiationswith us or in private actions seeking monetary damages or injunctive relief or in regulatory actions. Requests for monetary and injunctive remedies assertedin claims like these could be material and could have a significant impact on our business prospects. Any disputes with our licensees, potential licensees orother third parties could materially adversely affect our business prospects, financial condition and results of operations. 27  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 the year endedDecember 31, 2015, we used two functional currencies - the Ukraine hryvnia and the Russian ruble - in addition to the U.S. dollar, and derived more than32% of our total net revenues from operations outside the United States in Russia and CIS. Operations were ceased in the Ukraine in February 2015 and wehave no further exposure to the Ukraine hryvnia after that date. Further, as of March 20, 2016, the foreign exchange rate for the Russian Ruble hasdeteriorated by approximately 13% as compared to the weekly rate at January 11, 2015. Because our consolidated financial statements are presented in U.S.dollars, we must translate net revenues, interest income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or atthe end of each reporting period. Therefore, increases or decreases in the value of the U.S. dollar against other major currencies will affect the amounts of ournet revenues, interest income, operating expenses and the value of balance sheet items, including intercompany assets and obligations. Because we haveoperations in Russia, our exchange rate risk is highly sensitive to the prevailing value of the U.S. dollar relative to the Russian ruble, which exchange rateshave fluctuated significantly in recent months as a result, in part, of the continuing instability in Ukraine and Syria as well as continued sanctions againstRussia. Fluctuations in foreign currency exchange rates, particularly the U.S. dollar against the Russian ruble, may materially adversely affect our financialresults. Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Many of theselaws and regulations are subject to change and uncertain interpretations, and could result in claims, changes to our business practices, increased cost ofoperations 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 Digital Provider to mobile phonecarriers also are subject to certain of the rules and policies of such carriers and ongoing contractual covenants with such carriers, the violation of which mayresult in penalties and/or fines and possible termination of Digital Provider’s services. For additional information, see “Business Description - Regulation” inPart I, Item 1 of this Report. Poor perception of our brand, business or industry could harm our reputation and adversely affect our business prospects, financial condition and resultsof 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 of unflatteringreports in blogs, video blogs and the media about our business and our business model. Any damage to our reputation could harm our ability to obtain andretain contracts with mobile phone carriers, content providers, advertisers and other customers, which could materially adversely affect our results ofoperations, 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, terroristattacks, 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 at high risk ofhurricane and flood damage. In addition, acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural 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 not located inMiami, Florida but may also be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems,which could lead to interruptions, delays, loss of critical data or the unauthorized disclosure of confidential information. Such service providers may not havesufficient protection or recovery plans in certain circumstances, and our insurance may not be sufficient to compensate us for losses that may occur. As werely heavily on our servers, computer and communications systems and the Internet to conduct our business, such disruptions could negatively impact ourability to run our business and either directly or indirectly disrupt our customers’ respective businesses, which could have an adverse effect on our businessprospects, 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 time consuming,difficult and costly for us to develop, implement and maintain the additional internal controls, processes and reporting procedures required by federalstatutes, 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. 28  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.” Risks Related to Our Securities: Kenges Rakishev, a director of the Company, owns a large portion of the Company’s common stock. Future sales or distributions of the Company’scommon stock in the public market by the Company or Mr. Rakishev could adversely affect the trading price of the Company’s common stock. At March, 2016, Kenges Rakishev, a director of the Company, owned approximately 18% of the Company’s common stock. Sales or distributions of asubstantial number of shares of the Company’s common stock by Mr. Rakishev in the public market, or the perception that these sales or distributions mightoccur, may cause the market price of the Company’s common stock to decline. In addition, we may sell equity securities in the future to obtain funds for general corporate, working capital, acquisitions or other purposes. We may sellthese securities at a discount to the then market price. Any future sales of equity securities will dilute the holdings of existing stockholders, possibly reducingthe value of their investment. Our merchants may be unable to satisfy obligations for which we may also be liable. We are subject to the risk of our merchants being unable to satisfy obligations for which we may also be liable. For example, we and our merchants acquiringalliances may be subject to contingent liability for transactions originally acquired by us that are disputed by the cardholder and charged back to themerchants. If we or the alliance is unable to collect this amount from the merchant because of the merchant’s insolvency or other reasons, we or the alliancewill bear the loss for the amount of the refund paid to the cardholder. We have an active program to manage our credit risk and often mitigate our risk byobtaining collateral. It is possible, however, that a default on such obligations by one or more of our merchants could have a material adverse effect on ourbusiness. Fraud by merchants or others could have a material adverse effect on our business, financial condition, and results of operations. We may be subject to potential liability for fraudulent electronic payment transactions or credits initiated by merchants or others. Examples of merchantfraud include when a merchant or other party knowingly uses a stolen or counterfeit credit, debit or prepaid card, card number, or other credentials to record afalse sales transaction, processes an invalid card, or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Criminalsare using increasingly sophisticated methods to engage in illegal activities such as counterfeiting and fraud. It is possible that incidents of fraud couldincrease in the future. Failure to effectively manage risk and prevent fraud would increase our chargeback liability or other liability. Increases in chargebacksor other liability could have a material adverse effect on our business, financial condition, and results of operations. Changes in card association and debit network fees or products could increase costs or otherwise limit our operations. From time to time, card associations and debit networks increase the organization and/or processing fees (known as interchange fees) that they charge. It ispossible that competitive pressures will result in us absorbing a portion of such increases in the future, which would increase our operating costs, reduce ourprofit margin, and adversely affect our business, operating results, and financial condition. In addition, the various card associations and networks prescribecertain capital requirements. Any increase in the capital level required would further limit our use of capital for other purposes. Our Common Stock may be delisted from The NASDAQ Capital Market, which could affect its market price and liquidity. We are required to continually meet the listing requirements of The NASDAQ Capital Market (including a minimum bid price for our common stock of $1.00per share) to maintain the listing of our common stock on The NASDAQ Capital Market. On June 19, 2015, we received a deficiency letter from TheNASDAQ Capital Market indicating that for 30 consecutive trading days our common stock had a closing bid price below the $1.00 per share minimum. Inaccordance with NASDAQ Listing Rules, we were provided a compliance period of 180 calendar days, or until December 16, 2015, to regain compliance withthis requirement. On December 17, 2015, we received a letter from The NASDAQ Capital Market notifying us that the initial period of 180 calendar dayspreviously provided to the Company to regain compliance with the requirement was extended for an additional 180 calendar day period, or until June 13,2016. We can regain compliance with the minimum closing bid price requirement if the bid price of our Common Stock closes at $1.00 per share or higher fora minimum of 10 consecutive business days. If we do not regain compliance with the minimum closing bid price requirement by June 13, 2016, TheNASDAQ Capital Market will provide written notice that our securities are subject to delisting. At such time, we would be entitled to appeal the delistingdetermination to a NASDAQ Listing Qualifications Panel. We have received Board and shareholder approval to facilitate a reverse stock split to increase thebid price of our common stock, if required. We cannot provide any assurance that our stock price will recover within the permitted grace period. 29  Any delisting of our common stock from The NASDAQ Capital Market could adversely affect our ability to attract new investors, reduce the liquidity of ouroutstanding shares of common stock, reduce our flexibility to raise additional capital, reduce the price at which our common stock trades and increase thetransaction costs inherent in trading such shares with overall negative effects for our stockholders. In addition, delisting of our common stock could deterbroker-dealers from making a market in or otherwise seeking or generating interest in our common stock, and might deter certain institutions and personsfrom investing in our securities at all. For these reasons and others, delisting could adversely affect our business, 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 1,500 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 December 2016. Net Element Russia leases approximately 2,033 square feet of office space in Moscow, Russia at annual rent of $66,514, as well as one corporate apartment atannual rent of $14,571. The current lease term for the office space expires on January 31, 2017 and we expect to renew this lease at that time. The currentlease term for the corporate apartment expires on February 28, 2017. We believe that these facilities are adequate for our anticipated needs. Item 3. Legal Proceedings. 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 was filed. On May 12, 2015 The Appellate Division of theSupreme Court overturned the dismissal ruling of the lower Court and reinstated the Plaintiffs case. The Parties are in the process of Discovery and TOTpayments will continue pursuit of its claims against First Data through the litigation process. OOO-RM Invest 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) that Plaintiffwould receive a 30% ownership stake in TOT Money International, LTD and/or receive shares of stock in the Company; (g) that Tcahai HairullaevichKatcaev would hold the position of General Director of TOT Money; (h) Plaintiff would provide TOT Money International, LTD with access to Plaintiff’soperating accounts; and (i) Plaintiff would transfer client accounts and contracts to TOT Money. Plaintiff claims that we breached our obligations pursuant tothat alleged oral agreement, and was seeking, among other things, compensatory damages in excess of $50 million. We filed multiple counterclaims againstthe Plaintiff. 30  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 2014, 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 dismissedin view of the Federal Court action. On October 1, 2015 the parties to the lawsuit entered into a confidential settlement agreement fully and finally resolving and settling any and all claimsagainst one another arising from the matters referenced in this lawsuit. As part of the settlement agreement, the parties also agreed to broad releasesprecluding legal action for any claims against one another, howsoever arising and whether referenced in the lawsuit or not. On October 2, 2015, the parties tothe lawsuit filed a Joint Stipulation of Settlement and the court entered an order administratively closing the case. 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”). Orkin was aformer employee 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 interest inownership” 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.The Company asserts that it never had any dealings with Orkin and strongly denies all allegations contained in the Complaint. On September 23, 2014, The Court upheld the Motion to set aside a default judgment previously entered against Unified Payments. On the Motion toDismiss (“demurrer”), Plaintiffs attorney filed an amended complaint to address certain deficiencies raised by our counsel. Requests for Discovery were servedon Plaintiff’s counsel who recently requested an extension for filing responses thereto. At the court hearing on our demurrer to the Plaintiffs First AmendedComplaint, the court gave the Plaintiff another opportunity to clarify its Complaint and Orkin filed a Second Amended Complaint in the California litigationon June 8, 2015. The Defendants filed a Demurrer in response. At a hearing on the matter, the judge sustained the Defendants demurrer to the breach offiduciary duty claim against Unified Payments and Net Element –essentially dismissing these claims. However, the judge allowed the contract and fraudclaims to proceed against all defendants. The parties recently took depositions of various Plaintiff and Defendant parties. Litigation is proceeding in the California Courts and the trial is currentlyscheduled for June 27, 2016. As the employment agreement between Orkin and FBS has an arbitration clause that is binding on Orkin in his lawsuit against Unified Payments for allegedbreach of the employment agreement, the parties agreed in early November 2014 to stipulate to arbitration in Florida and to stay the California proceedingspending the outcome of the arbitration. A Demand for Arbitration was served on the company on May 5th. The Company will be defending the claims set outin the Arbitration Complaint. The Company did not assume any of the contracts from the Unified Payments entity it acquired in 2013. The Companyunderstands that the Predecessor Unified entity has filed counterclaims against Orkin in the arbitration matter and that the Arbitration is scheduled forhearing at the end of May 2016. 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 continue to attempt service of process 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. 31  Zell recently filed a Motion to set aside the Court Order alleging he was unaware of the Court Proceedings. We are opposing the Motion. There was a hearingon August 26, 2015 on Zell’s motion to dissolve the injunction in place against him. The Court dismissed Zell’s Motion to dissolve the injunction and thecase is moving forward. Zell served Discovery demands on the Company that was addressed by legal counsel. The matter remains pending. Dan Hudson In August 2015, we, as plaintiff, commenced an action in the Miami-Dade Circuit Court, Florida against Dan Hudson for defamation of our Company andCEO and tortious interference with our business relationships. The Motion is for an injunction against Hudson enjoining him from posting any informationabout our Company and CEO on any website and enjoining him from contacting our business partners or investors. The Company has been unable to locatethe Defendant to serve process on him. This matter is proceeding. Mari Vanna In March 2016, the Company learned that Mari Vanna DC, LLC (“the Plaintiff”) had filed a lawsuit in the United States District Court for the District ofColumbia against Net Element and its TOT Group and Unified Payments subsidiaries. The Company has not been served any legal papers at this time but isaware of the filed suit. The Plaintiff alleges among other things, that the Company and its subsidiaries improperly withheld and failed to remit certain creditcard transaction proceeds they processed on behalf of the Plaintiff. The Company disputes the allegations in the lawsuit and has proactively entered intodiscussions with the Plaintiff to resolve this matter. The parties have tentatively reached a settlement of this matter. Item 4. Mine Safety Disclosures. Not applicable. 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 Quarter Ended High Low High Low March 31, $1.43 $1.03 $5.35 $3.15 June 30, 1.30 0.38 3.49 1.51 September 30, 0.63 0.12 3.49 0.88 December 31, 0.43 0.05 2.48 1.06 Holders As of December 31, 2015, our common stock was held by approximately 364 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 Plans 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. 32  Recent Sales of Unregistered Securities The Company did not sell any securities during the fiscal years ended December 31, 2015 and 2014 that were not registered under the Securities Act of 1933,as amended, 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 For the years ended December 31, 2015 and 2014, we did not repurchase any shares of our common stock. Item 6. Selected Financial Data. Not Applicable. 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 Prior to the third quarter of 2015, we operated in a single operating segment, that being a provider of transactional services and mobile payment solutions inthe United States and emerging countries, including the CIS. As of September 30, 2015, we operate three business segments. For additional information aboutour business segments, see “Business Segments” under Part I, Item 1 of this Report. Online Payment and Transaction Processing Business Mobile Payments We renamed our TOT Money subsidiary Digital Provider during 2015 in an effort to better brand our service offerings. We also began offering our ownbranded content. 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. 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. Revenue for access to branded content is recognized monthly asthe mobile subscribers purchase access to content. Collectability is assessed based on a number of factors, including transaction history with the customerand the credit worthiness of the customer. If it is determined that the collection is not reasonably assured, revenue is not recognized until collection becomesreasonably assured, which is generally upon receipt of cash. We record cash received in advance of revenue recognition as 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 2015, Digital Provider recovered approximately $0.1 million of advances previously reserved. During 2014,Digital Provider recovered approximately $1.6 million of advances previously reserved. For 2015 and 2014, we recognized $754,162 and $496,709 for net ACH rejects that occurred in the normal course of business. 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. 33  Results of Operations for the Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014 We reported a net loss attributable to common stockholders of $14,838,704 or ($0.23) per share for the year ended December 31, 2015 as compared to a netloss of $10,185,516 or ($0.27) per share for the year ended December 31, 2014. Our net loss for the years ended December 31, 2015 and 2014 primarilyresulted from our non-cash compensation, gains and loss on change in fair value of derivatives and gains and loss from debt extinguishment and general andadministrative expenses, as discussed further below. The following table sets forth our sources of revenues, cost of revenues and gross margins for the years ended December 31, 2015 and 2014. Gross Margin Analysis Twelve Twelve Months Ended Months Ended Increase / December 31, 2015 Mix December 31, 2014 Mix (Decrease) Source of Revenues North America Transaction Solutions $27,388,598 68% $19,373,877 91% $8,014,721 Mobile Solutions 9,043,705 22% 1,862,827 9% 7,180,878 Online Solutions 3,803,059 10% - 0% 3,803,059 Total $40,235,362 100% $21,236,704 100% $18,998,658 Cost of Revenues North America Transaction Solutions $23,497,808 86% $15,925,924 82% $7,571,884 Mobile Solutions 8,124,763 90% - 0% 8,124,763 Online Solutions 2,354,644 62% - 0% 2,354,644 Total $33,977,215 84% $15,925,924 75% $18,051,291 Gross Margin North America Transaction Solutions $3,890,790 14% $3,447,953 18% $442,837 Mobile Solutions 918,942 10% 1,862,827 100% (943,885)Online Solutions 1,448,415 38% - 0% 1,448,415 Total $6,258,147 16% $5,310,780 25% $947,367 Net revenues consist primarily of payment processing fees. Net revenues were $40,235,362 for the year ended December 31, 2015 as compared to$21,236,704 the twelve months ended December 31, 2014. The increase in net revenues is primarily due to organic growth of merchants in our North AmericaTransaction Solutions segment. In addition, we acquired and began consolidating revenues from our online solutions segments from PayOnline, acquired inMay of 2015 and we began generating revenues for branded content in our mobile solutions segment beginning the quarter ending September 30, 2015. Cost of revenues represents direct costs of generating revenues, including commissions, mobile operator fees, purchases of short numbers, interchangeexpense and processing fees. Cost of revenues for the twelve months ended December 31, 2015 were $33,977,215 as compared to $15,925,924 for the twelvemonths ended December 31, 2014. The year over year increase in cost of revenues of $18,051,291, is primarily a result of mobile costs which now includemobile operator fees and content provider costs for branded content. In addition, we continue to experience an increase in North America transaction volumeand there was $2,354,644 resulting from online solutions segment (PayOnline) operations (Acquired May 20, 2015). Gross Margin for the twelve months ended December 31, 2015 was $6,258,147, or 16% of net revenue, as compared to $5,310,780, or 25% of net revenue, forthe twelve months ended December 31, 2014. The primary reason for the decrease in the margin percentage was a change in revenue composition mix andassociated costs as well as full restructure of Mobile Solutions business in July 2014 as compared to new business model of Mobile Solutions business for2015. Our 2015 business mix had more branded content revenues which yield lower margins, and lower margins on revenues from North America TransactionSolutions, despite higher sales volume for 2015 versus 2014. Total operating expenses were $16,779,514 for the year ended December 31, 2015, as compared to total operating expenses of $12,558,233 for the yearended December 31, 2014. Total operating expenses for the year ended December 31, 2015 consisted of general and administrative expenses of, $13,616,781,a bad debt provision of $649,571 and depreciation and amortization of $2,513,162. For the year ended December 31, 2014, operating expenses consisted ofgeneral and administrative expenses of $11,353,244, recovery of loan losses of $1,153,147 and depreciation and amortization of $2,358,136. 34  The components of our general and administrative expenses are discussed below. General and administrative expenses were $13,616,781 for the year ended December 31, 2015 as compared to $11,353,244 for the year ended December 31,2014. General and administrative expenses for the years ended December 31, 2015 and 2014 consisted of operating expenses not otherwise delineated in ourConsolidated Statements of Operations and Comprehensive Loss, including non-cash compensation expense, salaries and benefits, professional fees, rent,filing fees and other expenses required to run our business, as follows: Twelve months ended December 31, 2015 Category North America TransactionSolutions Mobile Solutions Online Solutions Corporate Expenses& Eliminations Total Salaries, benefits, taxes and contractor payments $904,447 405,910 $332,961 $2,172,923 $3,816,241 Professional fees 465,680 12,326 789,197 2,296,682 3,563,885 Rent 3,438 3,439 74,945 393,986 475,808 Business development 31,661 780 77,074 - 109,515 Travel expense 170,578 23,806 24,844 102,928 322,156 Filing fees - - - 100,001 100,001 Transaction (gains) losses - 68,713 (69,480) (76,327) (77,094)Other expenses 507,002 523,451 46,231 (76,719) 999,965 Share based compensation - - - 4,306,304 4,306,304 Total $2,082,806 $1,038,425 $1,275,772 $9,219,778 $13,616,781 Twelve months ended December 31, 2014 Category North America TransactionSolutions Mobile Solutions Online Solutions Corporate Expenses& Eliminations Total Salaries, benefits, taxes and contractorpayments $886,353 392,362 $- $1,931,281 $3,209,996 Professional fees 482,215 459,832 - 1,218,570 2,160,617 Rent 6,000 28,487 - 425,311 459,798 Business development 11,498 - 57,237 68,735 Travel expense 200,967 14,428 - 87,898 303,293 Filing fees - - - 101,836 101,836 Transaction (gains) losses - 165,719 - (209,846) (44,127)Other expenses 462,449 15,791 - 347,522 825,762 Share based compensation - - - 4,267,334 4,267,334 Total $2,049,482 $1,076,619 $- $8,227,143 $11,353,244 Corporate non-cash compensation expense from share-based compensation was $4,306,304 for the year ended December 31, 2015 compared to $4,267,334for the year ended December 31, 2014. The non-cash compensation expenses were higher for the year ended December 31, 2015 due to additional executivestock based compensation versus the year ended December 31, 2014 Salaries, benefits, taxes and contractor payments were $3,816,241 for the year ended December 31, 2015 as compared to $3,209,996 for the year endedDecember 31, 2014, representing an increase of $606,245 as follows: Segment Salaries and benefits for thetwelve months endedDecember 31, 2015 Salaries and benefits for thetwelve months endedDecember 31, 2014 Increase / (Decrease) North America Transaction Solutions $904,447 $886,353 $18,094 Mobile Solutions 405,910 392,362 13,548 Online Solutions 332,961 - 332,961 Corporate Expenses & Eliminations 2,172,923 1,931,281 241,642 Total $3,816,241 $3,209,996 $606,245 35  The increase in salaries of $606,245 was due primarily to the increase of $332,961 of our online solutions segment salaries due to the May 20, 2015acquisition and consolidation of PayOnline. Corporate salaries increased $241,642 due to an increase in corporate headcount for two new managementpositions. Professional fees were $3,563,885 for the year ended December 31, 2015 as compared to $2,160,617 for the year ended December 31, 2014, representing aincrease of $1,403,268 as follows: Twelve months ended December 31, 2015 Professional Fees North AmericaTransactionSolutions Mobile Solutions Online Solutions Corporate Expenses &Eliminations Total General Legal $62,163 $1,732 $10,533 $557,355 $631,783 SEC Compliance Legal Fees 77,304 - - 118,695 195,999 Accounting and Auditing 850 7,899 76,949 542,355 628,053 Tax Compliance and Planning - - - 38,425 38,425 Consulting 325,363 2,697 701,714 1,039,851 2,069,625 Total $465,680 $12,328 $789,196 $2,296,681 $3,563,885 Twelve months ended December 31, 2014 Professional Fees North AmericaTransactionSolutions Mobile Solutions Online Solutions Corporate Expenses &Eliminations Total General Legal $15,697 $104,699 $- $117,539 $237,935 SEC Compliance Legal Fees 97,304 - - 131,569 228,873 Accounting and Auditing 22,450 7,742 - 443,314 473,506 Tax Compliance and Planning 3,000 - - 65,700 68,700 Consulting 343,764 347,391 - 460,448 1,151,603 Total $482,215 $459,832 $- $1,218,570 $2,160,617 Variance Professional Fees North AmericaTransactionSolutions Mobile Solutions Online Solutions Corporate Expenses &Eliminations Increase /(Decrease) General Legal $46,466 $(102,967) $10,533 $439,816 $393,848 SEC Compliance Legal Fees (20,000) - - (12,874) (32,874)Accounting and Auditing (21,600) 157 76,949 99,041 154,547 Tax Compliance and Planning (3,000) - - (27,275) (30,275)Consulting (18,401) (344,694) 701,714 579,403 918,022 Total $(16,535) $(447,504) $789,196 $1,078,111 $1,403,268 The most significant increases in professional fees were attributable to general legal of $393,848, accounting / auditing fees of $154,547 and consultingservices of $918,022. General legal expenses increased as a result of corporate overhead for legal expenses increasing $439,816, online solutions segmentlegal expenses increasing $92,557 and North America Transactions Solutions legal fees increasing $46,466, offset by a decrease in mobile solutions segmentlegal expenses of $102,967, during the year ended December 31, 2015 versus the year ended December 31, 2014. Accounting fees increased as a result of acorporate accounting fee increase of $99,041 due to various sec filings, online payments increased $76,949 due to the acquisition of PayOnline and relatedaccounting costs for its purchase. These accounting costs were offset by a decrease in US Transaction accounting fees, during the year ended December 31,2015 versus the year ended December 31, 2014. Corporate consulting fees increased $579,403 because of increased investor relations costs and valuationfees, online solutions consulting costs increased $701,714 as result of PayOnline’s acquisition and consolidation. This was offset by a $344,694 decrease inconsulting costs in our Mobile Solutions segment and a $18,401 decrease in consulting costs in our North America Transaction Solutions segment. Other general and administrative expenses were $999,965 for the year ended December 31, 2015 as compared to $825,762 for the year ended December 31,2014, representing an increase of $174,203. This difference was primarily comprised of a $46,332 increase due to the acquisition of PayOnline and $507,660due to an increase in expenses our Mobile Solutions segment, $44,553 increase in North America Transaction Solutions primarily to due to an increase incommunications and office expense offset by a $424,241 decrease due to decreased Corporate expenses. Other expenses for the year ended December 31,2014 and 2015 are made up of performance bonuses, general office expenses and expenses related to communications. 36  We recorded a provision for bad debt of $649,571 for the year ended December 31, 2015, compared to a net recovery for bad debts of $1,153,147 for the yearended December 31, 2014. For the twelve months ended December 31, 2015 we recorded a loss provision which was primarily comprised of $754,162 inACH rejects, attributable to the normal course of our US transaction Payment segment, offset by $100,868 recovery from our mobile payments business. Forthe twelve months ended December 31, 2014 we recorded a loss provision which was primarily comprised of $496,709 in ACH rejects, attributable to thenormal course of our North America Transaction Solutions segment, offset by $1,649,858 bad debt recovery from our mobile solutions segment. During the years ended December 31, 2015 and 2014, we did not recognize any goodwill impairment. Depreciation and amortization expense consists primarily of the amortization of merchant portfolios, trademarks and domain names plus depreciationexpense on fixed assets, client acquisition costs, capitalized software expenses and employee non-compete agreements. Depreciation and amortization expense was $2,513,162 for the year ended December 31, 2015 as compared to $2,358,136 for the year ended December 31,2014. Depreciation and amortization expense comprised of amortization expense for the year ended December 31, 2015 which was $2,383,818, which primarilyconsist of, $110,183 (for the amortization of terminal inventory placed for free attributable to North America Transaction Solutions segment), $356,753 (forthe amortization of client acquisition costs attributable to North America Transaction Solutions segment), $842,806 ( for amortization of Portfolios and clientlists, of which $549,056 was attributed to our North America Transaction Solutions segment and $293,750 was attributed to our online payment solutions),$276,667 (for IP software amortization, attributable to our online solutions segment), $93,542 (for the amortization of our PCI certification attributable to ouronline solutions segment), $146,290 (for the amortization of our trademarks, attributable to our online solutions segment), $90,793(for the amortization ofour domain names, attributable to our online solutions segment), and $280,000 (for the amortization of our covenant not to compete, attributable to ourcorporate segment). Depreciation and amortization expense primarily comprised of amortization expense for the year ended December 31, 2014 which was $2,338,697, of which$65,049 (for the amortization of terminal inventory placed for free attributable to US transaction processing segment), $94,893 (for IP software amortization,attributable US transaction processing segment), $1,766,690 (for amortization of portfolios and client lists, attributed to our US transaction processingsegment), $197,114 (for the amortization of client acquisition costs attributable to US transaction processing segment) and $280,000 (for the amortization ofour covenant not to compete, attributable to our corporate segment). Interest expense was $3,575,698 for the year ended December 31, 2015 as compared to $3,705,694 for the year ended December 31, 2014, representing adecrease of $129,996 as follows: Funding Source Twelve months endedDecember 31, 2015 Twelve months endedDecember 31, 2014 Increase / (Decrease) Alfa Bank $- $273,083 $(273,083)Convertible Notes Payable 3,027,354 - 3,027,354 Capital Sources NY - 212,750 (212,750)Creed Note - 1,043,844 (1,043,844)Georgia Notes LLC - 1,302,149 (1,302,149)MBF Note - 443,414 (443,414)RBL Note 513,994 382,462 131,532 Other 34,350 47,992 (13,642)Total $3,575,698 $3,705,694 $(129,996) Interest for 2015 was primarily attributed to our corporate overhead, of which $3,027,354 was due to the accretion of interest in amortizing the debt discountsattributed to the Convertible notes payable that were extinguished during the fourth quarter of 2015. Additionally, $513,994 was for our RBL financing. Interest expense for 2014 consisted primarily of $1,302,149 from the September 15, 2014 repayment of the Georgia Notes LLC note payable, attributed to ourcorporate segment. 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 onSeptember 15, 2014, this also was attributed to corporate segment. Interest expense of $212,750 related to the Capital Sources note payable which was repaidon September 15, 2014 and was attributed to our North America Transactions Solutions segment. Interest expense of $178,843 is related to our current RBLnote which was attributed to our corporate segment. Interest expense of $203,619 was related to two RBL notes which were repaid on April 7, 2014 whichwas attributed to our North America Transactions Solutions segment. Interest expense of $443,414 is related to the MBF note which was repaid in July 2014which was attributed to our US transactions processing segment. Interest expense of $273,083 was related to our factoring line for Russian operations withAlfa-Bank, which was attributed to our mobile solutions segment and $47,992 was for other miscellaneous interest charges attributed to our corporatesegment. 37  During 2015 we recorded a loss on the change in fair value on the beneficial conversion derivative related to the Convertible preferred stock and the relatednote payable in the amount of $26,932,496. During the fourth quarter we extinguished the note payable and convertible preferred stock and recognized a$27,743,980 gain on these extinguishments these gains were attributable to our corporate segment. 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 2015 and 2014. The net loss attributable to non-controlling interests amounted to $74,314 and $29,250 for 2015 and 2014, respectively. The loss was attributed to our NorthAmerica Transaction Solutions segment for a 10% non-controlling interest in Aptito. The non-controlling interest reflects the results of operations ofsubsidiaries that are allocable to equity owners other than us. Since our inception, we have incurred significant operating losses. We incurred net losses totaling $13.3 million and $10.2 million for the years endedDecember 31, 2015 and 2014, respectively. We had a working capital deficit of approximately $3.1 million and an accumulated deficit of $144 million atDecember 31, 2015. 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, 2015 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, 2015 were $22,913,561 compared to $14,322,669 at December 31, 2014. The year over year change in total assets isprimarily attributable to the $1.1 million increase in our North America Transaction Solutions receivables, $0.6 million mobile services receivables, $2.9million increase in our intangibles and a $3.0 million increase in our goodwill, from our Online payment services segments (as a result of our May 20, 2015purchase of PayOnline services) for the year ended December 31, 2015 compared to the year ended December 31, 2014. At December 31, 2015, we had total current assets of $7,330,756 including $1,025,747 of cash, $5,198,993 of accounts receivable, and $1,106,016 of prepaidexpenses and other assets. At December 31, 2014, we had total current assets of $4,883,214 including $503,343 of cash, $3,417,173 of accounts receivable,$962,698 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 2016. We expect to have a significant increase in our capital requirements during the 2016 fiscal year due to our expanding oftransactional processing operations and acquisitions. We currently believe that we will require an additional $3.6 million to finance continuing operations as currently conducted 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 financing on termssatisfactory to us will be available or otherwise occur. Debt financing must be repaid regardless of whether we generate revenues or cash flows fromoperations and may be secured by substantially all of our assets. Any equity financing or debt financing that requires the issuance of equity securities orwarrants to the lender would cause the percentage ownership by our current stockholders to be diluted, which dilution may be substantial. Also, anyadditional equity securities issued may have rights, preferences or privileges senior to those of existing stockholders. If such financings are not availablewhen required or are not available on acceptable terms, we may be unable to implement our business plans or take advantage of business opportunities, anyof which could have a material adverse effect on our business, financial condition, results of operations and/or prospects and may ultimately require us tosuspend or cease operations, which could cause investors to lose the entire amount of their investment. Operating activities used $1.7 million of cash for the twelve months ended December 31, 2015 as compared to providing $2.3 million of cash for the twelvemonths ended December 31, 2014. Negative operating cash flow for the twelve months ended December 31, 2015 was primarily due to a $13.3 million loss,adjusted for non-cash expenses and working capital items. Investing activities used $4.3 million of cash for the year ended December 31, 2015 as compared used $1.8 million of cash provided for the year endedDecember 31, 2014. The increase in cash used by investing activities in the year ended December 31, 2015 was primarily attributable to a $3.2 millionpurchase of our online transactions services segment and $.9 million of North America Transaction Solutions segment client acquisition costs. 38  During 2014 cash used from investing activities consisted of primarily $1.0 million of North America Transaction Solutions segment portfolios and $0.8million for the purchase of fixed and other assets. Financing activities provided $6.5million dollars, primarily from $5.5 million in the issuance of preferred stock, later converted to common stock during theyear ending December 31, 2015, $0.7 million in additional notes payable from RBL and $.3 million in related party loans from our CEO. Financing activities provided $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. The Company often conducts transactions in foreign currencies, such as Russian Rubles. The effect of exchange rate changes on cash amounted to $0.4million for the twelve months ended December 31, 2015 as compared to ($0.2) million for the twelve months ended December 31, 2014. 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. 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 alsoprovided for pro rata interest in the amount of $16,020 and a prepayment premium in the amount of $42,508 which was also charge to interestexpense. The total payoff for this note amounted to $1,567,693. We accrued monthly payments of $77,560 in principal and interest at 15.636%, plusan additional 5% in restructuring 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 payoffalso provided 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 in principal and interest plus accrued an additional 5% restructuring interest from January 2013 through March 2014 for a total of$116,533. Alfa-Bank Factoring Agreement. In September 2014, Digital Provider entered into the Supplement Agreement No. 14 and the Supplement Agreement No. 15with Alfa-Bank, which renewed and amended the prior factoring agreement with Alfa-Bank, which expired on April 20, 2014. Pursuant to such amendments,the factoring credit facility (“FCF”) was renewed and will expire on June 30, 2016, the maximum aggregate limit of financing (secured by Digital Provider’saccounts receivable) to be provided by Alfa-Bank to Digital Provider under the FCF was increased to 415 million Russian rubles (approximately US$10.8million based on the currency exchange rate on September 17, 2014), Alfa-Bank's fees (commissions) for providing financing to Digital Provider wasamended to be computed as a financing rate that ranges from 13.22% to 14.50% of the amounts borrowed, depending upon the number of days in the periodfrom the date financing is provided until the date the factored receivable is paid. The maximum financing amount was increased from 80% to 100% of theassigned accounts receivable. The agreement requires us to comply with covenants. Accordingly, the amounts of our draws will depend on amounts ofaccounts receivable suitable for assignment at the time we choose to draw under such facility. We have not drawn any funds under the FCF. RBL Capital Group, LLC. Effective June 30, 2014, TOT Group, Inc. and its subsidiaries as co-borrowers, TOT Payments, LLC, TOT BPS, LLC, TOT FBS,LLC, Process Pink, LLC, TOT HPS, LLC and TOT New Edge, LLC, entered into a Loan and Security Agreement with RBL Capital Group, LLC (“RBL”), aslender (the “RBL Loan Agreement”). Pursuant to the RBL Loan Agreement, we may borrow up to $10,000,000 from RBL during the period of 18 monthsfrom the closing of this credit facility. Prior to maturity of the loan, the principal amount of the borrowings under the credit facility will carry a fixed interestrate 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 theadvances under the credit facility, an additional three percent per annum would be added to such interest rate, and for any other amounts, obligations orpayments due to RBL, an annual default rate not to exceed the lesser of (i) the prime rate plus 13% per annum and (ii) 18.635% per annum. As furtherdescribed below, borrowings from the line of credit in the amounts of $3,315,000, $400,000 and $250,000 were converted into term loans. At December 31,2015, we had $6,035,000 available on our RBL 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. Effective July 17, 2014, we entered into a $3,315,000 term loan with RBL. Net proceeds from the loan were used to repay the $3.0 million MBF loan andrelated costs and interest, in addition to approximately $239 thousand for working capital. The loan requires interest only payments at 13.90% interestthrough January 2015, commencing on August 20, 2014 followed by monthly interest and principal payments of $90,421 through January 2019. 39  Effective February 10, 2015, we entered into a $400,000 term loan note with RBL. The loan provides for interest-only payments at 13.90% interest throughJuly 20, 2015. From August 20, 2015 through July 20, 2019, the note maturity date, we are obligated to make interest and principal payments of $10,911 permonth. We paid $8,000 in costs related to this loan, which is classified within other assets on the balance sheet. Effective March 27, 2015, we entered into a $250,000 term loan note with RBL. The loan provides for interest-only payments at 13.90% interest through July20, 2015. From August 20, 2015 through July 20, 2019, the note maturity date, we are obligated to make interest and principal payments of $6,819 permonth. We paid $5,000 in costs related to this loan, which the amortized amount is classified within other assets on the condensed consolidated balancesheet. Off-balance sheet arrangements At December 31, 2015, 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 Standard Update (“ASU”) 2014-09, “Revenue from Contracts withCustomers,” which supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and requires entities to recognize revenue in away that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitledin exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which defers by one year the effective date of ASU 2014-09.Accordingly, this guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted for interim andannual periods beginning after December 15, 2016. The Company plans to adopt this guidance on January 1, 2018. The Company is currently evaluating theeffects, if any, that the adoption of this guidance will have on the Company’s financial position, results of operations and cash flows. 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. ASU 2014-16 is effective for annualperiods beginning after December 15, 2015, and interim periods thereafter. The adoption of ASU 2014-16 will not have a material impact on our consolidatedfinancial statements, as we do not have outstanding hybrid financial instruments at December 31, 2015. In September 2015, the FASB issued ASU 2015-16, “Business Combinations,” which simplifies the accounting for measurement-period adjustments byeliminating the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires the cumulativeimpact of measurement period adjustments, including the impact on prior periods, to be recognized in the reporting period in which the adjustment isidentified. The ASU is effective for public companies for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlyadoption is permitted for any interim and annual financial statements that have not yet been issued. The Company evaluated the effects of the ASU 2015-16and elected to early adopt the ASU during the third quarter of 2015. The ASU will be applied prospectively to the acquisitions which require adjustments tothe provisional amounts that occurred during the open measurement periods, regardless of the acquisition date. 40  In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities to present deferred taxassets and deferred tax liabilities as noncurrent in a classified balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred taxasset or liability. This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reportingperiod, and entities are permitted to apply either prospectively or retrospectively; early adoption is permitted. The Company is currently evaluating theeffects, if any, that the adoption of this guidance will have on the Company’s financial position, results of operations and cash flows. In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and FinancialLiabilities”. The new standard principally affects accounting standards for equity investments, financial liabilities where the fair value option has beenelected, and the presentation and disclosure requirements for financial instruments. Upon the effective date of the new standards, all equity investments inunconsolidated entities, other than those accounted for using the equity method of accounting, will generally be measured at fair value through earnings.There will no longer be an available-for-sale classification and therefore, no changes in fair value will be reported in other comprehensive income for equitysecurities with readily determinable fair values. The new guidance on the classification and measurement will be effective for public business entities in fiscalyears beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The Company is in the processof evaluating the impact of the adoption of ASU 2016-01 on the Company’s financial position, results of operations and cash flows. In February 2016, the FASB issued ASU 2016-02, “Leases” which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability,initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost,calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscalyears beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currentlyevaluating the effects that the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements. In March 2016, the FASB issued Accounting Standards Update 2016-08 Revenue from Contracts with Customers (Topic 606) to clarify implementationguidance on principal versus agent considerations (for reporting revenue on a gross or net basis). The ASU is an amendment to Topic 606, clarifies theimplementation guidance, and requires an entity to account for revenue as an agent when another entity controls the specified good or service before thatgood or service is transferred to the customer. This ASU is effective for annual periods beginning after December 15, 2017. The Company is currentlyevaluating the effects, if any, which the adoption of this guidance will have on the Company’s financial position, results of operations and cash flows. 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 firm set forth on pages F-2 throughF-6 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 and will continue to address deficiencies as resources 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. 41  Management of the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31,2015, based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission (the “COSO II Framework”). Based on management’s assessment in accordance with the criteria in the COSO II Framework, our managementconcluded that our internal control over financial reporting was not effective as of December 31, 2015. 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: 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, 2015. 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 recordingof certain transactions as of December 31, 2015 due to the small size of our accounting teams. We do not have sufficient personnel to provideadequate 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. The continuing changes in board membership and the composition of Companysubsidiaries has resulted in insufficient time for us to provide board training and establish 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 plan to provide best practices training to our newer audit committee members. 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. publically reporting company. As a result we have identified deficiencies in our internal controls within ourkey business processes, particularly with respect to the design of quarterly accounting, financial statements close, consolidation, and externalfinancial reporting procedures. Management believes there are entity level controls that are effective within our key business processes. However,certain of these processes could not be formally tested because of lack of documentation and/or process design details. Information and Communication 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 timely 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 additional review and monitoring procedures. We plan to periodically assess the need for additional accounting resources as businessdevelops and resources permit. Management also is committed to taking further action by implementing enhancements or improvements as resources permit.We recognize that, due to the size and global nature of our business, implementation of additional measures may take considerable 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 of2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 42  Item 9B. Other Information None. PART III Item 10. Directors, Executive Officers and Corporate Governance. The information required by this Item 10 is incorporated by reference herein from our Definitive Proxy Statement for our 2016 Annual Meeting ofStockholders to be filed with the SEC as set forth under the caption "Documents Incorporated by Reference." Item 11. Executive Compensation. The information required by this Item 11 is incorporated by reference herein from our Definitive Proxy Statement for our 2016 Annual Meeting ofStockholders to be filed with the SEC as set forth under the caption "Documents Incorporated by Reference." Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this Item 12 is incorporated by reference herein from our Definitive Proxy Statement for our 2016 Annual Meeting ofStockholders to be filed with the SEC as set forth under the caption "Documents Incorporated by Reference." Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this Item 13 is incorporated by reference herein from our Definitive Proxy Statement for our 2016 Annual Meeting ofStockholders to be filed with the SEC as set forth under the caption "Documents Incorporated by Reference." 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, 2015 and 2014 were $370,000 and $315,000, 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, 2015and 2014 were $117,129 and $16,575, 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, 2015 and 2014 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, 2015 and 2014 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, 2015 and 2014 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-29 and are filed as part of this Report: 43  Reports of Independent Registered Public Accounting Firms Audited Consolidated Balance Sheets as of December 31, 2015 and 2014 Audited Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2015 and 2014 Audited Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015 and 2014 Audited Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014 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-29 of this Report and is incorporatedherein by reference. 44  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, 2016By:/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, 2016By:/s/ Oleg Firer Oleg Firer Chief Executive Officer and Director (Principal Executive Officer) March 30, 2016By:/s/ Jonathan New Jonathan New Chief Financial Officer (Principal Financial Officer and PrincipalAccounting Officer) March 30, 2016By:/s/ Kenges Rakishev Kenges Rakishev Director March 30, 2016By:/s/ Drew Freeman Drew Freeman Director March 30, 2016By:/s/ David P. Kelley II David P. Kelley II Director March 30, 2016By:/s/ James Caan James Caan Director March 30, 2016By:/s/ William Healy William Healy Director 45  NET ELEMENT, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReports of Independent Registered Public Accounting FirmF-2 Consolidated Balance Sheets as of December 31, 2015 and 2014F-3 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2015 and 2014F-4 Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2015 and 2014F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2015 and 2014F-6 Notes to Consolidated Financial StatementsF-7  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 sheets of Net Element, Inc. (the “Company”) at December 31, 2015 and 2014, and the relatedconsolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for the years then ended. 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 audits 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 consolidated financial statements are free of material misstatement. TheCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationof internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Net Element, Inc. atDecember 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generallyaccepted 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, 2016 F-2  NET ELEMENT, INC.CONSOLIDATED BALANCE SHEETS December 31, 2015 December 31, 2014 ASSETS Current assets: Cash $1,025,747 $503,343 Accounts receivable, net 5,198,993 3,417,173 Prepaid expenses and other assets 1,106,016 962,698 Total current assets, net 7,330,756 4,883,214 Fixed assets, net 162,123 70,918 Intangible assets, net 5,423,880 2,492,050 Goodwill 9,643,752 6,671,750 Other long term assets 353,050 204,737 Total assets 22,913,561 14,322,669 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable 5,858,837 2,698,257 Deferred revenue 743,910 472,482 Accrued expenses 2,975,066 2,351,885 Notes payable (current portion) 518,437 98,493 Due to related parties 329,881 - Total current liabilities 10,426,131 5,621,117 Notes payable (net of current portion) 3,446,563 3,216,507 Total liabilities 13,872,694 8,837,624 Commitments and contingencies STOCKHOLDERS' EQUITY Series A Convertible Preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued andoutstanding, at December 31, 2015 and December 31, 2014) - - Common stock ($.0001 par value, 300,000,000 shares authorized at December 31, 2015 and 200,000,000shares authorized at December 31, 2014; 112,619,596 and 45,881,523 shares issued and outstanding atDecember 31, 2015 and December 31, 2014, respectively) 11,262 4,589 Paid in capital 154,351,558 136,689,629 Stock subscription receivable - (1,111,130)Accumulated other comprehensive loss (1,565,822) (1,251,461)Accumulated deficit (143,955,048) (129,116,344)Non-controlling interest 198,917 269,762 Total stockholders' equity 9,040,867 5,485,045 Total liabilities and stockholders' equity $22,913,561 $14,322,669 See accompanying notes to the consolidated financial statements F-3  NET ELEMENT, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Twelve months ended December 31, 2015 2014 Net revenues Service fees $31,204,871 $21,236,704 Branded content 9,030,491 - Total Revenues 40,235,362 $21,236,704 Costs and expenses: Cost of service Fees 25,858,098 15,925,924 Cost of branded content 8,119,117 - General and administrative (includes $4,306,304 and $4,267,334 of share based compensation for the twelve months ended December 31, 2015 and 2014 respectively) 13,616,781 11,353,244 Provision for (recovery of) bad debt 649,571 (1,153,147)Depreciation and amortization 2,513,162 2,358,136 Total costs and operating expenses 50,756,729 28,484,157 Loss from operations (10,521,367) (7,247,453)Interest expense, net (3,575,698) (3,705,694)(Loss) gain on change in fair value and settlement of beneficial conversion derivative (26,932,496) 5,569,158 Gain (loss) on debt extinguishment 27,743,980 (6,184,219)Gain on debt restructure - 1,596,000 Gain (loss) from asset disposal 40,369 (87,151)Other expense (82,714) (155,407)Net loss before income taxes (13,327,926) (10,214,766)Income taxes - - Net loss (13,327,926) (10,214,766)Net loss attributable to the noncontrolling interest 74,314 29,250 Net loss attributable to Net Element, Inc. stockholders (13,253,612) (10,185,516) Dividends for the benefit of preferred stockholders (1,585,092) - Net loss attributable to common stockholders (14,838,704) (10,185,516) Foreign currency translation (314,361) (1,080,911)Comprehensive loss attributable to common stockholders $(15,153,065) $(11,266,427) Loss per share - basic and diluted $(0.23) $(0.27) Weighted average number of common shares outstanding - basic and diluted 63,911,199 37,255,052 See accompanying notes to the consolidated financial statements F-4  NET ELEMENT, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Preferred Stock Common Stock Paid in Stock Comprehensive Non-controlling Accumulated Equity (Deficiency) Shares Amount Shares Amount Capital Subscription Income interest Deficit in Assets Balance December31, 2013 - $- 32,273,298 $3,229 $103,486,144 $329,406 $(170,550) $(125,043) $(118,930,828) $(15,407,642) Share basedcompensation - - 1,755,749 176 3,677,937 - - - - 3,678,113 Shares issued andissuable foracquisitions - - 57,288 6 329,400 (329,406) - - - - Shares issued to acquirenon-controllinginterest - - 323,085 32 617,060 - - 424,055 - 1,041,147 Shares issued inconnection with debtconversion - - 5,569,158 556 10,636,537 (1,111,130) - - - 9,525,963 Shares issued inconnection with debtrestructuring - - 100,000 10 203,990 - - - - 204,000 Shares issued inconnection with noteconversion - - 5,802,945 580 16,711,901 - - - - 16,712,481 Extinguishment of T1Tobligation - - - - 1,086,968 - - - - 1,086,968 NASDAQ shareregistration fees - - - - (60,308) - - - - (60,308)Net loss - - - - - - - (29,250) (10,185,516) (10,214,766)Comprehensiveloss - foreigncurrencytranslation - - - - - - (1,080,911) - - (1,080,911)Balance December31, 2014 - $- 45,881,523 $4,589 $136,689,629 $(1,111,130) $(1,251,461) $269,762 $(129,116,344) $5,485,045 Share basedcompensation - - 4,015,315 406 4,305,898 - - - - 4,306,304 Preferred shares issued 5,500 5,287,082 - - - - - - - - Preferred sharesconverted to commonshares (5,500) (5,287,082) 33,760,446 3,371 9,032,713 - - - - 9,036,084 Preferred sharedividends paid - - 6,128,908 613 1,584,479 - - - - 1,585,092 Shares issued inconnection with debtrestructuring - - 4,208,049 421 1,346,227 - - - - 1,346,648 Shares issued inexchange for warrants,net of discount - - 2,500,000 250 (2,680,111) - - - - (2,679,861)Shares issued andissuable foracquisitions - - 4,768,212 477 3,599,523 - - - - 3,600,000 Repurchase of non-controlling interest - - - - (3,489) - - 3,469 - - Shares issued for insiderfinancing - - 11,357,143 1,135 1,587,819 - - - - 1,588,954 Write-off of stocksubscription receivable - - - (1,111,130) 1,111,130 - - - - Net loss - - - - - - - (74,314) (14,838,704) (14,913,038)Comprehensiveloss - foreigncurrencytranslation - - - - - - (314,361) - - (314,361)Balance December31, 2015 - $- 112,619,596 $11,262 $154,351,558 $- $(1,565,822) $198,917 $(143,955,048) $9,040,867 See accompanying notes to the consolidated financial statements F-5  NET ELEMENT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Twelve Months Ended December 31, 2015 2014 Cash flows from operating activities Net loss $(13,253,612) $(10,185,516)Adjustments to reconcile net loss to net cash (used in) provided by operating activities Non controlling interest (74,309) 394,286 Share based compensation 4,306,304 4,267,334 Loss (gain) on change in fair value and settlement of beneficial conversion derivative 26,932,495 (5,569,158)(Gain) loss on debt extinguishment (27,743,980) 6,184,219 Depreciation and amortization 2,513,162 2,358,136 Amortization of debt discount 3,027,354 1,644,626 (Recovery of ) provision for loan losses - (1,649,858)(Gain) loss on disposal of fixed assets (40,369) 16,137 Gain on MBF debt restructure - (1,596,000) Changes in assets and liabilities, net of acquisitions and the effect of consolidation of equity affiliates Accounts receivable, net (1,502,205) 6,974,701 Advances to aggregators 10,022 934,816 Deferred revenue 271,428 233,084 Prepaid expenses and other assets 291,631 (445,555)Accounts payable 3,160,577 (338,618)Accrued expenses 410,730 (968,609)Net cash (used in) provided by operating activities (1,690,772) 2,254,025 Cash flows from investing activities Purchase of portfolio and client acquisition costs (878,085) (1,039,752)Sale of portfolio 300,000 - Note receivable - (2,650)Acquisition of PayOnline assets, net of cash received (3,195,452) - Purchase of fixed and other assets (579,209) (750,936)Net cash used in investing activities (4,352,746) (1,793,338) Cash flows from financing activities Repayment to Financial Institutions - 10,088,870 Proceeds from preferred stock 5,500,000 - Proceeds from indebtedness 650,000 (10,433,367)Repayment of indebtedness - Related party advances 331,273 418,099 Net cash provided by financing activities 6,481,273 73,602 Effect of exchange rate changes on cash 84,649 (157,265)Net increase in cash 522,404 377,024 Cash at beginning of period 503,343 126,319 Cash at end of period $1,025,747 $503,343 Supplemental disclosure of cash flow information Cash paid during the period for: Interest $548,344 $1,109,731 Taxes $74,563 $38,993 Inssuance of Common Stock upon conversion of indebtedness $1,436,648 $25,233,473 Inssuance of Common Stock upon redemption of Preferred Stock $9,036,084 $- Inssuance of Common Stock in exchange for Warrants $2,679,861 $- Inssuance of Common Stock for acquisition $9,036,084 $- See accompanying notes to the consolidated financial statements F-6  NET ELEMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2015 AND 2014 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation Organization Net Element, Inc. (“We”, “us”, “our” or the “Company”) is a financial technology-driven group specializing in mobile payments and other transactionalservices in emerging countries and in the United States. We are differentiated by our proprietary technology which enables us to provide a broad suite ofpayment products, end-to-end transaction processing services and superior client support. We have three reportable segments: (i) U.S. payment processing,(ii) Mobile payment processing (primarily in Russian Federation and CIS) (iii) Online payment processing (primarily in Russian Federation and CIS). We are able to deliver our services across multiple points of access, or “multi-channel,” including brick and mortar locations, software integration, e-commerce, mobile operator billing, mobile and tablet-based solutions. In the United States, via our U.S. based subsidiaries, we generate revenues fromtransactional services and other payment technologies for small and medium-sized businesses. Through TOT Group Russia and Net Element Russia, weprovide transactional services, mobile payment transactions, online payment transactions and other payment technologies in emerging countries in theRussian Federation, Commonwealth of Independent States (“CIS”), Europe and Asia. Business Our transactional services business enables merchants to accept credit cards as well as other forms of payment, including debit cards, checks, gift cards,loyalty programs and alternative payment methods in traditional card-present or swipe transactions, as well as card-not-present transactions, such as thoseconducted over the phone or through the Internet or a mobile device. We market and sell our services through both independent sales groups (“ISGs”), whichare non-employee, external sales organizations and other third party resellers of our products and services, and directly to merchants through electronicmedia, telemarketing and other programs, including utilizing partnerships with other companies that market products and services to local and internationalmerchants. In addition, we partner with banks such as BMO Harris Bank, N.A. in the United States and VTB Bank, Bank of Moscow, Raiffeisen Bank,Kazkommertsbank, and Rietumu Bank in the Russian Federation, CIS, Europe and Asia to sponsor us for membership in Visa ® , MasterCard ® and/or othercard associations and to settle transactions with merchants. We perform core functions for merchants such as application processing, underwriting, accountset-up, risk management, fraud detection, merchant assistance and support, equipment deployment and chargeback services. PayOnline provides flexible high-tech payment solutions to companies doing business on the Internet or in the mobile environment. PayOnline specializesin integration and customization of payment solutions for websites and mobile apps. In particular, PayOnline arranges payment on the website of anycommercial organization, which increases the convenience of using the website and helps maximize the number of successful transactions. In addition,PayOnline is focused on providing online and mobile payment acceptance services to the travel industry through direct integration with leading GlobalDistribution Systems, which includes Amadeus® and Sabre®. Key regions of the PayOnline company are: the CIS, Eastern Europe, Central Asia, WesternEurope, North America and Asia major sub regions. PayOnline offices are located in Russia and in the Republic of Cyprus. We included the results ofPayOnline starting May 20, 2015. Our mobile payments business, Digital Provider, LLC (f/k/a Tot Money, LLC) (“Digital Provider”) provides carrier-integrated mobile payments solutions.Our relationships with mobile operators give us substantial geographic coverage, a strong capacity for innovation in mobile payments and messaging, andthe ability to offer our clients’ in-app, premium SMS, online and carrier billing services. We also market our own branded content which is a new businessline for our mobile payments business. Aptito is a proprietary, next-generation, cloud-based payments platform for the hospitality industry, which creates an online consumer experience in offlinecommerce environments via tablet, mobile and all other cloud-connected devices. Aptito’s easy to use point-of-sale (“POS”) system makes things easier byproviding comprehensive solution to the hospitality industry to help streamline management and operations. Orders placed tableside by customers directlyspeed up the ordering process and improve overall efficiency. Aptito's mobile POS system provides portability to the staff while performing all the samefunctions as a traditional POS system, and more. Basis of Presentation Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities asof the balance sheet date and the reported amounts of expenses for the period presented. Actual results could differ from those estimates. F-7  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. Reclassifications Certain amounts in the 2014 consolidated financial statements have been reclassified to conform with the current year presentation. These reclassificationshad no effect on the reported results of operations. 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, 2015 and2014. The Company maintains $922,062 and $318,416 in un-insured bank accounts in Russian and the Cayman Islands at December 31, 2015 and 2014respectively. 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 subsidiaries of large telecommunication companies and we do not reserve for these receivablesgiven 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 $345,459 and $532,315 in terminals and iPads and related equipment acquired as of December 31, 2015and 2014 respectively, of which $268,501 and $292,718 has been placed with merchants during 2015 and 2014 respectively. Amortization of these terminalsamounted to $130,970 and $200,987 for the years ended December 31, 2015 and 2014. Fixed Assets The Company depreciates its furniture and equipment and computers over a term of two 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. 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 Groups (“ISG’s”) for the establishment of newmerchant relationships. Capitalized customer acquisition costs represent incremental, direct customer acquisition costs that are recoverable through grossmargins associated with merchant contracts. The up-front payment to the ISG is based on the estimated gross margin for the first year of the merchant contract.The deferred customer acquisition cost asset is recorded at the time of payment and the capitalized acquisition costs are primarily amortized on a straight-linebasis over a period of three years. F-8  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, 2015 and 2014, the Company recorded $878,085 and $347,204, respectively, in additional capitalized customeracquisition costs, and $356,757and $85,769 respectively, in related additional amortization. The balance of customer acquisition costs was $1,048,060 and$526,728 at December 31, 2015 and 2014, respectively, and is reflected in intangible assets in the accompanying consolidated balance sheets. Accrued Residual Commissions The Company reports commission payments as a cost of revenues in the accompanying consolidated statement of operations and comprehensive loss. Wepay agent commissions to ISGs and independent sales agents based on the processing volume of the merchants enrolled. The commission payments are basedon varying percentages of the volume processed by us on behalf of the merchants. Percentages vary based on the program type and transaction volume ofeach merchant. We report commission payments as a cost of revenues in the accompanying consolidated statement of operations and comprehensive loss. At December 31, 2015 and 2014 the residual commissions payable to ISGs and independent sales agents were $1,205,751 and $514,252 respectively. We pay agent commission on annual fees between January and April of each year. We amortize the annual fees paid in equal monthly amounts from date ofpayment to end of year. We pay our agent commissions for annual fees in advance of recognizing the associated revenue. We deferred $483,090 and$175,800 of agent commissions paid for annual fees at December 31, 2015 and 2014, respectively. Prepaid agent commissions for annual fees are included inprepaid expenses and other assets, and commissions payable are included in accounts payable in the accompanying condensed consolidated balance sheets. Financial Instruments Convertible securities containing detachable warrants where the conversion price of the security and/or the exercise price of the warrants are affected by thecurrent market price of our common stock are accounted for as derivative financial instruments when the exercise and conversion prices are not considered tobe indexed to our stock. For such issuances of convertible securities with detachable warrants, the Company initially records both the warrant and the beneficial conversion feature(“BCF”) at fair value, using option pricing models commonly used by the financial services industry (Black-Scholes-Merton options pricing model) usinginputs generally observable in the financial services industry. These derivative financial instruments are marked-to-market each reporting period, withunrealized changes in value reflected in earnings under the caption “gain (loss) on change in fair value of derivative”. For discounts arising from issuances of instruments embedded in a debt security, the discount is presented on the consolidated balance sheets as a discount tothe principal amount of the related note payable. For discounts arising from issuances of instruments embedded in an equity security, the discount ispresented as a reduction to additional paid-in-capital. The resulting discounts arising from the initial recording of the warrants and BCF are amortized over the term of the host security. The classification of theamortization is based on the nature of the host instrument. In this respect, amortization of discounts associated with debt issuances are classified as interestexpense, whereas amortization of discounts associated with preferred stock issuances are classified as preferred stock dividends. At the time a warrant or BCF is exercised or cancelled, the fair value of the derivative financial instrument at the time of exercise/cancellation is calculated,and a realized gain or loss on conversion is determined and reported as “gain (loss) on settlement of derivative”. 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 $3.9 million as of December 31, 2015approximates 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: F-9  Level 1 — Quoted market prices in active markets for identical assets or liabilities as of the reporting date Level 2 — Observable market based inputs or unobservable inputs that are corroborated by market data Level 3 — Unobservable inputs that are not corroborated by market data These non-financial assets and liabilities include intangible assets and liabilities acquired in a business combination as well as impairment calculations,when necessary. The fair value of the assets acquired and liabilities assumed in connection with the PayOnline acquisition, as discussed in Note 4, weremeasured at fair value by the Company at the acquisition date. The fair values of the Company’s merchant portfolios are primarily based on Level 3 inputsand are generally estimated based upon independent appraisals that include discounted cash flow analyses based on the Company’s most recent cash flowprojections, and, for years beyond the projection period, estimates based on assumed growth rates. Assumptions are also made regarding appropriate discountrates, perpetual growth rates, and capital expenditures, among others. In certain circumstances, the discounted cash flow analyses are corroborated by amarket-based approach that utilizes comparable company public trading values, and, where available, values observed in private market transactions. Theinputs used by management for the fair value measurements include significant unobservable inputs, and therefore, the fair value measurements employed areclassified as Level 3. The goodwill impairment was primarily based on observable inputs using company specific information and is classified as Level 3. Concentrations The Company’s total revenue was $40,235,362 and $21,234,704 for the years ended December 31, 2015 and 2014 respectively. Of the $40,235,362 in 2015revenues, $31,204,871 (which also includes its newly acquired Payonline Systems) was derived from processing of Visa®, MasterCard®, Discover® andAmerican Express® card transactions and $9,030,491 was derived from providing branded content during 2015. Since we began providing branded contentduring the third quarter of 2015, we had no similar revenue in 2014. The credit card processing revenues were from merchant customer transactions, which are processed primarily by three “third-party” processors. For thetwelve months ended December 31, 2015 and 2014, the Company processed 51% and 63% of its total revenue with Priority Data, and 10% and 24% withNational Processing Company (NPC), respectively. The mobile electronic payment revenues were from merchant customer transactions, which are processed primarily by three mobile operators during thetwelve months ended December 31, 2015 and two mobile operators during the twelve months ended December 31, 2014. For the year ended December 31,2015, the Company processed 9% with Beeline (OJSC Vimpelcom, 5% with MTS (Mobile TeleSystems OJSC) and 3% with Megaphone. During the twelvemonths ended December 31, 2014, the Company processed 3.4% of its total revenue with Beeline (OJSC Vimpelcom), and 3.5% with MTS (MobileTeleSystems OJSC). 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. 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 years ended December 31, 2015 and 2014 are principally derived from the following sources: Transactional Processing Fees: Transactional processing fees are generated primarily from TOT Payments doing business as Unified Payments, which is ourUS transaction processing company, PayOnline, which is our Russian online transaction processing company, consolidated effective May 20, 2015 when weobtained control of PayOnline. See “PayOnline” in Note 4 for additional more information and Aptito our point of sale solution for restaurants. F-10  Our transactional processing companies derive revenues primarily from the electronic processing of services including: credit, debit, electronic benefitstransfer and alternative payment methods card processing authorized and captured through proprietary and third party networks, electronic gift certificateprocessing, and equipment sales. These revenues are recorded as bankcard and other processing transactions when processed. In addition to generatingservice fees, Aptito earns monthly license fees for use of its platform. Typically, fees charged to merchants for these processing services are based on a variable percentage of the dollar amount of each transaction and in someinstances, additional fees are charged for each transaction. Merchant customers also may be charged miscellaneous fees, including statement fees, annual fees,monthly minimum fees, fees for handling chargebacks, gateway fees, and fees for other miscellaneous services. Generally, we (i) are the primary obligor in our arrangements with our merchant customers, (ii) have latitude in establishing the price of our services, (iii) havethe ability to change the product and perform parts of the services, (iv) have discretion in supplier selection, (v) have latitude in determining the product andservice specifications to meet the needs of our merchant customers, and (vi) assume credit risk. In such cases, we report revenues as gross of fees deducted byour sponsoring member banks, as well as fees deducted from card-issuing member banks and card associations (Visa® and MasterCard®) on behalf of oursponsoring member banks for interchange and assessments. These fees charged by the card associations to process the credit card transactions are recordedseparately as cost of revenue and interchange fees in the accompanying condensed consolidated statement of operations and comprehensive loss. Service Fees: Service fees are generated primarily from mobile payment processing services provided to third party content aggregators by Digital Provider.Service fees for services provided for content providers were recorded net of mobile operator fees during 2014 and the first half of 2015. In July of 2015, TOTMoney began to offer its branded content to customers and changed its name to “Digital Provider”. Digital Provider’s revenues for the access of brandedcontent are recorded at the amounts charged to the mobile subscriber. A corresponding charge to cost of sales for mobile operator and content fees is recordedfor branded content. Revenues for access to branded content are recorded on the income statement as branded content revenues. Mobile payment processing revenues for third party content providers continue to be accounted for as service fees and presented net of aggregator andmobile operator payments on the consolidated financial statements as these revenues are considered to be agency fees. Cost of revenues for Digital Provider is comprised primarily of mobile operator fees, content provider fees and fees for short numbers paid to mobileoperators. Additionally, penalties and penalty recoveries are recorded as cost of sales. Service revenues for mobile payment processing services are presentednet as these revenues are considered to be agency fees. Subscription revenues for our branded content are recognized when a content subscriber initiates the purchase of our access to content using WAP-click,Internet-click, or a SMS-to-short number registered to us. Digital Provider’s subscription revenues are recorded at the amounts charged to the third party customer. Cost of revenues for Digital Provider brandedcontent includes fees due to mobile operators and marketing partners, as well as short number fees. Cost of revenues for TOT Payments, Aptito and PayOnline is comprised primarily of processing fees paid to third parties attributable to providing transactionprocessing and service fees for POS system usage by our merchant customers. Interchange fees and cost of services are recognized as incurred, whichgenerally occurs in the same period in which the corresponding revenue is recognized. Interchange fees are set by the card networks, and are paid to the card-issuing bank. Interchange fees are calculated as a percentage of the dollar volume processed plus a per transaction fee. We also pay Visa® and MasterCard®network dues. 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. F-11  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. 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 both December 31, 2014 and 2015, the Company had 8,938,900 warrants and 14,643,688 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, 2015 and 2014, there was no impairment of goodwill and intangible assets. Income Taxes We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected 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, 2011and forward, the tax years which remain subject to examination at December 31, 2015. Please see Note 15 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 Standard Update (“ASU”) 2014-09, “Revenue from Contracts withCustomers,” which supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and requires entities to recognize revenue in away that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitledin exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which defers by one year the effective date of ASU 2014-09.Accordingly, this guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted for interim andannual periods beginning after December 15, 2016. The Company plans to adopt this guidance on January 1, 2018. The Company is currently evaluating theeffects, if any, that the adoption of this guidance will have on the Company’s financial position, results of operations and cash flows. F-12  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. ASU 2014-16 is effective for annualperiods beginning after December 15, 2015, and interim periods thereafter. The adoption of ASU 2014-16 will not have a material impact on our consolidatedfinancial statements, as we do not have outstanding hybrid financial instruments at December 31, 2015. In September 2015, the FASB issued ASU 2015-16, “Business Combinations,” which simplifies the accounting for measurement-period adjustments byeliminating the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires the cumulativeimpact of measurement period adjustments, including the impact on prior periods, to be recognized in the reporting period in which the adjustment isidentified. The ASU is effective for public companies for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlyadoption is permitted for any interim and annual financial statements that have not yet been issued. The Company evaluated the effects of the ASU 2015-16and elected to early adopt the ASU during the third quarter of 2015. The ASU will be applied prospectively to the acquisitions which require adjustments tothe provisional amounts that occurred during the open measurement periods, regardless of the acquisition date. In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities to present deferred taxassets and deferred tax liabilities as noncurrent in a classified balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred taxasset or liability. This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reportingperiod, and entities are permitted to apply either prospectively or retrospectively; early adoption is permitted. The Company is currently evaluating theeffects, if any, that the adoption of this guidance will have on the Company’s financial position, results of operations and cash flows. In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and FinancialLiabilities”. The new standard principally affects accounting standards for equity investments, financial liabilities where the fair value option has beenelected, and the presentation and disclosure requirements for financial instruments. Upon the effective date of the new standards, all equity investments inunconsolidated entities, other than those accounted for using the equity method of accounting, will generally be measured at fair value through earnings.There will no longer be an available-for-sale classification and therefore, no changes in fair value will be reported in other comprehensive income for equitysecurities with readily determinable fair values. The new guidance on the classification and measurement will be effective for public business entities in fiscalyears beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The Company is in the processof evaluating the impact of the adoption of ASU 2016-01 on the Company’s financial position, results of operations and cash flows. In February 2016, the FASB issued ASU 2016-02, “Leases” which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability,initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost,calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscalyears beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currentlyevaluating the effects that the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements. In March 2016, the FASB issued Accounting Standards Update 2016-08 Revenue from Contracts with Customers (Topic 606) to clarify implementationguidance on principal versus agent considerations (for reporting revenue on a gross or net basis). The ASU is an amendment to Topic 606, clarifies theimplementation guidance, and requires an entity to account for revenue as an agent when another entity controls the specified good or service before thatgood or service is transferred to the customer. This ASU is effective for annual periods beginning after December 15, 2017. The Company is currentlyevaluating the effects, if any, which the adoption of this guidance will have on the Company’s financial position, results of operations and cash flows. 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: (1) TOT Group, Inc., a 100% owned subsidiary formed in Delaware; (2) Netlab Systems, LLC, a wholly owned subsidiary formed in Florida; (3) NetLabSystems IP, LLC, a wholly owned subsidiary formed in Florida; (4) OOO Net Element Russia (“Net Element Russia”), a wholly owned subsidiary formed inRussia; and (5) Net Element Services, LLC, a wholly owned subsidiary formed in Florida. The subsidiaries listed above are the parent companies of several other subsidiaries, which hold the Company’s underlying investments or operating entities. TOT Group is the parent company of TOT Payments, LLC (“TOT Payments”) doing business as Unified Payments a wholly owned subsidiary formed inFlorida, Aptito, LLC, a 80% owned subsidiary formed in Florida (acquired June 18, 2013), TOT Group Europe LTD, a wholly owned subsidiary formed in theUnited Kingdom, Unified Portfolios, LLC, a wholly owned subsidiary formed in Florida and OOO TOT Group Russia, a wholly owned subsidiary formed inRussia. •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; -TOT BPS, LLC, a wholly owned subsidiary formed in Florida •OOO TOT Group Russia is the parent company of its wholly owned subsidiary OOO Digital Provider (f/k/a OOO TOT Money)(a company formed inRussia), Payonline Systems, LLC (a wholly-owned company formed in Russia), Innovative Payment Technologies, LLC (a wholly-owned companyformed in Russia) and TOT Group Kazakhstan, a wholly owned subsidiary formed in Kazakhstan. •Netlab Systems, LLC is the parent company of Tech Solutions LTD (Cayman Islands). •Net Element Russia is the parent company of 99% owned OOO TOT Group. •TOT Group Europe LTD is 100% owner of Polimore Capital Limited (Cyprus) and Brosword Holding Limited (Cyprus) All material intercompany accounts and transactions have been eliminated in consolidation. F-13  NOTE 3. LIQUIDITY AND 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 $13.3 million for the year ended December 31,2015, an accumulated deficit of $144.0 million and negative working capital of $3.1 million at December 31, 2015. 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. We are required to continually meet the listing requirements of The NASDAQ Capital Market (including a minimum bid price for our common stock of $1.00per share) to maintain the listing of our common stock on The NASDAQ Capital Market. On June 19, 2015, we received a deficiency letter from TheNASDAQ Capital Market indicating that for 30 consecutive trading days our common stock had a closing bid price below the $1.00 per share minimum. Inaccordance with NASDAQ Listing Rules, we were provided a compliance period of 180 calendar days, or until December 16, 2015, to regain compliance withthis requirement. On December 17, 2015, we received a letter from The NASDAQ Capital Market notifying us that the initial period of 180 calendar dayspreviously provided to the Company to regain compliance with the requirement was extended for an additional 180 calendar day period, or until June 13,2016. We can regain compliance with the minimum closing bid price requirement if the bid price of our Common Stock closes at $1.00 per share or higher fora minimum of 10 consecutive business days. If we do not regain compliance with the minimum closing bid price requirement by June 13, 2016, TheNASDAQ Capital Market will provide written notice that our securities are subject to delisting. At such time, we would be entitled to appeal the delistingdetermination to a NASDAQ Listing Qualifications Panel. We have received Board and shareholder approval to facilitate a reverse stock split to increase thebid price of our common stock, if required. We cannot provide any assurance that our stock price will recover within the permitted grace period. The independent auditors’ reports on the Company’s consolidated financial statements for the years ended December 31, 2015 and 2014 contain explanatoryparagraphs expressing substantial doubt as to the Company’s ability to continue as a going concern. NOTE 4. ACQUISITION OF PAYONLINE On May 20, 2015, our subsidiaries TOT Group Europe, Ltd. and TOT Group Russia LLC, entered into an agreement to acquire all of the assets and liabilitiesthat comprise PayOnline. PayOnline’s business includes the operation of a protected payment processing system to accept bank card payments for goods andservices. Purchase consideration consists of a combination of $3.6 million in cash, and restricted common shares with a value of $3.6 million, payable in five quarterlyinstallments, and, if applicable, additional earn-out payments in cash and restricted common shares based on a multiple of EBITDA. The acquisitionagreement sets forth the determination of the value of such shares based on the closing stock price on the date before each applicable payment date. TheCompany will be required to issue additional shares if the market value of the shares provided is less than $3.6 million in 12 months. The following table summarizes the fair value of consideration paid and the preliminary and final allocation of purchase price to the fair value of tangibleand intangible assets acquired and liabilities assumed: F-14  Initial purchase Final purchase price allocation price allocation Purchase Consideration: (in Millions) Adjustments (in Millions) Cash $3.6 $- $3.6 Fair Value of Earnout - 0.6 0.6 Issuance of Net Element Stock 3.6 $- 3.6 Total Consideration Transferred $7.2 $0.6 $7.8 Purchase Price Allocation to Identifiable assets acquired and liabilities assumed(Preliminary) Current Assets $0.8 $- $0.8 Merchant Portfolios and Client lists 1.9 (0.5) 1.4 Other Intangible Assets 4.8 (1.9) 2.9 Goodwill - 3.0 3.0 Fixed Assets 0.1 - 0.1 Currrent Liabilities (0.4) - (0.4)Total Identifiable Net Assets 7.2 0.6 7.8 Total Purchase Price Allocation $7.2 $7.8 We engaged a valuation expert to value the PayOnline net assets and this report was completed in March, 2016. Valuation resulted in a re-allocation of thevalues assigned to merchant portfolios, client lists and other intangible assets, with a corresponding increase to goodwill. Purchase consideration wasincreased due to recognition of an estimate of $0.6 million for earn-out value, a contingent liability that existed at May 20, 2015. As a result of the valuation,we reduced Merchant portfolio estimated value by $0.5 million and Intangible assets by $1.9 million and recognized additional goodwill of $3.0 million. Unaudited Pro Forma Information - Acquisitions The following unaudited supplemental pro forma results of operations include the results of operations of PayOnline acquired in the second quarter of 2015as if it had been consolidated as of January 1, 2014, and have been provided for illustrative purposes only and do not purport to be indicative of the actualresults that would have been achieved by the combined companies for the periods presented or that may be achieved by the combined companies in thefuture. Future results may vary significantly from the results reflected in the following pro forma financial information because of future events andtransactions, as well as other factors, many of which are beyond the Company’s control. The unaudited pro forma combined results of operations for the twelve months ended December 31, 2015 and 2014 have been prepared by adjusting thehistorical results of the Company to include the historical results of PayOnline as if the acquisition of PayOnline occurred on January 1, 2014. The pro formaresults of operations do not include any adjustments to eliminate the impact of acquisition related costs or any cost savings or other synergies that may resultfrom these acquisitions. Twelve Twelve Months Months Ended Ended December 31, 2015 December 31, 2014 Net Revenues $42,725,207 $27,404,966 Net Loss from Operations $(12,240,344) $(8,513,638) NOTE 5. ACCOUNTS RECEIVABLE Accounts receivable consist of amounts due from processors and Russian mobile operators/intermediaries. Total accounts receivable amounted to $5,198,993and $3,417,173 at December 31, 2015 and 2014 respectively, consisting primarily of $1,764,087 and $1,346,118 of amounts due from Russian mobileoperators, $211,019 and $0 due to PayOnline business and $3,223,287 and $2,071,053 of credit card processing receivables at December 31, 2015 and 2014respectively. F-15  The $3,223,287 and $2,071,053 of merchant receivables are presented net of a $103,031 allowance for doubtful accounts. There were additional charges toprovision for loan losses for the years ended December 31, 2015 and 2014 for $754,162 and $496,709, for ACH rejects in the normal course of operations anda ($104,591) and ($1,649,858) recovery as a result of an adjustment to the allowance for bad debts for our Russian operations. NOTE 6. FIXED ASSETS Fixed assets are stated at acquired cost less accumulated depreciation and amortization as follows: Useful life(in years) December 31, 2015 December 31, 2014 Furniture and equipment 3 - 10 $174,133 $132,228 Computers 2 - 5 141,692 61,369 Total 315,825 193,597 Less: Accumulated depreciation (153,702) (122,679) Total fixed assets, net $162,123 $70,918 Depreciation expense for the years ended December 31, 2015 and 2014 was $129,343 and $84,488, respectively. NOTE 7. INTANGIBLE ASSETS The Company had $5,423,880 and $2,492,050 in intangible assets at December 31, 2015 and 2014, respectively. Shown below are the details at December31, 2015 and 2014: IP Sofware Portfolios andClient Lists Client AcquisitionCosts PCICertification Trademarks DomainNames Covenant Not toCompete Total 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)Balance at December 31, 2014 $520,924 $1,082,731 $526,728 $- $- $- $361,667 $2,492,050 Additions due to Payonline purchase 1,328,000 1,410,000 - 449,000 708,062 429,939 - 4,325,001 Other additions 163,129 878,085 1,041,214 Amortization (463,451) (842,806) (356,753) (93,542) (146,290) (90,793) (280,000) (2,273,635)Divested - (160,750) - - - - - (160,750)Balance at December 31, 2015 $1,548,602 $1,489,175 $1,048,060 $355,458 $561,772 $339,146 $81,667 $5,423,880 Amortization expense for the year ended December 31, 2015 was $2,383,818 of which, $110,183 was for the amortization of terminal inventory placed forfree. Amortization expense for the year ended December 31, 2014 was $2,338,697, of which $65,049 was for the amortization of terminal inventory placed for free. As a result of the Payonline purchase, we acquired certain intangible assets with a fair market value of $4,325,001. This consisted of software ($1,328,000),client lists ($1,410,000), PCI certification ($449,000), trademarks ($708,062) and Domain names ($429,939). The $163,129 additions were primarily due to capitalized software costs attributed to our North America Transactional Solutions segment. On September 16, 2015, we sold portion of our portfolio, belonging to our North America Transaction Solutions segment for $300,000. This was the net of$270,000 of portfolio cost, offset by $109,250 accumulated amortization, resulting in a net asset value of $160,250. This transaction resulted in a net gain of$139,250. Software 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 2015 and 2014, the Company capitalized $163,129 and $371,992 of development costs aspart of developing for: point of sale software ($107,619 and $243,341), payment processing software ($46,868 and $100,782) and mobile payments billingsoftware ($8,642 and $27,869) for the years ended December 31, 2015 and 2014, respectively. F-16  Merchant Portfolios Merchant Portfolios consisted of purchased portfolios that 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, 2015 and 2014 the net value of these portfolios were $1,489,175and $1,082,731 respectively. The useful lives of merchant portfolios represent management’s best estimate over which the Company will recognize the economic benefits of theseintangible assets. Non-Compete During the year ended December 31, 2013, two key executives signed covenants not to compete. These covenants have a three-year life and have anunamortized value of $81,667 and $361,667 at December 31, 2015 and 2014, respectively. The following table presents the estimated aggregate amortization expense of other intangible assets for the next five years ending December 31, 2016 -2020. Year Amortization Expense 2016 $1,862,405 2017 1,780,738 2018 1,780,737 2019 - 2020 - Total $5,423,880 NOTE 8. 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, Digital Provider (f/k/a TOT Money). The Company chose to self-finance during 2015 and 2014 and the availability on this facility was unusedduring 2015 and 2014 respectively. In September 2012, Digital Provider had a factoring agreement with Alfa-Bank. Pursuant to the agreement Digital Provider assigned to Alfa-Bank its accountsreceivable as security for financing for up to 300 million Russian rubles (approximately $9.8 million in U.S. dollars at time of signing). The amount loanedby Alfa-Bank pursuant to the Factoring Credit Facility with respect to any particular account receivable was limited to 80% of the amount of the accountreceivable assigned to Alfa-Bank. Interest on the factoring arrangement ranged from 9.70% to 11.95% annually of the amounts borrowed, with servicing feesranging from 10 Russian rubles (approximately $0.33 in U.S. dollars) to 100 Russian rubles (approximately $3.28 million in U.S. dollars) per accountreceivable. Digital Provider’s obligations under the Factoring Credit Facility were 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. The Factoring Credit Facilityexpired on April 20, 2014 and was repaid. In September 2014, Digital Provider entered into the Supplement Agreement No. 14 and the Supplement Agreement No. 15 with Alfa-Bank, which renewedand amended the Factoring Credit Facility (“FCF”). Pursuant to such amendments, the FCF was renewed and will expire on June 30, 2016. The maximumaggregate limit of financing was increased to 415 million Russian rubles (approximately US$10.8 million based on the currency exchange rate on September17, 2014), Alfa-Bank's fees (commissions) were amended to be computed as a financing rate that ranges from 13.22% to 14.50% of the amounts borrowed,depending upon the number of days outstanding. The maximum financing amount was increased from 80% to 100% of the assigned accounts receivable. Theagreement required the Company to comply with certain additional covenants. Accordingly, the amounts of our draws will depend on amounts of accountsreceivable suitable for assignment at the time we choose to draw under such facility. We have not drawn any funds under the Factoring Credit Facility. Thisfacility is no longer guaranteed by AO SAT & Company. Alfa-Bank Credit Agreement In August 2012, Digital Provider entered into a Credit Agreement with Alfa-Bank. Pursuant to the Credit Agreement, Alfa-Bank agreed to provide a line ofcredit to Digital Provider with the credit line limit set at 300 million Russian rubles (approximately $9.8 million in U.S. dollars). The interest rate on theinitial amount borrowed of 53.9 million rubles (approximately $1.8 million in U.S. dollars) under the Credit Agreement is 3.55% per annum. The loan wassecured by 55.0 million rubles of restricted cash (approximately $1.8 million in U.S. dollars). Alfa-Bank had the unilateral right to change the interest rate onamounts borrowed 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 that the interest rate may not exceed 14% per annum. Interest must be repaid on a monthly basis on the 25th of each month. Amounts borrowedunder the Credit Agreement must be repaid within six months of the date borrowed. Digital Provider’s obligations under the Credit Agreement are secured bya pledge of Digital Provider’s deposits in its deposit account with Alfa-Bank and by a guarantee given by AO SAT & Company. The line of credit expired onMay 20, 2014. F-17  Bank Otkritie Credit Agreement In November 2014, Digital Provider entered into a factoring services agreement (together with related and ancillary agreements, collectively, the “BankOtkritie Agreement”) with Bank Otkritie Financial Corporation (“Bank Otkritie”). No funds were drawn under the Bank Otkritie Agreement and the agreement was terminated on August 31, 2015. Term Loan On April 14, 2015, Revere Wealth Management, LLC provided a $200,000 term loan with an annual interest rate of 12% due May 31, 2015. Terms of theloan provided for fees of $2,500 and required that the first $65,000 of the loan proceeds be used to fund expenses associated with the Company’s convertiblepreferred stock transaction and convertible senior notes and warrants transaction. This loan was repaid in May 2015. Senior Convertible Notes and Warrants On April 30, 2015, the Company entered into a $5,000,000 Securities Purchase Agreement (the “Debt SPA”) for the issuance of (i) senior convertible notes inthe aggregate principal amount of $5,000,000 (the “Notes”), convertible into shares of our common stock and (ii) 2,709,360 warrants (the “Warrants”) topurchase shares of our common stock. The investors had the right to purchase additional Notes and Warrants, up to $10,000,000. The notes accrued interest at 7% (default rate 18%) per year on the full face amount of $5,000,000, with accelerated interest and principal payments, payablein five (5) monthly installments in cash and/or shares of our common stock, and mature on April 30, 2018. The Notes were convertible into shares of ourcommon stock at an initial price of $1.624 per share, subject to market adjustments and “down round” reductions in the conversion price arising from futurestock issuances at prices less than the conversion price. The Warrants had a term of three years from issuance and were immediately exercisable to purchase shares of our common stock at an initial exercise price of$1.74 per share, subject to market adjustments and “down round” reductions in the conversion price arising from future stock issuances at prices less than theexercise price. Under certain circumstances, the holder of the Warrants may have elected a cashless exercise. Pursuant to a letter agreement dated August 4, 2015, (i) all Notes became automatically (i.e., without any further action by Company or the investors) nulland void as of October 11, 2015 (the “Moratorium Date”) with no obligations or liabilities whatsoever of the Company relating thereto; (ii) the investors'right to purchase, and the Company's obligation to issue, Additional Notes and Additional Warrants (each, as defined in the Debt SPA) became automatically(i.e., without any further action by the Company or the investors) null and void as of the Moratorium Date with no obligations or liabilities whatsoever of theCompany relating thereto. On December 1, 2015, the Company warrants previously issued to Series A Preferred stock investors were terminated and cancelled in exchange for 2,500,000in the aggregate of unrestricted shares of the Company’s common stock. NOTE 9. ACCRUED EXPENSES At December 31, 2015 and December 31, 2014, accrued expenses amounted to $2,975,065 and $2,351,885 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, 2015 and December 31, 2014. December 31, 2015 December 31, 2014 Accrued professional fees $220,140 $295,144 Short term loan advances 200,000 75,346 Accrued payroll 79,653 70,463 Accrued bonus 2,254,316 1,409,131 Accrued foreign taxes 79,691 189,690 Other accrued expenses 141,265 312,111 $2,975,065 $2,351,885 Accrued performance bonuses of $2,254,316 and $1,409,131 at December 31, 2015 and 2014 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. F-18  NOTE 10. LONG TERM DEBT Long Term debt consisted of the following: December 31, December 31, 2015 2014 RBL Capital Group LLC $3,965,000 $3,315,000 Convertible Notes Payable - - Total Debt 3,965,000 3,315,000 Less Current Portion (518,437) (98,493)Long Term Debt $3,446,563 $3,216,507 RBL Capital Group, LLC Effective June 30, 2014, TOT Group, Inc. and its subsidiaries as co-borrowers, TOT Payments, LLC, TOT BPS, LLC, TOT FBS, LLC, Process Pink, LLC, 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, we may borrow up to $10,000,000 from RBL during the period of 18 months from the closing of thiscredit facility. Prior to maturity of the loan, the principal amount of the borrowings under the credit facility will carry a fixed interest rate of the higher of13.90% 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 creditfacility, an additional three percent per annum would be added to such interest rate, and for any other amounts, obligations or payments due to RBL, anannual default rate not to exceed the lesser of (i) the prime rate plus 13% per annum and (ii) 18.635% per annum. As further described below, borrowings fromthe line of credit in the amounts of $3,315,000, $400,000 and $250,000 were converted into term loans. At December 31, 2015 and December 31, 2014 wehad $6,035,000 and $6,685,000 available on our RBL 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. Effective February 10, 2015, we entered into a $400,000 term loan note with RBL based on a draw down from the line of credit. The loan provides forinterest-only payments at 13.90% interest through July 20, 2015. From August 20, 2015 through July 20, 2019, the note maturity date, we are obligated tomake interest and principal payments of $10,911 per month. We paid $8,000 in costs related to this loan, which is classified within other assets on theconsolidated balance sheet. Effective March 27, 2015, we entered into a $250,000 term loan note with RBL based on the draw down from the line of credit. The loan provides for interest-only payments at 13.90% interest through July 20, 2015. From August 20, 2015 through July 20, 2019, the note maturity date, we are obligated to makeinterest and principal payments of $6,819 per month. We paid $5,000 in costs related to this loan, which the amortized amount is classified within otherassets on the consolidated balance sheet. During July 2014, $3,315,000 was drawn from the line and converted to a note. The note provides for interest only payments at 13.90% interest throughJanuary 2015, commencing on August 20, 2014 then monthly interest and principal payments of $90,421 through January 2019. Net proceeds from the loanwere used to repay the $3.0 million MBF loan and related costs and interest, in addition to approximately $239 thousand for working capital and providedfor $65 thousand loan fee in addition to the proceeds. The loan requires interest only payments at 13.90% interest through January 2015, commencing onAugust 20, 2014 followed by monthly interest and principal payments of $90,421 through January 2019. 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. F-19  Cayman Invest, S.A. 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 due tothe write-off of the remaining debt discount on the loan. A stock subscription receivable for $1,111,130 was written-off in 2015 and we are currently working to reclaim shares provided proportionally to theuncollected amounts. Capital Sources of New York and Georgia Notes LLC The Company had a unsecured $2,300,000 note payable to Capital Sources of New York (“CSNY”) and 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 rate on 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 in 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 CSNY 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 these promissory notes for such number of shares of our common stock as determined under the Agreement based upon80% of the volume-weighted average trading price of our Common Stock for a specified period of time (up to 90 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 F-20  Scheduled Debt Principal Repayment Scheduled principal maturities on RBL indebtedness at December 31, 2015 is as follows: Long term debt consisted of the Following: 2016 $518,437 2017 872,964 2018 1,002,342 2019 1,150,897 2020 420,360 Balance December 31, 2015 $3,965,000 NOTE 11. COMMITMENTS AND CONTINGENCIES Lease Commitments In May 2013, we entered into a lease agreement for approximately 5,200 square feet of office space located in North Miami Beach, Florida. We moved ourcorporate headquarters and principal executive office to this location in June 2013. The term of the lease agreement is from May 1, 2013 through December31, 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 throughDecember 31, 2013, $17,640 per month (or $211,680 per year) 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 through December 31, 2015 and $19,448 per month (or $233,377 per year) for the period from January1, 2016 through December 31, 2016. 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 and was renewed. Net Element Russia leases approximately 2,033 square feet of office space in Moscow, Russia at annual rent of $66,514, as well as one corporate apartment atannual rent of $14,571. The current lease term for the office space expires on January 31, 2017 and we expect to renew this lease at that time. The currentlease term for the corporate apartment expired on February 28, 2017. We believe that these facilities are adequate for our anticipated needs. Share Issuance Commitments On December 3, 2015, the Company’s Compensation Committee approved and authorized the issuance of 5,791,717 restricted shares of the Companycommon stock to Oleg Firer, the Chief Executive Officer of the Company, in lieu of and in satisfaction of accrued and unpaid compensation due to him in theamount of $1,042,509. Share issuance is subject to shareholder approval and shares will be not issued and will be deemed forfeited if such shareholders’approval is not obtained until the end of the Corporation’s fiscal year 2016, in which case Oleg Firer will be entitled to the accrued cash compensation. On December 3, 2015, the Compensation Committee awarded to Oleg Firer, the Chief Executive Officer of the Company, 3,750,000 restricted shares of theCompany common stock as performance bonus. Share issuance is subject to shareholder approval and shares will be not issued and will be deemed forfeited ifsuch shareholders’ approval is not obtained by the end of the Corporation’s fiscal year 2016. On December 3, 2015, the Compensation Committee awarded to Steven Wolberg, the Chief Legal Officer of the Company, 800,000 restricted shares of theCompany common stock as performance bonus. Share issuance is subject to shareholder approval and shares will be not issued and will be deemed forfeited ifsuch shareholders’ approval is not obtained by the end of the Corporation’s fiscal year 2016. The company is committed for the future issuance of shares to satisfy its obligations for the purchase of PayOnline Systems (Also see Note 4). 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 was filed. On May 12, 2015 The Appellate Division of theSupreme Court overturned the dismissal ruling of the lower Court and reinstated the Plaintiffs case. The Parties are in the process of Discovery and TOTpayments will continue pursuit of its claims against First Data through the litigation process. F-21  OOO-RM Invest 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) that Plaintiffwould receive a 30% ownership stake in TOT Money International, LTD and/or receive shares of stock in the Company; (g) that Tcahai HairullaevichKatcaev would hold the position of General Director of TOT Money; (h) Plaintiff would provide TOT Money International, LTD with access to Plaintiff’soperating accounts; and (i) Plaintiff would transfer client accounts and contracts to TOT Money. Plaintiff claims that we breached our obligations pursuant tothat alleged oral agreement, and was seeking, among other things, compensatory damages in excess of $50 million. We filed multiple counterclaims againstthe Plaintiff. 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 2014, 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 dismissedin view of the Federal Court action. On October 1, 2015 the parties to the lawsuit entered into a confidential settlement agreement fully and finally resolving and settling any and all claimsagainst one another arising from the matters referenced in this lawsuit. As part of the settlement agreement, the parties also agreed to broad releasesprecluding legal action for any claims against one another, howsoever arising and whether referenced in the lawsuit or not. On October 2, 2015, the parties tothe lawsuit filed a Joint Stipulation of Settlement and the court entered an order administratively closing the case. 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”). Orkin was aformer employee 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 interest inownership” 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.The Company asserts that it never had any dealings with Orkin and strongly denies all allegations contained in the Complaint. On September 23, 2014, The Court upheld the Motion to set aside a default judgment previously entered against Unified Payments. On the Motion toDismiss (“demurrer”), Plaintiffs attorney filed an amended complaint to address certain deficiencies raised by our counsel. Requests for Discovery were servedon Plaintiff’s counsel who recently requested an extension for filing responses thereto. At the court hearing on our demurrer to the Plaintiffs First AmendedComplaint, the court gave the Plaintiff another opportunity to clarify its Complaint and Orkin filed a Second Amended Complaint in the California litigationon June 8, 2015. The Defendants filed a Demurrer in response. At a hearing on the matter, the judge sustained the Defendants demurrer to the breach offiduciary duty claim against Unified Payments and Net Element –essentially dismissing these claims. However, the judge allowed the contract and fraudclaims to proceed against all defendants. The parties recently took depositions of various Plaintiff and Defendant parties. Litigation is proceeding in theCalifornia Courts and the trial is currently scheduled for June 27, 2016. As the employment agreement between Orkin and FBS has an arbitration clause that is binding on Orkin in his lawsuit against Unified Payments for allegedbreach of the employment agreement, the parties agreed in early November 2014 to stipulate to arbitration in Florida and to stay the California proceedingspending the outcome of the arbitration. A Demand for Arbitration was served on the company on May 5th. The Company will be defending the claims set outin the Arbitration Complaint. The Company did not assume any of the contracts from the Unified Payments entity it acquired in 2013. The Companyunderstands that the Predecessor Unified entity has filed counterclaims against Orkin in the arbitration matter and that the Arbitration is scheduled forhearing at the end of May 2016. F-22  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 continue to attempt service of process 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. Zell recently filed a Motion to set aside the Court Order alleging he was unaware of the Court Proceedings. The Court dismissed Zell’s Motion to dissolve theinjunction and the case is moving forward. Zell served Discovery demands on the Company that was addressed by legal counsel. The matter remainspending. Dan Hudson In August 2015, we, as plaintiff, commenced an action in the Miami-Dade Circuit Court, Florida against Dan Hudson for defamation of our Company andCEO and tortious interference with our business relationships. The Motion is for an injunction against Hudson enjoining him from posting any informationabout our Company and CEO on any website and enjoining him from contacting our business partners or investors. The Company has been unable to locatethe Defendant to serve process on him. This matter is proceeding. Mari Vanna In March 2016, the Company learned that Mari Vanna DC, LLC (“the Plaintiff”) had filed a lawsuit in the United States District Court for the District ofColumbia against Net Element and its TOT Group and Unified Payments subsidiaries. The Company has not been served any legal papers at this time but isaware of the filed suit. The Plaintiff alleges among other things, that the Company and its subsidiaries improperly withheld and failed to remit certain creditcard transaction proceeds they processed on behalf of the Plaintiff. The Company disputes the allegations in the lawsuit and has proactively entered intodiscussions with the Plaintiff to resolve this matter. The parties have tentatively reached a settlement of this matter. 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 our resultsof operations, financial condition, or cash flows. As more information becomes available, if management should determine that an unfavorable outcome isprobable on such a claim and that the amount of such probable loss that it will incur on that claim is reasonably estimable, we will record a reserve for theclaim in question. If and when we record such a reserve is recorded, it could be material and could adversely impact our results of operations, financialcondition, and cash flows. NOTE 12. RELATED PARTY TRANSACTIONS At January 1, 2014, 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 toa letter agreement dated June 10, 2014, we agreed to pay Enerfund $77,128 and Enerfund 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 when we adjusted our related party payable from Enerfund from $301,966 to$77,128. The $77,128 due to Enerfund was paid in October 2014. 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. On September 18, 2015 we received $50,000 and $100,000 from an officer of the Company and a member of the board of directors, respectively. F-23  On October 5, 2015 we received $50,000 and on October 6, 2015 we received an additional $50,000 from a company affiliated with the CEO of Net Element. We received three installments of $332,985, on October 7, 2015, November 12, 2015 and December 11, 2015 from a member of the Board of Directors. Thisbalance was settled with stock during the fourth quarter of 2015. During 2015 the Company’s CEO and Star Capital (an entity related to the CEO) provided advances to the Company totaling $745,712 of which $425,000was paid back during 2015, $125,000 in cash and $300,000 in common stock of the Company. Outstanding advances from our CEO and Star Capital are$320,712 at December 31, 2015. Total due to related parties was $329,881 at December 31, 2015 with $9,169 were attributed to our Mobile Solutions andOnline Solutions. NOTE 13. STOCKHOLDERS’ EQUITY On December 9, 2014, our shareholders approved the increase in authorized common stock from 100,000,000 to 200,000,000. On June 12, 2015, our shareholders approved the increase in authorized common stock from 200,000,000 to 300,000,000. On September 11, 2015, we entered into a letter agreement (as subsequently amended) by and among our company and certain accredited investors,including certain of our directors and officers, providing for the issuance of 11,357,143 restricted shares of our common stock in the aggregate and options topurchase 11,357,143 restricted shares of common stock for cash (the “Equity Funding”). The per share purchase price of each restricted share was $0.14.Consummation of the transaction was subject to shareholder approval which was received in November 2015. The options expire on the fifth (5th) annual anniversary of the date of the letter agreement. Prior to expiration, each restricted options is exercisable into onerestricted share at the exercise price of $0.22 (110% of the closing trading price of Common Stock reported on The NASDAQ Capital Market on the date ofthe letter agreement). Each investor may elect to exercise it or his amended restricted option through a cashless exercise. Equity Incentive Plan On December 5, 2013, our Board submitted and the shareholders approved the Net Element International, Inc. 2013 Equity Incentive Plan (the “2013 Plan”).Awards under the 2013 Plan may be granted in any one or all of the following forms: (i) incentive stock options (“Incentive Stock Options”) meeting therequirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”); (ii) non-qualified stock options (“Non-Qualified StockOptions”) (unless otherwise indicated, references to “Options” include both Incentive Stock Options and Non-Qualified Stock Options); (iii) stockappreciation rights (“Stock Appreciation Rights”), which may be awarded either in tandem with Options (“Tandem Stock Appreciation Rights”) or on astand-alone basis (“Nontandem Stock Appreciation Rights”); (iv) shares of common stock that are restricted (“Restricted Shares”); (v) units representingshares 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 aggregatenumber of shares of common stock available for award under the 2013 Plan at September 30, 2015 is 9,121,422, subject to adjustment as provided for in the2013 Plan. The 2013 Plan is administered by the compensation committee. 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 was recorded during 2015 as the 670,000 restricted shares granted vest ratably during 2015. On December 8, 2015, we issued 3,167,351 incentive stock options with an exercise price of $0.24 per share. The options have a 10-year life and we recordedcompensation expense of $996,598 at time of issuance for the Black-Scholes value of options provided. During 2015 and 2014, we issued common stock to the members of our Board of Directors and recorded compensation charges of $87,000 and $225,550respectively. Stock Issuances In May 2014, the Company issued 100,000 shares of its common stock in connection with a restructuring of its indebtedness to MBF Merchant Capital, LLC. 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. F-24  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 Cayman Invest Note wasconverted into 5,569,158 shares of common stock constituting approximately 15% of the then outstanding shares of common stock of the Company. On September 15, 2014, we entered into a Master Exchange Agreement, (the “Agreement”) with Crede. Crede acquired two existing promissory notes thathad been previously issued by the Company, one with $2,343,500 principal amount outstanding plus interest due to Capital Sources of New York and theother with $13,533,360 principal amount outstanding plus interest due to Georgia Notes 18, LLC. Pursuant to the Agreement, the Company and Crede agreedto exchange the promissory notes held for shares of the Company’s common stock, as determined under the Agreement. The “exchange price” for this initial exchange was $5.70. Accordingly, on September 15, 2014, the Company exchanged 125% of the principal and interestunder both promissory notes into 3,481,768 shares of Common Stock. As this number of shares was subject to adjustments over the True-Up Period followingthis exchange, the Company issued to Crede an additional 2,321,177 shares to finalize the transaction. The entire 5,802,945 issued shares was calculated atthe end of the True-Up Period to by dividing the aggregate amount of the promissory notes by 80% of the volume-weighted average trading price of theCommon Stock during the True-Up Period. Sale of Series A Preferred Stock On April 30, 2015, we entered into a $5,500,000 Securities Purchase Agreement for the issuance of 5,500 shares of newly-issued Series A ConvertiblePreferred Stock. The Series A Convertible Preferred Stock pays dividends at 9% (default rate 18%) per year on the full face amount of $5,500,000, requiringaccelerated principal redemption and dividends payments to be made monthly in cash and/or shares of our common stock through October, 2015, andmatures on April 20, 2017. The Series A Convertible Preferred Stock initially is convertible into shares of our common stock at $1.74 per share, subject tomarket adjustments and “down round” reductions in the conversion price arising from future stock issuances at prices less than the conversion price. The conversion rights embedded in the Series A Convertible Preferred Stock are at a conversion price below-market, and subject to further market priceadjustments and “down round” provisions. As a result, the beneficial conversion feature (“BCF”) was accounted for as derivative financial instrument. TheBCF was valued at date of issuance using the Black- Scholes-Merton options pricing model, resulting in a recorded value of $212,918 at the time of issuance. During the year ended December 31, 2015, holders of Series A Convertible Preferred Stock converted 5,500 shares of such preferred stock in exchange for39,889,354 shares of our common stock. Pursuant to the agreement, we issued an additional 4,208,049 shares of our common stock resulting in a $1,346,648charge for the value of the shares issued. Additionally, we recorded preferred stock dividends of $1,585,092 for this transaction during 2015. The preferredstock issuance and subsequent conversions occurred during 2015 and accordingly, there were no charges for this during 2014. NOTE 14. WARRANTS AND OPTIONS Warrants In 2013, the Company (then known as Cazador Acquisition Corporation Ltd.) issued warrants to purchase 8,940,000 shares of common stock in connectionwith its private placement and initial public offering. At December 31, 2015 and 2014, we had warrants outstanding to purchase 8,938,900 shares of commonstock. We issued 2,709,360 warrants to purchase shares of our common stock on April 30, 2015, which were exchanged for 2,500,000 shares of common stock onDecember 1, 2015. These warrants had a term of three years from issuance and are immediately exercisable to purchase shares of our common stock at aninitial exercise price of $1.74 per share, subject to market adjustments and “down round” reductions in the conversion price arising from future stockissuances at prices less than the exercise price. For additional information, see “—Senior Convertible Notes and Warrants” in Note 8 above. At December 31, 2015, the warrants had a weighted average exercise price of $7.50 and a weighted average remaining contract term of 1.75 years. AtDecember 31, 2014, the warrants had a weighted average exercise price of $7.50 and a weighted average contract term of 2.75 years. These warrants have nointrinsic value at December 31, 2015 and 2014. Options In November 2015, we issued options to purchase 11,357,143 common shares at $0.22 per share with a life of 5-years. The options were issued in connectionwith insider financing which provided for the sale of 11,357,143 shares of common stock and an equal number of options. We recorded a $904,222compensation expense for the value of the options issued. F-25  At December 31, 2015, we had 14,643,688 options outstanding with a weighted average exercise price of $0.23 and a weighted average remaining contractterm of 5.98 years. At December 31, 2014, we had 119,194 incentive stock options outstanding with a weighted average exercise price of $1.34 and aweighted average remaining contract term of 9.94 years. These options had no intrinsic value as of December 31, 2015 and 2014. NOTE 15. INCOME TAXES The components of income (loss) before income tax provision are as follows: December 31, December 31, 2015 2014 United States $(11,748,447) $(11,024,546)Foreign (1,579,479) 809,780 $(13,327,926) $(10,214,766) There was no current U.S. income tax or deferred income tax provision for years ended December 31, 2015 and December 31, 2014. There were currentforeign tax provisions of $79,000 and $154,036 for the years ended December 31, 2015 and December 31, 2014 respectively. The following is a reconciliation of the effective income tax rate with the U.S. federal statutory income tax rate at December 31, 2015 and December 31,2014: December 31, December 31, 2015 2014 U. S. Federal statutory income tax rate 34.0% 34.0%State income tax, net of federal tax benefit 4.1% 3.3%Debt Extinguishment 0.0% -8.4%Currency translation adjustment 3.9% 3.7%Stock based compensation related permanent differences -5.9% 0.0%Dividend Preferred Stock related permanent differences -3.6% 0.0%Change in uncertain tax liabilities -0.5% -1.4%Difference in foreign tax rates 0.1% -0.6%Change in valuation allowance -32.7% -32.0%Effective income tax rate -0.6% -1.4% The effective tax rate on operations of -0.6% at December 31, 2015 varied from the statutory rate of 34%, primarily due to the permanent difference related todividends paid on preferred stock, stock based compensation and the increase in our valuation allowance. The effective rate on operations of -1.4% atDecember 31, 2014 varied from the statutory rate of 34% primarily due to the permanent difference related to debt extinguishment and the increase in ourvaluation allowance. Significant components of our deferred tax assets and liabilities as of December 31, 2015 and December 31, 2014 are as follows: December 31, December 31, 2015 2014 Deferred tax assets: Net operating loss carry forwards $17,086,460 $14,590,807 Stock based compensation 572,004 - Contingent legal expenses 235,259 - Basis difference in goodwill 3,038,988 3,488,850 Basis difference in fixed assets 62,710 11,815 Basis difference in intangible assets 1,447,782 1,286,862 Valuation allowance for deferred tax assets (22,443,203) (19,378,334)Total deferred tax assets - - Deferred tax liabilities: Basis difference in fixed assets - - Basis difference in intangible assets - - Total deferred tax liabilities - - Net deferred taxes $- $- F-26  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, 2015, we had cumulative federal and state net operatinglosses (“NOLs”) carry forwards of approximately $44.9 million. At December 31, 2014, we had cumulative federal and state NOLs carry forwards ofapproximately $38.8 million. We also have $10.4 million and $9.2 million in foreign NOLs as of December 31, 2015 and 2014, respectively. The valuationallowance was increased by $3.1 million in fiscal year 2015. The fiscal 2015 increase was primarily related to additional operating loss incurred, anddifference in tax and book basis of goodwill and other intangible assets. We have considered all the evidence, both positive and negative, that the NOLs andother deferred tax assets may not be realized and have recorded a valuation allowance for $22.4 million. The federal NOLs begin to expire in December 2025while 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 2015,approximately $2.4 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 $5.1 million. Thus, the total of approximately $9.2 million as of December 31, 2015 isavailable to offset future income. NOTE 16. SEGMENT INFORMATION Prior to the third quarter of 2015, we had a single reportable business segment: payment processing for electronic commerce. On May 20, 2015, we obtainedfinancial and operational control of PayOnline, a provider of online payment processing of online transactions in emerging markets for services fees.Additionally, we rebranded our mobile payments business to Digital Provider and began reporting gross revenues for mobile payments where we provideaccess to branded content. Given the size of assets and revenues from PayOnline and Digital Provider, we began reporting segment information for threeoperating segments. Our three reportable segments include: (i) North America Transaction Solutions for electronic commerce, (ii) mobile solutions (primary Russian Federationand CIS) (iii) Online solutions, which started up with our acquisition of PayOnline Solutions on May 20, 2015. Management determines the reportablesegments based on the internal reporting used by our Chief Operating Decision Maker to evaluate performance and to assess where to allocate resources.During the twelve months ending December 31, 2015, the principal revenue stream for all segments came from services fees and branded content. During thetwelve months ending December 31, 2014 the revenue stream for all segments was service fees. Factors management used to identify the entity’s reportable segments The Company’s reportable segments are business units that offer different products and services in different geographies. The reportable segments are eachmanaged separately because they offer distinct products, in distinct geographic locations, with different delivery and service processes. North America Transaction Solutions Our US payment processing business segment consists of the former Unified Payments business and Aptito. This segment operates primarily in NorthAmerica. In March 2013, we acquired all of the business assets of Unified Payments, a provider of comprehensive turnkey, payment processing solutions tosmall and medium size business owners (merchants) and independent sales organizations across the United States. In April 2013, we purchased 80% of Aptito, a cloud based Software-as-a-Service (“SaaS”) restaurant management solution, which provides integrated POS,mPOS, Kiosk, Digital Menus functionality to drive consumer engagement via Apple® iPad®-based POS, kiosk and all other cloud-connected devices. F-27  Mobile Solutions Our Russian mobile and online payment processing segment consists of Digital Provider which operates primarily in Russia. In June 2012, we formed our subsidiary, OOO TOT Money to develop a business in mobile commerce payment processing. TOT Money launched its initialoperations in Russia as a payment facilitator using SMS (short message services, which is a text messaging service) and MMS (multimedia message services)for mobile phone subscribers in Russia. During 2015, we changed or business model, rebranded our name to Digital Provider, and began to offer brandedcontent to subscribers. Online Solutions On May 20, 2015, we acquired the net assets that comprise PayOnline, which includes a protected payment processing system to accept bank card paymentsfor goods and services. PayOnline primarily operates in Russia and CIS. The accounting policies of the individual transactions in the reportable segments are the same as those of the Company, as described in Note 1. Transactionsbetween reportable segments are primarily conducted at market rates, resulting in segment profits or expenses that are eliminated for reporting consolidatedresults. Segment Summary Information Geographic Summary Information 2015Revenues 2015Long-LivedAssets 2014Revenues 2014Long-LivedAssets North America $27,388,598 $2,912,363 $19,373,877 $3,089,053 Russia and CIS 12,846,764 6,366,814 1,862,827 94,460 The following tables present financial information of the Company’s reportable segments at December 31, 2015. The “corporate and eliminations” columnincludes all corporate expenses and intercompany eliminations for consolidated purposes. Prior to May 20, 2015, we only had one segment – Paymentprocessing for electronic transactions. F-28  Twelve months ended December 31, 2015 NorthAmericaTransactionSolutions MobileSolutions OnlineSolutions CorporateExpenses &Eliminations Total Net revenues $27,388,598 $9,043,705 $3,803,059 $- $40,235,362 Cost of revenues 23,497,808 8,124,763 2,354,644 - 33,977,215 Gross Margin 3,890,790 918,942 1,448,415 - 6,258,147 Gross margin % 14% 10% 38% - 16%General, administrative, asset disposal andother (Unallocated includes $4,306,304 inshare based compensation) 2,038,833 1,043,187 1,349,970 9,184,791 13,616,781 Provision (recovery) for bad debt 749,952 (100,868) - 487 649,571 Depreciation and amortization 1,212,266 20,625 971,830 308,441 2,513,162 Interest expense (income), net 538,994 - 773 3,035,931 3,575,698 Loss on change in fair value and settlementof beneficial conversion derivative - - - 26,932,496 26,932,496 Gain on debt extinguishment - - (27,743,980) (27,743,980)Net (loss) income for segment $(649,255) $(44,002) $(874,158) $(11,718,166) $(13,285,581)Segment assets $7,673,994 $1,848,574 $7,531,767 $5,859,226 $22,913,561 Expenditures for long-lived assets $991,739 $67,039 $4,429,664 $- $5,488,442 Twelve months ended December 31, 2014 NorthAmericaTransactionSolutions MobileSolutions OnlineSolutions CorporateExpenses &Eliminations Total Net revenues $19,373,877 $1,862,827 $- $- $21,236,704 Cost of revenues 15,925,924 - - - 15,925,924 Gross Margin 3,447,953 1,862,827 - - 5,310,780 Gross margin % 18% 100% - - 25%General, administrative, asset disposal andother (Unallocated includes $4,267,334 inshare based compensation) 2,859,512 573,239 - 7,920,493 11,353,244 Provision (recovery) for bad debt 496,711 (1,649,858) - - (1,153,147)Depreciation and amortization 2,009,332 2,894 - 345,910 2,358,136 Interest expense (income), net 2,388,833 271,233 - 1,045,628 3,705,694 Income from change in fair value andsettlement of beneficial conversionderivative - - - (5,569,158) (5,569,158)Loss on debt extinguishment - - - 6,184,219 6,184,219 Gain on debt restructure (1,596,000) (1,596,000)Net (loss) income for segment $(4,306,435) $2,665,319 $- $(8,331,092) $(9,972,208)Segment assets $5,860,470 $1,761,752 $- $6,700,447 $14,322,669 Expenditures for long-lived assets $1,866,323 $69,307 $- $- $1,935,630 NOTE 17. SUBSEQUENT EVENTS On January 21, 2016, the Company entered into an amendment of a letter agreement with its Chairman, Kenges Rakishev. The amendment provided for$910,000 in equity financing to the Company in exchange for the issuance by the Company of (i) 4,664,275 restricted shares of the Company’s commonstock based on $0.1951 per share; and (ii) options to purchase 4,664,275 restricted shares of the Company’s common stock. Each common stock option will expire on the fifth (5th) annual anniversary of the date of the amendment and shall be exercisable (prior to its expiration) intoone (1) Restricted Share at the exercise price equal to $0.2146 or may elect to exercise his restricted options through a cashless exercise. The transaction is subject to shareholder approval. In the event that the Stockholders Approval is not obtained within 120 days from the amendment date, theInvestor and the Company agreed that at the Investor’s election, (i) the purchase price for the Restricted Shares and the Restricted Options shall beautomatically amended to be equal to the product of (x) 4,664,275 and (y) the sum of $0.1951 and $0.125, in which case the Investor will have paid to theCompany the difference between such price and the previously paid purchase price for the Restricted Shares and the Restricted Options, (ii) the number ofRestricted Shares and the Restricted Options issuable to the Investor will be adjusted to be equal to the quotient determined by dividing (I) $910,000 by (II)$0.3201, or (iii) the Restricted Options will not be issued and the Investor will be issued the number of Restricted Shares calculated on the basis of $0.1951per share purchase price. On February 26, 2016, the Company’s CEO advanced $55,924 for working capital purposes. During January 2016, the Company issued 167,500 incentive shares representing the final vesting of December 2014 grant. A compensation expense of$224,450 was taken in December 2015. These shares were considered outstanding at December 31, 2015 since they vest January 1, 2016. Pursuant to the second installment provisions of the PayOnline purchase agreement, the Company issued 425,650 shares in January 2016 pursuant to theearn-out calculation in the contract. F-29  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., Oleg Firer,and Georgia Notes 18 LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with 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 reference toExhibit 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 (incorporatedby 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 Exhibit 3.4to 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) 3.6 Certificate of Amendment to Amended and Restated Certificate of Incorporation, to increase authorized common stock to 200 millionshares (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 17,2014) 3.7 Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 of theCompany’s Current Report on Form 8-K filed with the Commission on May 1, 2015) 3.8 Certificate of Amendment to Amended and Restated Certificate of Incorporation, dated June 15, 2015, to increase authorized common stockto 300 million shares (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission onJune 16, 2015) 3.9 Amendment No. 1 to the Bylaws of the Company, dated June 15, 2015 (incorporated by reference to Exhibit 3.2 of the Company’s CurrentReport on Form 8-K filed with the Commission on June 16, 2015) 47  3.10 Amendment No. 2 to the Bylaws of the Company, dated July 10, 2015 (incorporated by reference to Exhibit 3.1 of the Company’s CurrentReport on Form 8-K filed with the Commission on July 10, 2015) 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 (incorporatedby reference to Exhibit 10.5 to the Registration Statement, as amended, on Form F-1/A filed by the Company with the Commission onOctober 6, 2010) 4.4 Warrant Agreement by and between Cazador Acquisition Corporation Ltd. and Continental Stock Transfer & Trust Company (incorporatedby reference to Exhibit 4.4 to the Registration Statement, as amended, on Form F-1/A filed by the Company with the Commission onOctober 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) 4.6 Form of Amended and Restated Restricted Options to Purchase Shares of Restricted Common Stock (incorporated by reference to Exhibit4.1 to Net Element’s Current Report on Form 8-K filed with the Commission on October 7, 2015) 4.7 Form of Option to Kenges Rakishev to Purchase Shares of Restricted Common Stock (incorporated by reference to Exhibit 4.1 to NetElement’s Current Report on Form 8-K filed with the Commission on January 22, 2016) 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 10.1 toNet Element’s Current Report on Form 8-K filed with the Commission on July 10, 2012) 10.6 Credit Agreement, dated August 17, 2012, between Alpha-Bank and OOO Digital Provider (formerly OOO TOT Money) (incorporated byreference to Exhibit 10.1 to Net Element’s Current Report on Form 8-K filed with the Commission on August 23, 2012) 10.7 Agreement of Property Rights Pledge, dated August 17, 2012, between Alpha-Bank and OOO Digital Provider (formerly OOO TOT Money)(incorporated by reference to Exhibit 10.2 to Net Element’s Current Report on Form 8-K filed with the Commission on August 23, 2012) 10.8 General Agreement No. TR-0672 on General Conditions of Financing against Assignment of Monetary Claim (Factoring) within Russia,dated September 19, 2012, between Alpha-Bank and OOO Digital Provider (formerly OOO TOT Money) (including related supplementaryagreements) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission onOctober 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 OOODigital Provider (formerly OOO TOT Money) (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-Kfiled with the Commission on April 12, 2013) 10.10# Management and Consulting Services Agreement, dated October 24, 2012, between Bond Street Management LLC and Net 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) 48  10.11 Agreement on transfer of rights and obligations, dated July 1, 2012, among Mobile Telesystems OJSC, OOO RM-Invest and OOO DigitalProvider (formerly OOO TOT Money), with respect to Contract No. D0811373, dated July 1, 2008, between Mobile Telesystems OJSC andOOO RM-Invest (Net Element International, Inc. is requesting confidential treatment of certain information which has been omitted fromthis Agreement. The omitted information has been separately filed with the SEC.) (incorporated by reference to Exhibit 10.33 to theCompany’s Current Report on Form 8-K filed with the Commission on November 19, 2012) 10.12 Contract No. D0811373, dated July 1, 2008, between Mobile Telesystems OJSC and OOO RM-Invest (including material 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 Digital Provider (formerly OOO TOT Money) (NetElement International, Inc. is requesting confidential treatment of certain information which has been omitted from Contract No. CPA-86. The omitted information has been separately filed with the SEC.) (incorporated by reference to Exhibit 10.35 to the Company’s CurrentReport on Form 8-K filed with the Commission on November 19, 2012) 10.14 Contract No. 0382, dated September 20, 2012, between OJSC VimpelCom and OOO Digital Provider (formerly OOO TOT Money)(including Supplementary Agreement No. 1 thereto) (Net Element International, Inc. is requesting confidential treatment of certaininformation which has been omitted from Contract No. 0382 and Supplementary Agreement No. 1 thereto. 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) 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 to Exhibit10.1 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 by referenceto 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 Digital Provider (formerly OOO TOT Money) and OOO RM Invest, as amended on July30, 2012, August 17, 2012 and February 25, 2013 (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form10-K filed with the Commission on April 12, 2013) 10.22 Termination Agreement for Management and Consulting Agreement, dated April 15, 2013, between Net Element International, Inc. 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 Digital Provider (formerly OOO TOT Money)(incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013,filed with the Commission on May 15, 2013) (Net Element, Inc. is requesting confidential treatment of certain information which has beenomitted from Contract No. CPA/ML-17. The omitted information has been separately filed with the Commission.) 49  10.25 Commercial Lease, dated May 1, 2013, between BGC LLC and Net Element International, Inc. (incorporated by reference to Exhibit 10.4 tothe 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 quarterly periodended June 30, 2013, filed with the Commission on August 19, 2013) 10.27# Letter Agreement, dated January 14, 2013, among OOO Digital Provider (formerly OOO TOT Money), Tcahai Hairullaevich Katcaev andVarwood Holdings Limited (incorporated by reference to Exhibit 10.2 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) 10.28# Letter Agreement, dated July 1, 2013, among OOO Digital Provider (formerly OOO TOT Money), OOO NETE, Net Element International,Inc. and Tcahai Hairullaevich Katcaev (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for thequarterly period ended June 30, 2013, filed with the Commission on August 19, 2013) 10.29# Settlement, Separation Agreement and General Release, dated May 10, 2013, between Net Element International, Inc. and Curtis Wolfe(incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013,filed with the Commission on August 19, 2013) 10.30 Letter Agreement, dated August 28, 2013, among Net Element International, Inc., Oleg Firer, Steven Wolberg, Vladimir Sadovskiy, GeorgiaNotes 18, LLC, Kenges Rakishev and Mike Zoi (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-Kfiled with the Commission on September 10, 2013) 10.31 Services Agreement, dated December 5, 2013, between Net Element International, Inc. an K 1 Holding Limited (incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 6, 2013) 10.32 Letter Agreement, dated December 5, 2013, among TGR Capital, LLC, Net Element International, Inc. and K 1 Holding Limited(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on December 6, 2013) 10.33 Form of Incentive Stock Option Award Agreement Under the Net Element, Inc. 2013 Equity Incentive Plan (incorporated by reference toExhibit 10.33 to the Company’s Annual Report on Form 10-K filed with the Commission on March 30, 2015) 10.34 Form of Non-Qualified Stock Option Award Agreement Under the Net Element, Inc. 2013 Equity Incentive Plan (incorporated by referenceto Exhibit 10.34 to the Company’s Annual Report on Form 10-K filed with the Commission on March 30, 2015) 10.35 Form of Restricted Share Award Agreement Under the Net Element, Inc. 2013 Equity Incentive Plan (incorporated by reference to Exhibit10.35 to the Company’s Annual Report on Form 10-K filed with the Commission on March 30, 2015) 10.36 Assignment of Membership Interest, dated February 11, 2014, between Net Element, Inc. and T1T Group, LLC (incorporated by reference toExhibit 10.1 to Net Element’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, filed with the Commission onMay 15, 2014) 10.37 Loan and Security Agreement, dated June 30, 2014, among RBL Capital Group, LLC, as lender, and TOT Group, Inc., TOT Payments, LLC,TOT BPS, LLC, TOT FBS, LLC, Process Pink, LLC, TOT HPS, LLC and TOT New Edge, LLC, as co-borrowers (incorporated by reference toExhibit 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 Digital Provider (formerly OOO TOT Money) on September 17,2014), to the General Agreement No. TR-0672 on General Conditions of Financing against Assignment of Receivables (Factoring) withinRussia, dated September 19, 2012, between JSC Alpha-Bank and OOO Digital Provider (formerly OOO TOT Money) (incorporated byreference to Exhibit 10.1 to Net Element’s Current Report on Form 8-K filed with the Commission on September 24, 2014) 50  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 DigitalProvider (formerly OOO TOT Money) (incorporated by reference to Exhibit 10.2 to Net Element’s Current Report on Form 8-K filed with theCommission on September 24, 2014) 10.42 General Agreement No. 09969-HP on General Conditions of Factoring Services under “Liquidity” Program, dated as of November 5, 2014,between Bank Otkritie Financial Corporation and Digital Provider Limited Liability Company (incorporated by reference to Exhibit 10.1 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) 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) 10.45 Securities Purchase Agreement (Series A Preferred Stock) among the Company and the investors party thereto (incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 1, 2015) 10.46 Voting Agreement (related to Series A Preferred Stock sale) among the Company and the stockholders party thereto (incorporated byreference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on May 1, 2015) 10.47 Form of Lock-Up Agreement (related to Series A Preferred Stock transaction) (incorporated by reference to Exhibit 10.3 to the Company’sCurrent Report on Form 8-K filed with the Commission on May 1, 2015) 10.48 Securities Purchase Agreement (Senior Convertible Notes and Warrants) among the Company and the investors party thereto (incorporatedby reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K/A filed with the Commission on July 17, 2015) 10.49 Registration Rights Agreement among the Company and the investors party thereto (incorporated by reference to Exhibit 10.5 to theCompany’s Current Report on Form 8-K filed with the Commission on May 1, 2015) 10.50 Form of Lock-Up Agreement (related to Senior Convertible Notes and Warrants transaction) (incorporated by reference to Exhibit 10.6 tothe Company’s Current Report on Form 8-K filed with the Commission on May 1, 2015) 10.51 Form of Voting Agreement (related to Senior Convertible Notes and Warrants transaction) among the Company and the stockholders thereto(incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the Commission on May 1, 2015) 10.52 Acquisition Agreement, dated May 20, 2015, among TOT Group Europe Ltd., ТOT Group Russia LLC, Maglenta Enterprises Inc. andChampfremont Holding Ltd., Polimore Capital Limited, Brosword Holding Limited and other Target Companies listed in Exhibit B thereto(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 27, 2015) 10.53 Escrow Agreement, dated May 20, 2015, among TOT Group Europe Ltd., ТOT Group Russia LLC, Maglenta Enterprises Inc.,Champfremont Holding Ltd. and Reznick Law, PLLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form8-K filed with the Commission on May 27, 2015) 10.54 Guaranty, dated May 20, 2015, among Net Element, Inc., Maglenta Enterprises Inc. and Champfremont Holding Ltd. (incorporated byreference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on May 27, 2015) 10.55 Guaranty, dated May 20, 2015, by Lacerta Management Ltd in favor of TOT Group Europe Ltd., and ТOT Group Russia LLC (incorporatedby reference to Exhibit 10.4 to the Company’s Current Report on Form 8-Kfiled with the Commission on May 27, 2015) 10.56 Letter Agreement, dated August 4, 2015, by and among the Company and the investors listed on the signature pages attached thereto(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 4, 2015) 51  10.57 Letter Agreement, dated August 4, 2015, by and among the Company and the investors listed on the signature pages attached thereto(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on August 4, 2015) 10.58 Letter Agreement, dated as of September 11, 2015, among the Company and the investors listed on the signature pages attached thereto(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 16,2015) 10.59 Additional Letter Agreement among the Company and the investors listed on the signature pages attached thereto (incorporated byreference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on October 7, 2015) 10.60 Amendment to Letter Agreement dated August 4, 2015, dated December 1, 2015, by and among the Company and the investors listed onthe signature pages attached thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with theCommission on December 2, 2015) 10.61 Amendment to Letter Agreement dated August 4, 2015, dated December 1, 2015, by and among the Company and the investors listed onthe signature pages attached thereto (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with theCommission on December 2, 2015) 10.62 Second Additional Letter Agreement, dated as of January 21, 2016, between the Company and Kenges Rakishev (incorporated by referenceto Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 22, 2016) 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 on November26, 2012) 21.1* List of Subsidiaries 23.1* Consent of Independent Registered Public Accounting Firm (Daszkal Bolton LLP) 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934 32.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. § 1350 101* The following financial information from the Annual Report on Form 10-K for the fiscal year ended December 31, 2015, formatted in XBRL(eXtensible Business Reporting Language), is filed electronically herewith: (i) Consolidated Balance Sheets as of December 31, 2015 and2014; (ii) Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2015 and 2014; (iii)Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2015 and 2014; (iv) ConsolidatedStatements of Cash Flows for the Years Ended December 31, 2015 and 2014; and (v) Notes to Consolidated Financial Statements.____________________# Indicates management contract or compensatory plan or arrangement.* Filed herewith. 52  Exhibit 21.1 LIST OF SUBSIDIARIES Name Jurisdiction of Incorporation or OrganizationAptito, LLC FloridaNet Element Services, LLC FloridaNetLab Systems IP LLC FloridaNetlab Systems, LLC FloridaOOO Net Element Russia RussiaOOO TOT Group RussiaOOO TOT Group Russia RussiaOOO Digital Provider RussiaTech Solutions LTD Cayman IslandsTOT Group, Inc. DelawareTOT Group Europe LTD U.K.TOT Group Cyprus CyprusTOT Group Kazakhstan LLC KazakhstanTOT Group Ukraine LLC UkraineTOT Payments, LLC FloridaProcess Pink, LLC FloridaTOT HPS, LLC FloridaTOT FBS, LLC FloridaTOT New Edge, LLC FloridaTOT BPS, LLC FloridaUnified Portfolios, LLC FloridaPolimore Capital Limited CyprusBrosword Holding Limited CyprusPay Online Systems LLC RussiaInnovative Payment Technologies LLC Russia  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. 333-204840 and No. 333-199432)and Form S-8 (No. 333-195476 and No. 333-208364) of Net Element, Inc. of our report dated March 30, 2016, relating to the consolidated financialstatements, at and for the years ended December 31, 2015 and 2014, which appear in this Form 10-K. Our report contains an explanatory paragraph regardingthe Company’s ability to continue as a going concern. /s/ DASZKAL BOLTON LLPFort Lauderdale, Florida March 30, 2016  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 thisreport; 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 inExchange Act 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 the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 theeffectiveness of 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 controlover financial reporting. March 30, 2016By:/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 thisreport; 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 inExchange Act 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 the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 theeffectiveness of 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 controlover financial reporting. March 30, 2016By:/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, Inc. for the year ended December 31, 2015, each of the undersignedhereby 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’s knowledge: (i)such Annual Report on Form 10-K of Net Element, Inc. for the year ended December 31, 2015 fully complies with the requirements 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 Net Element, Inc. for the year endedDecember 31, 2015 fairly presents, in all material respects, the financial condition and results of operations of Net Element, Inc. March 30, 2016By:/s/ Oleg Firer Date Oleg Firer Chief Executive Officer (Principal Executive Officer) March 30, 2016By:/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, Inc. and will be retained by Net Element, Inc. andfurnished to the Securities and Exchange Commission or its staff upon request. 

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