10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

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 (State or other jurisdiction of incorporation or organization)	90-1025599 (I.R.S. Employer Identification No.)
3363 NE 163rd Street, Suite 705 North Miami Beach, Florida (Address of principal executive offices)	33160 (Zip Code)

(305) 507-8808

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	NETE	The Nasdaq Stock Market, LLC (Nasdaq Capital Market)

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 of 1934 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 filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Non-accelerated filer ☒        Accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of outstanding shares of common stock, $.0001 par value, of the registrant as of August 13, 2020 was 4,596,709.

Net Element, Inc.

Quarterly Report on Form 10-Q

Table of Contents

		Page No.
	PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets – at June 30, 2020 and December 31, 2019	3
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss – for the Three and Six Months Ended June 30, 2020 and 2019	4
	Unaudited Condensed Consolidated Statements of Cash Flows – for the Six Months Ended June 30, 2020 and 2019	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
	PART II — OTHER INFORMATION	28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 6.	Exhibits	29
	Signatures	30

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

NET ELEMENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	June 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash	$	865,812		$	486,604
Accounts receivable, net		5,855,538			6,560,928
Prepaid expenses and other assets		1,530,625			1,621,144
Total current assets, net		8,251,975			8,668,676
Intangible assets, net		4,703,406			5,678,649
Goodwill		7,681,186			7,681,186
Operating lease right-of-use asset		316,118			380,986
Other long term assets		730,185			629,651
Total assets	$	21,682,870		$	23,039,148
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	5,360,103		$	6,037,833
Accrued expenses		2,121,161			1,800,344
Deferred revenue		1,291,703			1,401,117
Notes payable (current portion)		936,391			909,086
Operating lease liability (current portion)		68,859			133,727
Due to related party		81,591			126,662
Total current liabilities		9,859,808			10,408,769
Operating lease liability (net of current portion)		247,259			247,259
Notes payable (net of current portion)		8,986,881			8,342,461
Total liabilities		19,093,948			18,998,489
STOCKHOLDERS' EQUITY
Series A Convertible Preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at June 30, 2020 and December 31, 2019)		-			-
Common stock ($.0001 par value, 100,000,000 shares authorized 4,195,670 and 4,111,082 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively)		419			410
Paid in capital		185,496,940			185,297,069
Accumulated other comprehensive loss		(2,209,363	)		(2,274,187	)
Accumulated deficit		(180,442,122	)		(178,750,634	)
Non-controlling interest		(256,952	)		(231,999	)
Total stockholders' equity		2,588,922			4,040,659
Total liabilities and stockholders' equity	$	21,682,870		$	23,039,148

See Accompanying Notes to the Condensed Consolidated Unaudited Financial Statements.

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NET ELEMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net revenues
Service fees	$	13,718,609		$	16,487,311		$	29,556,175		$	31,534,494
Total Revenues		13,718,609			16,487,311			29,556,175			31,534,494
Costs and expenses:
Cost of service fees		11,536,787			13,901,365			24,837,195			26,161,512
Selling, general and administrative		1,385,329			2,299,070			3,701,221			4,683,936
Non-cash compensation		7,500			2,005,840			45,900			2,020,847
Bad debt expense		33,310			143,190			476,088			482,498
Depreciation and amortization		772,402			747,347			1,551,844			1,598,567
Total costs and operating expenses		13,735,328			19,096,812			30,612,248			34,947,360
Loss from operations		(16,719	)		(2,609,501	)		(1,056,073	)		(3,412,866	)
Interest expense		(341,020	)		(252,582	)		(689,433	)		(497,635	)
Other income		19,325			1,284,411			29,065			1,198,018
Net loss from continuing operations before income taxes		(338,414	)		(1,577,672	)		(1,716,441	)		(2,712,483	)
Income taxes		-			-			-			-
Net loss from continuing operations		(338,414	)		(1,577,672	)		(1,716,441	)		(2,712,483	)
Net loss attributable to the non-controlling interest		13,724			40,225			24,953			54,191
Net loss attributable to Net Element, Inc. stockholders		(324,690	)		(1,537,447	)		(1,691,488	)		(2,658,292	)
Foreign currency translation		(65,990	)		(5,537	)		64,824			(20,099	)
Comprehensive loss attributable to common stockholders	$	(390,680	)	$	(1,542,984	)	$	(1,626,664	)	$	(2,678,391	)
Loss per share - basic and diluted	$	(0.08	)	$	(0.37	)	$	(0.41	)	$	(0.68	)
Weighted average number of common shares outstanding - basic and diluted		4,175,148			4,199,076			4,146,396			3,908,872

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

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NET ELEMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities
Net loss attributable to Net Element, Inc. stockholders	$	(1,691,488	)	$	(2,658,292	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-controlling interest		(24,953	)		(54,191	)
Share based compensation		45,899			2,020,847
Deferred revenue		(109,414	)		(1,046,398	)
Provision for bad debt		(8,668	)		(8,927	)
Depreciation and amortization		1,551,844			1,598,567
Non cash interest		46,552			21,711
Changes in assets and liabilities:
Accounts receivable		700,506			1,165,261
Prepaid expenses and other assets		(287,386	)		668,646
Accounts payable and accrued expenses		(538,178	)		(2,305,202	)
Net cash used in operating activities		(315,286	)		(597,978	)
Cash flows from investing activities:
Client acquisition costs		(359,350	)		(1,210,278	)
Purchase of equipment and changes in other assets		(35,666	)		(468,287	)
Net cash used in investing activities		(395,016	)		(1,678,565	)
Cash flows from financing activities:
Proceeds from SBA Loans		651,392			-
Proceeds from indebtedness		174,314			1,116,500
Repayment of indebtedness		-			(209,084	)
Lease liability		(64,868	)		442,094
Related party advances		159,432			166,561
Net cash provided by financing activities		920,270			1,516,071
Effect of exchange rate changes on cash		14,589			6,271
Net increase (decrease) in cash		224,557			(754,201	)
Cash and restricted cash at beginning of period		1,116,255			2,249,551
Cash and restricted cash at end of period	$	1,340,812		$	1,495,350
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	336,120		$	475,924
Taxes	$	-		$	103,841

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

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NET ELEMENT, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying June 30, 2020 interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, but we believe the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation have been included in the condensed consolidated financial statements included herein. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the periods presented are not necessarily indicative of results to be expected for the full fiscal year or any other periods.

The condensed consolidated unaudited financial statements contained in this report include the accounts of Net Element, Inc., and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

NOTE 2. ORGANIZATION AND OPERATIONS

Net Element, Inc. (collectively with its subsidiaries, “Net Element”, “we”, “us”, “our” or the “Company”) is a financial technology-driven group specializing in payment acceptance and value-added solutions across multiple channels in the United States and selected international markets. We are differentiated by our proprietary technology which enables us to provide a broad suite of payment products and end-to-end transaction processing services. Our transactional services business enables merchants to accept credit cards as well as other forms of payment, including debit cards, checks, gift cards, loyalty programs and alternative payment methods in traditional card-present or swipe transactions, as well as card-not-present transactions, such as those conducted over the phone or through the Internet or a mobile device. We operate in two reportable business operating segments: (i) North American Transaction Solutions, and (ii) International Transaction Solutions.

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 from transactional services and other payment technologies for small and medium-sized businesses. Through PayOnline, we provide transactional services, mobile payment transactions, online payment transactions and other payment technologies in emerging countries in the Eurasian Economic Community ("EAEC"), Europe and Asia.

Our transactional services business enables merchants to accept credit cards as well as other forms of payment, including debit cards, checks, gift cards, loyalty programs and alternative payment methods in traditional card-present or swipe transactions, as well as card-not-present transactions, such as those conducted over the phone or through the Internet or a mobile device. We market and sell our services through both independent sales groups (“ISGs”), which are non-employee, external sales organizations and other third-party resellers of our products and services, and directly to merchants through electronic media, telemarketing and other programs, including utilizing partnerships with other companies that market products and services to local and international merchants. We have agreements with several banks that sponsor us for membership in the Visa ®, MasterCard ®, American Express ®, and Discover ® card associations and settle card transactions for our merchants. These sponsoring banks include Citizens Bank, Esquire Bank, N.A. and Wells Fargo Bank, N.A. From time to time, we may enter into agreements with additional banks. We perform core functions for merchants such as application processing, underwriting, account set-up, risk management, fraud detection, merchant assistance and support, equipment deployment and chargeback services.

Our Mobile Solutions business, PayOnline, provides relationships and contracts with mobile operators that gives us the ability to offer our clients in-app, premium SMS (short message services, which is a text messaging service), Wireless Application Protocol (WAP)-click, one click and other carrier billing services. PayOnline provides flexible high- tech payment solutions to companies doing business on the Internet or in the mobile environment. PayOnline specializes in integration and customization of payment solutions for websites and mobile apps. In particular, PayOnline arranges payment on the website of any commercial organization, which increases the convenience of using the website and helps maximize the number of successful transactions. In addition, PayOnline is focused on providing online and mobile payment acceptance services to the travel industry through direct integration with leading Global Distribution Systems (“GDS”), which include Amadeus® and Sabre®. Key geographic regions that PayOnline serves include Eastern Europe, Central Asia, Western Europe, North America and Asia major sub regions. The PayOnline office is located in Moscow, Russia.

Also part of our transactional services business, Aptito is a proprietary, cloud-based payments platform for the hospitality industry, which creates an online consumer experience in offline commerce environments via tablet, mobile and all other cloud-connected devices. Aptito’s easy to use point-of-sale (“POS”) system makes things easier by providing a comprehensive solution to the hospitality industry to help streamline management and operations. Orders placed tableside by customers directly speed up the ordering process and improve overall efficiency. Aptito's mobile POS system provides portability to the staff while performing all the same functions as a traditional POS system.

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NOTE 3. LIQUIDITY AND GOING CONCERN

Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. We sustained a net loss of approximately $1.7 million for the six months ended June 30, 2020 and $6.5 million for the year ended December 31, 2019 and have an accumulated deficit of $180.4 million and a negative working capital of $1.6 million at June 30, 2020.

The continuing spread of the novel coronavirus pandemic (“COVID-19”) is currently impacting countries, communities, supply chains and markets, global financial markets, as well as, the largest industry group serviced by our Company. The Company cannot predict, at this time, whether COVID-19 will continue to have a material impact on our future financial condition and results of operations due to understaffing in the service sector and the decrease in revenues and profits, particularly restaurants, and any possible future government ordinances that may further restrict restaurant and other service or retail sectors operations.

During March 2020, our Company evaluated its liquidity position, future operating plans, and its labor force, which included a reduction in the labor force and compensation to executives and other employees, in order to maintain current payment processing functions, capabilities, and continued customer service to its merchants. We are also seeking sources of capital to pay our contractual obligations as they come due, in light of these uncertain times. Management believes that its operating strategy will provide the opportunity for us to continue as a going concern as long as we are able to obtain additional financing. At this time, due to our continuing losses from operations, negative working capital, and the COVID-19 pandemic, we cannot predict the impact of these conditions on our ability to obtain financing necessary for the Company to fund its future working capital requirements. Our Company has also decided to explore strategic alternatives and potential options for its business, including sale of the Company or certain assets, licensing of technology, spin-offs, or a business combination. There can be no assurance, at this time, regarding the eventual outcome of our planned strategic alternatives.  In most respects, it is still too early in the COVID-19 pandemic to be able to quantify or qualify the longer-term ramifications on our merchant processing business, our merchants, our planned strategic alternatives to enhance current shareholder value, our current investors, and/or future potential investors.

As part of our Company's plan to obtain capital to fund future operations, on March 27, 2020, our Company entered into a Master Exchange Agreement, (the “ESOUSA Agreement”) with ESOUSA Holdings, LLC ("ESOUSA"), a related party. Prior to entering into the ESOUSA Agreement, ESOUSA agreed to acquire an existing promissory note that had been previously issued by the Company, of up to $2,000,000 in principal amount outstanding and unpaid interest due to RBL Capital Group, LLC ("RBL"). Pursuant to the ESOUSA Agreement, the Company has the right, at any time prior to March 27, 2021, to request ESOUSA, and ESOUSA agreed upon each such request, to exchange this promissory note in tranches on the dates when the Company instructs ESOUSA, for such number of shares of the Company’s common stock (“Common Stock”) as determined under the ESOUSA Agreement based upon the number of shares of Common Stock (already in ESOUSA’s possession) that ESOUSA sold in order to finance its purchase of such tranche of the promissory note from RBL.  ESOUSA will purchase each tranche of the promissory note equal to 88% of the gross proceeds from the shares of Common Stock sold by ESOUSA to finance the purchase of such exchange amount from RBL. Each such tranche shall be $148,000 unless otherwise agreed to by the Company and ESOUSA. On April 23, 2020, the Company entered into an amendment (the “Amendment”) to the ESOUSA Agreement with ESOUSA. The Amendment increased from $2,000,000 to $5,000,000 the principal amount and unpaid interest of one or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. The Company has the right, pursuant to the ESOUSA Agreement (as amended by the Amendment), to request ESOUSA to exchange in tranches such promissory notes for shares of the Company’s common stock on the terms and conditions and subject to the limitations set forth in the ESOUSA Agreement. On August 3, 2020, our Company entered into a Second Amendment (the “Second Amendment”) to the Agreement. The Second Amendment increased from $5,000,000 to $15,000,000 the principal amount and unpaid interest of one or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL, in connection with the ESOUSA Agreement. Our Company has the right pursuant to the Agreement (as amended by the Amendment) to request ESOUSA to exchange in tranches such promissory notes for shares of the Company’s common stock on the terms and conditions and subject to the limitations set forth in the Agreement. 

The Company received its first tranche of approximately $148,000 on March 27, 2020, less any fees. In April 2020, ESOUSA exchanged the promissory note for shares in our Company's common stock which has been reflected in our stockholders" equity section. (Refer to  Note 11. Stockholders" Equity). The Company received a second tranche of approximately $143,000 on April 28, 2020, less any fees, which is reflected in accrued expenses on the accompanying consolidated balance sheet as of June 30, 2020. No shares of the Company's common stock have been issued as of this date in connection with this tranche. On August 11, 2020, the Company received a third tranche of approximately $707,000 from RBL, less any fees. The Company issued 66,190 shares of its' common stock to ESOUSA in connection with this transaction.

On May 7, 2020, the Company entered into a promissory note (the “Note”) evidencing an unsecured loan (the “Loan”) in the amount of $491,493 made to the Company under the Paycheck Protection Program (the “PPP”). The Note matures on May 7, 2022 and bears interest at a rate of 1% per annum. Beginning December 7, 2020, the Company is required to make 17 monthly payments of principal and interest, with the principal component of each such payment based upon the level amortization of principal over a two-year period from May 7, 2020. Pursuant to the terms of the CARES Act and the PPP, the Company may apply to the Lender for forgiveness for the amount due on the Loan. The amount eligible for forgiveness is based on the amount of Loan proceeds used by the Company (during the eight-week period after the Lender makes the first disbursement of Loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), interest on mortgage obligations, rent and utilities, subject to certain limitations and reductions in accordance with the CARES Act and the PPP. No assurance can be given, at this time, that the Company will obtain forgiveness of the Loan in whole or in part. (Refer to Note 7. Notes Payable).

On May 18, 2020, the Company entered into a promissory note in the amount of $159,899 made to the Company by the U.S. Small Business Administration under the Economic Injury Disaster Loan program. (Refer to Note 7. Notes Payable).

On August 4, 2020, our Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mullen Technologies, Inc., a California corporation (“Mullen”), and Mullen Acquisition, Inc., a California corporation and wholly owned subsidiary of the Company (“Merger Sub”). Pursuant to, and on the terms and subject to the conditions of, the Merger Agreement, Merger Sub will be merged with and into Mullen (the “Merger”), with Mullen continuing as the surviving corporation in the Merger. After Mullen’s completion and delivery to our Company, of the audited financial statements for Mullen and its subsidiaries and affiliates required to be included in a registration statement, the Company intends to prepare and file with the Commission a registration statement on Form S-4 (together with all amendments thereto, the “Registration Statement”) in which the proxy statement will be included as a part of the prospectus, in connection with the registration under the Securities Act of the shares of Parent Shares to be issued in connection with the transactions contemplated in the Merger Agreement. The Merger Agreement contains termination rights for each of the Company and Mullen, including, among others, (i) in the event that the Merger has not been consummated by December 31, 2020, (ii) in the event that the requisite approval of the Company’s stockholders is not obtained upon a vote thereon, (iii) in the event that any governmental authority shall have taken action to restrain, enjoin or prohibit the consummation of the Merger, which action shall have become final and non-appealable and (iv) in the event that there is a breach by the other party of any of its representations, warranties, covenants or agreements, which breach is sufficiently material and not timely cured or curable. In addition, Mullen may terminate the Merger Agreement if, prior to receipt of the requisite approval of the Company’s stockholders, the Company’s board of directors shall have changed their recommendation in respect of the Merger. Further, the Company may terminate the Merger Agreement prior to receipt of the requisite approval of the Company’s stockholders to enter into a definitive agreement with respect to a Superior Proposal (as such term is defined in the Merger Agreement). 

Consummation of the Merger, the Divestiture, the Private Placement and the other transactions contemplated in the Merger Agreement, is subject to customary conditions including, among others, the approval of the Company’s stockholders. There is no guarantee that the Merger, the Divestiture, the Private Placement or the other transactions contemplated in the Merger Agreement will be completed. 

As contemplated by the Merger Agreement, on August 11, 2020, our Company as lender, entered into an unsecured Promissory Note, dated August 11, 2020 (the “Note”), with Mullen. Pursuant to the Note, Mullen borrowed from the Company $500,000. Prior to maturity of the loan, the principal amount of the loan will carry an interest rate of 14% per annum compounded monthly and payable upon demand. This loan will mature on the earlier of (i) the date that the Merger Agreement is terminated for any reason by any party thereto and (ii) the Merger Effective Time (as defined in the Merger Agreement).

These conditions raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company’s significant accounting policies are described below.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with GAAP and pursuant to the reporting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”).

Principles of Consolidation

These consolidated financial statements include the accounts of Net Element, Inc. and our subsidiary companies. All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash

We maintain our U.S. dollar-denominated cash in several non-interest bearing bank deposit accounts. All U.S. non-interest bearing transaction accounts are insured up to a maximum of $250,000 at FDIC insured institutions. The bank balances exceeded FDIC limits by approximately $162,000and $134,000 at June 30, 2020 and December 31, 2019, respectively. We maintained approximately $39,000 and $30,000 in uninsured bank accounts in Russia and the Cayman Islands at June 30, 2020 and December 31, 2019, respectively.

Restricted Cash

Restricted cash represents funds held-on-deposit with processing banks pursuant to agreements to cover potential merchant losses. It is presented as other long-term assets on the accompanying consolidated balance sheets since the related agreements extend beyond the next twelve months. Following the adoption of ASU 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230), the Company includes restricted cash along with the cash balance for presentation in the consolidated statements of cash flows. The reconciliation between the consolidated balance sheet and the consolidated statement of cash flows is as follows:

	June 30, 2020		December 31, 2019
Cash on consolidated balance sheet	$	865,812	$	486,604
Restricted cash		475,000		629,651
Total cash and restricted cash	$	1,340,812	$	1,116,255

Accounts Receivable and Credit Policies

Accounts receivable consist primarily of uncollateralized credit card processing residual payments due from processing banks requiring payment within thirty days following the end of each month. Accounts receivable also include amounts due from the sales of our technology solutions to its customers. The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts, if necessary, which reflects management’s best estimate of the amounts that will not be collected. The allowance is estimated based on management’s knowledge of its customers, historical loss experience and existing economic conditions. Accounts receivable and the allowance are written-off when, in management’s opinion, all collection efforts have been exhausted.

Other Current Assets

Other current assets consist of point-of-sale equipment which we use to service both merchants and independent sales agents ("ISG"). Often, we will provide the equipment as an incentive for merchants and independent sales agents to enter into a merchant contracts with us. The term of these contracts have an average length of three years and the cost of the equipment plus any setup fees will be amortized over the contract period. If the merchants terminate their contract with us early, they are obligated to either return the equipment or pay for it.

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Intangible Assets

Intangible assets acquired, either individually or with a group of other assets (but not those acquired in a business combination), are initially recognized and measured based on fair value. Goodwill acquired in business combinations is initially computed as the amount paid in excess of the fair value of the net assets acquired. We did not acquire any businesses during the year ended December 31, 2019 or the six months ended June 30, 2020.

The cost of internally developing, maintaining and restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity are recognized as an expense when incurred.

Intangible assets include acquired merchant relationships, recurring cash flow portfolios, referral agreements, trademarks, tradenames, website development costs and non-compete agreements. Merchant relationships represent the fair value of customer relationships purchased by us. Recurring cash flow portfolios give us the right to retain a greater share of the cash flow, in the form of paying less commissions to an independent sales agent, related to certain future transactions with the agent referred sales partners. Referral agreements represent the right to exclusively obtain referrals from a partner for their customers' credit card processing services.

We amortize definite lived identifiable intangible assets using a method that reflects the pattern in which the economic benefits of the intangible asset are expected to be consumed or otherwise utilized. The estimated useful lives of our customer-related intangible assets approximate the expected distribution of cash flows on a straight-line basis from each asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement.

Management evaluates the remaining useful lives and carrying values of long-lived assets, including definite lived intangible assets, at least annually, or when events and circumstances warrant such a review, to determine whether significant events or changes in circumstances indicate that a change in the useful life or impairment in value may have occurred. There were no impairment charges during the six months ended June 30, 2020 and June 30, 2019.

Goodwill

In accordance with ASC 350, Intangibles—Goodwill and Other, we test goodwill for impairment for each reporting unit on an annual basis, or when events or circumstances indicate the fair value of a reporting unit is below its carrying value.

Our goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations. The goodwill generated from the business combinations is primarily related to the value placed on the employee workforce and expected synergies. Judgment is involved in determining if an indicator or change in circumstances relating to impairment has occurred. Such changes may include, among others, a significant decline in expected future cash flows, a significant adverse change in the business climate, and unforeseen competition.

We have the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit. Factors we consider in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of our reporting units, events or changes affecting the composition or carrying amount of the net assets of its reporting units, sustained decrease in its share price, and other relevant entity specific events. If the management determines on the basis of qualitative factors that the fair value of the reporting unit is more likely than not less than the carrying value, then we perform a quantitative test for that reporting unit. The fair value of each reporting unit is compared to the reporting unit’s carrying value, including goodwill. Subsequent to the adoption on January 1, 2017 of Accounting Standards Update (“ASU”) No. 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment, if the fair value of a reporting unit is less than its carrying value, we recognize an impairment equal to the excess carrying value, not to exceed the total amount of goodwill allocated to that reporting unit.

At December 31, 2019, our management determined that an impairment charge of approximately $1.3 million was necessary to reduce the goodwill relating to the acquisition of PayOnline which is part of our International Transaction Solutions segment . We did not recognize any impairment charge to goodwill during the six months ended June 30, 2020

For a discussion of the estimate methodology and the significance of various inputs, please see the subheading below titled “Use of Estimates.”

Capitalized Customer Acquisition Costs, Net

Capitalized customer acquisition costs consist of up-front cash payments made to ISG’s for the establishment of new merchant relationships. Capitalized customer acquisition costs represent incremental, direct customer acquisition costs that are recoverable through gross margins associated with merchant contracts. The up-front cash payment to the ISG is based on the estimated gross margin for the first year of the merchant contract. The deferred customer acquisition cost asset is recorded at the time amounts are receivable but not yet earned and the capitalized acquisition costs are amortized on a straight-line basis over a period of approximately four years. These capitalized costs, net of amortization expense, are included in intangible assets on the accompanying consolidated balance sheets (See Note 5 – item labeled “Client Acquisition Costs”).

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Accrued Residual Commissions

We record commissions as a cost of revenues in the accompanying consolidated statement of operations and comprehensive loss. We pay agent commissions to ISGs and independent sales agents based on the processing volume of the merchants enrolled. The commission obligations are based on varying percentages of the volume processed by us on behalf of the merchants. Percentages vary based on the program type and transaction volume of each merchant.

Fair Value Measurements

Our financial instruments consist primarily of cash, accounts receivables, accounts payables, and a note payable. The carrying values of these financial instruments are considered to be representative of their fair values due to the short-term nature of these instruments. The carrying amount of notes payable of approximately $9.9 million and $9.3 million at June 30, 2020 and December 31, 2019, respectively, approximates fair value because current borrowing rates do not materially differ from market rates for similar bank borrowings. The notes payable are classified as a Level 2 item within the fair value hierarchy.

We measure certain nonfinancial assets and liabilities at fair value on a nonrecurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-level fair value hierarchy to prioritize the inputs used to measure fair value and maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted market prices in active markets for identical assets or liabilities as of the reporting date

Level 2 — Observable market based inputs or unobservable inputs that are corroborated by market data

Level 3 — Unobservable inputs that are not corroborated by market data

These non-financial assets and liabilities include intangible assets and liabilities acquired in a business combination as well as impairment calculations, when necessary. The fair value of the assets acquired and liabilities assumed in connection with the PayOnline acquisition, were measured at fair value by us at the acquisition date. The fair values of our merchant portfolios are primarily based on Level 3 inputs and are generally estimated based upon independent appraisals that include discounted cash flow analyses based on our most recent cash flow projections, and, for years beyond the projection period, estimates based on assumed growth rates. Assumptions are also made regarding appropriate discount rates, perpetual growth rates, and capital expenditures, among others. In certain circumstances, the discounted cash flow analyses are corroborated by a market-based approach that utilizes comparable company public trading values, and, where available, values observed in private market transactions. The inputs used by management for the fair value measurements include significant unobservable inputs, and therefore, the fair value measurements employed are classified as Level 3. Goodwill impairment is primarily based on observable inputs using company specific information and is classified as Level 3.

Leases

Effective January 1, 2019, we adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) which supersedes the lease accounting requirements in Accounting Standards Codification (ASC) 840, Leases (Topic 840). Please refer to Recent Accounting Pronouncements below for additional information on the adoption of Topic 842 and the impact upon adoption to the Company’s consolidated financial statements.

Under Topic 842, we applied a dual approach to all leases whereby we are a lessee and classify leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the Company. Lease classification is evaluated at the inception of the lease agreement. Regardless of classification, we record a right-of-use asset and a lease liability for all leases with a term greater than 12 months. Our lease, for the premises we occupy for the North American Transaction Solutions segment's U.S. headquarters, was classified as an operating lease as of January 1, 2019. Operating lease expense is recognized on a straight-line basis over the term of the lease.

We identify leases in our contracts if the contract conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. We do not allocate lease consideration between lease and non-lease components and record a lease liability equal to the present value of the remaining fixed consideration under the lease. Any interest rate implicit in our leases are generally not readily determinable. Accordingly, we use our estimated incremental borrowing rate at the commencement date of the lease to determine the present value discount of the lease liability. We estimate the incremental borrowing rate for each lease based on an evaluation of our expected credit rating and the prevailing market rates for collateralized debt in a similar economic environment with similar payment terms and maturity dates commensurate with the term of the lease. The right-of-use asset for each lease is equal to the lease liability, adjusted for unamortized initial direct costs and lease incentives. We exclude options to extend or terminate leases from the calculation of the lease liability unless it is reasonably certain the option will be exercised.

Revenue Recognition and Deferred Revenue

We recognize revenue when all of the following criteria are met: (1) the parties to the contract have approved the contract and are committed to perform their respective obligations, (2) we can identify each party’s rights regarding the goods or services to be transferred, (3) we can identify the payment terms for the goods or services to be transferred, (4) the contract has commercial substance, and (5) it is probable that we will collect substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer. We consider persuasive evidence of a sales arrangement to be the receipt of a billable transaction from aggregators, signed contract or the processing of a credit card transaction. Collectability is assessed based on a number of factors, including transaction history with the customer and the credit worthiness of the customer. If it is determined that the collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. We record cash received in advance of revenue recognition as deferred revenue. Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services and is recognized as revenue during the period the transactions are processed or when the related services are performed.

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Our transactional processing fees are generated primarily from TOT Group doing business as Unified Payments, which is our North American Transaction Solutions segment, PayOnline, which is our International Transaction Solutions segment, and Aptito, which is our point of sale solution for restaurants.

We work directly with payment card networks and banks so that our merchants do not need to manage the complex systems, rules, and requirements of the payments industry. We satisfy our performance obligations and therefore recognize the transactional processing service fees as revenue upon authorization of a transaction by the merchant’s customer’s bank.

The majority of our revenues is derived from volume-based payment processing fees ("discount fees”) and other related fixed transaction or service fees. Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed. Discount fees are recognized at the time the merchants’ transactions are processed. Generally, where we have control over merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale on a gross basis equal to the full amount of the discount charged to the merchant. This amount includes interchange fees paid to card issuing banks and assessments paid to payment card networks pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants. Revenues generated from merchant portfolios where we do not have control over merchant pricing, liability for merchant losses or credit risk or rights of portability are reported net of interchange and other fees.

Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees, and fees for other miscellaneous services, such as handling chargebacks. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. Revenue from the sale of equipment is recognized upon transfer of ownership and delivery to the customer, after which there are no further performance obligations.

We primarily report revenues gross as a principal versus net as an agent. Although some of our processing agreements vary with respect to specific terms, the transactional processing service fees collected from merchants generally are recognized as revenue on a gross basis as we are the principal in the delivery of the managed payments solutions to the sellers. The gross fees we collect are intended to cover the interchange, assessments and other processing and non-processing fees which are included and are part of our gross margin.

We have primary responsibility for providing end-to-end payment processing services for our clients. Our clients contract us for all credit card processing services, including transaction authorization, settlement, dispute resolution, data/transmission security, risk management, reporting, technical support and other value-added services. We have concluded that we are the principal because we control the services before delivery to the merchant, and are primarily responsible for the delivery of the services, have discretion in setting prices charged to merchants, and responsible for losses. We also have pricing latitude and can provide services using several different network options.

Net Loss per Share

Basic net loss per common share is computed by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares issuable upon exercise of common stock options or warrants. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would have an anti-dilutive effect.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize net deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

We account for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. We classify the liability for unrecognized tax benefits as current to the extent we anticipate payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. Our evaluation of uncertain tax positions was performed for the tax years ended December 31, 2012 and forward, the tax years which remain subject to examination at June 30, 2020.

Interchange, Network Fees and Other Cost of Services

Interchange and network fees consist primarily of fees that are directly related to discount fee revenue. These include interchange fees paid to issuers and assessment fees payable to card associations, which are a percentage of the processing volume we generate from Visa and Mastercard, AMEX, and Discover, as well as fees charged by card-issuing banks. Other costs of services include costs directly attributable to processing and bank sponsorship costs, which may not be based on a percentage of volume. These costs also include related costs such as residual payments to sales groups, which are based on a percentage of the net revenues generated from merchant referrals. In certain merchant processing bank relationships we are liable for chargebacks against a merchant equal to the volume of the transaction. Losses resulting from chargebacks against a merchant are included in other cost of services or as a bad debt expense, determined on the timing and nature of the specific transaction, on the accompanying consolidated statement of operations. We evaluate the risk for such transactions and our potential loss from chargebacks based primarily on historical experience and other relevant factors.

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 Advertising and Promotion Costs

Advertising and promotion costs are expensed as incurred and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss.

Equity-based Compensation

We account for grants of equity awards to employees in accordance with ASC 718, Compensation—Stock Compensation. This standard requires compensation expense to be measured based on the estimated fair value of the share-based awards on the date of grant and recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

Foreign Currency Transactions

We are subject to exchange rate risk in our foreign operations in Russia, the functional currency of which is the Russian ruble, where we generate service fee revenues, interest income or expense, incur product development, engineering, website development, and selling, general and administrative costs and expenses. Our Russian subsidiaries pay a majority of their operating expenses in their local currencies, exposing us to exchange rate risk.

Use of Estimates

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Such estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, amortization of intangible assets, goodwill and asset impairment review, valuation reserves for accounts receivable, valuation of acquired or current merchant portfolios, incurred but not reported claims, revenue recognition for multiple element arrangements, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities, as well as, the related valuation allowances. Actual results could differ from those estimates.

Below is a summary of the Company’s critical accounting estimates for which the nature of management’s assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and for which the impact of the estimates and assumptions on financial condition or operating performance is material.

Goodwill

The Company tests goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment.

Significant estimates and assumptions are used in our goodwill impairment review and include the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Our assessment of qualitative factors involves significant judgments about expected future business performance, general market conditions, and regulatory changes. In a quantitative assessment, the fair value of each reporting unit is determined based largely on the present value of projected future cash flows, growth assumptions regarding discount rates, estimated growth rates and our future long-term business plans. Changes in any of these estimates or assumptions could materially affect the determination of fair value and the associated goodwill impairment charge for each reporting unit.

Recent Accounting Pronouncements

Adoption of ASU 2016-02, Leases

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, “Leases (Topic 842)” which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Effective January 1, 2019, we adopted Topic 842 using the modified retrospective transition method. Under this method, we applied Topic 842 to the lease for the premises we occupy for our North American Transaction Solutions segment's U.S. headquarters. There was no cumulative impact adjustment necessary with the adoption to our accumulated deficit on January 1, 2019. Our consolidated financial statements for periods ending after January 1, 2019 are presented in accordance with the requirements of Topic 842, while comparative prior period amounts have not been adjusted and continue to be reported in accordance with Topic 840. Please refer to "Leases" above for a description of our lease accounting policies upon the adoption on Topic 842.

Recent accounting pronouncements not yet adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this update changed how companies measure and recognize credit impairment for many financial assets. The new expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets (including trade receivables) that are within the scope of the update. The update also made amendments to the current impairment model for held-to-maturity and available-for-sale debt securities and certain guarantees. The guidance was effective for us on January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements.

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NOTE 5. INTANGIBLE ASSETS

The Company had approximately $4.7million and $5.7 million in intangible assets, net of amortization, at June 30, 2020 and December 31, 2019, respectively. Shown below are the details of the components that represent these balances.

Intangible assets consisted of the following as of June 30, 2020

	Cost		Accumulated Amortization			Carrying Value		Amortization Life and Method
IP Software	$	2,378,248	$	(2,306,565	)	$	71,682	3 years - straight-line
Portfolios and Client Lists		7,714,665		(6,195,599	)		1,519,066	4 years - straight-line
Client Acquisition Costs		8,625,568		(5,512,910	)		3,112,658	4 years - straight-line
PCI Certification		449,000		(449,000	)		-	3 years - straight-line
Trademarks		703,586		(703,586	)		-	3 years - straight-line
Domain Names		437,810		(437,810	)		-	3 years - straight-line
Total	$	20,308,876	$	(15,605,470	)	$	4,703,406

Intangible assets consisted of the following as of December 31, 2019

	Cost		Accumulated Amortization			Carrying Value		Amortization Life and Method
IP Software	$	2,343,888	$	(2,240,695	)	$	103,193	3 years - straight-line
Portfolios and Client Lists		7,714,665		(5,614,880	)		2,099,785	4 years - straight-line
Client Acquisition Costs		8,238,018		(4,762,347	)		3,475,671	4 years - straight-line
PCI Certification		449,000		(449,000	)		-	3 years - straight-line
Trademarks		703,586		(703,586	)		-	3 years - straight-line
Domain Names		437,810		(437,810	)		-	3 years - straight-line
Total	$	19,886,966	$	(14,208,317	)	$	5,678,649

Amortization expense for the intangible assets was approximately $679,000 and $649,000 for the three months June 30, 2020 and 2019, respectively. Amortization expense for each of the six months ended June 30, 2020 and 2019 was approximately $1.4 million.

The following table presents the estimated aggregate future amortization expense of intangible assets:

2020 (remainder of year)	$	567,754
2021		1,135,508
2022		1,135,508
2023		1,123,561
2024		741,075
Balance June 30, 2020	$	4,703,406

NOTE 6. ACCRUED EXPENSES

At June 30, 2020 and December 31, 2019, accrued expenses amounted to approximately $2.1 million and $1.8 million, respectively. Accrued expenses represent expenses that are owed at the end of the period or are estimates of services provided that have not been billed by the provider or vendor. The following table reflect the balances outstanding as of June 30, 2020 and December 31, 2019.

	June 30, 2020		December 31, 2019
Accrued professional fees	$	283,071	$	276,239
PayOnline accrual		-		69,039
Accrued interest		89,573		43,021
Accrued bonus		1,516,808		1,318,060
Accrued foreign taxes		863		2,064
Other accrued expenses		230,846		91,921
Total accrued expenses	$	2,121,161	$	1,800,344

Included in accrued bonus are non-discretionary compensation due to our Chairman and CEO, which was approximately $1.2 million and $1.0 million at June 30, 2020 and December 31, 2019, respectively, and approximately $362,000 and $339,000 at June 30, 2020 and December 31, 2019, respectively, for discretionary performance bonuses due to certain employees.

Included in other accrued expenses at June 30, 2020 is approximately $136,000 in connection with a tranche received from ESOUSA pursuant to the ESOUSA Agreement, which was subsequently paid through the issuance of common shares of our Company.

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NOTE 7. NOTES PAYABLE

Notes payable consist of the following:

	June 30, 2020			December 31, 2019
RBL Capital Group, LLC	$	9,431,157		$	9,431,157
SBA Loan - EIDL		159,899			-
SBA Loan - PPP		491,493			-
Subtotal		10,082,549			9,431,157
Less: deferred loan costs		(159,277	)		(179,610	)
Subtotal		9,923,272			9,251,547
Less: current portion		(936,391	)		(909,086	)
Long term debt	$	8,986,881		$	8,342,461

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 (collectively, the “co-borrowers”), entered into a Loan and Security Agreement (“Credit Facility”) with RBL Capital Group, LLC (“RBL”), as lender (the “RBL Loan Agreement”). The original terms provided us with an 18-month, $10 million credit facility with interest at the higher of 13.90% per annum or the prime rate plus 10.65%. On May 2, 2016, we renewed our Credit Facility with RBL, increasing the facility from $10 million to $15 million and extending the term through February 2019.

The co-borrowers’ obligations to RBL pursuant to the RBL Loan Agreement are secured by a first priority security interest in all of the co-borrowers’ tangible and intangible assets, including but not limited to their merchants, merchant contracts and proceeds thereof, and all right title and interest in co-borrowers’ processing contracts, contract rights, and portfolio cash flows with all processors of the co-borrowers.

On December 19, 2019, in connection with an addendum to those certain term notes made by TOT Group, Inc.in favor of RBL, the Credit Facility referred to above, we received funding of $1,000,000 and new terms were negotiated for the total outstanding notes payable amount of $9,431,157. This total loan amount bears interest at 14.19%. On January 20, 2020, we are required to make one (1) payment of interest only for $117,329, followed by five (5) payments of interest only in the amount of $111,523. Effective July 20, 2020, we are required to make forty-eight (48) monthly payments, which includes principal and interest for $258,620, until March 20, 2024 the date this term note matures. In the event any of the installments or other payment required to be made is not received by or on behalf of RBL in full within ten (10) days after the due date thereof, and the same subsequently is received and accepted by or on behalf of RBL, the Company shall pay on demand a late charge in the amount of five percent (5%) of the amount of the delinquent payment. In the event of the occurrence of an Event of Default (as defined in the Loan Agreement), the entire unpaid balance of principal and interest of the Loan shall become due and payable immediately, without notice or demand, at the election of the Note holder, provided that the holder shall endeavor (but is not required) to provide notice to the Company of any such acceleration. The Company waives demand, presentment for payment, protest, notice of protest and notice of nonpayment or dishonor of the Note. The Company shall not have any right to prepay this loan except as expressly provided in the Loan Agreement.

On March 27, 2020, our Company entered into a Master Exchange Agreement, (the “ESOUSA Agreement”) with ESOUSA Holdings, LLC ("ESOUSA"), a related party. Prior to entering into the ESOUSA Agreement, ESOUSA agreed to acquire an existing promissory note that had been previously issued by the Company, of up to $2,000,000 in principal amount outstanding plus interest due to RBL Capital Group, LLC. Pursuant to the ESOUSA Agreement, the Company has the right, at any time prior to March 27, 2021, to request ESOUSA, and ESOUSA agreed upon each such request, to exchange this promissory note in tranches on the dates when the Company instructs ESOUSA, for such number of shares of the Company’s common stock (“Common Stock”) as determined under the ESOUSA Agreement based upon the number of shares of Common Stock (already in ESOUSA’s possession) that ESOUSA sold in order to finance its purchase of such tranche of the promissory note from RBL Capital Group, LLC. ESOUSA will purchase each tranche of the promissory note equal to 88% of the gross proceeds from the shares of Common Stock sold by ESOUSA to finance the purchase ofsuch Exchange Amount from RBL Capital Group, LLC. Each such tranche to be $148,000 unless otherwise agreed to by the Company and ESOUSA. The Company received its first tranche of approximately $148,000 on March 27, 2020, less any fees. In April 2020, ESOUSA exchanged the promissory note for shares in our Company's common stock which has been reflected in our stockholders" equity section. (Refer to  Note 11. Stockholders" Equity).

On April 23, 2020, the Company entered into an amendment (the “Amendment”) to the ESOUSA Agreement. The Amendment increased from $2,000,000 to $5,000,000 the principal amount and unpaid interest of one or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. The Company received a second tranche of approximately $143,000 on April 28, 2020, less any fees, which is reflected in accrued expenses on the accompanying consolidated balance sheet as of June 30, 2020. No shares of the Company's common stock have been issued as of this date in connection with this tranche.

On August 3, 2020, our Company entered into a Second Amendment (the “Second Amendment”) to the ESOUSA Agreement. The Second Amendment increased from $5,000,000 to $15,000,000 the principal amount and unpaid interest of one or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. 

On August 11, 2020, the Company received a third tranche of approximately $707,000 from RBL, less any fees. The Company issued 66,190 shares of its' common stock to ESOUSA in connection with this tranche.

SBA Loans

On May 7, 2020, the Company entered into a promissory note (the “Note”) evidencing an unsecured loan (the “Loan”) in the amount of $491,493 made to the Company under the Paycheck Protection Program (the “PPP”). The Note matures on May 7, 2022 and bears interest at a rate of 1% per annum. Beginning December 7, 2020, the Company is required to make 17 monthly payments of principal and interest, with the principal component of each such payment based upon the level amortization of principal over a two-year period from May 7, 2020. Pursuant to the terms of the CARES Act and the PPP, the Company may apply to the Lender for forgiveness for the amount due on the Loan. The amount eligible for forgiveness is based on the amount of Loan proceeds used by the Company (during the eight-week period after the Lender makes the first disbursement of Loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), interest on mortgage obligations, rent and utilities, subject to certain limitations and reductions in accordance with the CARES Act and the PPP. No assurance can be given, at this time, that the Company will obtain forgiveness of the Loan in whole or in part. (Refer to Note 7. Notes Payable).

On May 18, 2020, the Company entered into a promissory note (the "Note") in the amount of $159,899 made to the Company by the U.S. Small Business Administration under the Economic Injury Disaster Loan program. Monthly installment payments on the Note will begin twelve months from the date of the Note, with the balance of any accrued principal and interest at 3.75% annually, payable thirty years from the date of the Note.

Scheduled notes payable principal repayment at June 30, 2020 is as follows:

2020 (remainder of year)	$	936,391
2021		2,353,216
2022		2,470,767
2023		3,418,653
2024		763,380
thereafter		140,141
Balance June 30, 2020	$	10,082,549

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NOTE 8. CONCENTRATIONS

Our credit card processing revenues are from merchant customer transactions, which were processed primarily by two third-party processors (greater than 5%) and our own dedicated bank identification number ("BIN")/Interbank Card Association ("ICA") number during the three and six months ended June 30, 2020 and 2019.

During the six months ended June 30, 2020, we processed 33% of our total revenue with Priority Payment Systems,46% from our own dedicated BIN/ICA with Esquire Bank, and 10% with First Data Corp. During the six months ended June 30, 2019, we processed 49% of our total revenue with Priority Payment Systems, 35% from our own dedicated BIN/ICA with Esquire Bank, and 7% from First Data Corp.

During the three months ended June 30, 2020, we processed 27% of our total revenue with Priority Payment Systems, 50% from our own dedicated BIN/ICA with Esquire Bank, and 10% with First Data Corp. During the three months ended June 30, 2019, we processed 46% of our total revenue with Priority Payment Systems, 38% from our own dedicated BIN/ICA with Esquire Bank, and 8% from First Data Corp.

NOTE 9. COMMITMENTS AND CONTINGENCIES

Employment Agreement

On February 25, 2020, as per approval of the Compensation Committee (the “Committee”) of the board of directors of the board of directors of the Company, the Company entered into an employment agreement (the “Agreement”) with Steven Wolberg, the Company's Chief Legal Officer and Corporate Secretary. The Agreement provides for continuation of the current base salary of $250,000. The term of the Agreement is 5 years, with subsequent 1-year renewals. The Agreement provides for a sign in bonus of 10,000 shares of Company’s common stock, to be granted to Mr. Wolberg pursuant to the Company’s equity incentive plan, the severance in the amount of two times annual base salary of Mr. Wolberg if Mr. Wolberg’s employment is terminated by the Company without “cause” (as defined in the Agreement) or Mr. Wolberg terminates the employment for “good reason” (as defined in the Agreement). For each fiscal year during the term of the Agreement, the Agreement provides for a bonus arrangement equal to 50% of Mr. Wolberg’s base salary, payable in the Company’s shares of common stock or, at the Company’s discretion, in cash. Further, for each fiscal year during the term of the Agreement, Mr. Wolberg will be eligible to receive long-term equity incentive awards, as determined by the Committee at the time of grant, pursuant to the Company’s equity incentive plan.

Minimum Billing Processing Fees Commitment

We have non-exclusive agreements with two of our processors to provide services related to processing. The agreements require us to submit a minimum number of  billable processing fees. If we submit an amount that is lower than the minimum, we are required to pay to each processor the fees it would have received if we had submitted the required minimum number of billable processing fees. As of June 30, 2020, the aggregate minimum monthly processing fees for these processors amounts to approximately $150,000 per month.

Leases

North American Transaction Solutions

During May 2013, we entered into a lease agreement, for approximately 4,101 square feet of office space located at 3363 N.E. 163rd Street, Suites 705 through 707, North Miami Beach, Florida 33160. The term of the lease agreement was from May 1, 2013 through December 31, 2016, with monthly rent increasing from $16,800 per month at inception to $19,448 per month (or $233,377 per year) for the period from January 1, 2016 through December 31, 2016. The lease was extended for a period of five years commencing August 1, 2017 and expiring July 31, 2022 with equal monthly base rent installments of $14,354 ($172,248 per year) plus sales tax.

On September 26, 2019, we entered into a lease for additional office space in the building that our current office space is located for our North American Transactions Solutions. The space is for 5,875 square feet and the term is for 5 years commencing on September 23, 2019 and expiring on September 30, 2024. The monthly base rent is $16,156 ($193,875 per year) plus sales tax. In consideration of our Company foregoing its rights to credits towards the cubicle installation, the lease was amended. The amended lease requires the Company to begin paying $11,500 effective July 7, 2020, with the original monthly rent payment of $16,156 commencing on January 1, 2021. In addition, commencing on March 1, 2021, our Company will begin making up the difference between the original monthly lease payment of $16,156 and the amended monthly lease payment of $11,500, the deferred monthly rent, by paying the landlord an additional $2,000 per month until the deferred portion of the rent is fully repaid. The Company is expected to occupy these premises in the near future.

Net Element Software, our subsidiary, currently leases approximately 1,654 square feet of office space in Yekaterinburg, Russia, where we develop value added services, mobile applications, smart terminals applications, sales central ERP system development and marketing activities, at an annual rent of approximately $21,000.The lease term expired on June 1, 2019 and was renewed with indefinite terms.

International Transaction Solutions

The Company occupies an office in Moscow, Russia with approximately 1600 square feet at an annual rent of $50,900, which lease expired on February 10, 2020. This lease was renewed with indefinite terms.

We believe that our current facilities are suitable and adequate for our present purposes, and we anticipate that we will be able to extend our existing leases on terms satisfactory to us or move to new facilities on acceptable terms.

The following table presents a reconciliation of the undiscounted future minimum lease payments, under the lease for the premises we occupy for our North American Transaction Solutions segment's U.S. headquarters, to the amounts reported as operating lease liabilities on the consolidated balance sheet as of June 30, 2020:

	Operating Lease
Undiscounted future minimum lease payments:
2020 (remainder of year)	$	86,124
2021		172,248
2022		100,478
Total	$	358,850
Amount representing imputed interest		(42,732	)
Total operating lease liability		316,118
Current portion of operating lease liability		(68,859	)
Operating Lease Liability, non-current	$	247,259

	As of June 30, 2020
Remaining term on Lease		2.00
Incremental borrowing rate		12	%

As of June 30, 2020, the future minimum lease payments under other operating leases, not subject to Topic 842, are approximately $122,000 for the remainder of the year. 

Litigation, Claims, and Assessments

With respect to all legal, regulatory and governmental proceedings, and in accordance with ASC 450-20, Contingencies—Loss Contingencies, we consider the likelihood of a negative outcome. If we determine the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, we record an accrual for the estimated amount of loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and we are able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, we disclose the estimate of the amount of possible loss or range of loss. However, management in some instances may be unable to estimate an amount of possible loss or range of loss based on the significant uncertainties involved in, or the preliminary nature of, the matter, and in these instances we will disclose the nature of the contingency and describe why we are unable to determine an estimate of possible loss or range of loss.

In addition, we are involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business and otherwise not described below. We have considered all such ordinary course legal proceedings in formulating our disclosures and assessments, which are not expected to have a material adverse effect on our consolidated financial statements.

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Aptito.com, Inc.

On August 6, 2014, our subsidiary (Aptito, LLC) filed a lawsuit against Aptito.com, Inc. and the shareholders of Aptito.com, Inc., in state court in the 11th Judicial Circuit in and for Miami-Dade County. This is an interpleader action in regards to 125,000 shares of our stock. Aptito, LLC acquired Aptito.com, Inc. in exchange for, among other things, 125,000 shares (prior to adjustment for two one-for-ten reverse stock splits) of our stock. There has been disagreements among the Aptito.com, Inc. shareholders as to proper distribution of the 125,000 shares (prior to adjustment for two one-for-ten reverse stock splits). To avoid any liability in regards to improper distribution, Aptito, LLC filed the interpleader action so as to allow the Defendants to litigate amongst themselves as to how the shares (prior to adjustment for two one- for-ten reverse stock splits) should be distributed. Aptito.com, Inc. opposed the motion to interplead and filed counterclaims relative to Aptito, LLC for non-delivery of the 125,000 shares (prior to adjustment for two one-for-ten reverse stock splits).

On July 18, 2017, the Court granted Aptito LLC’s motion to interplead and also indicated that Aptito, LLC could not be held liable for any alleged damages relative to the purported non- delivery of the 125,000 shares after the interpleader action was filed on August 6, 2014.

In March 2018, a new Judge in the case ruled that Aptito.com, Inc. was entitled to receive 125,000 newly issued shares of our common stock, but indicated that he was not ruling that we were required to issue such shares. We plan to appeal this ruling, and our legal counsel is addressing the counterclaims filed by Aptito.com, Inc. in this matter.

In July 2018, our counsel was disqualified due to a conflict of interest. We engaged a new law firm to represent our ongoing interests in this case. Since that time, there have been multiple Motions and claims brought by Aptito.com, Inc., including the request for rescission of the asset purchase agreement that gave rise to the share issuance obligation. All of these Motions and claims are being vigorously defended.

A court ordered mediation conference was held on April 24, 2019 but the parties were unable to reach a settlement. On May 1, 2019 the Court denied Aptito.com, Inc.’s Motion for Summary Judgement and further hearings on a variety of Motions were scheduled in this matter.

On August 14, 2019, the court granted final Summary Judgment in favor of the Company, removing Net Element as a party to the lawsuit and denying Aptito.com, Inc’s Motion for rehearing and reconsideration of this matter. Aptito, LLC, in which the Company has a majority ownership interest, remains a Defendant in this litigation. On September 17, 2019, the court granted the Company’s Motion for sanctions against the attorney representing Aptito.com, Inc. in this matter. The Company is pursuing collection of legal fees incurred from the Plaintiff and their attorney. This matter was pending a special set hearing to be held on March 23, 2020. That hearing was postponed and rescheduled for hearing in July 2020. On July 23, 2020, the Court entered a judgement against the attorney representing Aptito.com and awarded attorney fees to the Company. The attorney stated on the record he will be filing for bankruptcy. The Company intends pursuing recovery from the attorney.

Gene Zell

In June 2014, we, as plaintiff, commenced an action in the Miami-Dade Circuit Court, Florida against Gene Zell ("Zell") for defamation of our Company and CEO and tortious interference with our business relationships. In October 2014, the court granted a temporary injunction against Zell enjoining him from posting any information about our Company and CEO on any website and enjoining him from contacting our business partners or investors. Zell violated the Court Order and the Court granted a Motion imposing sanctions against Zell. We continue to seek enforcement of the Court Order.

In April 2015, Zell filed a Motion to set aside the Court Order alleging he was unaware of the Court Proceedings. The Court, on August 26, 2015, dismissed Zell’s Motion to dissolve the injunction. In March 2017 the Court dismissed another Motion brought by Zell to dissolve the injunction. Accordingly, the injunction order prohibiting Zell from making further defamatory posts remains in place.

In 2018, we filed a motion to enforce the injunction and contempt orders against Zell. The court upheld the injunction and we continue to vigorously protect its interests. We are pursuing an action for damages sustained as a result of the defamation.

On September 20, 2019, the Court granted a Permanent Injunction against Zell. The Company is evaluating pursuing actions against Zell for collection of legal fees and damages.

A trial was scheduled for April 2020 on the issue of Net Element’s damages. However, Zell recently filed bankruptcy, so that trial and all further legal proceedings involving Zell will be stayed as a result of the automatic bankruptcy stay.

NOTE 10. RELATED PARTY TRANSACTIONS

During the three months ended June 30, 2020 and 2019, agent commissions resulting from merchant processing of approximately and $18,000 were paid to Prime Portfolios, LLC, an entity owned by Oleg Firer, our Chairman and CEO, and Steven Wolberg, our Chief Legal Officer. In addition, key members of management owned companies received similar commissions and/or reimbursement for equipment purchased on the Company’s behalf, which amounted to approximately $186,000 and $195,000 for the three months ended June 30, 2020 and 2019, respectively. 

During the six months ended June 30, 2020 and 2019, agent commissions resulting from merchant processing of approximately $58,000and $36,000, respectively,were paid to Prime Portfolios, LLC, an entity owned by Oleg Firer, our Chairman and CEO, and Steven Wolberg, our Chief Legal Officer. In addition, key members of management owned companies received similar commissions and/or reimbursement for equipment purchased on the Company’s behalf, which amounted to approximately $412,000and $365,000 for the six months ended June 30, 2020 and 2019, respectively. 

At June 30, 2020 and December 31, 2019, we had accrued expenses of approximately $61,000and $127,000, respectively, which consisted primarily of various travel, professional fees, and other expenses paid and charged for by our CEO on his personal credit cards. This is reflected as due to related party on the accompanying consolidated balance sheets. In addition, approximately $74,000 of various travel, professional fees, and other expenses paid and charged for by our CEO on his personal credit cards, are included in accounts payable.

On March 27, 2020, our Company entered into a Master Exchange Agreement, (the “ESOUSA Agreement”) with ESOUSA Holdings, LLC ("ESOUSA"), a related party. Prior to entering into the ESOUSA Agreement, ESOUSA agreed to acquire an existing promissory note that had been previously issued by the Company, of up to $2,000,000 in principal amount outstanding plus interest due to RBL Capital Group, LLC. Pursuant to the ESOUSA Agreement, the Company has the right, at any time prior to March 27, 2021, to request ESOUSA, and ESOUSA agreed upon each such request, to exchange this promissory note in tranches on the dates when the Company instructs ESOUSA, for such number of shares of the Company’s common stock (“Common Stock”) as determined under the ESOUSA Agreement based upon the number of shares of Common Stock (already in ESOUSA’s possession) that ESOUSA sold in order to finance its purchase of such tranche of the promissory note from RBL Capital Group, LLC. ESOUSA will purchase each tranche of the promissory note equal to 88% of the gross proceeds from the shares of Common Stock sold by ESOUSA to finance the purchase ofsuch Exchange Amount from RBL Capital Group, LLC. Each such tranche to be $148,000 unless otherwise agreed to by the Company and ESOUSA. The Company received its first tranche of approximately $148,000 on March 27, 2020, less any fees. In April 2020, ESOUSA exchanged the promissory note for shares in our Company's common stock which has been reflected in our stockholders" equity section. (Refer to  Note 11. Stockholders" Equity).

On April 23, 2020, the Company entered into an amendment (the “Amendment”) to the ESOUSA Agreement with ESOUSA. The Amendment increased from $2,000,000 to $5,000,000 the principal amount and unpaid interest of one or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. The Company received a second tranche of approximately $143,000 on April 28, 2020, less any fees, which is reflected in accrued expenses on the accompanying consolidated balance sheet as of June 30, 2020. No shares have been issued as of this date in connection with this tranche.

On August 3, 2020, our Company entered into a Second Amendment (the “Second Amendment”) to the Agreement. The Second Amendment increased from $5,000,000 to $15,000,000 the principal amount and unpaid interest of one or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. 

On August 11, 2020, the Company received a third tranche of approximately $707,000 from RBL, less any fees. The Company issued 66,190 shares of its' common stock to ESOUSA in connection with this tranche.

NOTE 11. STOCKHOLDERS’ EQUITY

On October 5, 2017, we effected a one-for-ten reverse stock split of our common stock. Our condensed consolidated financial statements and disclosures reflect these changes in capital structure for all periods presented.

On June 12, 2015 and June 13, 2016, our shareholders approved 100,000,000 increases in our authorized common stock to 300,000,000 and 400,000,000, respectively. On October 2, 2017, our shareholders approved a 300,000,000 decrease in our authorized common stock to 100,000,000.

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The following table represents the change in our stockholders' equity for the three and six months ended June 30, 2020 and 2019:

	Three and Six Months Ended June 30, 2019
	Common Stock				Paid in		Accumulated Other			Non-controlling			Accumulated			Total
	Shares		Amount		Capital		Comprehensive Loss			interest			Deficit			Stockholder's Equity
Balance December 31, 2018		3,863,019	$	386.30	$	183,246,232	$	(2,232,163	)	$	(125,737	)	$	(172,292,252	)	$	8,596,466
Share based compensation		2,448		0.24		15,006		-			-			-			15,006
Net loss		-		-		-		-			(13,966	)		(1,120,847	)		(1,134,813	)
Comprehensive loss - foreign currency translation		-		-		-		(14,561	)		-			-			(14,561	)
Balance March 31, 2019		3,865,467	$	386.55	$	183,261,238	$	(2,246,724	)	$	(139,703	)	$	(173,413,099	)	$	7,462,098
Share based compensation		319,047		23.90		2,005,816											2,005,840
Net loss		-		-		-					(40,225	)		(1,537,447	)		(1,577,672	)
Comprehensive loss - foreign currency translation		-		-		-		(5,537	)								(5,537	)
Balance June 30, 2019		4,184,514	$	410.45	$	185,267,054	$	(2,252,261	)	$	(179,928	)	$	(174,950,546	)	$	7,884,729

	Three and Six Months Ended June 30, 2020
	Common Stock				Paid in			Accumulated Other			Non-controlling			Accumulated			Total
	Shares		Amount		Capital			Comprehensive Loss			interest			Deficit			Stockholder's Equity
Balance December 31, 2019		4,111,082	$	410.66	$	185,297,069		$	(2,274,187	)	$	(231,999	)	$	(178,750,634	)	$	4,040,660
Share based compensation		14,672		1.47		45,896			-			-			-			45,897
Expenses paid in connection with ESOUSA transaction		-		-		(5,000	)		-			-			-			(5,000	)
Net loss		-		-		-			-			(11,228	)		(1,366,798	)		(1,378,026	)
Comprehensive loss - foreign currency translation		-		-		-			130,813			-			-			130,813
Balance March 31, 2020		4,125,754	$	412.13	$	185,337,965		$	(2,143,374	)	$	(243,227	)	$	(180,117,432	)	$	2,834,345
Share based compensation		4,054		0.41		7,500												7,500
ESOUSA transaction		65,862		6.59		151,475												151,482
Net loss		-		-		-						(13,724	)		(324,690	)		(338,414	)
Comprehensive loss - foreign currency translation		-		-		-			(65,990	)								(65,990	)
Balance June 30, 2020		4,195,670	$	419.13	$	185,496,940		$	(2,209,364	)	$	(256,951	)	$	(180,442,122	)	$	2,588,923

Equity Incentive Plan Activity

On December 5, 2013, our shareholders approved the Net Element International, Inc. 2013 Equity Incentive Plan (as amended to date, the “2013 Plan”). Awards under the 2013 Plan may be granted in any one or all of the following forms: (i) incentive stock options meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as amended; (ii) non-qualified stock options (unless otherwise indicated, references to “Options” include both Incentive Stock Options and Non-Qualified Stock Options); (iii) stock appreciation rights, which may be awarded either in tandem with Options or on a stand-alone basis; (iv) shares of common stock that are restricted; (v) units representing shares of common stock; (vi) units that do not represent shares of common stock but which may be paid in the form of common stock; and (vii) shares of common stock that are not subject to any conditions to vesting.

On November 27, 2018, our shareholders approved an amendment to the 2013 Plan to increase the number of shares of the Company’s common stock available for issuance by 178,900 shares resulting in the aggregate of 773,000 shares authorized for issuance under the 2013 Plan. 

On October 23, 2019, our shareholders approved an amendment to the 2013 Plan to increase the number of shares of the Company’s common stock available for issuance by 177,000 shares resulting in the aggregate of 950,000 shares authorized for issuance under the 2013 Plan.

The maximum aggregate number of shares of common stock available for award under the 2013 Plan at June 30, 2020 and December 31, 2019 was 153,709and 252,436, respectively. The 2013 Plan is administered by the compensation committee.

2013 Equity Incentive Plan - Shares and Stock Options

During the three months ended June 30, 2020 and 2019, we issued common stock pursuant to the 2013 Plan to the members of our Board of Directors and recorded a compensation charge of $7,500 and $15,000, respectively. 

During the six months ended June 30, 2020 and 2019, we issued common stock pursuant to the 2013 Plan to the members of our Board of Directors and recorded a compensation charge of approximately $15,000 and $30,000, respectively. 

At June 30, 2020 and December 31, 2019, we had 154,005 incentive stock options outstanding with a weighted average exercise price of $10.73 and a weighted average remaining contract term of 7.58 years at June 30, 2020 and 8.08 years at December 31, 2019, respectively. All of the stock options were anti-dilutive at June 30, 2020 and December 31, 2019.

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NOTE 12. WARRANTS AND OPTIONS

Options

At June 30, 2020 and December 31, 2019, we had fully vested options outstanding to purchase 314,218 shares of common stock at exercise prices ranging from $3.27 to $134.00 per share. 

Due to the high level of volatility in the stock price of our common stock, our management determined the grant date fair value of the options using the then quoted stock price at the grant date.

Warrants

At June 30, 2020 and December 31, 2019, we had warrants outstanding to purchase 728,583 shares of common stock. At June 30, 2020 the warrants had a weighted average exercise price of $6.18 per share purchased and a weighted average remaining contractual term of 2.50 years. At December 31, 2019, the warrants had a weighted average exercise price of $6.18 per share purchased and a weighted average remaining contractual term of 3.00 years.

Non-Incentive Plan Options

At June 30, 2020 and December 31, 2019, we had 323,498 non-incentive options outstanding with a weighted-average exercise price of $21.84. The non-incentive options have a remaining contract term of .42 years at June 30, 2020. These options were out of the money at June 30, 2020 and December 31, 2019 and had no intrinsic value.

NOTE 13. SUBSEQUENT EVENT

On August 3, 2020, our Company entered into a Second Amendment (the “Second Amendment”) to the Agreement. The Second Amendment increased from $5,000,000 to $15,000,000 the principal amount and unpaid interest of one or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. On August 11, 2020, the Company received a third tranche of approximately $707,000 from RBL, less any fees. The Company issued 66,190 shares of its' common stock to ESOUSA shares in connection with this tranche.

On August 4, 2020, our Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mullen Technologies, Inc., a California corporation (“Mullen”), and Mullen Acquisition, Inc., a California corporation and wholly owned subsidiary of the Company (“Merger Sub”). Pursuant to, and on the terms and subject to the conditions of, the Merger Agreement, Merger Sub will be merged with and into Mullen (the “Merger”), with Mullen continuing as the surviving corporation in the Merger. After Mullen’s completion and delivery to our Company, of the audited financial statements for Mullen and its subsidiaries and affiliates required to be included in a registration statement, the Company intends to prepare and file with the Commission a registration statement on Form S-4 (together with all amendments thereto, the “Registration Statement”) in which the proxy statement will be included as a part of the prospectus, in connection with the registration under the Securities Act of the shares of Parent Shares to be issued in connection with the transactions contemplated in the Merger Agreement. The Merger Agreement contains termination rights for each of the Company and Mullen, including, among others, (i) in the event that the Merger has not been consummated by December 31, 2020, (ii) in the event that the requisite approval of the Company’s stockholders is not obtained upon a vote thereon, (iii) in the event that any governmental authority shall have taken action to restrain, enjoin or prohibit the consummation of the Merger, which action shall have become final and non-appealable and (iv) in the event that there is a breach by the other party of any of its representations, warranties, covenants or agreements, which breach is sufficiently material and not timely cured or curable. In addition, Mullen may terminate the Merger Agreement if, prior to receipt of the requisite approval of the Company’s stockholders, the Company’s board of directors shall have changed their recommendation in respect of the Merger. Further, the Company may terminate the Merger Agreement prior to receipt of the requisite approval of the Company’s stockholders to enter into a definitive agreement with respect to a Superior Proposal (as such term is defined in the Merger Agreement). 

As contemplated by the Merger Agreement, on August 11, 2020, our Company as lender, entered into an unsecured Promissory Note, dated August 11, 2020 (the “Note”), with Mullen. Pursuant to the Note, Mullen borrowed from the Company $500,000. Prior to maturity of the loan, the principal amount of the loan will carry an interest rate of 14% per annum compounded monthly and payable upon demand. This loan will mature on the earlier of (i) the date that the Merger Agreement is terminated for any reason by any party thereto and (ii) the Merger Effective Time (as defined in the Merger Agreement).

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read and evaluated in conjunction with the condensed consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q (this "Report") and the Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the "Annual Report") and in Part II, Item 1A of this Report.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

As used in this Report, unless the context otherwise indicates, the references to “we”, “us,” “our” or the “Company” refers to Net Element, Inc. and its consolidated subsidiaries, unless the context suggests otherwise.

This Report and other written or oral statements made from time to time by us may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can sometimes identify forward looking-statements by our use of the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “forecast,” “guidance” and similar expressions. Some of the statements we use in this report contain forward-looking statements concerning our business operations, economic performance and financial condition, including in particular: our business strategy and means to implement the strategy; measures of future results of operations, such as revenue, expenses, operating margins, and earnings per share; other operating metrics such as shares outstanding and capital expenditures; our success and timing in developing and introducing new products or services and expanding our business, including with respect to joint ventures; the successful integration of future acquisitions; our future responses to and the anticipated impact of novel coronavirus COVID-19 ("COVID-19"); and the potential Merger between the Company and Mullen and the related transactions, including the planned Divestiture.

Although we believe that the plans and expectations reflected in or suggested by our forward-looking statements are reasonable, those statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, many of which are beyond our control, cannot be foreseen and reflect future business decisions that are subject to change. Accordingly, we cannot guarantee you that our plans and expectations will be achieved. Our actual results, including actual revenues, revenue growth rates and margins, other results of operations and shareholder values, could differ materially from those anticipated in our forward-looking statements as a result of known and unknown factors, many of which are beyond our ability to predict or control. These factors include, but are not limited to, those set forth in Part II, Item 1A - Risk Factors of this Report and in our Annual Report, those set forth elsewhere in this report and those set forth in our press releases, reports and other filings made with the SEC, including under “Cautionary Note Regarding Forward-looking Statements” in the Company’s Current Report on Form 8-K filed on August 5, 2020, as amended.  In particular, these statements also depend on the duration, severity, and evolution of the COVID-19 pandemic and related risks, and its effect on our business, financial condition, results of operations and cash flows. These cautionary statements qualify all of our forward-looking statements, and you are cautioned not to place undue reliance on these forward-looking statements.

Our forward-looking statements speak only as of the date they are made and should not be relied upon as representing our plans and expectations as of any subsequent date. While we may elect to update or revise forward-looking statements at some time in the future, we specifically disclaim any obligation to publicly release the results of any revisions to our forward-looking statements.

Company Overview

Net Element is a global technology and value-added solutions group that supports electronic payments acceptance in a multi-channel environment including point-of- sale (POS), ecommerce and mobile devices. The Company operates two business segments as a provider of North American Transaction Solutions and International Transaction Solutions.

We offer a broad range of payment acceptance and transaction processing services that enable merchants of all sizes to accept and process over 100 different payment options in more than 120 currencies, including credit, debit, prepaid and alternative payments. We also provide merchants with value-added services and technologies including integrated payment technologies, POS solutions, fraud management, information solutions and analytical tools.

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We are differentiated by our technology-centered value-added service offerings built around our payments ecosystem and our diversified business model, which enables us to provide our varied customer base with a broad range of transaction-processing services from a single source across numerous channels and geographic markets. We believe these capabilities provide several competitive advantages that will enable us to continue to penetrate our existing customer base with complementary new services, win new customers, develop new sales channels and enter new markets. We believe these competitive advantages include:

● Our ability to provide competitive products through use of proprietary technologies;

● Our ability to provide in one package a range of services that traditionally had to be sourced from different vendors;

● Our ability to provide a single agnostic on-boarding and merchant management platform to our indirect non-bank sales force ("Sales Partners");

● Our ability to provide management and optimization tools to our Sales Partners amongst multiple networks and platforms;

● Our ability to serve customers with disparate operations in several geographies with technology solutions that enable them to manage their business as one enterprise; and

● Our ability to capture and analyze data across the transaction processing value chain and use that data to provide value-added services that are differentiated from those offered by pure-play vendors that serve only one portion of the transaction processing value chain (such as only merchant acquiring or POS).

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/or administrative personnel are based. Through U.S. based subsidiaries, we generate revenues from transactional services, valued-added payment services and technologies that we provide to SMBs. Through wholly owned subsidiaries, we focus on transactional services, mobile payment transactions, online payment transactions, value-added payment services and technologies in selected international markets.

Our business is characterized by transaction related fees, multi-year contracts, and a diverse client base, which allows us to grow alongside our clients. Our multi-year contracts allow us to achieve a high level of recurring revenues with the same clients. While the contracts typically do not specify fixed revenues to be realized thereunder, they do provide a framework for revenues to be generated based on volume of services provided during such contracts’ term.

Products and Services Information

Our broad suite of services spans the entire transaction processing value chain of commerce enabling services and technologies and includes a range of front-end customer-facing solutions, as well as back-end support services and account reconciliation. We deliver our value-added solutions from a suite of proprietary technology products, software, cloud-based applications, processing services, fraud management offerings, and customer support programs that we configure to meet our client’s individual needs.

Many of our payment solutions are technology-enabled in that they incorporate or are incorporated into innovative, technology-driven solutions, including enterprise software solutions, designed to enable merchants to better manage their businesses.

Integrated and Vertical Markets. Our integrated and vertical market solutions provide advanced payments technology that is deeply integrated into business enterprise software solutions either owned by us or by our partners. We grow our business when new merchants implement our enterprise software solutions and when new or existing merchants enable payments services through enterprise software solutions sold by us or by our partners. Our primary technology-enabled solutions include integrated and vertical markets, ecommerce and multi-channel solutions, each as described below:

● Unified Payments – doing business as Unified Payments, we provide businesses of all sizes and types throughout the United States with a wide range of fully- integrated payment acceptance solutions, value-added POS and business process management services;

● PayOnline – through our subsidiary, PayOnline Systems (“PayOnline”), we provide a wide range of value-added online solutions in the selected international markets utilizing our fully-integrated, agnostic electronic commerce platform that simplifies complex enterprise online transaction processing challenges from payment acceptance and processing through risk prevention and payment security via point-to-point encryption and tokenization solutions;

● Pay-Travel – integrated payment processing solutions to the travel industry, which includes integrations with various Global Distribution Systems (“GDS”) such as Amadeus®, Galileo®, Sabre®, additional geo filters and passenger name record (PNR) through Pay-Travel service offered by PayOnline;

● Aptito POS Platform – an integrated POS platform developed on Apple’s® iOS and Android® mobile operating systems for the hospitality, retail, service and on the go industries. Our goal with Aptito is to create an easy to use POS and business management solution, which incorporates everything a small business needs to help streamline every-day management, operations and payment acceptance;

● Restoactive – utilizing Aptito POS Platform architecture, we have developed and launched Restoactive, which seamlessly plugs into a current restaurant environment through integrations with some of the biggest POS and restaurant management platforms available on the market today;

● Unified m-POS – mobile POS application makes accepting payments on the go easy and secure. Mobile application is EMV-compliant, accepts traditional and contactless transactions such as Apple Pay®. Unified m-POS application is available for download in Apple’s App Store and Google Play;

● Zero Pay – zero-fee payment acceptance program for SMB merchants in the United States. Zero Pay program saves merchants costs involved in accepting credit and debit cards using mobile POS;

● Netevia – our internally developed future-ready multi-channel payments and merchant management platform. Connecting and simplifying payments across sales channels through a single integration point, Netevia delivers end-to-end payment processing through easy-to-use APIs. The Netevia platform is the core of the company’s technology stack.

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Recent Developments

The outbreak and continuing spread of the COVID-19 pandemic has negatively affected businesses across the globe, in particular the service industry, which includes restaurants, a significant part of our business, as well as disrupted global supply chains and workforce participation, and created significant volatility and disruption of financial markets. Further, this has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, “shelter-in-place,” “stay-at-home” or similar orders, business limitations or total shutdowns. For example, many of our restaurant merchants that we service located within mainland United States, as well as hospitality and retail sector merchants, have been temporarily closed, have shortened operating hours and/or have otherwise been adversely affected by the impact continuing spread of COVID-19. These merchants have experienced significant sales declines or no sales at all due to closure of their business. Additionally, the COVID-19 outbreak has negatively impacted our employee productivity, including affecting the availability of employees reporting for work.

Since March 2020, we have taken initiatives to help minimize the risks to our business and protect our shareholders. Our management team’s experience during the 2008 financial crisis is proving to be very valuable in dealing with the current crisis. Our entire staff is fully committed and working diligently to support our merchants through these difficult times. Most of our merchants have contactless payment acceptance capabilities through their POS solutions, as well as, e-commerce and mobile contactless payment acceptance capabilities to eliminate the need for physical payments to help reduce the spread of COVID-19. The following initiatives, including an extensive business continuity plan, have been implemented:

Risk Management:

● Enhanced risk controls and safeguards have been put in place for merchants that sell products with an extended delivery time frame, products paid in advance, catering, ticketing, transportation and travel related merchants
● Onboarding of new merchants in the above categories has been put on hold until further notice
● For those employees that will be working from home, we have implemented a “remote work” policy and provided employees with the technology necessary to do so
● For those employees that require office attendance, we are taking significant steps to ensure seamless service delivery while safeguarding employees health

Contactless Payments:

● Most of our merchants have contactless payment acceptance capabilities through their POS devices from equipment manufacturers such as PAX, Poynt and Verifone which are fully integrated into Netevia and Aptito platforms
● We launched an initiative to deploy contactless payment acceptance equipment to merchants that don’t currently have it
● Mobile contactless payment acceptance is available through our Unified mPOS App which can be downloaded from Apple’s App Store and Google’s Google Play Apps
● Online ecommerce payments through shopping carts allow our merchants to sell their products and services to customers that prefer to shop from the convenience of their homes

During March 2020, our Company evaluated its liquidity position, future operating plans, and its labor force, which included a reduction in the labor force and compensation to executives and other employees, in order to maintain current payment processing functions, capabilities, and continued customer service to its merchants. We are also seeking sources of capital to pay our contractual obligations as they come due, in light of these uncertain times. Management believes that its operating strategy will provide the opportunity for us to continue as a going concern as long as we are able to obtain additional financing. At this time, due to our continuing losses from operations, negative working capital, and the COVID-19 pandemic, we cannot predict the impact of these conditions on our ability to obtain financing necessary for the Company to fund its future working capital requirements. Our Company has also decided to explore strategic alternatives and potential options for its business, including sale of the Company or certain assets, licensing of technology, spin-offs, or a business combination. Accordingly, on August 4, 2020, the Company entered into a merger agreement in connection with the contemplated merger (the “Merger”) with Mullen Technologies, Inc., a California corporation (“Mullen”), and certain related transactions, including a divestiture of the Company’s existing business operations.  See “—Recent Developments—Mullen Merger and Related Transactions” for additional information. There can be no assurance, at this time, regarding the eventual outcome of our planned strategic alternatives, including the Merger and the related transactions. In most respects, it is still too early in the COVID-19 pandemic to be able to quantify or qualify the longer-term ramifications on our merchant processing business, our merchants, our planned strategic alternatives to enhance current shareholder value, our current investors, and/or future potential investors.

As part of our Company's plan to obtain capital to fund future operations, on March 27, 2020, our Company entered into a Master Exchange Agreement, (the “ESOUSA Agreement”) with ESOUSA Holdings, LLC ("ESOUSA"), a related party. Prior to entering into the ESOUSA Agreement, ESOUSA agreed to acquire an existing promissory note that had been previously issued by the Company, of up to $2,000,000 in principal amount outstanding and unpaid interest due to RBL Capital Group, LLC ("RBL"). Pursuant to the ESOUSA Agreement, the Company has the right, at any time prior to March 27, 2021, to request ESOUSA, and ESOUSA agreed upon each such request, to exchange this promissory note in tranches on the dates when the Company instructs ESOUSA, for such number of shares of the Company’s common stock (“Common Stock”) as determined under the ESOUSA Agreement based upon the number of shares of Common Stock (already in ESOUSA’s possession) that ESOUSA sold in order to finance its purchase of such tranche of the promissory note from RBL.  ESOUSA will purchase each tranche of the promissory note equal to 88% of the gross proceeds from the shares of Common Stock sold by ESOUSA to finance the purchase of such exchange amount from RBL. Each such tranche shall be $148,000 unless otherwise agreed to by the Company and ESOUSA. On April 23, 2020, the Company entered into an amendment (the “Amendment”) to the ESOUSA Agreement. The Amendment increased from $2,000,000 to $5,000,000 the principal amount and unpaid interest of one or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. The Company has the right, pursuant to the ESOUSA Agreement (as amended by the Amendment), to request ESOUSA to exchange in tranches such promissory notes for shares of the Company’s common stock on the terms and conditions and subject to the limitations set forth in the ESOUSA Agreement. On August 3, 2020, our Company entered into a Second Amendment (the “Second Amendment”) to the ESOUSA Agreement. The Second Amendment increased from $5,000,000 to $15,000,000 the principal amount and unpaid interest of one or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL 

On May 7, 2020, the Company entered into a promissory note (the “Note”) evidencing an unsecured loan (the “Loan”) in the amount of $491,493 made to the Company under the Paycheck Protection Program (the “PPP”). The Note matures on May 7, 2022 and bears interest at a rate of 1% per annum. Beginning December 7, 2020, the Company is required to make 17 monthly payments of principal and interest, with the principal component of each such payment based upon the level amortization of principal over a two-year period from May 7, 2020. Pursuant to the terms of the CARES Act and the PPP, the Company may apply to the Lender for forgiveness for the amount due on the Loan. The amount eligible for forgiveness is based on the amount of Loan proceeds used by the Company (during the eight-week period after the Lender makes the first disbursement of Loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), interest on mortgage obligations, rent and utilities, subject to certain limitations and reductions in accordance with the CARES Act and the PPP. No assurance can be given, at this time, that the Company will obtain forgiveness of the Loan in whole or in part.

On May 18, 2020, the Company entered into a promissory note in the amount of $159,899 made to the Company by the U.S. Small Business Administration under the Economic Injury Disaster Loan program.

Mullen Merger and Related Transactions

On August 4, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mullen and Mullen Acquisition, Inc., a California corporation and wholly owned subsidiary of the Company (“Merger Sub”).  Pursuant to, and on the terms and subject to the conditions of, the Merger Agreement, Merger Sub will be merged with and into Mullen, with Mullen continuing as the surviving corporation in the Merger.   The parties to the Merger Agreement intend that the number of shares of the Company’s common stock outstanding immediately after the Merger effective time on a fully diluted and fully converted basis will not exceed 75,000,000, with 15% of such common stock outstanding immediately after the Merger effective time on a fully diluted and fully converted basis to be allocated to the persons that hold shares of the Company common stock immediately prior to the Merger effective time (the “Parent Pre-Merger Stockholders”) (subject to upward adjustment described below).

The parties to the Merger Agreement intend that, subject to the Company’s stockholders’ approval, the Company will effect a private placement of the Company common stock prior to the Merger effective time (the “Private Placement”) and to loan at 14% annual interest rate compounding monthly all or a portion of the net proceeds of the Private Placement to Mullen on an unsecured basis. In connection with such financing, for every one dollar of loan funding (including all accrued interest on such loans) provided by the Company to Mullen prior to the Merger effective time, the Parent Pre-Merger Stockholders will retain an additional 0.00000067% of the shares of the Company common stock to be outstanding on a fully diluted basis immediately after the Merger effective time.

The Parties to the Merger Agreement intend that, prior to the Merger effective time but, subject to and after the Company’s stockholders’ approval, the Company will divest itself of its existing business operations to another party, and will cause such party to assume all liabilities of the Company directly related to its operations of its existing business immediately prior to the closing of such divestiture (the “Divestiture”).

As contemplated by the Merger Agreement, on August 11, 2020, our Company as lender, entered into an unsecured Promissory Note, dated August 11, 2020 (the “Note”), with Mullen. Pursuant to the Note, Mullen borrowed from the Company $500,000. Prior to maturity of the loan, the principal amount of the loan will carry an interest rate of 14% per annum compounded monthly and payable upon demand. This loan will mature on the earlier of (i) the date that the Merger Agreement is terminated for any reason by any party thereto and (ii) the Merger Effective Time (as defined in the Merger Agreement).

Consummation of the Merger, the Divestiture, the Private Placement and the other transactions contemplated in the Merger Agreement, is subject to customary conditions including, among others, the approval of the Company’s stockholders. There is no guarantee that the Merger, the Divestiture, the Private Placement or the other transactions contemplated in the Merger Agreement will be completed.  

Our Mission and Vision

Our mission is to power global commerce and allow our clients to conduct business globally through a centralized solution. We believe that understanding consumer behavior and the needs of our merchants is the most effective and, ultimately, the most profitable means to accomplish our mission and create long-term value for all stakeholders.

We drive client growth through our in-depth knowledge of global transactional services and related value-added service offerings which separate us from the competition.

Our vision is to set the standard for multi-channel payments acceptance and value-added service offerings with focus on the creation of a unified global transaction acceptance ecosystem. We believe in disruptive emerging technologies and, as such, we have developed Netevia, our future-ready multi-channel payments platform to support development of value-added solutions designed for everyday commerce. Moving forward, we believe exciting projects and disruptive technologies like blockchain, IoT, biometric payments and artificial intelligence will provide us the opportunity to continue developing innovative payments solutions, which will provide value to our clients.

In order to achieve this vision, we seek to further develop single on-boarding, global transaction acceptance ecosystem. Manifesting this vision requires scaling our direct and indirect connectivity to multiple payment and mobile networks internationally. By implementing this vision, we believe that we will be able to provide centralized, global multi-channel transactional platform to our clients internationally.

Our Strategy

Our strategy is to capitalize on consumer appetite for digital payment methods, the perceived movement towards a cashless society. To continue to grow our business, our strategy is to focus on providing merchants with the ability to process a variety of electronic transactions across multiple channels. We seek to leverage the adoption of and transition to card, electronic and digital-based payments by expanding our market share through our distribution channels and services innovations. We also seek growth through strategic acquisitions to improve our offerings, scale and geography. We intend to continue to invest in and leverage our technology infrastructure and our people to increase our penetration in existing markets.

Key elements of our business strategy include:

● Continued investment in our core technology and new technology offerings;

● Allocation of resources and expertise to grow in commerce and payments segments;

● Grow and control distribution by adding new merchants and partners;

● Leverage technology and operational advantages throughout our global footprint;

● Expansion of our cardholder and 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 revenue growth. We believe that our available capacity and infrastructure will allow us to take advantage of operational efficiencies and increased margin as we grow our processing volume and expand to other geographical territories.

Market Overview

The financial technology and transaction processing industry is an integral part of today’s worldwide financial structure. The industry is continually evolving, 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, whether in 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 are increasingly 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 for small dollar amount purchases. Given these advantages of card-based payment systems to merchants and consumers, favorable demographic trends, and the resulting proliferation of credit and debit card usage, we believe businesses will increasingly seek to accept card-based payment systems in order to remain competitive.

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We believe that cash transactions are becoming progressively obsolete. The proliferation of bankcards has made the acceptance of bankcard payments a virtual necessity for many businesses, regardless of size, in order to remain competitive. In addition, the advent and growth of e-commerce and crypto-currencies have marked a significant new trend in the way business is being conducted. E-commerce is dependent upon credit and debit cards, as well as other cashless payment processing methods.

The payment processing industry continues to evolve rapidly, based on the application of new technology and changing customer needs. We intend to continue to evolve with the market to provide the necessary technological advances to meet the ever-changing needs of our market place. Traditional players in the industry must quickly adapt to the changing environment or be left behind in the competitive landscape.

The recent outbreak and continuing spread of the novel coronavirus pandemic (“COVID-19”) is currently impacting countries, communities, supply chains and markets, global financial markets, as well as, the largest industry group serviced by our Company. The Company cannot predict, at this time, whether COVID-19 will
continue to have a material impact on our future financial condition and results of operations due to understaffing in the service sector and the decrease in revenues and profits, particularly restaurants, and any possible future government ordinances that may further restrict restaurant and other service or retail sectors operations.

Business Segments

We operate two reportable business operating segments: (i) North American Transaction Solutions and (ii) International Transaction Solutions. Our segments are designed to establish lines of businesses that support our client base and further globalize our solutions. Management determines the reportable segments based on the internal reporting used by our Chief Operating Decision Maker to evaluate performance and to assess where to allocate resources. The principal revenue stream for all segments comes from service and transaction related fees.

North American Transaction Solutions

North American Transaction Solutions is currently our largest segment, 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 fully-integrated payment acceptance solutions at the point of sale, including Merchant Acquiring, e-commerce, mobile commerce, POS and other business solutions. Our largest service in this segment is Merchant Acquiring, which facilitates the acceptance of cashless transactions at the POS, whether a retail transaction at a physical business location, a mobile commerce transaction through a mobile or 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.

International Transaction Solutions

Through our subsidiary, PayOnline, we provide a wide range of value-added online and mobile solutions utilizing our fully-integrated, platform agnostic electronic commerce offering that simplifies complex enterprise online transaction processing challenges from payment acceptance and processing through risk prevention and payment security via point-to-point encryption and tokenization solutions. Our proprietary SaaS suite of solutions for electronic and mobile commerce gateway and payment processing platform is compliant at Level 1 of PCI DSS, streamlines the order-to-cash process, improves electronic payment acceptance and reduces the scope of burden of PCI DSS compliance. PayOnline holds a potential leadership position in the Russian Federation as one of the largest independent Internet Payment Services Providers (“IPSP”).

Segment Summary Information

The following tables present financial information of the Company’s reportable segments at and for the three and six months ended June 30, 2020 and 2019. The “corporate and eliminations” column includes corporate expenses and intercompany eliminations for consolidated purposes.

Three months ended June 30, 2020	North American Transaction Solutions			International Transaction Solutions			Corp Exp & Eliminations			Total
Net revenues	$	12,977,536		$	741,073		$	-		$	13,718,609
Cost of revenues		11,016,028			520,759			-			11,536,787
Gross Margin		1,961,508			220,314			-			2,181,822
Gross margin %		15	%		30	%		-			16	%
Selling, general and administrative		720,538			125,785			539,006			1,385,329
Non-cash compensation		-			-			7,500			7,500
Provision for bad debt		31,755			1,555			-			33,310
Depreciation and amortization		765,823			6,579			-			772,402
Interest expense, net		341,020			-			-			341,020
Other expense		(17,846	)		9,289			(10,768	)		(19,325	)
Net (loss) income for segment	$	120,218		$	77,106		$	(535,738	)	$	(338,414	)
Goodwill		6,671,750			1,009,436			-			7,681,186
Other segment assets		13,545,980			455,704			-			14,001,684
Total segment assets	$	20,217,730		$	1,465,140		$	-		$	21,682,870

Three months ended June 30, 2019	North American Transaction Solutions			International Transaction Solutions			Corp Exp & Eliminations			Total
Net revenues	$	15,737,998		$	749,313		$	-		$	16,487,311
Cost of revenues		13,444,074			457,291			-			13,901,365
Gross Margin		2,293,924			292,022			-			2,585,946
Gross margin %		15	%		39	%		-			16	%
Selling, general and administrative		669,730			248,213			1,381,127			2,299,070
Non-cash compensation		48,433			-			1,957,407			2,005,840
Provision for bad debt		141,827			1,363			-			143,190
Depreciation and amortization		738,117			9,230			-			747,347
Interest expense, net		252,582			-			-			252,582
Other (income) expense		295,939			(1,164,554	)		(415,796	)		(1,284,411	)
Net (loss) income for segment	$	(647,040	)	$	(8,248,059	)	$	8,103,532		$	(1,577,672	)
Goodwill		6,671,750			2,336,002			-			9,007,752
Other segment assets		13,888,723			354,620			-			14,243,343
Total segment assets	$	20,560,473		$	2,690,622		$	-		$	23,251,095

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Six months ended June 30, 2020	North American Transaction Solutions			International Transaction Solutions			Corp Exp & Eliminations			Total
Net revenues	$	28,131,616		$	1,424,559		$	-		$	29,556,175
Cost of revenues		23,840,300			996,895			-			24,837,195
Gross Margin		4,291,316			427,664			-			4,718,980
Gross margin %		15	%		30	%		-			16	%
Selling, general and administrative		1,590,103			536,760			1,574,358			3,701,221
Non-cash compensation		-			-			45,900			45,900
Provision for bad debt		475,018			1,070			-			476,088
Depreciation and amortization		1,537,065			14,779			-			1,551,844
Interest expense, net		689,433			-			-			689,433
Other expense (income)		(17,846	)		(451	)		(10,768	)		(29,065	)
Net (loss) income for segment	$	17,543		$	(124,494	)	$	(1,609,490	)	$	(1,716,441	)
Goodwill		6,671,750			1,009,436			-			7,681,186
Other segment assets		13,545,980			455,704			-			14,001,684
Total segment assets	$	20,217,730		$	1,465,140		$	-		$	21,682,870

Six months ended June 30, 2019	North American Transaction Solutions			International Transaction Solutions			Corp Exp & Eliminations			Total
Net revenues	$	30,101,504		$	1,432,990		$	-		$	31,534,494
Cost of revenues		25,212,812			948,700			-			26,161,512
Gross Margin		4,888,692			484,290			-			5,372,982
Gross margin %		16	%		34	%		-			17	%
Selling, general and administrative		1,286,166			521,618			2,876,152			4,683,936
Non-cash compensation		48,433			-			1,972,414			2,020,847
Provision for bad debt		491,147			(8,649	)		-			482,498
Depreciation and amortization		1,580,658			17,909			-			1,598,567
Interest expense, net		497,635			-			-			497,635
Other (income) expense		295,939			(1,177,160	)		(316,797	)		(1,198,018	)
Net (loss) income for segment	$	688,714		$	1,130,572		$	(4,531,769	)	$	(2,712,483	)
Goodwill		6,671,750			2,336,002			-			9,007,752
Other segment assets		13,888,723			355,008			-			14,243,731
Total segment assets	$	20,560,473		$	2,691,010		$	-		$	23,251,483

Results of Operations for the Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

We reported a net loss attributable to common stockholders of approximately $300,000 or $0.08 per share loss for the three months ended June 30, 2020 as compared to a net loss of approximately $1.5 million or $0.37 per share loss for the three months ended June 30, 2019. The decrease in net loss attributable to stockholders of approximately $1.2 million was primarily due to the reorganization of the labor force, including lay-offs, which reduced our selling, general and administrative expenses.

The following table sets forth our sources of revenues, cost of revenues and the respective gross margins for the three months ended June 30, 2020 and 2019.

	Three					Three
	Months Ended					Months Ended					Increase /
Source of Revenues	June 30, 2020		Mix			June 30, 2019		Mix			(Decrease)
North American Transaction Solutions	$	12,977,536		94.6	%	$	15,737,998		95.5	%	$	(2,760,462	)
International Transaction Solutions		741,073		5.4	%		749,313		4.5	%		(8,240	)
Total	$	13,718,609		100.0	%	$	16,487,311		100.0	%	$	(2,768,702	)

	Three					Three
	Months Ended		% of			Months Ended		% of			Increase /
Cost of Revenues	June 30, 2020		revenues			June 30, 2019		revenues			(Decrease)
North American Transaction Solutions	$	11,016,028		84.9	%	$	13,444,074		85.4	%	$	(2,428,046	)
International Transaction Solutions		520,759		70.3	%		457,291		61.0	%		63,468
Total	$	11,536,787		84.1	%	$	13,901,365		84.3	%	$	(2,364,578	)

	Three					Three
	Months Ended		% of			Months Ended		% of			Increase /
Gross Margin	June 30, 2020		revenues			June 30, 2019		revenues			(Decrease)
North American Transaction Solutions	$	1,961,508		15.1	%	$	2,293,924		14.6	%	$	(332,416	)
International Transaction Solutions		220,314		29.7	%		292,022		39.0	%		(71,708	)
Total	$	2,181,822		15.9	%	$	2,585,946		15.7	%	$	(404,124	)

Net revenues consist primarily of service fees from transaction processing. Net revenues were approximately $13.7 million for the three months ended June 30, 2020 as compared to $16.5 million for the three months ended June 30, 2019. The decrease in net revenues in our North American Transaction Solutions segment was primarily driven by the adverse impact of the COVID-19 pandemic on our end-to-end payment volumes and gateway transactions.

Cost of revenues represents direct costs of generating revenues, including commissions, mobile operator fees, interchange expense, processing, and non-processing fees. Cost of revenues for the three months ended June 30, 2020 were approximately $11.5 million as compared to approximately $13.9 million for the three months ended June 30, 2019. This decrease is in line with the decrease in revenues for the three months ending June, 30, 2020.

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The gross margin for the three months ended June 30, 2020 was approximately $2.2 million, or 15.9%, as compared to approximately $2.6 million, or 15.7%, for the three months ended June 30, 2019. The gross margin percentage was in line with the results from the previous comparable period.

Operating Expenses Analysis:

Operating expenses were approximately $2.2 million for the three months ended June 30, 2020, as compared to $5.2 million for three months ended June 30, 2019. Operating expenses for the three months ended June 30, 2020 primarily consisted of selling, general and administrative expenses of approximately $1.4 million,and depreciation and amortization of approximately $0.8 million. Operating expenses for the three months ended June 30, 2019, primarily consisted of selling, general and administrative expenses of approximately $2.3 million, non-cash compensation of $2.0 million, and depreciation and amortization expense of approximately $0.7 million.

The components of our selling, general and administrative expenses are reflected in the table below.

Selling, general and administrative expenses for the three months ended June 30, 2020 and 2019 consisted of operating expenses not otherwise delineated in our Condensed Consolidated Statements of Operations and Comprehensive Loss, as follows:

Three months ended June 30, 2020
Category	North American Transaction Solutions		International Transaction Solutions			Corporate Expenses & Eliminations		Total
Salaries, benefits, taxes and contractor payments	$	536,915	$	91,825		$	118,574	$	747,314
Professional fees		55,336		39,537			241,288		336,161
Rent		13,070		13,325			39,093		65,488
Business development		32,228		-			3,805		36,033
Travel expense		638		9,373			39,894		49,905
Filing fees		-		-			15,525		15,525
Transaction gains		-		(80,512	)		-		(80,512	)
Office expenses		41,976		3,759			16,879		62,614
Communications expenses		40,083		46,374			15,863		102,320
Insurance expense		-		-			42,000		42,000
Other expenses		292		2,104			6,085		8,481
Total	$	720,538	$	125,785		$	539,006	$	1,385,329

Three months ended June 30, 2019
Category	North American Transaction Solutions		International Transaction Solutions			Corporate Expenses & Eliminations		Total
Salaries, benefits, taxes and contractor payments	$	318,487	$	95,231		$	799,417	$	1,213,135
Professional fees		133,316		72,497			345,723		551,536
Rent		-		15,277			51,277		66,554
Business development		56,184		489			4,944		61,617
Travel expense		35,511		5,084			33,299		73,894
Filing fees		1,078		-			17,704		18,782
Transaction losses		-		(12,974	)		-		(12,974	)
Office expenses		83,122		4,147			12,990		100,259
Communications expenses		41,746		65,717			18,447		125,910
Insurance expense		-		-			36,267		36,267
Other (income) expenses		286		2,745			61,059		64,090
Total	$	669,730	$	248,213		$	1,381,127	$	2,299,070

Variance
Category	North American Transaction Solutions			International Transaction Solutions			Corporate Expenses & Eliminations			Total
Salaries, benefits, taxes and contractor payments	$	218,428		$	(3,406	)	$	(680,843	)	$	(465,821	)
Professional fees		(77,980	)		(32,960	)		(104,435	)		(215,375	)
Rent		13,070			(1,952	)		(12,184	)		(1,066	)
Business development		(23,956	)		(489	)		(1,139	)		(25,584	)
Travel expense		(34,873	)		4,289			6,595			(23,989	)
Filing fees		(1,078	)		-			(2,179	)		(3,257	)
Transaction gains		-			(67,538	)		-			(67,538	)
Office expenses		(41,146	)		(388	)		3,889			(37,645	)
Communications expenses		(1,663	)		(19,343	)		(2,584	)		(23,590	)
Insurance expense		-			-			5,733			5,733
Other (income) expenses		6			(641	)		(54,974	)		(55,609	)
Total	$	50,808		$	(122,428	)	$	(842,121	)	$	(913,741	)

22

Salaries, benefits, taxes and contractor payments, and professional fees decreased by approximately $0.7 million on a consolidated basis for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. This was due to the staffing reductions necessary due to the effects of the COVID-19 pandemic on our operations.

Segment	Salaries and benefits for the three months ended June 30, 2020		Salaries and benefits for the three months ended June 30, 2019		Increase / (Decrease)
North American Transaction Solutions	$	536,915	$	318,487	$	218,428
International Transaction Solutions		91,825		95,231		(3,406	)
Corporate Expenses & Eliminations		118,574		799,417		(680,843	)
Total	$	747,314	$	1,213,135	$	(465,821	)

Three months ended June 30, 2020
Professional Fees	North American Transaction Solutions		International Transaction Solutions		Corporate Expenses & Eliminations		Total
General Legal	$	-	$	-	$	13,284	$	13,284
SEC Compliance Legal Fees		-		-		35,390		35,390
Accounting and Auditing		-		-		98,264		98,264
Consulting		55,336		39,537		94,350		189,223
Total	$	55,336	$	39,537	$	241,288	$	336,161

Three months ended June 30, 2019
Professional Fees	North American Transaction Solutions		International Transaction Solutions		Corporate Expenses & Eliminations		Total
General Legal	$	6,157	$	18,177	$	53,058	$	77,392
SEC Compliance Legal Fees		-		-		35,662		35,662
Accounting and Auditing		-		-		97,500		97,500
Tax Compliance and Planning		-		-		6,000		6,000
Consulting		127,159		54,320		153,503		334,982
Total	$	133,316	$	72,497	$	345,723	$	551,536

Variance
Professional Fees	North American Transaction Solutions			International Transaction Solutions			Corporate Expenses & Eliminations			Increase / (Decrease)
General Legal	$	(6,157	)	$	(18,177	)	$	(39,774	)	$	(64,108	)
SEC Compliance Legal Fees		-			-			(272	)		(272	)
Accounting and Auditing		-			-			764			764
Consulting		(71,823	)		(14,783	)		(59,153	)		(145,759	)
Total	$	(77,980	)	$	(32,960	)	$	(104,435	)	$	(215,375	)

All other operating expenses were relatively in line with the previous comparable quarter.

Other Income and Expenses Delineated in the Condensed Consolidated Statements of Operations and Comprehensive Loss:

Non-cash Compensation:

Non-cash compensation expense was approximately $7,500 for the three months ended June 30, 2020 as compared to approximately $2.0 million for the three months ended June 30, 2019. The decrease in expense during the three months ended June 30, 2020 was the result of no grants of shares and stock options to named executives, certain employees, and certain consultants during the three months ended June 30, 2020.

Bad Debt Expense Analysis:

We reflected a bad debt expense on the accompanying consolidated statements of operations, which represents uncollected fees of approximately $33,000 for the three months ended June 30, 2020, compared to bad debt expense, representing uncollected fees of approximately $143,000 for the three months ended June 30, 2019. The decrease in bad debt expense was primarily due to billing adjustments relating to chargebacks made by our processors that settled during the three months ended June 30, 2020.

23

Depreciation and Amortization Expense:

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios in connection with residual buyout arrangements and client acquisition costs.  Depreciation and amortization expense was approximately $772,000 for the three months ended June 30, 2020 as compared to approximately $747,000 for the three months ended June 30, 2019. 

Interest Expense:

Interest expense for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 is as follows;

Funding Source	Three months ended June 30, 2020		Three months ended June 30, 2019		Increase / (Decrease)
RBL Notes	$	330,853	$	237,963	$	92,890
Other		10,167		14,619		(4,452	)
Total	$	341,020	$	252,582	$	88,438

Total interest expense increased due to the increase in borrowings as compared to the prior period.

Other Income:

Other income decreased from approximately $1.3 million for the three months ended June 30, 2019 to approximately $19,000 for the three months ended June 30, 2020, primarily due to a one time reversal of approximately $1.1 million in accrued expenses relating to merchant reserves recorded in a previous year deemed not to be an obligation during 2019.

Results of Operations for the Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

We reported a net loss attributable to common stockholders of approximately $1.7 million or $0.41 per share loss for the six months ended June 30, 2020 as compared to a net loss of approximately $2.7 million or $0.68 per share loss for the six months ended June 30, 2019. The decrease in net loss attributable to stockholders was primarily due to the issuance of non-cash compensation (shares and options) valued, at the date of grant, at approximately $2.0 million during the six months ended June 30, 2020 which was partially offset by decreases of approximately $1.0 million in selling, general and administrative expenses.

The following table sets forth our sources of revenues, cost of revenues and the respective gross margins for the six months ended June 30, 2020 and 2019.

	Six					Six
	Months Ended					Months Ended					Increase /
Source of Revenues	June 30, 2020		Mix			June 30, 2019		Mix			(Decrease)
North American Transaction Solutions	$	28,131,616		95.2	%	$	30,101,504		95.5	%	$	(1,969,888	)
International Transaction Solutions		1,424,559		4.8	%		1,432,990		4.5	%		(8,431	)
Total	$	29,556,175		100.0	%	$	31,534,494		100.0	%	$	(1,978,319	)

	Six					Six
	Months Ended		% of			Months Ended		% of			Increase /
Cost of Revenues	June 30, 2020		revenues			June 30, 2019		revenues			(Decrease)
North American Transaction Solutions	$	23,840,300		84.7	%	$	25,212,812		83.8	%	$	(1,372,512	)
International Transaction Solutions		996,895		70.0	%		948,700		66.2	%		48,195
Total	$	24,837,195		84.0	%	$	26,161,512		83.0	%	$	(1,324,317	)

	Six					Six
	Months Ended		% of			Months Ended		% of			Increase /
Gross Margin	June 30, 2020		revenues			June 30, 2019		revenues			(Decrease)
North American Transaction Solutions	$	4,291,316		15.3	%	$	4,888,692		16.2	%	$	(597,376	)
International Transaction Solutions		427,664		30.0	%		484,290		33.8	%		(56,626	)
Total	$	4,718,980		16.0	%	$	5,372,982		17.0	%	$	(654,002	)

Net revenues consist primarily of service fees from transaction processing. Net revenues were approximately $29.6 million for the six months ended June 30, 2020 as compared to approximately $31.5 million for the six months ended June 30, 2019. The decrease in net revenues for the comparable period was primarily due to the impact of the COVID-19 pandemic on our end-to-end payment volumes and gateway transactions.

Cost of revenues represents direct costs of generating revenues, including commissions, mobile operator fees, interchange expense, processing, and non-processing fees. Cost of revenues for the six months ended June 30, 2020 were approximately $24.8 million as compared to approximately $26.2 million for the six months ended June 30, 2019. This decrease is in line with the decrease in revenues for the six months ending June, 30, 2020.

The gross margin for the six months ended June 30, 2020 was approximately $4.7 million, or 16.0%, as compared to approximately $5.4 million, or 17.0%, for the six months ended June 30, 2019. The decrease in gross margin was primarily the result of the competitive pressure in our industry, relating to costs that can be passed through to our merchants.

24

Operating Expenses Analysis:

Operating expenses were approximately $5.8 million for the six months ended June 30, 2020, as compared to $8.8 million for six months ended June 30, 2019. Operating expenses for the six months ended June 30, 2020 primarily consisted of selling, general and administrative expenses of approximately $3.7 million, bad debt expense of approximately $0.5 million and depreciation and amortization of approximately $1.6 million. Operating expenses for the six months ended June 30, 2019 primarily consisted of selling, general and administrative expenses of approximately $4.7 million, non-cash compensation of $2.0 million, bad debt expense of approximately $0.5 million, and depreciation and amortization expense of approximately $1.6 million.

The components of our selling, general and administrative expenses are reflected in the table below.

Selling, general and administrative expenses for the six months ended June 30, 2020 and 2019 consisted of operating expenses not otherwise delineated in our Condensed Consolidated Statements of Operations and Comprehensive Loss, as follows:

Six months ended June 30, 2020
Category	North American Transaction Solutions		International Transaction Solutions		Corporate Expenses & Eliminations		Total
Salaries, benefits, taxes and contractor payments	$	1,085,541	$	204,967	$	669,295	$	1,959,803
Professional fees		161,578		88,428		496,948		746,954
Rent		17,643		30,158		91,508		139,309
Business development		111,349		17		5,907		117,273
Travel expense		5,309		34,496		95,526		135,331
Filing fees		-		-		37,338		37,338
Transaction losses (gains)		-		76,499		-		76,499
Office expenses		119,485		10,728		44,975		175,188
Communications expenses		88,770		89,364		35,871		214,005
Insurance expense		-		-		80,685		80,685
Other expenses		427		2,103		16,307		18,837
Total	$	1,590,102	$	536,760	$	1,574,360	$	3,701,222

Six months ended June 30, 2019
Category	North American Transaction Solutions			International Transaction Solutions			Corporate Expenses & Eliminations		Total
Salaries, benefits, taxes and contractor payments	$	622,477		$	276,022		$	1,564,965	$	2,463,464
Professional fees		274,346			127,962			847,383		1,249,691
Rent		-			34,097			105,290		139,387
Business development		93,168			1,116			10,114		104,398
Travel expense		59,647			13,485			65,368		138,500
Filing fees		1,078			-			39,834		40,912
Transaction losses (gains)		-			(44,091	)		-		(44,091	)
Office expenses		158,181			10,025			26,314		194,520
Communications expenses		79,704			97,067			41,874		218,645
Insurance expense		-			-			70,514		70,514
Other expenses		(2,435	)		5,935			104,496		107,996
Total	$	1,286,166		$	521,618		$	2,876,152	$	4,683,936

Variance
Category	North American Transaction Solutions			International Transaction Solutions			Corporate Expenses & Eliminations			Total
Salaries, benefits, taxes and contractor payments	$	463,064		$	(71,055	)	$	(895,670	)	$	(503,661	)
Professional fees		(112,768	)		(39,534	)		(350,435	)		(502,737	)
Rent		17,643			(3,939	)		(13,782	)		(78	)
Business development		18,181			(1,099	)		(4,207	)		12,875
Travel expense		(54,338	)		21,011			30,158			(3,169	)
Filing fees		(1,078	)		-			(2,496	)		(3,574	)
Transaction losses (gains)		-			120,590			-			120,590
Office expenses		(38,696	)		703			18,661			(19,332	)
Communications expenses		9,066			(7,703	)		(6,003	)		(4,640	)
Insurance expense		-			-			10,171			10,171
Other income		2,862			(3,832	)		(88,189	)		(89,159	)
Total	$	303,936		$	15,142		$	(1,301,792	)	$	(982,714	)

25

Salaries, benefits, taxes and contractor payments, and professional fees decreased by approximately $1.0 million on a consolidated basis for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. This was due to the staffing reductions necessary due to the effects of the COVID-19 pandemic on our operations.

Segment	Salaries and benefits for the six months ended June 30, 2020		Salaries and benefits for the six months ended June 30, 2019		Increase / (Decrease)
North American Transaction Solutions	$	1,085,541	$	622,477	$	463,064
International Transaction Solutions		204,967		276,022		(71,055	)
Corporate Expenses & Eliminations		669,295		1,564,965		(895,670	)
Total	$	1,959,803	$	2,463,464	$	(503,661	)

Six months ended June 30, 2020
Professional Fees	North American Transaction Solutions		International Transaction Solutions		Corporate Expenses & Eliminations		Total
General Legal	$	2,600	$	64	$	19,708	$	22,372
SEC Compliance Legal Fees		-		-		80,776		80,776
Accounting and Auditing		-		-		196,621		196,621
Consulting		158,978		88,364		199,843		447,185
Total	$	161,578	$	88,428	$	496,948	$	746,954

Six months ended June 30, 2019
Professional Fees	North American Transaction Solutions		International Transaction Solutions		Corporate Expenses & Eliminations		Total
General Legal	$	21,116	$	21,633	$	217,810	$	260,559
SEC Compliance Legal Fees		-		-		93,091		93,091
Accounting and Auditing		-		-		195,000		195,000
Tax Compliance and Planning		-		-		6,000		6,000
Consulting		253,230		106,329		335,482		695,041
Total	$	274,346	$	127,962	$	847,383	$	1,249,691

Variance
Professional Fees	North American Transaction Solutions			International Transaction Solutions			Corporate Expenses & Eliminations			Increase / (Decrease)
General Legal	$	(18,516	)	$	(21,569	)	$	(198,102	)	$	(238,187	)
SEC Compliance Legal Fees		-			-			(12,315	)		(12,315	)
Accounting and Auditing		-			-			1,621			1,621
Consulting		(94,252	)		(17,965	)		(135,639	)		(247,856	)
Total	$	(112,768	)	$	(39,534	)	$	(350,435	)	$	(502,737	)

All other operating expenses were relatively in line with the previous comparable quarter.

Other Income and Expenses Delineated in the Condensed Consolidated Statements of Operations and Comprehensive Loss:

Non-cash Compensation:

Non-cash compensation expense was approximately $46,000 for the six months ended June 30, 2020 as compared to approximately $2.0 million for the six months ended June 30, 2019. The decrease in expense during the six months ended June 30, 2020 was the result of no grants of shares and stock options to named executives, certain employees, and certain consultants during the six months ended June 30, 2020.

Bad Debt Expense Analysis:

We reflected a bad debt expense on the accompanying consolidated statements of operations, representing uncollected fees of approximately $0.5 million for each of the six months ended June 30, 2020 and  June 30, 2019. 

26

Depreciation and Amortization Expense:

Depreciation and amortization expense consists primarily of the amortization of merchant portfolios in connection with residual buyout arrangements and client acquisition costs.  Depreciation and amortization expense was approximately $1.6 million for the six months ended June 30, 2020 and June 30, 2019.

Interest Expense:

Interest expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 is as follows;

Funding Source	Six months ended June 30, 2020		Six months ended June 30, 2019		Increase / (Decrease)
RBL Notes	$	669,100	$	468,703	$	200,397
Other		20,334		28,932		(8,598	)
Total	$	689,434	$	497,635	$	191,799

Total interest expense increased due to the increase in borrowings compared to the prior period.

Other Income:

Other income decreased from approximately $1.2 million for the six months ended June 30, 2019 to approximately $30,000 for the six months ended June 30, 2020, which was primarily due to the Company recognizing a one time charge to other income of approximately $1.1 million relating to merchant reserves recorded in a previous year deemed not to be an obligation at June 30, 2020.

Liquidity and Capital Resources

Total assets at June 30, 2020 were approximately $21.7 million compared to approximately $23.0 million at December 31, 2019. The primary reason for the net decrease in total assets was the result of the amortization of our intangible assets.

At June 30, 2020, we had total current assets of approximately $8.2 million and approximately $8.7 million at December 31, 2019. The primary reason for the decrease in current assets was due to an increase in cash on hand to fund operations of approximately $676,000 which was offset by a decrease of approximately $705,000 in our accounts receivable.

Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. We sustained a net loss of approximately $1.7 million for the six months ended June 30, 2020 and $6.5 million for the year ended December 31, 2019 and have an accumulated deficit of $180.4 million and a negative working capital of $1.6 million at June 30, 2020.

During March 2020, our Company evaluated its liquidity position, future operating plans, and its labor force, which included a reduction in the labor force and compensation to executives and other employees, in order to maintain current payment processing functions, capabilities, and continued customer service to its merchants. We are also seeking sources of capital to pay our contractual obligations as they come due, in light of these uncertain times. Management believes that its operating strategy will provide the opportunity for us to continue as a going concern as long as we are able to obtain additional financing. At this time, due to our continuing losses from operations, negative working capital, and the COVID-19 pandemic, we cannot predict the impact of these conditions on our ability to obtain financing necessary for the Company to fund its future working capital requirements. Our Company has also decided to explore strategic alternatives and potential options for its business, including sale of the Company or certain assets, licensing of technology, spin-offs, or a business combination. There can be no assurance, at this time, regarding the eventual outcome of our planned strategic alternative.  In most respects, it is still too early in the COVID-19 pandemic to be able to quantify or qualify the longer-term ramifications on our merchant processing business, our merchants, our planned strategic alternatives to enhance current shareholder value, our current investors, and/or future potential investors.

As part of our Company's plan to obtain capital to fund future operations, on March 27, 2020, our Company entered into a Master Exchange Agreement, (the “ESOUSA Agreement”) with ESOUSA Holdings, LLC ("ESOUSA"), a related party. Prior to entering into the ESOUSA Agreement, ESOUSA agreed to acquire an existing promissory note that had been previously issued by the Company, of up to $2,000,000 in principal amount outstanding and unpaid interest due to RBL Capital Group, LLC ("RBL"). Pursuant to the ESOUSA Agreement, the Company has the right, at any time prior to March 27, 2021, to request ESOUSA, and ESOUSA agreed upon each such request, to exchange this promissory note in tranches on the dates when the Company instructs ESOUSA, for such number of shares of the Company’s common stock (“Common Stock”) as determined under the ESOUSA Agreement based upon the number of shares of Common Stock (already in ESOUSA’s possession) that ESOUSA sold in order to finance its purchase of such tranche of the promissory note from RBL.  ESOUSA will purchase each tranche of the promissory note equal to 88% of the gross proceeds from the shares of Common Stock sold by ESOUSA to finance the purchase of such exchange amount from RBL. Each such tranche shall be $148,000 unless otherwise agreed to by the Company and ESOUSA. On April 23, 2020, the Company entered into an amendment (the “Amendment”) to the ESOUSA Agreement with ESOUSA. The Amendment increased from $2,000,000 to $5,000,000 the principal amount and unpaid interest of one or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. The Company has the right, pursuant to the ESOUSA Agreement (as amended by the Amendment), to request ESOUSA to exchange in tranches such promissory notes for shares of the Company’s common stock on the terms and conditions and subject to the limitations set forth in the ESOUSA Agreement. On August 3, 2020, our Company entered into a Second Amendment (the “Second Amendment”) to the Agreement. The Second Amendment increased from $5,000,000 to $15,000,000 the principal amount and unpaid interest of one or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL Our Company has the right pursuant to the Agreement (as amended by the Amendment) to request ESOUSA to exchange in tranches such promissory notes for shares of the Company’s common stock on the terms and conditions and subject to the limitations set forth in the Agreement. The Company received its first tranche of approximately $148,000 on March 27, 2020, less any fees. In April 2020, ESOUSA exchanged the promissory note for shares in our Company's common stock which has been reflected in our stockholders" equity section. (Refer to  Note 11. Stockholders" Equity). The Company received a second tranche of approximately $143,000 on April 28, 2020, less any fees, which is reflected in accrued expenses on the accompanying consolidated balance sheet as of June 30, 2020. No shares of the Company's common stock have been issued as of this date in connection with this tranche. On August 11, 2020, the Company received a third tranche of approximately $707,000 from RBL, less any fees. The Company issued 66,190 shares of its common stock to ESOUSA in connection with this tranche.

On May 7, 2020, the Company entered into a promissory note (the “Note”) evidencing an unsecured loan (the “Loan”) in the amount of $491,493 made to the Company under the Paycheck Protection Program (the “PPP”). The Note matures on May 7, 2022 and bears interest at a rate of 1% per annum. Beginning December 7, 2020, the Company is required to make 17 monthly payments of principal and interest, with the principal component of each such payment based upon the level amortization of principal over a two-year period from May 7, 2020. Pursuant to the terms of the CARES Act and the PPP, the Company may apply to the Lender for forgiveness for the amount due on the Loan. The amount eligible for forgiveness is based on the amount of Loan proceeds used by the Company (during the eight-week period after the Lender makes the first disbursement of Loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), interest on mortgage obligations, rent and utilities, subject to certain limitations and reductions in accordance with the CARES Act and the PPP. No assurance can be given, at this time, that the Company will obtain forgiveness of the Loan in whole or in part.

On May 18, 2020, the Company entered into a promissory note in the amount of $159,899 made to the Company by the U.S. Small Business Administration under the Economic Injury Disaster Loan program.

On August 4, 2020, our Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mullen Technologies, Inc., a California corporation (“Mullen”), and Mullen Acquisition, Inc., a California corporation and wholly owned subsidiary of the Company (“Merger Sub”). Pursuant to, and on the terms and subject to the conditions of, the Merger Agreement, Merger Sub will be merged with and into Mullen (the “Merger”), with Mullen continuing as the surviving corporation in the Merger. After Mullen’s completion and delivery to our Company, of the audited financial statements for Mullen and its subsidiaries and affiliates required to be included in a registration statement, the Company intends to prepare and file with the Commission a registration statement on Form S-4 (together with all amendments thereto, the “Registration Statement”) in which the proxy statement will be included as a part of the prospectus, in connection with the registration under the Securities Act of the shares of Parent Shares to be issued in connection with the transactions contemplated in the Merger Agreement. The Merger Agreement contains termination rights for each of the Company and Mullen, including, among others, (i) in the event that the Merger has not been consummated by December 31, 2020, (ii) in the event that the requisite approval of the Company’s stockholders is not obtained upon a vote thereon, (iii) in the event that any governmental authority shall have taken action to restrain, enjoin or prohibit the consummation of the Merger, which action shall have become final and non-appealable and (iv) in the event that there is a breach by the other party of any of its representations, warranties, covenants or agreements, which breach is sufficiently material and not timely cured or curable. In addition, Mullen may terminate the Merger Agreement if, prior to receipt of the requisite approval of the Company’s stockholders, the Company’s board of directors shall have changed their recommendation in respect of the Merger. Further, the Company may terminate the Merger Agreement prior to receipt of the requisite approval of the Company’s stockholders to enter into a definitive agreement with respect to a Superior Proposal (as such term is defined in the Merger Agreement). 

As contemplated by the Merger Agreement, on August 11, 2020, our Company as lender, entered into an unsecured Promissory Note, dated August 11, 2020 (the “Note”), with Mullen. Pursuant to the Note, Mullen borrowed from the Company $500,000. Prior to maturity of the loan, the principal amount of the loan will carry an interest rate of 14% per annum compounded monthly and payable upon demand. This loan will mature on the earlier of (i) the date that the Merger Agreement is terminated for any reason by any party thereto and (ii) the Merger Effective Time (as defined in the Merger Agreement).

Consummation of the Merger, the Divestiture, the Private Placement and the other transactions contemplated in the Merger Agreement, is subject to customary conditions including, among others, the approval of the Company’s stockholders. There is no guarantee that the Merger, the Divestiture, the Private Placement or the other transactions contemplated in the Merger Agreement will be completed.  

Consummation of the Merger, the Divestiture, the Private Placement and the other transactions contemplated in the Merger Agreement, is subject to customary conditions including, among others, the approval of the Company’s stockholders. There is no guarantee that the Merger, the Divestiture, the Private Placement or the other transactions contemplated in the Merger Agreement will be completed.  

These conditions raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The net loss attributable to Net Element, Inc. stockholders was approximately $325,000 for the three months ended June 30, 2020 compared to approximately $1.5 million for the three months ended June 30, 2019.

The net loss attributable to Net Element, Inc. stockholders was approximately $1.7 million for the six months ended June 30, 2020 compared to approximately $2.7 million for the six months ended June 30, 2019.

Operating activities used approximately $0.3 million of cash for the six months ended June 30, 2020 as compared to approximately $600,000 of cash used for the six months ended June 30, 2019.

Investing activities used approximately $0.4 million in cash for the six months ended June 30, 2020 as compared to approximately $1.7 million used in investing activities for the six months ended June 30, 2019. The decrease in cash used in investing activities of approximately $1.3 million was primarily due to a decrease of approximately $0.9 million in client acquisition costs and a decrease of approximately $0.4 million in changes in other assets relating to the right-of-use asset relating to the premises occupied by the Company.

Financing activities provided approximately $0.9 million in cash for the six months ended June 30, 2020 as compared to approximately $1.5 million of cash provided by financing activities for the six months ended June 30, 2019. Cash provided by financing activities for the six months ended June 30, 2020 was primarily the result of proceeds received from the Small Business Administration.

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Off-balance sheet arrangements

At June 30, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. 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 chief executive officer and our 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 Securities Exchange Act of 1934, as amended (the "Exchange Act")).

Disclosure controls and procedures are designed to provide reasonable, but not absolute, assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Commission’s (the “Commission”) rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not deemed effective due to the material weaknesses in our internal control over financial reporting (as defined in Rule 13a-15(f )and Rule 15d-15(f ) under the Exchange Act), as discussed in Item 9A. Controls and Procedures of the Company’s Form 10-K for the fiscal year ended December 31, 2019, under the heading “Management’s Report on Internal Control over Financial Reporting.”

Changes in Internal Control 

As of June 30, 2020, the material weaknesses disclosed in our Form 10-K for the year ended December 31, 2019 have not yet been fully remediated; however, significant progress were made during 2019 in remediating certain material weaknesses. Several steps taken in improving and remediating internal controls over financial reporting have included retaining a financial reporting manager, the formation of a disclosure committee, as well as, formal education and training of our Board members. Remediation activities for our material weaknesses include:

● Risk Assessment. We are continuing the process of designing and implementing an improved enterprise wide risk management process that follows the COSO 2013 framework and one aspect of this process will focus on identifying and mitigating risks to our business that could have an impact on our internal control over financial reporting. Our process includes periodic updates of the enterprise risk universe through the consideration of current and historical risks, periodic input from executive management, and our domestic and international segment local management. Each time a new potential risk is identified, we will evaluate if any additional controls are required to mitigate risks to our internal control over financial reporting. During the year ended December 31, 2019, management sent a consultant to Russia in an effort to fully understand, implement, train, and eventually test the internal controls relating to our International Transaction Solution's segment’s internal control over financial reporting. The local management team in our International Transaction Solution's segment is continuing in the process of documenting processes, controls, and recommendations provided under the guidance and assistance of the Company's consultant.

Due to the current COVID-19 pandemic, the Company has had to allocate resources to mitigate risks with its current merchant accounts and evaluated its operational plans to eliminate any potential exposure to its disclosure controls and procedures. Pending the outcome of this uncertainty, including health concerns and travel restrictions to Russia, we cannot determine how or when we expect to remediate the material weaknesses noted above, including the allocation of appropriate resources to department heads during 2020.

Except as stated above, there were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during our quarter ended June 30, 2020 that are reasonably likely to materially affect our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures 

Control systems, no matter how well conceived and operated, are designed to provide a reasonable but not an absolute level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.

PART II — OTHER INFORMATION

Item 1. Legal proceedings

For a discussion of legal proceedings, Refer to Note 9. "Commitments and Contingencies” in the condensed consolidated unaudited financial statements contained in Part I, Item 1 of this Report, which section is incorporated by reference herein.

Item 1A. Risk Factors

In addition to the information set forth in this Report, you should read and consider the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or future results of operation. The risks described in such report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to have a material adverse effect on our business, financial condition and/or future operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sale of Unregistered Securities

Information required by Item 701 of Regulation S-K as to other unregistered equity securities we sold during the period covered by this Report that were not registered under the Securities Act has been previously reported in the Company’s Current Reports on Form 8-K filed with the Commission in addition to the following:

On April 28, 2020, we issued 65,862 shares of our common stock in exchange for a tranche of $148,000 aggregate amount of certain RBL promissory notes purchased by ESOUSA pursuant to the ESOUSA Agreement. Such shares of common stock were issued to ESOUSA under an exemption from the registration requirements of the Securities Act in reliance upon Section 3(a)(9) of the Securities Act. See Note 7 to the condensed consolidated financial statements for additional information.

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Item 6. Exhibits

Exhibit Number	Exhibit Description
3.1	Certificate of Corporate Domestication of Cazador, filed with the Secretary of State of the State of Delaware on October 2, 2012 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on October 5, 2012)
3.2	Amended and Restated Certificate of Incorporation of Net Element International, Inc., a Delaware corporation, filed with the Secretary of State of the State of Delaware on October 2, 2012 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Commission on October 5, 2012)
3.3	Amended and Restated Bylaws of Net Element International, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the Commission on October 5, 2012)
3.4	Certificate of Merger, filed with the Secretary of State of the State of Delaware on October 2, 2012 (incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K filed with the Commission on October 5, 2012)
3.5	Certificate of Amendment to Amended and Restated Certificate of Incorporation, dated December 5, 2013, changing the Company’s name from Net Element International, Inc. to Net Element, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 6, 2013)
3.6	Certificate of Amendment to Amended and Restated Certificate of Incorporation, dated December 16, 2014, to increase authorized common stock to 200 million shares (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 17, 2014)
3.7	Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 1, 2015)

3.8	Certificate of Amendment to Amended and Restated Certificate of Incorporation, dated June 15, 2015, to increase authorized common stock to 300 million shares (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 16, 2015)
3.9	Amendment No. 1 to the Bylaws of the Company, dated June 15, 2015 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Commission on June 16, 2015)
3.10	Amendment No. 2 to the Bylaws of the Company, dated July 10, 2015 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 10, 2015)
3.11	Certificate of Amendment to Amended and Restated Certificate of Incorporation, dated May 24, 2016 (incorporated by reference to Exhibit 3.1 to the Company’s second Current Report on Form 8-K filed with the Commission on May 24, 2016)
3.12	Certificate of Amendment to Amended and Restated Certificate of Incorporation, dated June 15, 2016 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on June 16, 2016)
3.13	Certificate of Amendment to Amended and Restated Certificate of Incorporation, dated October 4, 2017 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on October 4, 2017)
10.1	Amendment, dated as of April 23, 2020, to Master Exchange Agreement, dated as of March 27, 2020 between Net Element, Inc. and ESOUSA Holdings, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 24, 2020)
10.2	Promissory Note, dated as of May 7, 2020, between Net Element, Inc. and Truist Bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 15, 2020)
10.3	Binding Letter of Intent, dated June 12, 2020, between Net Element, Inc. and Mullen Technologies, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 15, 2020)
10.4	Promissory Note, dated as of August 11, 2020, between Net Element, Inc. and Mullen Technologies, Inc.
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.INS* XBRL Instance Document

101.SCH* XBRL Taxonomy Extension Schema Document

101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF* XBRL Taxonomy Extension Definition Linkbase Document

101.LAB* XBRL Taxonomy Extension Label Linkbase Document

101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith (furnished herewith with respect to Exhibit 32.1).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Net Element, Inc.
Date: August 13, 2020	By:	/s/ Oleg Firer
		Name: Oleg Firer
		Title: Chief Executive Officer   (Principal Executive Officer)
	By:	/s/ Jeffrey Ginsberg
		Name: Jeffrey Ginsberg Title: Chief Financial Officer   (Principal Financial Officer and Principal Accounting Officer)

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EX-10.4

Exhibit 10.4

PROMlSSORY NOTE

$500,000	Brea, California
	August 11, 2020

FOR VALUE RECEIVED, and subject to the terms and conditions set forth herein, Mullen Technologies, Inc., a California corporation (hereinafter referred to as "Maker"), hereby unconditionally promises to pay to Net Element, Inc, a Delaware corporation (and together with its successors and assigns, hereinafter referred to as "Holder"), in the manner hereinafter provided, the aggregate principal sum of FIVE HUNDRED THOUSAND DOLLARS ($500,000) in immediately available funds and in lawful money of the United States of America, together with interest thereon, all in accordance with the provisions hereinafter specified.

I.    Funding. On the date hereof, Maker received the aggregate principal sum of FIVE HUNDRED THOUSAND DOLLARS ($500,000), from Holder. The amount funded hereunder and repaid may not be reborrowed.

2.    Accrual of Interest. Interest shall accrue and be computed on the principal amount outstanding under this Note until the same is repaid in full at a rate equal fourteen percent (14%) per annum compounding monthly. Interest shall be calculated hereunder on the basis of a 360-day year for the actual number of days elapsed. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law. Such interest shall be payable in cash upon demand.

3.    Payment of Interest. Maker shall pay interest on this Note on the Maturity Date (as hereafter defined) to Holder. Interest payable on this Note shall be paid on the Maturity Date in cash. During the continuance of an Event of Default, notwithstanding anything else to the contrary contained in this Note, interest payable on the outstanding principal hereunder shall bear interest at the then applicable interest rate set forth in the immediately preceding section plus thirteen percent (13%) per annum; provided, however, that such rate shall be increased or decreased to reflect the maximum interest rate permitted under applicable law. Such default interest shall be payable in cash upon demand.

4.    Maturity Date. The entire unpaid principal amount of this Note, together with all accrued unpaid interest, shall be due and payable on the earlier of (i) the date that certain Agreement and Plan of Merger, dated as of August 4, 2020, among Maker, Holder and Mullen Acquisition, Inc., a California corporation and a wholly-owned subsidiary of Holder (the "Merger Agreement") is terminated for any reason by any party thereto and (ii) theMerger Effective Time (as defined in the Merger Agreement) (the "Maturity Date") or, if earlier, the date on which this Note is declared due and payable pursuant to the terms of this Note, including without limitation as provided in Section 9 of this Note.

5.    Intentionally Omitted.

6.    Manner and Application of Payments. All amounts payable in cash hereunder shall be payable to Holder by wire transfer of immediately available funds and in lawful money of the United States of America without set-off, deduction or counterclaim at such place as Holder may from time to time designate in writing to Maker. Payments hereunder shall be applied first to interest and then to principal outstanding hereunder, except that if Holder has incurred any cost or expense in connection with the enforcement or collection of the obligations of Maker hereunder, Holder shall have the option of applying any monies received from Maker to payment of such costs or expenses plus interest thereon before applying any of such monies to any interest or principal then due. If any payment of principal or interest under this Note shall be payable on a day other than a business day such payment shall be made on the next succeeding business day and interest shall be payable at the rate specified in this Note during such extension. The books and records of Holder shall be the best evidence of any amounts at any time owed under this Note (including but not limited to principal, interest and any fees owed hereunder) and shall be conclusive absent manifest error.

7.     Representation and Warranties. Maker hereby represents and warrants to Holder that:

(i)     Maker is validly existing as a corporation under the laws of the State of California and has the power and authority to execute and deliver this Note and has duly executed and delivered this Note;

(ii)    this Note is the legal, valid and binding obligation of Maker, enforceable in accordance with its terms;

(iii)   the execution, delivery and performance of this Note and the borrowing evidenced hereby does not (i) require the consent or approval of any other party (including any governmental or regulatory party), (ii) violate any law, regulation, agreement, order, writ, judgment, injunction, decree, determination or award presently in effect to which Maker is a party or to which Maker or any of its assets may be subject, or (iii) conflict with or constitute a breach of, or default under, or require any consent under, or result in the creation of any lien, charge or encumbrance upon the property or assets of Maker pursuant to any other agreement or instrument (other than any pledge of or security interest granted in any collateral pursuant to this Note) to which Maker is a party or is bound or by which its properties may be bound or affected; and (i) require the consent or approval of any other party (including any governmental or regulatory party), (ii) violate any law, regulation, agreement, order, writ, judgment, injunction, decree, determination or award presently in effect to which Maker is a party or to which Maker or any of its assets may be subject, or (iii) conflict with or constitute a breach of, or default under, or require any consent under, or result in the creation of any lien, charge or encumbrance upon the property or assets of Maker pursuant to any other agreement or instrument (other than any pledge of or security interest granted in any collateral pursuant to this Note) to which Maker is a party or is bound or by which its properties may be bound or affected; and

(iv)   there are no actions, suits, investigations or proceedings pending or, to the best of Maker's knowledge, threatened at law, in equity, in arbitration or by or before any other authority involving or affecting Maker that are likely to have a material adverse effect on the financial condition of Maker.

8.     Covenants.

(i)     Further Assurances. Maker shall execute, acknowledge and deliver, or cause to be executed, acknowledged or delivered, any and all such further assurances and other agreements or instruments, and take or cause to be taken all such other action, as shall be reasonably necessary from time to time to give full effect to the Note and the obligations hereunder.

(ii)    Maintenance of Existence. Maker shall preserve, renew and maintain in full force and effect its corporate or organizational existence and take all reasonable action to maintain all rights and privileges necessary or desirable in the ordinary course of business except as would not have a materially adverse effect.

(iii)   Notices of Defaults. As soon as possible and in any event within two (2) business days after Maker becomes aware of a Default or Event of Default under this Note, Maker shall notify Holder in writing of the nature and extent of such default or event of default and the action, if any, Maker has taken or proposes to take with respect to such default or event of default.

9.     Events of Default. Each of the following acts, events or circumstances shall constitute an Event of Default (each an "Event of Default") hereunder:

(i)     Maker shall default in the payment when due (in accordance with the terms of this Note) of any principal;

(ii)    Maker shall default in the payment when due (in accordance with the terms of this Note) of any interest or other amounts owing hereunder, and such default is not cured within three (3) business days of the due date;

(iii)   (a) Maker shall commence a voluntary case concerning itself under any bankruptcy, insolvency or similar laws or statutes (including Title 11 of the United States Code, as amended, supplemented or replaced) (collectively , the "Bankruptcy Code"); or (b) an involuntary case is commenced against Maker and is not dismissed within ninety (90) days; or (c) a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of Maker or Maker commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to Maker or there is commenced against Maker any such proceeding; or (d) any order of relief or other order approving any such case or proceeding is entered; or (e) Maker is adjudicated insolvent or bankrupt; or (f) Maker makes a general assignment for the benefit of creditors; or (g) Maker shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or (h) Maker shall by any act or failure to act consent to, approve of or acquiesce in any of the foregoing;

(iv)   Maker shall dissolve or for any reason cease to be in existence;

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(v)    any representation or warranty made or that is deemed made by Maker shall have been false or misleading in any material respect on the date as of which such representation or warranty was made or deemed made;

(vi)   Maker shall fail to perform or observe any agreement, covenant or obligation arising under any provision hereof for more than thirty (30) days following receipt by Maker of a notice from Holder indicating any such violation;

(vii)  Maker shall default on any other indebtedness, whether such indebtedness is owed to Holder or a third party;

(viii) Maker shall breach or default on, as applicable, any of its representations, warranties, covenants and/or agreements set forth in the Merger Agreement; and

(ix)   any material adverse effect shall occur with respect to (a) the validity or enforceability of this Note or the rights, powers and privileges purported to be created hereby, (b) the right rights and remedies of the Holder hereunder, (c) Maker's ability to perform any of its obligations hereunder, or (d) the business, assets, properties, liabilities (actual or contingent), operations or condition (financial or otherwise) of Maker.

If an Event of Default, other than an Event of Default described in clause (iii) of this section, occurs, Holder by written notice to Maker may declare the principal of and accrued interest on this Note to be immediately due and payable. Upon a declaration of acceleration, such principal and interest shall become immediately due and payable. If an Event of Default described in clause (iii) of this Section occurs, the principal of and accrued interest on this Note then outstanding shall become immediately due and payable without any declaration or other act on the part of Holder.

As used herein, the term "Default" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

10.  Remedies; Cumulative Rights. In addition to the rights provided under the immediately preceding Section, Holder shall also have any other rights that Holder may have been afforded under any contract or agreement at any time, and any other rights that Holder may have pursuant to applicable law. No delay on the part of Holder in the exercise of any power or right under this Note or under any other instrument executed pursuant hereto shall operate as a waiver thereof, nor shall a single or partial exercise of any power or right preclude other or further exercise thereof or the exercise of any other power or right. No extension of time of the payment of this Note or any other modification, amendment or forbearance made by agreement with any person now or hereafter liable for the payment of this Note shall operate to release, discharge, modify, change or affect the liability of any co-borrower, endorser, guarantor or any other person with regard to this Note, either in part or in whole. No failure on the part of Holder or any holder hereof to exercise any right or remedy hereunder, whether before or after the occurrence of a default, shall constitute a waiver thereof, and no waiver of any past default shall constitute a waiver of any future default or of any other default. No failure to accelerate the debt evidenced hereby by reason of an Event of Default hereunder or acceptance ofa past due installment, or indulgence granted from time to time shall be construed to be a waiver of the right to insist upon prompt payment thereafter, or to impose late payment charges, or shall bedeemed to bea novation of this Note or any reinstatement of the debt evidenced hereby, or a waiver of such right of acceleration or any other right, or be construed so as to preclude the exercise of any right which Holder or any holder hereof may have, whether by the laws of the State of Florida, by agreement or otherwise, and none of the foregoing shall operate to release, change or affect the liability of Maker under this Note, and Maker hereby expressly waives (to the extent allowed by law) the benefit of any statute or rule of law or equity which would produce a result contrary to or in conflict with the foregoing.

I I.   Attorneys' Fees. Maker agrees to pay all costs and expenses of collection and enforcement of this Note when incurred, including Holder' s reasonable attorneys' fees and legal and court costs, including any incurred on appeal or in connection with bankruptcy or insolvency, whether or not any lawsuit or proceeding is ever filed with respect hereto.

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12.  Waivers. Except for the notices expressly required by the terms of this Note (which rights to notice are not waived by Maker), Maker, for itself and its successors and assigns, hereby forever waives presentment, protest and demand, notice of protest, demand, dishonor and non-payment of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note, and waives and renounces (to the extent allowed by law), all rights to the benefits of any statute of limitations and any moratorium, appraisement, and exemption now allowed or which may hereby be provided by any federal or state statute or decisions against the enforcement and collection of the obligations evidenced by this Note and any and all amendments, substitutions, extensions, renewals, increases, and modifications hereof. Maker expressly agrees that this Note may be extended or subordinated, by forbearance or otherwise, from time to time, without in any way affecting the liability of Maker. No consent or waiver by Holder with respect to any action or failure to act which without such consent or waiver would constitute a breach of any provision of this Note shall be valid or binding unless in writing signed by Holder and then only to the extent expressly specified therein. Neither the failure nor any delay in exercising any right, power or privilege under this Note, at law or equity, or otherwise available agreement, will operate as a waiver of such right, power or privilege and no single or partial exercise of any such right, power or privilege by Holder will preclude any other or further exercise of such right, power or privilege.

13.  Notices. Any notices required or permitted to be given under the terms of this Note shall be sent or delivered personally or by courier (including a recognized, receipted overnight delivery service) or by facsimile (with a copy sent by a recognized, receipted overnight delivery service) and shall be effective upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to Maker or Holder. The addresses for such communications shall be:

Ifto Maker:

Mullen Technologies, Inc.

1405 Pioneer Street

Brea, California 9282l Attention: David Michery, CEO

Email: david@mullenusa.com

Ifto Holder:

Net Element, Inc.

3363 NE 163rd St., Suite 705 North Miami Beach, Florida 33160

Attention: Oleg Firer, CEO and Steven Wolberg, Chief Legal Officer

Email: ofirer@netelement.com and swolberg@netelement.com

Maker or Holder shall provide notice to the other of any change in its address.

14.   Usury. All terms, conditions and agreements herein are expressly limited so that in no contingency or event whatsoever, whether by acceleration of maturity of the unpaid principal balance hereof, or otherwise, shall the amount paid or agreed to be paid to Holder for the use, forbearance or detention of the money advanced hereunder exceed the highest lawful rate permissible under applicable laws. If, from any circumstances whatsoever, fulfillment of any provision hereof shall involve transcending the limit of validity prescribed by law which a court of competent jurisdiction, in a final determination may deem applicable hereto, then ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if under any circumstances Holder shall ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to reduction of the unpaid principal balance due hereunder and not to the payment of interest.

15.   Severability; Invalidity. Maker and Holder intend and believe that each provision in this Note comports with all applicable local, state and federal laws and judicial decisions. However, if any provisions, provision, or portion of any provision in this Note is found by a court of competent jurisdiction to be in violation of any applicable local, state or federal ordinance, statute, law, or administrative or judicial decision, or public policy, including applicable usury laws, and if such court would declare such portion, provision or provisions of this Note to be illegal, invalid, unlawful, void or unenforceable as written, then it is the intent of all parties hereto that such portion, provision or provisio ns shall be given force and effect to the fullest possible exte:t they are legal, valid and enforceable, and the remainder/ of this Note shall be construed as if such illegal, invalid, unlawful, void or unenforceable portion, provision or provisions were severable and not contained herein , and the rights, obligations and interest of Maker and Holder under the remainder of this Note shall continue in full force and effect.

4

16.   No Strict Construction. The language used in this Note shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party.

17.   Assignment. Maker may not transfer, assign or delegate any of its rights or obligations hereunder without the prior written consent of Holder. Holder shall have the right, without the consent of Maker, to transfer or assign, in whole or in part, its rights and interests in and to this Note, and, as used herein, the term " Holder" shall mean and include such successors and assigns. This Note shall accrue to the benefit of Holder and its successors and assigns and shall be binding upon the undersigned and its successors and assigns.

18.   Amendment. The provisions of this Note may be amended only by a written instrument signed by Maker and Holder.

19.   Governing Law. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF ALL PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF FLORIDA WITHOUT REFERENCE TO THAT STATE'S RULES REGARDING CHOICE OF LAW.

20.   Jurisdiction; Waiver of Jury Trial. ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS NOTE SHALL BE FILED, TRIED AND LITIGATED IN THE STATE AND FEDERAL COURTS LOCATED IN MIAMI-DADE COUNTY, FLORIDA. MAKER VOLUNTARILY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR IN CONNECTION WITH THIS NOTE OR ANY OTHER DOCUMENT RELATED HERETO, OR THE TRANSACTIONS OR OBLIGATIONS UNDER WHICH THIS NOTE WAS DELIVERED, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY PARTY RELATING TO THIS NOTE, INCLUDING CONTRACT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. MAK.ER HAS REVIEWED THIS WAIVER AND KNOWINGLY AND VOLUNTARILY WAIVES THE AFORESAID TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS NOTE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

21.   Counterparts. This Note may be executed in any number of counterparts, each of which when executed, shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument binding upon all of the parties hereto notwithstanding the fact that all parties are not signatory to the original or the same counterpart.

[Remainder Of Page Intentionally Left Blank; Signature Page Follows]

5

EXECUTED AND DELIVERED as of the first date written above.

MAKER:	MULLEN TECHNOLOGIES, INC.
	By:
	Name:
	Title:
ACKNOWLEDGED:	NET ELEMENT, INC.
	By:
	Name:	Oleg Firer
	Title:	CEO

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 

RULE 13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

I, Oleg Firer, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange 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, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness 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 recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’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 reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 13, 2020	By:	/s/ Oleg Firer
Date	Oleg Firer
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

RULE 13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

I, Jeffrey Ginsberg, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange 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, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness 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 recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’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 reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 13, 2020	By:	/s/ Jeffrey Ginsberg
Date	Jeffrey Ginsberg
	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER 

PURSUANT TO 18 U.S.C. §1350, AS ADOPTED PURSUANT TO  

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form 10-Q of Net Element, Inc. (the “Company”) for the quarterly period ended June 30, 2020 (the “Report”), each of the undersigned hereby certifies pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the undersigned’s knowledge:

(i)    the Report 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 the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 13, 2020

	By:	/s/ Oleg Firer
Date	Oleg Firer
	Chief Executive Officer
	(Principal Executive Officer)
August 13, 2020	By:	/s/ Jeffrey Ginsberg
Date	Jeffrey Ginsberg
	Chief Financial Officer
	(Principal Financial Officer and
	Principal 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. and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2020	Aug. 13, 2020
Document Information [Line Items]
Entity Registrant Name	Net Element, Inc.
Entity Central Index Key	0001499961
Trading Symbol	nete
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Interactive Data Current	Yes
Entity Common Stock, Shares Outstanding (in shares)		4,117,878
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Jun. 30, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q2
Amendment Flag	false
Title of 12(b) Security	Common Stock, par value $0.0001 per share

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($)	Jun. 30, 2020	Dec. 31, 2019
ASSETS
Cash	$ 865,812	$ 486,604
Accounts receivable, net	5,855,538	6,560,928
Prepaid expenses and other assets	1,530,625	1,621,144
Total current assets, net	8,251,975	8,668,676
Intangible assets, net	4,703,406	5,678,649
Goodwill	7,681,186	7,681,186
Operating lease right-of-use asset	316,118	380,986
Other long term assets	730,185	629,651
Total assets	21,682,870	23,039,148
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	5,360,103	6,037,833
Accrued expenses	2,121,161	1,800,344
Deferred revenue	1,291,703	1,401,117
Notes payable (current portion)	936,391	909,086
Operating lease liability (current portion)	68,859	133,727
Due to related party	81,591	126,662
Total current liabilities	9,859,808	10,408,769
Operating lease liability (net of current portion)	247,259	247,259
Notes payable (net of current portion)	8,986,881	8,342,461
Total liabilities	19,093,948	18,998,489
STOCKHOLDERS' EQUITY
Series A Convertible Preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at June 30, 2020 and December 31, 2019)
Common stock ($.0001 par value, 100,000,000 shares authorized 4,195,670 and 4,111,082 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively)	419	410
Paid in capital	185,496,940	185,297,069
Accumulated other comprehensive loss	(2,209,363)	(2,274,187)
Accumulated deficit	(180,442,122)	(178,750,634)
Non-controlling interest	(256,952)	(231,999)
Total stockholders' equity	2,588,922	4,040,659
Total liabilities and stockholders' equity	$ 21,682,870	$ 23,039,148

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Jun. 30, 2020	Dec. 31, 2019
Preferred stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Preferred stock, shares authorized (in shares)	1,000,000	1,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Common stock shares authorized (in shares)	100,000,000	100,000,000
Common stock, shares issued (in shares)	4,195,670	4,111,082
Common stock, shares outstanding (in shares)	4,195,670	4,111,082

XML

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Service fees	$ 13,718,609	$ 16,487,311	$ 29,556,175	$ 31,534,494
Costs and expenses:
Cost of service fees	11,536,787	13,901,365	24,837,195	26,161,512
Selling, general and administrative	1,385,329	2,299,070	3,701,221	4,683,936
Non-cash compensation	7,500	2,005,840	45,900	2,020,847
Bad debt expense	33,310	143,190	476,088	482,498
Depreciation and amortization	772,402	747,347	1,551,844	1,598,567
Total costs and operating expenses	13,735,328	19,096,812	30,612,248	34,947,360
Loss from operations	(16,719)	(2,609,501)	(1,056,073)	(3,412,866)
Interest expense	(341,020)	(252,582)	(689,433)	(497,635)
Other income	19,325	1,284,411	29,065	1,198,018
Net loss from continuing operations before income taxes	(338,414)	(1,577,672)	(1,716,441)	(2,712,483)
Income taxes
Net loss	(338,414)	(1,577,672)	(1,716,441)	(2,712,483)
Net loss attributable to the non-controlling interest	13,724	40,225	24,953	54,191
Net loss attributable to Net Element, Inc. stockholders	(324,690)	(1,537,447)	(1,691,488)	(2,658,292)
Foreign currency translation	(65,990)	(5,537)	64,824	(20,099)
Comprehensive loss attributable to common stockholders	$ (390,680)	$ (1,542,984)	$ (1,626,664)	$ (2,678,391)
Loss per share - basic and diluted (in dollars per share)	$ (0.08)	$ (0.37)	$ (0.41)	$ (0.68)
Weighted average number of common shares outstanding - basic and diluted (in shares)	4,175,148	4,199,076	4,146,396	3,908,872
Service Fees [Member]
Service fees	$ 13,718,609	$ 16,487,311	$ 29,556,175	$ 31,534,494

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Cash flows from operating activities
Net loss attributable to Net Element, Inc. stockholders	$ (1,691,488)	$ (2,658,292)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-controlling interest	(24,953)	(54,191)
Share based compensation	45,899	2,020,847
Deferred revenue	(109,414)	(1,046,398)
Provision for bad debt	(8,668)	(8,927)
Depreciation and amortization	1,551,844	1,598,567
Non cash interest	46,552	21,711
Changes in assets and liabilities:
Accounts receivable	700,506	1,165,261
Prepaid expenses and other assets	(287,386)	668,646
Accounts payable and accrued expenses	(538,178)	(2,305,202)
Net cash used in operating activities	(315,286)	(597,978)
Cash flows from investing activities:
Client acquisition costs	(359,350)	(1,210,278)
Purchase of equipment and changes in other assets	(35,666)	(468,287)
Net cash used in investing activities	(395,016)	(1,678,565)
Cash flows from financing activities:
Proceeds from SBA Loans	651,392
Proceeds from indebtedness	174,314	1,116,500
Repayment of indebtedness		(209,084)
Lease liability	(64,868)	442,094
Related party advances	159,432	166,561
Net cash provided by financing activities	920,270	1,516,071
Effect of exchange rate changes on cash	14,589	6,271
Net increase (decrease) in cash	224,557	(754,201)
Cash and restricted cash at beginning of period	1,116,255	2,249,551
Cash and restricted cash at end of period	1,340,812	1,495,350
Supplemental disclosure of cash flow information
Interest	336,120	475,924
Taxes		$ 103,841

XML

Note 1 - Basis of Presentation

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Basis of Accounting [Text Block]

NOTE

1.

BASIS

OF

PRESENTATION

The accompanying

June 30, 2020

interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, but we believe the disclosures made are adequate to make the information presented

not

misleading. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation have been included in the condensed consolidated financial statements included herein. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form

10

-K for the year ended

December 31, 2019

. The results of operations for the periods presented are

not

necessarily indicative of results to be expected for the full fiscal year or any other periods.

The condensed consolidated unaudited financial statements contained in this report include the accounts of Net Element, Inc., and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

XML

Note 2 - Organization and Operations

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Nature of Operations [Text Block]

NOTE

2.

ORGANIZATION AND OPERATIONS

Net Element, Inc. (collectively with its subsidiaries, “Net Element”, “we”, “us”, “our” or the “Company”) is a financial technology-driven group specializing in payment acceptance and value-added solutions across multiple channels in the United States and selected international markets. We are differentiated by our proprietary technology which enables us to provide a broad suite of payment products and end-to-end transaction processing services. Our transactional services business enables merchants to accept credit cards as well as other forms of payment, including debit cards, checks, gift cards, loyalty programs and alternative payment methods in traditional card-present or swipe transactions, as well as card-

not

-present transactions, such as those conducted over the phone or through the Internet or a mobile device. We operate in

two

reportable business operating segments: (i) North American Transaction Solutions, and (ii) International Transaction Solutions.

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 from transactional services and other payment technologies for small and medium-sized businesses. Through PayOnline, we provide transactional services, mobile payment transactions, online payment transactions and other payment technologies in emerging countries in the Eurasian Economic Community ("EAEC"), Europe and Asia.

Our transactional services business enables merchants to accept credit cards as well as other forms of payment, including debit cards, checks, gift cards, loyalty programs and alternative payment methods in traditional card-present or swipe transactions, as well as card-

not

-present transactions, such as those conducted over the phone or through the Internet or a mobile device. We market and sell our services through both independent sales groups (“ISGs”), which are non-employee, external sales organizations and other

third

-party resellers of our products and services, and directly to merchants through electronic media, telemarketing and other programs, including utilizing partnerships with other companies that market products and services to local and international merchants. We have agreements with several banks that sponsor us for membership in the Visa

®

, MasterCard

®

, American Express

®, 

and Discover

®

card associations and settle card transactions for our merchants. These sponsoring banks include Citizens Bank, Esquire Bank, N.A. and Wells Fargo Bank, N.A. From time to time, we

may

enter into agreements with additional banks. We perform core functions for merchants such as application processing, underwriting, account set-up, risk management, fraud detection, merchant assistance and support, equipment deployment and chargeback services.

Our Mobile Solutions business, PayOnline, provides relationships and contracts with mobile operators that gives us the ability to offer our clients in-app, premium SMS (short message services, which is a text messaging service), Wireless Application Protocol (WAP)-click,

one

click and other carrier billing services. PayOnline provides flexible high- tech payment solutions to companies doing business on the Internet or in the mobile environment. PayOnline specializes in integration and customization of payment solutions for websites and mobile apps. In particular, PayOnline arranges payment on the website of any commercial organization, which increases the convenience of using the website and helps maximize the number of successful transactions. In addition, PayOnline is focused on providing online and mobile payment acceptance services to the travel industry through direct integration with leading Global Distribution Systems (“GDS”), which include Amadeus® and Sabre®. Key geographic regions that PayOnline serves include Eastern Europe, Central Asia, Western Europe, North America and Asia major sub regions. The PayOnline office is located in Moscow, Russia.

Also part of our transactional services business, Aptito is a proprietary, cloud-based payments platform for the hospitality industry, which creates an online consumer experience in offline commerce environments via tablet, mobile and all other cloud-connected devices. Aptito's easy to use point-of-sale (“POS”) system makes things easier by providing a comprehensive solution to the hospitality industry to help streamline management and operations. Orders placed tableside by customers directly speed up the ordering process and improve overall efficiency. Aptito's mobile POS system provides portability to the staff while performing all the same functions as a traditional POS system.

XML

Note 3 - Liquidity and Going Concern Considerations

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Substantial Doubt about Going Concern [Text Block]

NOTE

3.

LIQUIDITY AND GOING CONCERN

Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. We sustained a net loss of approximately

$1.7

 million for the

six

 months ended

June 30, 2020

and

$6.5

million for the year ended

December 31, 2019

and have an accumulated deficit of

$180.4

 million and a negative working capital of

$1.6

 million at

June 30, 2020.

The continuing spread of the novel coronavirus pandemic (“COVID-

19”

) is currently impacting countries, communities, supply chains and markets, global financial markets, as well as, the largest industry group serviced by our Company. The Company cannot predict, at this time, whether COVID-

19

will continue to have a material impact on our future financial condition and results of operations due to understaffing in the service sector and the decrease in revenues and profits, particularly restaurants, and any possible future government ordinances that

may

further restrict restaurant and other service or retail sectors operations.

During

March 

2020,

our Company evaluated its liquidity position, future operating plans, and its labor force, which included a reduction in the labor force and compensation to executives and other employees, in order to maintain current payment processing functions, capabilities, and continued customer service to its merchants. We are also seeking sources of capital to pay our contractual obligations as they come due, in light of these uncertain times. Management believes that its operating strategy will provide the opportunity for us to continue as a going concern as long as we are able to obtain additional financing. At this time, due to our continuing losses from operations, negative working capital, and the COVID-

19

pandemic, we cannot predict the impact of these conditions on our ability to obtain financing necessary for the Company to fund its future working capital requirements. Our Company has also decided to explore strategic alternatives and potential options for its business, including sale of the Company or certain assets, licensing of technology, spin-offs, or a business combination. There can be

no

assurance, at this time, regarding the eventual outcome of our planned strategic alternatives.  In most respects, it is still too early in the COVID-

19

pandemic to be able to quantify or qualify the longer-term ramifications on our merchant processing business, our merchants, our planned strategic alternatives to enhance current shareholder value, our current investors, and/or future potential investors.

As part of our Company's plan to obtain capital to fund future operations, on

March 27, 2020, 

our Company entered into a Master Exchange Agreement, (the “ESOUSA Agreement”) with ESOUSA Holdings, LLC ("ESOUSA"), a related party. Prior to entering into the ESOUSA Agreement, ESOUSA agreed to acquire an existing promissory note that had been previously issued by the Company, of up to

$2,000,000

in principal amount outstanding and unpaid interest due to RBL Capital Group, LLC ("RBL"). Pursuant to the ESOUSA Agreement, the Company has the right, at any time prior to

March 27, 2021,

to request ESOUSA, and ESOUSA agreed upon each such request, to exchange this promissory note in tranches on the dates when the Company instructs ESOUSA, for such number of shares of the Company's common stock (“Common Stock”) as determined under the ESOUSA Agreement based upon the number of shares of Common Stock (already in ESOUSA's possession) that ESOUSA sold in order to finance its purchase of such tranche of the promissory note from RBL.  ESOUSA will purchase each tranche of the promissory note equal to

88%

of the gross proceeds from the shares of Common Stock sold by ESOUSA to finance the purchase of such exchange amount from RBL. Each such tranche shall be

$148,000

unless otherwise agreed to by the Company and ESOUSA. On

April 23, 2020,

the Company entered into an amendment (the “Amendment”) to the ESOUSA Agreement with ESOUSA. The Amendment increased from

$2,000,000

to

$5,000,000

the principal amount and unpaid interest of

one

or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. The Company has the right, pursuant to the ESOUSA Agreement (as amended by the Amendment), to request ESOUSA to exchange in tranches such promissory notes for shares of the Company's common stock on the terms and conditions and subject to the limitations set forth in the ESOUSA Agreement. On

August 3, 2020,

our Company entered into a Second Amendment (the “Second Amendment”) to the Agreement. The Second Amendment increased from

$5,000,000

to

$15,000,000

the principal amount and unpaid interest of

one

or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL, in connection with the ESOUSA Agreement. Our Company has the right pursuant to the Agreement (as amended by the Amendment) to request ESOUSA to exchange in tranches such promissory notes for shares of the Company's common stock on the terms and conditions and subject to the limitations set forth in the Agreement. 

The Company received its

first

tranche of approximately

$148,000

on

March 27, 2020,

less any fees. In

April 2020,

ESOUSA exchanged the promissory note for shares in our Company's common stock which has been reflected in our stockholders" equity section. (Refer to 

Note

11.

Stockholders" Equity

). The Company received a

second

tranche of approximately

$143,000

 on

April 28, 2020,

less any fees, which is reflected in accrued expenses on the accompanying consolidated balance sheet as of

June 30, 2020.

No

shares of the Company's common stock have been issued as of this date in connection with this tranche. On

August 11, 2020,

the Company received a

third

 tranche of approximately

$707,000

from RBL, less any fees. The Company issued

66,190

shares of its' common stock to ESOUSA in connection with this transaction.

On

May 7, 2020,

the Company entered into a promissory note (the “Note”) evidencing an unsecured loan (the “Loan”) in the amount of

$491,493

 made to the Company under the Paycheck Protection Program (the “PPP”). The Note matures on

May 7, 2022

and bears interest at a rate of

1%

per annum. Beginning

December 7, 2020,

the Company is required to make

17

monthly payments of principal and interest, with the principal component of each such payment based upon the level amortization of principal over a

two

-year period from

May 7, 2020. 

Pursuant to the terms of the CARES Act and the PPP, the Company

may

apply to the Lender for forgiveness for the amount due on the Loan. The amount eligible for forgiveness is based on the amount of Loan proceeds used by the Company (during the

eight

-week period after the Lender makes the

first

disbursement of Loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), interest on mortgage obligations, rent and utilities, subject to certain limitations and reductions in accordance with the CARES Act and the PPP.

No

assurance can be given, at this time, that the Company will obtain forgiveness of the Loan in whole or in part. (

Refer to Note

7.

Notes Payable

).

On

May 18, 2020,

the Company entered into a promissory note in the amount of

$159,899

made to the Company by the U.S. Small Business Administration under the Economic Injury Disaster Loan program. (

Refer to Note

7.

Notes Payable

).

On

August 4, 2020,

our Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mullen Technologies, Inc., a California corporation (“Mullen”), and Mullen Acquisition, Inc., a California corporation and wholly owned subsidiary of the Company (“Merger Sub”). Pursuant to, and on the terms and subject to the conditions of, the Merger Agreement, Merger Sub will be merged with and into Mullen (the “Merger”), with Mullen continuing as the surviving corporation in the Merger. After Mullen's completion and delivery to our Company, of the audited financial statements for Mullen and its subsidiaries and affiliates required to be included in a registration statement, the Company intends to prepare and file with the Commission a registration statement on Form S-

4

(together with all amendments thereto, the “Registration Statement”) in which the proxy statement will be included as a part of the prospectus, in connection with the registration under the Securities Act of the shares of Parent Shares to be issued in connection with the transactions contemplated in the Merger Agreement. The Merger Agreement contains termination rights for each of the Company and Mullen, including, among others, (i) in the event that the Merger has

not

been consummated by

December 31, 2020, (

ii) in the event that the requisite approval of the Company's stockholders is

not

obtained upon a vote thereon, (iii) in the event that any governmental authority shall have taken action to restrain, enjoin or prohibit the consummation of the Merger, which action shall have become final and non-appealable and (iv) in the event that there is a breach by the other party of any of its representations, warranties, covenants or agreements, which breach is sufficiently material and

not

timely cured or curable. In addition, Mullen

may

terminate the Merger Agreement if, prior to receipt of the requisite approval of the Company's stockholders, the Company's board of directors shall have changed their recommendation in respect of the Merger. Further, the Company

may

terminate the Merger Agreement prior to receipt of the requisite approval of the Company's stockholders to enter into a definitive agreement with respect to a Superior Proposal (as such term is defined in the Merger Agreement). 

Consummation of the Merger, the Divestiture, the Private Placement and the other transactions contemplated in the Merger Agreement, is subject to customary conditions including, among others, the approval of the Company's stockholders. There is

no

guarantee that the Merger, the Divestiture, the Private Placement or the other transactions contemplated in the Merger Agreement will be completed. 

As contemplated by the Merger Agreement, on

August 11, 2020, 

our Company as lender, entered into an unsecured Promissory Note, dated

August 11, 2020 (

the “Note”), with Mullen. Pursuant to the Note, Mullen borrowed from the Company

$500,000.

Prior to maturity of the loan, the principal amount of the loan will carry an interest rate of

14%

per annum compounded monthly and payable upon demand. This loan will mature on the earlier of (i) the date that the Merger Agreement is terminated for any reason by any party thereto and (ii) the Merger Effective Time (as defined in the Merger Agreement).

These conditions raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do

not

include any adjustments that might be necessary if the Company is unable to continue as a going concern.

XML

Note 4 - Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Significant Accounting Policies [Text Block]

NOTE

4.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company's significant accounting policies are described below.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with GAAP and pursuant to the reporting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”).

Principles of Consolidation

These consolidated financial statements include the accounts of Net Element, Inc. and our subsidiary companies. All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash

We maintain our U.S. dollar-denominated cash in several non-interest bearing bank deposit accounts. All U.S. non-interest bearing transaction accounts are insured up to a maximum of

$250,000

at FDIC insured institutions. The bank balances exceeded FDIC limits by approximately

$162,000

and

$134,000

 at

June 30, 2020

and

December 31, 2019

, respectively. We maintained approximately

$39,000

 and

$30,000

in uninsured bank accounts in Russia and the Cayman Islands at

June 30, 2020

and

December 31, 2019

, respectively.

Restricted Cash

Restricted cash represents funds held-on-deposit with processing banks pursuant to agreements to cover potential merchant losses. It is presented as other long-term assets on the accompanying consolidated balance sheets since the related agreements extend beyond the next

twelve

months. Following the adoption of ASU

2016

-

18,

Statement of Cash Flows: Restricted Cash

(Topic

230

), the Company includes restricted cash along with the cash balance for presentation in the consolidated statements of cash flows. The reconciliation between the consolidated balance sheet and the consolidated statement of cash flows is as follows:

	June 30, 2020		December 31, 2019
Cash on consolidated balance sheet	$	865,812	$	486,604
Restricted cash		475,000		629,651
Total cash and restricted cash	$	1,340,812	$	1,116,255

Accounts Receivable and Credit Policies

Accounts receivable consist primarily of uncollateralized credit card processing residual payments due from processing banks requiring payment within

thirty

days following the end of each month. Accounts receivable also include amounts due from the sales of our technology solutions to its customers. The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts, if necessary, which reflects management's best estimate of the amounts that will

not

be collected. The allowance is estimated based on management's knowledge of its customers, historical loss experience and existing economic conditions. Accounts receivable and the allowance are written-off when, in management's opinion, all collection efforts have been exhausted.

Other Current Assets

Other current assets consist of point-of-sale equipment which we use to service both merchants and independent sales agents ("ISG"). Often, we will provide the equipment as an incentive for merchants and independent sales agents to enter into a merchant contracts with us. The term of these contracts have an average length of

three

years and the cost of the equipment plus any setup fees will be amortized over the contract period. If the merchants terminate their contract with us early, they are obligated to either return the equipment or pay for it.

Intangible Assets

Intangible assets acquired, either individually or with a group of other assets (but

not

those acquired in a business combination), are initially recognized and measured based on fair value. Goodwill acquired in business combinations is initially computed as the amount paid in excess of the fair value of the net assets acquired. We did

not

acquire any businesses during the year ended

December 31, 2019

or the

six

months ended

June 30, 2020

.

The cost of internally developing, maintaining and restoring intangible assets (including goodwill) that are

not

specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity are recognized as an expense when incurred.

Intangible assets include acquired merchant relationships, recurring cash flow portfolios, referral agreements, trademarks, tradenames, website development costs and non-compete agreements. Merchant relationships represent the fair value of customer relationships purchased by us. Recurring cash flow portfolios give us the right to retain a greater share of the cash flow, in the form of paying less commissions to an independent sales agent, related to certain future transactions with the agent referred sales partners. Referral agreements represent the right to exclusively obtain referrals from a partner for their customers' credit card processing services.

We amortize definite lived identifiable intangible assets using a method that reflects the pattern in which the economic benefits of the intangible asset are expected to be consumed or otherwise utilized. The estimated useful lives of our customer-related intangible assets approximate the expected distribution of cash flows on a straight-line basis from each asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement.

Management evaluates the remaining useful lives and carrying values of long-lived assets, including definite lived intangible assets, at least annually, or when events and circumstances warrant such a review, to determine whether significant events or changes in circumstances indicate that a change in the useful life or impairment in value

may

have occurred. There were

no

impairment charges during the

six

months ended

June 30, 2020

and

June 30, 2019

.

Goodwill

In accordance with ASC

350,

Intangibles—Goodwill and Other

, we test goodwill for impairment for each reporting unit on an annual basis, or when events or circumstances indicate the fair value of a reporting unit is below its carrying value.

Our goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations. The goodwill generated from the business combinations is primarily related to the value placed on the employee workforce and expected synergies. Judgment is involved in determining if an indicator or change in circumstances relating to impairment has occurred. Such changes

may

include, among others, a significant decline in expected future cash flows, a significant adverse change in the business climate, and unforeseen competition.

We have the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The option of whether or

not

to perform a qualitative assessment is made annually and

may

vary by reporting unit. Factors we consider in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of our reporting units, events or changes affecting the composition or carrying amount of the net assets of its reporting units, sustained decrease in its share price, and other relevant entity specific events. If the management determines on the basis of qualitative factors that the fair value of the reporting unit is more likely than

not

less than the carrying value, then we perform a quantitative test for that reporting unit. The fair value of each reporting unit is compared to the reporting unit's carrying value, including goodwill. Subsequent to the adoption on

January 1, 2017

of Accounting Standards Update (“ASU”)

No.

2017

-

04,

Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment, if the fair value of a reporting unit is less than its carrying value, we recognize an impairment equal to the excess carrying value,

not

to exceed the total amount of goodwill allocated to that reporting unit.

At

December 31, 2019

, our management determined that an impairment charge of approximately

$1.3

million was necessary to reduce the goodwill relating to the acquisition of PayOnline which is part of our International Transaction Solutions segment . We did 

not

recognize any impairment charge to goodwill during the

six

months ended

June 30, 2020

For a discussion of the estimate methodology and the significance of various inputs, please see the subheading below titled “Use of Estimates.”

Capitalized Customer Acquisition Costs, Net

Capitalized customer acquisition costs consist of up-front cash payments made to ISG's for the establishment of new merchant relationships. Capitalized customer acquisition costs represent incremental, direct customer acquisition costs that are recoverable through gross margins associated with merchant contracts. The up-front cash payment to the ISG is based on the estimated gross margin for the

first

year of the merchant contract. The deferred customer acquisition cost asset is recorded at the time amounts are receivable but

not

yet earned and the capitalized acquisition costs are amortized on a straight-line basis over a period of approximately

four

years. These capitalized costs, net of amortization expense, are included in intangible assets on the accompanying consolidated balance sheets (See Note

5

– item labeled “

Client Acquisition Costs

”).

Accrued Residual Commissions

We record commissions as a cost of revenues in the accompanying consolidated statement of operations and comprehensive loss. We pay agent commissions to ISGs and independent sales agents based on the processing volume of the merchants enrolled. The commission obligations are based on varying percentages of the volume processed by us on behalf of the merchants. Percentages vary based on the program type and transaction volume of each merchant.

Fair Value Measurements

Our financial instruments consist primarily of cash, accounts receivables, accounts payables, and a note payable. The carrying values of these financial instruments are considered to be representative of their fair values due to the short-term nature of these instruments. The carrying amount of notes payable of approximately

$9.9

 million and

$9.3

 million at

June 30, 2020

and

December 31, 2019

, respectively, approximates fair value because current borrowing rates do 

not

materially differ from market rates for similar bank borrowings. The notes payable are classified as a Level

2

item within the fair value hierarchy.

We measure certain nonfinancial assets and liabilities at fair value on a nonrecurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a

three

-level fair value hierarchy to prioritize the inputs used to measure fair value and maximizes the use of observable inputs and minimizes the use of unobservable inputs. The

three

levels of inputs used to measure fair value are as follows:

Level

1

— Quoted market prices in active markets for identical assets or liabilities as of the reporting date

Level

2

— Observable market based inputs or unobservable inputs that are corroborated by market data

Level

3

— Unobservable inputs that are

not

corroborated by market data

These non-financial assets and liabilities include intangible assets and liabilities acquired in a business combination as well as impairment calculations, when necessary. The fair value of the assets acquired and liabilities assumed in connection with the PayOnline acquisition, were measured at fair value by us at the acquisition date. The fair values of our merchant portfolios are primarily based on Level

3

inputs and are generally estimated based upon independent appraisals that include discounted cash flow analyses based on our most recent cash flow projections, and, for years beyond the projection period, estimates based on assumed growth rates. Assumptions are also made regarding appropriate discount rates, perpetual growth rates, and capital expenditures, among others. In certain circumstances, the discounted cash flow analyses are corroborated by a market-based approach that utilizes comparable company public trading values, and, where available, values observed in private market transactions. The inputs used by management for the fair value measurements include significant unobservable inputs, and therefore, the fair value measurements employed are classified as Level

3.

Goodwill impairment is primarily based on observable inputs using company specific information and is classified as Level 

3.

Leases

Effective

January 1, 2019,

we adopted Accounting Standards Update (ASU) 

2016

-

02,

 

Leases 

(Topic

842

) which supersedes the lease accounting requirements in Accounting Standards Codification (ASC)

840,

 

Leases 

(Topic

840

). Please refer to Recent Accounting Pronouncements below for additional information on the adoption of Topic

842

and the impact upon adoption to the Company's consolidated financial statements.

Under Topic

842,

 we applied a dual approach to all leases whereby we are a lessee and classify leases as either finance or operating leases based on the principle of whether or

not

the lease is effectively a financed purchase by the Company. Lease classification is evaluated at the inception of the lease agreement. Regardless of classification, we record a right-of-use asset and a lease liability for all leases with a term greater than

12

months. Our lease, for the premises we occupy for the North American Transaction Solutions segment's U.S. headquarters, was classified as an operating lease as of

January 1, 2019.

Operating lease expense is recognized on a straight-line basis over the term of the lease.

We identify leases in our contracts if the contract conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. We do 

not

allocate lease consideration between lease and non-lease components and record a lease liability equal to the present value of the remaining fixed consideration under the lease. Any interest rate implicit in our leases are generally

not

readily determinable. Accordingly, we use our estimated incremental borrowing rate at the commencement date of the lease to determine the present value discount of the lease liability. We estimate the incremental borrowing rate for each lease based on an evaluation of our expected credit rating and the prevailing market rates for collateralized debt in a similar economic environment with similar payment terms and maturity dates commensurate with the term of the lease. The right-of-use asset for each lease is equal to the lease liability, adjusted for unamortized initial direct costs and lease incentives. We exclude options to extend or terminate leases from the calculation of the lease liability unless it is reasonably certain the option will be exercised.

Revenue Recognition and Deferred Revenue

We recognize revenue when all of the following criteria are met: (

1

) the parties to the contract have approved the contract and are committed to perform their respective obligations, (

2

) we can identify each party's rights regarding the goods or services to be transferred, (

3

) we can identify the payment terms for the goods or services to be transferred, (

4

) the contract has commercial substance, and (

5

) it is probable that we will collect substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer. We consider persuasive evidence of a sales arrangement to be the receipt of a billable transaction from aggregators, signed contract or the processing of a credit card transaction. Collectability is assessed based on a number of factors, including transaction history with the customer and the credit worthiness of the customer. If it is determined that the collection is

not

reasonably assured, revenue is

not

recognized until collection becomes reasonably assured, which is generally upon receipt of cash. We record cash received in advance of revenue recognition as deferred revenue. Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services and is recognized as revenue during the period the transactions are processed or when the related services are performed.

Our transactional processing fees are generated primarily from TOT Group doing business as Unified Payments, which is our North American Transaction Solutions segment, PayOnline, which is our International Transaction Solutions segment, and Aptito, which is our point of sale solution for restaurants.

We work directly with payment card networks and banks so that our merchants do

not

need to manage the complex systems, rules, and requirements of the payments industry. We satisfy our performance obligations and therefore recognize the transactional processing service fees as revenue upon authorization of a transaction by the merchant's customer's bank.

The majority of our revenues is derived from volume-based payment processing fees ("discount fees”) and other related fixed transaction or service fees. Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed. Discount fees are recognized at the time the merchants' transactions are processed. Generally, where we have control over merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale on a gross basis equal to the full amount of the discount charged to the merchant. This amount includes interchange fees paid to card issuing banks and assessments paid to payment card networks pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants. Revenues generated from merchant portfolios where we do 

not

have control over merchant pricing, liability for merchant losses or credit risk or rights of portability are reported net of interchange and other fees.

Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees, and fees for other miscellaneous services, such as handling chargebacks. Revenues derived from service fees are recognized at the time the services are performed and there are

no

further performance obligations. Revenue from the sale of equipment is recognized upon transfer of ownership and delivery to the customer, after which there are

no

further performance obligations.

We primarily report revenues gross as a principal versus net as an agent. Although some of our processing agreements vary with respect to specific terms, the transactional processing service fees collected from merchants generally are recognized as revenue on a gross basis as we are the principal in the delivery of the managed payments solutions to the sellers. The gross fees we collect are intended to cover the interchange, assessments and other processing and non-processing fees which are included and are part of our gross margin.

We have primary responsibility for providing end-to-end payment processing services for our clients. Our clients contract us for all credit card processing services, including transaction authorization, settlement, dispute resolution, data/transmission security, risk management, reporting, technical support and other value-added services. We have concluded that we are the principal because we control the services before delivery to the merchant, and are primarily responsible for the delivery of the services, have discretion in setting prices charged to merchants, and responsible for losses. We also have pricing latitude and can provide services using several different network options.

Net Loss per Share

Basic net loss per common share is computed by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares issuable upon exercise of common stock options or warrants. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would have an anti-dilutive effect.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize net deferred tax assets to the extent that we believe these assets are more likely than

not

to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences,projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

We account for uncertainty in income taxes using a

two

-step approach to recognizing and measuring uncertain tax positions. The

first

step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than

not

that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The

second

step is to measure the tax benefit as the largest amount that is more than

50%

likely of being realized upon settlement. We classify the liability for unrecognized tax benefits as current to the extent we anticipate payment (or receipt) of cash within

one

year. Interest and penalties related to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. Our evaluation of uncertain tax positions was performed for the tax years ended

December 31, 2012

and forward, the tax years which remain subject to examination at

June 30, 2020

.

Interchange, Network Fees and Other Cost of Services

Interchange and network fees consist primarily of fees that are directly related to discount fee revenue. These include interchange fees paid to issuers and assessment fees payable to card associations, which are a percentage of the processing volume we generate from Visa and Mastercard, AMEX, and Discover, as well as fees charged by card-issuing banks. Other costs of services include costs directly attributable to processing and bank sponsorship costs, which

may

not

be based on a percentage of volume. These costs also include related costs such as residual payments to sales groups, which are based on a percentage of the net revenues generated from merchant referrals. In certain merchant processing bank relationships we are liable for chargebacks against a merchant equal to the volume of the transaction. Losses resulting from chargebacks against a merchant are included in other cost of services or as a bad debt expense, determined on the timing and nature of the specific transaction, on the accompanying consolidated statement of operations. We evaluate the risk for such transactions and our potential loss from chargebacks based primarily on historical experience and other relevant factors.

 Advertising and Promotion Costs

Advertising and promotion costs are expensed as incurred and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss.

Equity-based Compensation

We account for grants of equity awards to employees in accordance with ASC

718,

Compensation—Stock Compensation

. This standard requires compensation expense to be measured based on the estimated fair value of the share-based awards on the date of grant and recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

Foreign Currency Transactions

We are subject to exchange rate risk in our foreign operations in Russia, the functional currency of which is the Russian ruble, where we generate service fee revenues, interest income or expense, incur product development, engineering, website development, and selling, general and administrative costs and expenses. Our Russian subsidiaries pay a majority of their operating expenses in their local currencies, exposing us to exchange rate risk.

Use of Estimates

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Such estimates include, but are

not

limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, amortization of intangible assets, goodwill and asset impairment review, valuation reserves for accounts receivable, valuation of acquired or current merchant portfolios, incurred but

not

reported claims, revenue recognition for multiple element arrangements, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities, as well as, the related valuation allowances. Actual results could differ from those estimates.

Below is a summary of the Company's critical accounting estimates for which the nature of management's assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and for which the impact of the estimates and assumptions on financial condition or operating performance is material.

Goodwill

The Company tests goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment.

Significant estimates and assumptions are used in our goodwill impairment review and include the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Our assessment of qualitative factors involves significant judgments about expected future business performance, general market conditions, and regulatory changes. In a quantitative assessment, the fair value of each reporting unit is determined based largely on the present value of projected future cash flows, growth assumptions regarding discount rates, estimated growth rates and our future long-term business plans. Changes in any of these estimates or assumptions could materially affect the determination of fair value and the associated goodwill impairment charge for each reporting unit.

Recent Accounting Pronouncements

Adoption of ASU

2016

-

02,

Leases

In

February 2016,

the Financial Accounting Standards Board ("FASB") issued ASU

2016

-

02,

“Leases (Topic

842

)” which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years. Effective

January 1, 2019,

we adopted Topic

842

using the modified retrospective transition method. Under this method, we applied Topic

842

to the lease for the premises we occupy for our North American Transaction Solutions segment's U.S. headquarters. There was

no

cumulative impact adjustment necessary with the adoption to our accumulated deficit on

January 1, 2019.

Our consolidated financial statements for periods ending after

January 1, 2019

are presented in accordance with the requirements of Topic

842,

while comparative prior period amounts have

not

been adjusted and continue to be reported in accordance with Topic

840.

Please refer to "Leases" above for a description of our lease accounting policies upon the adoption on Topic

842.

Recent accounting pronouncements

not

yet adopted

In

June 2016,

the FASB issued ASU

2016

-

13,

“Financial Instruments - Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments.” The amendments in this update changed how companies measure and recognize credit impairment for many financial assets. The new expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets (including trade receivables) that are within the scope of the update. The update also made amendments to the current impairment model for held-to-maturity and available-for-sale debt securities and certain guarantees. The guidance was effective for us on

January 1, 2020.

The adoption of this guidance did

not

have a material impact on our consolidated financial statements.

XML

Note 5 - Intangible Assets

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Goodwill and Intangible Assets Disclosure [Text Block]

NOTE

5.

 INTANGIBLE ASSETS

The Company had approximately

$4.7

millionand

$5.7

 million in intangible assets, net of amortization, at

June 30, 2020

and

December 31, 2019

, respectively. Shown below are the details of the components that represent these balances.

Intangible assets consisted of the following as of

June 30, 2020

	Cost		Accumulated Amortization			Carrying Value		Amortization Life and Method
IP Software	$	2,378,248	$	(2,306,565	)	$	71,682	3 years - straight-line
Portfolios and Client Lists		7,714,665		(6,195,599	)		1,519,066	4 years - straight-line
Client Acquisition Costs		8,625,568		(5,512,910	)		3,112,658	4 years - straight-line
PCI Certification		449,000		(449,000	)		-	3 years - straight-line
Trademarks		703,586		(703,586	)		-	3 years - straight-line
Domain Names		437,810		(437,810	)		-	3 years - straight-line
Total	$	20,308,876	$	(15,605,470	)	$	4,703,406

Intangible assets consisted of the following as of

December 31, 2019

	Cost		Accumulated Amortization			Carrying Value		Amortization Life and Method
IP Software	$	2,343,888	$	(2,240,695	)	$	103,193	3 years - straight-line
Portfolios and Client Lists		7,714,665		(5,614,880	)		2,099,785	4 years - straight-line
Client Acquisition Costs		8,238,018		(4,762,347	)		3,475,671	4 years - straight-line
PCI Certification		449,000		(449,000	)		-	3 years - straight-line
Trademarks		703,586		(703,586	)		-	3 years - straight-line
Domain Names		437,810		(437,810	)		-	3 years - straight-line
Total	$	19,886,966	$	(14,208,317	)	$	5,678,649

Amortization expense for the intangible assets was approximately

$679,000

 and

$649,000

 for the

three

months

June 30, 2020

and

2019

, respectively. Amortization expense for each of the

six

months ended

June 30, 2020

and

2019

was approximately 

$1.4

 million.

The following table presents the estimated aggregate future amortization expense of intangible assets:

2020 (remainder of year)	$	567,754
2021		1,135,508
2022		1,135,508
2023		1,123,561
2024		741,075
Balance June 30, 2020	$	4,703,406

XML

Note 6 - Accrued Expenses

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

NOTE

6.

ACCRUED EXPENSES

At

June 30, 2020

and

December 31, 2019

, accrued expenses amounted to approximately $

2.1

million 

and

$1.8

 million, respectively. Accrued expenses represent expenses that are owed at the end of the period or are estimates of services provided that have

not

been billed by the provider or vendor. The following table reflect the balances outstanding as of

June 30, 2020

and

December 31, 2019

.

	June 30, 2020		December 31, 2019
Accrued professional fees	$	283,071	$	276,239
PayOnline accrual		-		69,039
Accrued interest		89,573		43,021
Accrued bonus		1,516,808		1,318,060
Accrued foreign taxes		863		2,064
Other accrued expenses		230,846		91,921
Total accrued expenses	$	2,121,161	$	1,800,344

Included in accrued bonus are non-discretionary compensation due to our Chairman and CEO, which was approximately

$1.2

 millionand

$1.0

million at

June 30, 2020

and

December 31, 2019

, respectively, and approximately

$362,000

 and

$339,000

 at

June 30, 2020

and

December 31, 2019

, respectively, for discretionary performance bonuses due to certain employees.

Included in other accrued expenses at 

June 30, 2020

is approximately

$136,000

in connection with a tranche received from ESOUSA pursuant to the ESOUSA Agreement, which was subsequently paid through the issuance of common shares of our Company.

XML

Note 7 - Notes Payable

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Debt Disclosure [Text Block]

NOTE

7.

NOTES PAYABLE

Notes payable consist of the following:

	June 30, 2020			December 31, 2019
RBL Capital Group, LLC	$	9,431,157		$	9,431,157
SBA Loan - EIDL		159,899			-
SBA Loan - PPP		491,493			-
Subtotal		10,082,549			9,431,157
Less: deferred loan costs		(159,277	)		(179,610	)
Subtotal		9,923,272			9,251,547
Less: current portion		(936,391	)		(909,086	)
Long term debt	$	8,986,881		$	8,342,461

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 (collectively, the “co-borrowers”), entered into a Loan and Security Agreement (“Credit Facility”) with RBL Capital Group, LLC (“RBL”), as lender (the “RBL Loan Agreement”). The original terms provided us with an

18

-month,

$10

million credit facility with interest at the higher of

13.90%

per annum or the prime rate plus

10.65%.

 On

May 2, 2016,

we renewed our Credit Facility with RBL, increasing the facility from

$10

million to

$15

million and extending the term through

February 2019.

The co-borrowers' obligations to RBL pursuant to the RBL Loan Agreement are secured by a

first

priority security interest in all of the co-borrowers' tangible and intangible assets, including but

not

limited to their merchants, merchant contracts and proceeds thereof, and all right title and interest in co-borrowers' processing contracts, contract rights, and portfolio cash flows with all processors of the co-borrowers.

On

December 19, 2019,

in connection with an addendum to those certain term notes made by TOT Group, Inc.in favor of RBL, the Credit Facility referred to above, we received funding of

$1,000,000

and new terms were negotiated for the total outstanding notes payable amount of

$9,431,157.

This total loan amount bears interest at

14.19%.

On

January 20, 2020,

we are required to make

one

(

1

) payment of interest only for

$117,329,

followed by

five

(

5

) payments of interest only in the amount of

$111,523.

Effective

July 20, 2020,

we are required to make

forty-eight

(

48

) monthly payments, which includes principal and interest for

$258,620,

until

March 20, 2024

the date this term note matures. In the event any of the installments or other payment required to be made is

not

received by or on behalf of RBL in full within

ten

(

10

) days after the due date thereof, and the same subsequently is received and accepted by or on behalf of RBL, the Company shall pay on demand a late charge in the amount of

five

percent (

5%

) of the amount of the delinquent payment. In the event of the occurrence of an Event of Default (as defined in the Loan Agreement), the entire unpaid balance of principal and interest of the Loan shall become due and payable immediately, without notice or demand, at the election of the Note holder, provided that the holder shall endeavor (but is

not

required) to provide notice to the Company of any such acceleration. The Company waives demand, presentment for payment, protest, notice of protest and notice of nonpayment or dishonor of the Note. The Company shall

not

have any right to prepay this loan except as expressly provided in the Loan Agreement.

On

March 27, 2020,

our Company entered into a Master Exchange Agreement, (the “ESOUSA Agreement”) with ESOUSA Holdings, LLC ("ESOUSA"), a related party. Prior to entering into the ESOUSA Agreement, ESOUSA agreed to acquire an existing promissory note that had been previously issued by the Company, of up to

$2,000,000

in principal amount outstanding plus interest due to RBL Capital Group, LLC. Pursuant to the ESOUSA Agreement, the Company has the right, at any time prior to

March 27, 2021,

to request ESOUSA, and ESOUSA agreed upon each such request, to exchange this promissory note in tranches on the dates when the Company instructs ESOUSA, for such number of shares of the Company's common stock (“Common Stock”) as determined under the ESOUSA Agreement based upon the number of shares of Common Stock (already in ESOUSA's possession) that ESOUSA sold in order to finance its purchase of such tranche of the promissory note from RBL Capital Group, LLC. ESOUSA will purchase each tranche of the promissory note equal to

88%

of the gross proceeds from the shares of Common Stock sold by ESOUSA to finance the purchase ofsuch Exchange Amount from RBL Capital Group, LLC. Each such tranche to be

$148,000

unless otherwise agreed to by the Company and ESOUSA. The Company received its

first

tranche of approximately

$148,000

on

March 27, 2020,

less any fees. In

April 2020,

ESOUSA exchanged the promissory note for shares in our Company's common stock which has been reflected in our stockholders" equity section. (Refer to 

Note

11.

Stockholders" Equity

).

On

April 23, 2020,

the Company entered into an amendment (the “Amendment”) to the ESOUSA Agreement. The Amendment increased from

$2,000,000

to

$5,000,000

the principal amount and unpaid interest of

one

or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. The Company received a

second

tranche of approximately

$143,000

 on

April 28, 2020,

less any fees, which is reflected in accrued expenses on the accompanying consolidated balance sheet as of

June 30, 2020.

No

shares of the Company's common stock have been issued as of this date in connection with this tranche.

On

August 3, 2020,

our Company entered into a Second Amendment (the “Second Amendment”) to the ESOUSA Agreement. The Second Amendment increased from

$5,000,000

to

$15,000,000

the principal amount and unpaid interest of

one

or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. 

On

August 11, 2020,

the Company received a

third

 tranche of approximately

$707,000

from RBL, less any fees. The Company issued

66,190

shares of its' common stock to ESOUSA in connection with this tranche.

SBA Loans

On

May 7, 2020,

the Company entered into a promissory note (the “Note”) evidencing an unsecured loan (the “Loan”) in the amount of

$491,493

 made to the Company under the Paycheck Protection Program (the “PPP”). The Note matures on

May 7, 2022

and bears interest at a rate of

1%

per annum. Beginning

December 7, 2020,

the Company is required to make

17

monthly payments of principal and interest, with the principal component of each such payment based upon the level amortization of principal over a

two

-year period from

May 7, 2020. 

Pursuant to the terms of the CARES Act and the PPP, the Company

may

apply to the Lender for forgiveness for the amount due on the Loan. The amount eligible for forgiveness is based on the amount of Loan proceeds used by the Company (during the

eight

-week period after the Lender makes the

first

disbursement of Loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), interest on mortgage obligations, rent and utilities, subject to certain limitations and reductions in accordance with the CARES Act and the PPP.

No

assurance can be given, at this time, that the Company will obtain forgiveness of the Loan in whole or in part. (

Refer to Note

7.

Notes Payable

).

On

May 18, 2020, 

the Company entered into a promissory note (the "Note") in the amount of

$159,899

made to the Company by the U.S. Small Business Administration under the Economic Injury Disaster Loan program. Monthly installment payments on the Note will begin

twelve

months from the date of the Note, with the balance of any accrued principal and interest at

3.75%

annually, payable

thirty

years from the date of the Note.

Scheduled notes payable principal repayment at

June 30, 2020

is as follows:

2020 (remainder of year)	$	936,391
2021		2,353,216
2022		2,470,767
2023		3,418,653
2024		763,380
thereafter		140,141
Balance June 30, 2020	$	10,082,549

XML

Note 8 - Concentrations

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

NOTE

8.

CONCENTRATIONS

Our credit card processing revenues are from merchant customer transactions, which were processed primarily by

two

 

third

-party processors (greater than

5%

) and our own dedicated bank identification number ("BIN")/Interbank Card Association ("ICA") number during the

three

and

six

months ended

June 30, 2020

and

2019

.

During the

six

months ended

June 30, 2020

, we processed

33%

of our total revenue with Priority Payment Systems,

46%

from our own dedicated BIN/ICA with Esquire Bank, and

10%

with First Data Corp. During the

six

months ended

June 30, 2019

, we processed

49%

of our total revenue with Priority Payment Systems,

35%

from our own dedicated BIN/ICA with Esquire Bank, and

7%

from First Data Corp.

During the

three

months ended

June 30, 2020

, we processed

27%

of our total revenue with Priority Payment Systems,

50%

from our own dedicated BIN/ICA with Esquire Bank, and

10%

with First Data Corp. During the

three

months ended

June 30, 2019

, we processed

46

% of our total revenue with Priority Payment Systems, 

38

% from our own dedicated BIN/ICA with Esquire Bank, and

8%

from First Data Corp.

XML

Note 9 - Commitments and Contingencies

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

NOTE

9.

COMMITMENTS AND CONTINGENCIES

Employment Agreement

On

February 25, 2020,

as per approval of the Compensation Committee (the “Committee”) of the board of directors of the board of directors of the Company

,

 the Company entered into an employment agreement (the “Agreement”) with Steven Wolberg, the Company's Chief Legal Officer and Corporate Secretary. The Agreement provides for continuation of the current base salary of

$250,000.

The term of the Agreement is

5

years, with subsequent

1

-year renewals. The Agreement provides for a sign in bonus of

10,000

shares of Company's common stock, to be granted to Mr. Wolberg pursuant to the Company's equity incentive plan, the severance in the amount of

two

times annual base salary of Mr. Wolberg if Mr. Wolberg's employment is terminated by the Company without “cause” (as defined in the Agreement) or Mr. Wolberg terminates the employment for “good reason” (as defined in the Agreement). For each fiscal year during the term of the Agreement, the Agreement provides for a bonus arrangement equal to

50%

of Mr. Wolberg's base salary, payable in the Company's shares of common stock or, at the Company's discretion, in cash. Further, for each fiscal year during the term of the Agreement, Mr. Wolberg will be eligible to receive long-term equity incentive awards, as determined by the Committee at the time of grant, pursuant to the Company's equity incentive plan.

Minimum Billing Processing Fees Commitment

We have non-exclusive agreements with

two

of our processors to provide services related to processing. The agreements require us to submit a minimum number of  billable processing fees. If we submit an amount that is lower than the minimum, we are required to pay to each processor the fees it would have received if we had submitted the required minimum number of billable processing fees. As of

June 30, 2020,

the aggregate minimum monthly processing fees for these processors amounts to approximately

$150,000

 per month.

Leases

North American Transaction Solutions

During

May 2013,

we entered into a lease agreement, for approximately

4,101

square feet of office space located at

3363

N.E.

163rd

Street, Suites

705

through

707,

North Miami Beach, Florida

33160.

The term of the lease agreement was from

May 1, 2013

through

December 31, 2016,

with monthly rent increasing from

$16,800

per month at inception to

$19,448

per month (or

$233,377

per year) for the period from

January 1, 2016

through

December 31, 2016.

The lease was extended for a period of

five

years commencing

August 1, 2017

and expiring

July 31, 2022

with equal monthly base rent installments of

$14,354

(

$172,248

per year) plus sales tax.

On

September 26, 2019,

we entered into a lease for additional office space in the building that our current office space is located for our North American Transactions Solutions. The space is for

5,875

square feet and the term is for

5

years commencing on

September 23, 2019

and expiring on

September 30, 2024.

The monthly base rent is

$16,156

(

$193,875

per year) plus sales tax. In consideration of our Company foregoing its rights to credits towards the cubicle installation, the lease was amended. The amended lease requires the Company to begin paying

$11,500

effective

July 7, 2020,

with the original monthly rent payment of

$16,156

 commencing on

January 1, 2021.

In addition, commencing on

March 1, 2021,

our Company will begin making up the difference between the original monthly lease payment of

$16,156

and the amended monthly lease payment of

$11,500,

the deferred monthly rent, by paying the landlord an additional

$2,000

per month until the deferred portion of the rent is fully repaid. The Company is expected to occupy these premises in the near future.

Net Element Software, our subsidiary, currently leases approximately

1,654

square feet of office space in Yekaterinburg, Russia, where we develop value added services, mobile applications, smart terminals applications, sales central ERP system development and marketing activities, at an annual rent of approximately

$21,000.The

lease term expired on

June 1, 2019

and was renewed with indefinite terms.

International Transaction Solutions

The Company occupies an office in Moscow, Russia with approximately

1600

square feet at an annual rent of

$50,900,

 which lease expired on

February 10, 2020.

This lease was renewed with indefinite terms.

We believe that our current facilities are suitable and adequate for our present purposes, and we anticipate that we will be able to extend our existing leases on terms satisfactory to us or move to new facilities on acceptable terms.

The following table presents a reconciliation of the undiscounted future minimum lease payments, under the lease for the premises we occupy for our North American Transaction Solutions segment's U.S. headquarters, to the amounts reported as operating lease liabilities on the consolidated balance sheet as of

June 30, 2020

:

	Operating Lease
Undiscounted future minimum lease payments:
2020 (remainder of year)	$	86,124
2021		172,248
2022		100,478
Total	$	358,850
Amount representing imputed interest		(42,732	)
Total operating lease liability		316,118
Current portion of operating lease liability		(68,859	)
Operating Lease Liability, non-current	$	247,259

	As of June 30, 2020
Remaining term on Lease		2.00
Incremental borrowing rate		12	%

As of

June 30, 2020

, the future minimum lease payments under other operating leases,

not

subject to Topic

842,

are approximately

$122,000

 for the remainder of the year. 

Litigation, Claims, and Assessments

With respect to all legal, regulatory and governmental proceedings, and in accordance with ASC

450

-

20,

Contingencies—Loss Contingencies

, we consider the likelihood of a negative outcome. If we determine the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, we record an accrual for the estimated amount of loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and we are able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is

no

accrued liability, we disclose the estimate of the amount of possible loss or range of loss. However, management in some instances

may

be unable to estimate an amount of possible loss or range of loss based on the significant uncertainties involved in, or the preliminary nature of, the matter, and in these instances we will disclose the nature of the contingency and describe why we are unable to determine an estimate of possible loss or range of loss.

In addition, we are involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business and otherwise

not

described below. We have considered all such ordinary course legal proceedings in formulating our disclosures and assessments, which are

not

expected to have a material adverse effect on our consolidated financial statements.

Aptito.com, Inc.

On

August 6, 2014,

our subsidiary (Aptito, LLC) filed a lawsuit against Aptito.com, Inc. and the shareholders of Aptito.com, Inc., in state court in the

11th

Judicial Circuit in and for Miami-Dade County. This is an interpleader action in regards to

125,000

shares of our stock. Aptito, LLC acquired Aptito.com, Inc. in exchange for, among other things,

125,000

shares (prior to adjustment for

two one

-for-

ten

reverse stock splits) of our stock. There has been disagreements among the Aptito.com, Inc. shareholders as to proper distribution of the

125,000

shares (prior to adjustment for

two one

-for-

ten

reverse stock splits). To avoid any liability in regards to improper distribution, Aptito, LLC filed the interpleader action so as to allow the Defendants to litigate amongst themselves as to how the shares (prior to adjustment for

two one

- for-

ten

reverse stock splits) should be distributed. Aptito.com, Inc. opposed the motion to interplead and filed counterclaims relative to Aptito, LLC for non-delivery of the

125,000

shares (prior to adjustment for

two one

-for-

ten

reverse stock splits).

On

July 18, 2017,

the Court granted Aptito LLC's motion to interplead and also indicated that Aptito, LLC could

not

be held liable for any alleged damages relative to the purported non- delivery of the

125,000

shares after the interpleader action was filed on

August 6, 2014.

In

March 2018,

a new Judge in the case ruled that Aptito.com, Inc. was entitled to receive

125,000

newly issued shares of our common stock, but indicated that he was

not

ruling that we were required to issue such shares. We plan to appeal this ruling, and our legal counsel is addressing the counterclaims filed by Aptito.com, Inc. in this matter.

In

July 2018,

our counsel was disqualified due to a conflict of interest. We engaged a new law firm to represent our ongoing interests in this case. Since that time, there have been multiple Motions and claims brought by Aptito.com, Inc., including the request for rescission of the asset purchase agreement that gave rise to the share issuance obligation. All of these Motions and claims are being vigorously defended.

A court ordered mediation conference was held on

April 24, 2019

but the parties were unable to reach a settlement. On

May 1, 2019

the Court denied Aptito.com, Inc.'s Motion for Summary Judgement and further hearings on a variety of Motions were scheduled in this matter.

On

August 14, 2019,

the court granted final Summary Judgment in favor of the Company, removing Net Element as a party to the lawsuit and denying Aptito.com, Inc's Motion for rehearing and reconsideration of this matter. Aptito, LLC, in which the Company has a majority ownership interest, remains a Defendant in this litigation. On

September 17, 2019,

the court granted the Company's Motion for sanctions against the attorney representing Aptito.com, Inc. in this matter. The Company is pursuing collection of legal fees incurred from the Plaintiff and their attorney. This matter was pending a special set hearing to be held on

March 23, 2020. 

That hearing was postponed and rescheduled for hearing in

July 2020. 

On

July 23, 2020,

the Court entered a judgement against the attorney representing Aptito.com and awarded attorney fees to the Company. The attorney stated on the record he will be filing for bankruptcy. The Company intends pursuing recovery from the attorney.

Gene Zell

In

June 2014,

we, as plaintiff, commenced an action in the Miami-Dade Circuit Court, Florida against Gene Zell ("Zell") for defamation of our Company and CEO and tortious interference with our business relationships. In

October 2014,

the court granted a temporary injunction against Zell enjoining him from posting any information about our Company and CEO on any website and enjoining him from contacting our business partners or investors. Zell violated the Court Order and the Court granted a Motion imposing sanctions against Zell. We continue to seek enforcement of the Court Order.

In

April 2015,

Zell filed a Motion to set aside the Court Order alleging he was unaware of the Court Proceedings. The Court, on

August 26, 2015,

dismissed Zell's Motion to dissolve the injunction. In

March 2017

the Court dismissed another Motion brought by Zell to dissolve the injunction. Accordingly, the injunction order prohibiting Zell from making further defamatory posts remains in place.

In

2018,

we filed a motion to enforce the injunction and contempt orders against Zell. The court upheld the injunction and we continue to vigorously protect its interests. We are pursuing an action for damages sustained as a result of the defamation.

On

September 20, 2019,

the Court granted a Permanent Injunction against Zell. The Company is evaluating pursuing actions against Zell for collection of legal fees and damages.

A trial was scheduled for

April 2020

on the issue of Net Element's damages. However, Zell recently filed bankruptcy, so that trial and all further legal proceedings involving Zell will be stayed as a result of the automatic bankruptcy stay.

XML

Note 10 - Related Party Transactions

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

NOTE

10.

RELATED PARTY TRANSACTIONS

During the

three

months ended

June 30, 2020

and

2019

, agent commissions resulting from merchant processing of approximately and

$18,000

were paid to Prime Portfolios, LLC, an entity owned by Oleg Firer, our Chairman and CEO, and Steven Wolberg, our Chief Legal Officer. In addition, key members of management owned companies received similar commissions and/or reimbursement for equipment purchased on the Company's behalf, which amounted to approximately

$186,000

 and

$195,000

 for the

three

months ended

June 30, 2020

and

2019

, respectively. 

During the

six

 months ended

June 30, 2020

and

2019

, agent commissions resulting from merchant processing of approximately

$58,000

and

$36,000,

respectively,were paid to Prime Portfolios, LLC, an entity owned by Oleg Firer, our Chairman and CEO, and Steven Wolberg, our Chief Legal Officer. In addition, key members of management owned companies received similar commissions and/or reimbursement for equipment purchased on the Company's behalf, which amounted to approximately

$412,000

and

$365,000

 for the

six

 months ended

June 30, 2020

and

2019

, respectively. 

At 

June 30, 2020

and

December 31, 2019

, we had accrued expenses of approximately

$61,000

and

$127,000,

respectively, which consisted primarily of various travel, professional fees, and other expenses paid and charged for by our CEO on his personal credit cards. This is reflected as due to related party on the accompanying consolidated balance sheets. In addition, approximately

$74,000

of various travel, professional fees, and other expenses paid and charged for by our CEO on his personal credit cards, are included in accounts payable.

On

March 27, 2020,

our Company entered into a Master Exchange Agreement, (the “ESOUSA Agreement”) with ESOUSA Holdings, LLC ("ESOUSA"), a related party. Prior to entering into the ESOUSA Agreement, ESOUSA agreed to acquire an existing promissory note that had been previously issued by the Company, of up to

$2,000,000

in principal amount outstanding plus interest due to RBL Capital Group, LLC. Pursuant to the ESOUSA Agreement, the Company has the right, at any time prior to

March 27, 2021,

to request ESOUSA, and ESOUSA agreed upon each such request, to exchange this promissory note in tranches on the dates when the Company instructs ESOUSA, for such number of shares of the Company's common stock (“Common Stock”) as determined under the ESOUSA Agreement based upon the number of shares of Common Stock (already in ESOUSA's possession) that ESOUSA sold in order to finance its purchase of such tranche of the promissory note from RBL Capital Group, LLC. ESOUSA will purchase each tranche of the promissory note equal to

88%

of the gross proceeds from the shares of Common Stock sold by ESOUSA to finance the purchase ofsuch Exchange Amount from RBL Capital Group, LLC. Each such tranche to be

$148,000

unless otherwise agreed to by the Company and ESOUSA. The Company received its

first

tranche of approximately

$148,000

on

March 27, 2020,

less any fees. In

April 2020,

ESOUSA exchanged the promissory note for shares in our Company's common stock which has been reflected in our stockholders" equity section. (Refer to 

Note

11.

Stockholders" Equity

).

On

April 23, 2020,

the Company entered into an amendment (the “Amendment”) to the ESOUSA Agreement with ESOUSA. The Amendment increased from

$2,000,000

to

$5,000,000

the principal amount and unpaid interest of

one

or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. The Company received a

second

tranche of approximately

$143,000

 on

April 28, 2020,

less any fees, which is reflected in accrued expenses on the accompanying consolidated balance sheet as of

June 30, 2020.

No

shares have been issued as of this date in connection with this tranche.

On

August 3, 2020,

our Company entered into a Second Amendment (the “Second Amendment”) to the Agreement. The Second Amendment increased from

$5,000,000

to

$15,000,000

the principal amount and unpaid interest of

one

or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. 

On

August 11, 2020,

the Company received a

third

 tranche of approximately

$707,000

from RBL, less any fees. The Company issued

66,190

shares of its' common stock to ESOUSA in connection with this tranche.

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Note 11 - Stockholders' Equity

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

NOTE

11.

STOCKHOLDERS' EQUITY

On

October 5, 2017,

we effected a 

one

-for-

ten

reverse stock split of our common stock. Our condensed consolidated financial statements and disclosures reflect these changes in capital structure for all periods presented.

On

June 12, 2015

and

June 13, 2016,

our shareholders approved

100,000,000

increases in our authorized common stock to

300,000,000

and

400,000,000,

respectively. On

October 2, 2017,

our shareholders approved a

300,000,000

decrease in our authorized common stock to

100,000,000.

The following table represents the change in our stockholders' equity for the

three

and 

six

months ended

June 30, 2020

and

2019

:

	Three and Six Months Ended June 30, 2019
	Common Stock				Paid in		Accumulated Other			Non-controlling			Accumulated			Total
	Shares		Amount		Capital		Comprehensive Loss			interest			Deficit			Stockholder's Equity
Balance December 31, 2018		3,863,019	$	386.30	$	183,246,232	$	(2,232,163	)	$	(125,737	)	$	(172,292,252	)	$	8,596,466
Share based compensation		2,448		0.24		15,006		-			-			-			15,006
Net loss		-		-		-		-			(13,966	)		(1,120,847	)		(1,134,813	)
Comprehensive loss - foreign currency translation		-		-		-		(14,561	)		-			-			(14,561	)
Balance March 31, 2019		3,865,467	$	386.55	$	183,261,238	$	(2,246,724	)	$	(139,703	)	$	(173,413,099	)	$	7,462,098
Share based compensation		319,047		23.90		2,005,816											2,005,840
Net loss		-		-		-					(40,225	)		(1,537,447	)		(1,577,672	)
Comprehensive loss - foreign currency translation		-		-		-		(5,537	)								(5,537	)
Balance June 30, 2019		4,184,514	$	410.45	$	185,267,054	$	(2,252,261	)	$	(179,928	)	$	(174,950,546	)	$	7,884,729

	Three and Six Months Ended June 30, 2020
	Common Stock				Paid in			Accumulated Other			Non-controlling			Accumulated			Total
	Shares		Amount		Capital			Comprehensive Loss			interest			Deficit			Stockholder's Equity
Balance December 31, 2019		4,111,082	$	410.66	$	185,297,069		$	(2,274,187	)	$	(231,999	)	$	(178,750,634	)	$	4,040,660
Share based compensation		14,672		1.47		45,896			-			-			-			45,897
Expenses paid in connection with ESOUSA transaction		-		-		(5,000	)		-			-			-			(5,000	)
Net loss		-		-		-			-			(11,228	)		(1,366,798	)		(1,378,026	)
Comprehensive loss - foreign currency translation		-		-		-			130,813			-			-			130,813
Balance March 31, 2020		4,125,754	$	412.13	$	185,337,965		$	(2,143,374	)	$	(243,227	)	$	(180,117,432	)	$	2,834,345
Share based compensation		4,054		0.41		7,500												7,500
ESOUSA transaction		65,862		6.59		151,475												151,482
Net loss		-		-		-						(13,724	)		(324,690	)		(338,414	)
Comprehensive loss - foreign currency translation		-		-		-			(65,990	)								(65,990	)
Balance June 30, 2020		4,195,670	$	419.13	$	185,496,940		$	(2,209,364	)	$	(256,951	)	$	(180,442,122	)	$	2,588,923

Equity Incentive Plan Activity

On

December 5, 2013,

our shareholders approved the Net Element International, Inc.

2013

Equity Incentive Plan (as amended to date, the

“2013

Plan”). Awards under the

2013

Plan

may

be granted in any

one

or all of the following forms: (i) incentive stock options meeting the requirements of Section

422

of the Internal Revenue Code of

1986,

as amended; (ii) non-qualified stock options (unless otherwise indicated, references to “Options” include both Incentive Stock Options and Non-Qualified Stock Options); (iii) stock appreciation rights, which

may

be awarded either in tandem with Options or on a stand-alone basis; (iv) shares of common stock that are restricted; (v) units representing shares of common stock; (vi) units that do

not

represent shares of common stock but which

may

be paid in the form of common stock; and (vii) shares of common stock that are

not

subject to any conditions to vesting.

On

November 27, 2018,

our shareholders approved an amendment to the

2013

Plan to increase the number of shares of the Company's common stock available for issuance by

178,900

shares resulting in the aggregate of

773,000

shares authorized for issuance under the

2013

Plan. 

On

October 23, 2019,

our shareholders approved an amendment to the

2013

Plan to increase the number of shares of the Company's common stock available for issuance by

177,000

shares resulting in the aggregate of

950,000

shares authorized for issuance under the

2013

Plan.

The maximum aggregate number of shares of common stock available for award under the

2013

Plan at

June 30, 2020

and

December 31, 2019

was

153,709

and

252,436,

respectively. The

2013

Plan is administered by the compensation committee.

2013

Equity Incentive Plan - Shares and Stock Options

During the

three

months ended

June 30, 2020

and

2019

, we issued common stock pursuant to the

2013

Plan to the members of our Board of Directors and recorded a compensation charge of $

7,500

 and

$15,000,

respectively. 

During the

six

 months ended

June 30, 2020

and

2019

, we issued common stock pursuant to the

2013

Plan to the members of our Board of Directors and recorded a compensation charge of approximately

$15,000

 and

$30,000,

respectively. 

At

June 30, 2020 

and

December 31, 2019,

we had

154,005

 incentive stock options outstanding with a weighted average exercise price of

$10.73

 and a weighted average remaining contract term of

7.58

 years at

June 30, 2020 

and

8.08

years at

December 31, 2019,

respectively. All of the stock options were anti-dilutive at

June 30, 2020 

and

December 31, 2019.

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Note 12 - Warrants and Options

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

NOTE

12.

WARRANTS AND OPTIONS

Options

At

June 30, 2020

and

December 31, 2019

, we had fully vested options outstanding to purchase

314

,218

 

shares of common stock at exercise prices ranging from

$3.27

 to

$134.00

per share. 

Due to the high level of volatility in the stock price of our common stock, our management determined the grant date fair value of the options using the then quoted stock price at the grant date.

Warrants

At

June 30, 2020

and

December 31, 2019

, we had warrants outstanding to purchase

728,583

shares of common stock. At

June 30, 2020

the warrants had a weighted average exercise price of

$6.18

per share purchased and a weighted average remaining contractual term of

2.50

 years. At

December 31, 2019

, the warrants had a weighted average exercise price of

$6.18

per share purchased and a weighted average remaining contractual term of

3.00

years.

Non-Incentive Plan Options

At

June 30, 2020

and

December 31, 2019

, we had

323,498

non-incentive options outstanding with a weighted-average exercise price of

$21.84.

The non-incentive options have a remaining contract term of

.42

 years at

June 30, 2020

. These options were out of the money at

June 30, 2020

and

December 31, 2019

and had

no

intrinsic value.

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Note 13 - Subsequent Event

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Subsequent Events [Text Block]

NOTE

13.

SUBSEQUENT EVENT

On

August 3, 2020,

our Company entered into a Second Amendment (the “Second Amendment”) to the Agreement. The Second Amendment increased from

$5,000,000

to

$15,000,000

the principal amount and unpaid interest of

one

or more promissory notes of the Company or its direct or indirect subsidiaries that ESOUSA either purchased in whole or has an irrevocable right to purchase in tranches from RBL in connection with the ESOUSA Agreement. On

August 11, 2020,

the Company received a

third

 tranche of approximately

$707,000

from RBL, less any fees. The Company issued

66,190

shares of its' common stock to ESOUSA shares in connection with this tranche.

On

August 4, 2020,

our Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mullen Technologies, Inc., a California corporation (“Mullen”), and Mullen Acquisition, Inc., a California corporation and wholly owned subsidiary of the Company (“Merger Sub”). Pursuant to, and on the terms and subject to the conditions of, the Merger Agreement, Merger Sub will be merged with and into Mullen (the “Merger”), with Mullen continuing as the surviving corporation in the Merger. After Mullen's completion and delivery to our Company, of the audited financial statements for Mullen and its subsidiaries and affiliates required to be included in a registration statement, the Company intends to prepare and file with the Commission a registration statement on Form S-

4

(together with all amendments thereto, the “Registration Statement”) in which the proxy statement will be included as a part of the prospectus, in connection with the registration under the Securities Act of the shares of Parent Shares to be issued in connection with the transactions contemplated in the Merger Agreement. The Merger Agreement contains termination rights for each of the Company and Mullen, including, among others, (i) in the event that the Merger has

not

been consummated by

December 31, 2020, (

ii) in the event that the requisite approval of the Company's stockholders is

not

obtained upon a vote thereon, (iii) in the event that any governmental authority shall have taken action to restrain, enjoin or prohibit the consummation of the Merger, which action shall have become final and non-appealable and (iv) in the event that there is a breach by the other party of any of its representations, warranties, covenants or agreements, which breach is sufficiently material and

not

timely cured or curable. In addition, Mullen

may

terminate the Merger Agreement if, prior to receipt of the requisite approval of the Company's stockholders, the Company's board of directors shall have changed their recommendation in respect of the Merger. Further, the Company

may

terminate the Merger Agreement prior to receipt of the requisite approval of the Company's stockholders to enter into a definitive agreement with respect to a Superior Proposal (as such term is defined in the Merger Agreement). 

As contemplated by the Merger Agreement, on

August 11, 2020, 

our Company as lender, entered into an unsecured Promissory Note, dated

August 11, 2020 (

the “Note”), with Mullen. Pursuant to the Note, Mullen borrowed from the Company

$500,000.

Prior to maturity of the loan, the principal amount of the loan will carry an interest rate of

14%

per annum compounded monthly and payable upon demand. This loan will mature on the earlier of (i) the date that the Merger Agreement is terminated for any reason by any party thereto and (ii) the Merger Effective Time (as defined in the Merger Agreement).

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Note 4 - Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2020

Notes Tables

Restrictions on Cash and Cash Equivalents [Table Text Block]

	June 30, 2020		December 31, 2019
Cash on consolidated balance sheet	$	865,812	$	486,604
Restricted cash		475,000		629,651
Total cash and restricted cash	$	1,340,812	$	1,116,255

XML

Note 5 - Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2020

Notes Tables

Schedule of Finite-Lived Intangible Assets [Table Text Block]

	Cost		Accumulated Amortization			Carrying Value		Amortization Life and Method
IP Software	$	2,378,248	$	(2,306,565	)	$	71,682	3 years - straight-line
Portfolios and Client Lists		7,714,665		(6,195,599	)		1,519,066	4 years - straight-line
Client Acquisition Costs		8,625,568		(5,512,910	)		3,112,658	4 years - straight-line
PCI Certification		449,000		(449,000	)		-	3 years - straight-line
Trademarks		703,586		(703,586	)		-	3 years - straight-line
Domain Names		437,810		(437,810	)		-	3 years - straight-line
Total	$	20,308,876	$	(15,605,470	)	$	4,703,406

	Cost		Accumulated Amortization			Carrying Value		Amortization Life and Method
IP Software	$	2,343,888	$	(2,240,695	)	$	103,193	3 years - straight-line
Portfolios and Client Lists		7,714,665		(5,614,880	)		2,099,785	4 years - straight-line
Client Acquisition Costs		8,238,018		(4,762,347	)		3,475,671	4 years - straight-line
PCI Certification		449,000		(449,000	)		-	3 years - straight-line
Trademarks		703,586		(703,586	)		-	3 years - straight-line
Domain Names		437,810		(437,810	)		-	3 years - straight-line
Total	$	19,886,966	$	(14,208,317	)	$	5,678,649

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

2020 (remainder of year)	$	567,754
2021		1,135,508
2022		1,135,508
2023		1,123,561
2024		741,075
Balance June 30, 2020	$	4,703,406

XML

Note 6 - Accrued Expenses (Tables)

6 Months Ended

Jun. 30, 2020

Notes Tables

Schedule of Accounts Payable and Accrued Liabilities [Table Text Block]

	June 30, 2020		December 31, 2019
Accrued professional fees	$	283,071	$	276,239
PayOnline accrual		-		69,039
Accrued interest		89,573		43,021
Accrued bonus		1,516,808		1,318,060
Accrued foreign taxes		863		2,064
Other accrued expenses		230,846		91,921
Total accrued expenses	$	2,121,161	$	1,800,344

XML

Note 7 - Notes Payable (Tables)

6 Months Ended

Jun. 30, 2020

Notes Tables

Schedule of Long-term Debt Instruments [Table Text Block]

	June 30, 2020			December 31, 2019
RBL Capital Group, LLC	$	9,431,157		$	9,431,157
SBA Loan - EIDL		159,899			-
SBA Loan - PPP		491,493			-
Subtotal		10,082,549			9,431,157
Less: deferred loan costs		(159,277	)		(179,610	)
Subtotal		9,923,272			9,251,547
Less: current portion		(936,391	)		(909,086	)
Long term debt	$	8,986,881		$	8,342,461

Schedule of Maturities of Long-term Debt [Table Text Block]

2020 (remainder of year)	$	936,391
2021		2,353,216
2022		2,470,767
2023		3,418,653
2024		763,380
thereafter		140,141
Balance June 30, 2020	$	10,082,549

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Note 9 - Commitments and Contingencies (Tables)

6 Months Ended

Jun. 30, 2020

Notes Tables

Lessee, Operating Lease, Liability, Maturity [Table Text Block]

	Operating Lease
Undiscounted future minimum lease payments:
2020 (remainder of year)	$	86,124
2021		172,248
2022		100,478
Total	$	358,850
Amount representing imputed interest		(42,732	)
Total operating lease liability		316,118
Current portion of operating lease liability		(68,859	)
Operating Lease Liability, non-current	$	247,259

	As of June 30, 2020
Remaining term on Lease		2.00
Incremental borrowing rate		12	%

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Note 11 - Stockholders' Equity (Tables)

6 Months Ended

Jun. 30, 2020

Notes Tables

Schedule of Stockholders Equity [Table Text Block]

	Three and Six Months Ended June 30, 2019
	Common Stock				Paid in		Accumulated Other			Non-controlling			Accumulated			Total
	Shares		Amount		Capital		Comprehensive Loss			interest			Deficit			Stockholder's Equity
Balance December 31, 2018		3,863,019	$	386.30	$	183,246,232	$	(2,232,163	)	$	(125,737	)	$	(172,292,252	)	$	8,596,466
Share based compensation		2,448		0.24		15,006		-			-			-			15,006
Net loss		-		-		-		-			(13,966	)		(1,120,847	)		(1,134,813	)
Comprehensive loss - foreign currency translation		-		-		-		(14,561	)		-			-			(14,561	)
Balance March 31, 2019		3,865,467	$	386.55	$	183,261,238	$	(2,246,724	)	$	(139,703	)	$	(173,413,099	)	$	7,462,098
Share based compensation		319,047		23.90		2,005,816											2,005,840
Net loss		-		-		-					(40,225	)		(1,537,447	)		(1,577,672	)
Comprehensive loss - foreign currency translation		-		-		-		(5,537	)								(5,537	)
Balance June 30, 2019		4,184,514	$	410.45	$	185,267,054	$	(2,252,261	)	$	(179,928	)	$	(174,950,546	)	$	7,884,729

	Three and Six Months Ended June 30, 2020
	Common Stock				Paid in			Accumulated Other			Non-controlling			Accumulated			Total
	Shares		Amount		Capital			Comprehensive Loss			interest			Deficit			Stockholder's Equity
Balance December 31, 2019		4,111,082	$	410.66	$	185,297,069		$	(2,274,187	)	$	(231,999	)	$	(178,750,634	)	$	4,040,660
Share based compensation		14,672		1.47		45,896			-			-			-			45,897
Expenses paid in connection with ESOUSA transaction		-		-		(5,000	)		-			-			-			(5,000	)
Net loss		-		-		-			-			(11,228	)		(1,366,798	)		(1,378,026	)
Comprehensive loss - foreign currency translation		-		-		-			130,813			-			-			130,813
Balance March 31, 2020		4,125,754	$	412.13	$	185,337,965		$	(2,143,374	)	$	(243,227	)	$	(180,117,432	)	$	2,834,345
Share based compensation		4,054		0.41		7,500												7,500
ESOUSA transaction		65,862		6.59		151,475												151,482
Net loss		-		-		-						(13,724	)		(324,690	)		(338,414	)
Comprehensive loss - foreign currency translation		-		-		-			(65,990	)								(65,990	)
Balance June 30, 2020		4,195,670	$	419.13	$	185,496,940		$	(2,209,364	)	$	(256,951	)	$	(180,442,122	)	$	2,588,923

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Note 2 - Organization and Operations (Details Textual)	6 Months Ended
	Jun. 30, 2020
Number of Reportable Segments	2

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Note 3 - Liquidity and Going Concern Considerations (Details Textual) - USD ($)						3 Months Ended		6 Months Ended		12 Months Ended
	Aug. 11, 2020	May 18, 2020	May 07, 2020	Apr. 28, 2020	Mar. 27, 2020	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019	Aug. 03, 2020	Apr. 23, 2020
Net Income (Loss) Attributable to Parent, Total						$ (324,690)	$ (1,537,447)	$ (1,691,488)	$ (2,658,292)	$ (6,500,000)
Retained Earnings (Accumulated Deficit), Ending Balance						(180,442,122)		(180,442,122)		(178,750,634)
Working Capital								1,600,000
Agreement, Maximum Notes Payable to be Paid						$ 10,082,549		10,082,549		$ 9,431,157
Proceeds from Paycheck Protection Program Under CARES Act			$ 491,493
Proceeds from Issuance of Unsecured Debt								$ 651,392
Esousa Holdings LLC [Member]
Sale of Promissory Note, Percent of Gross Proceeds of Equity Sale Used to Finance Purchase of Note					88.00%
Sale of Promissory Note, Periodic Purchase Amount					$ 148,000
Proceeds from Sale of Notes Payable				$ 143,000	148,000
Esousa Holdings LLC [Member] | Subsequent Event [Member]
Stock Issued During Period, Shares, New Issues (in shares)	66,190
RBL Capital Group, LLC [Member] | Subsequent Event [Member]
Proceeds from Sale of Notes Payable	$ 707,000
Mullen [Member] | Subsequent Event [Member]
Receivable with Imputed Interest, Face Amount	$ 500,000
Receivable with Imputed Interest, Effective Yield (Interest Rate)	14.00%
Promissory Note Issued to RBL Capital Group [Member]
Agreement, Maximum Notes Payable to be Paid					$ 2,000,000							$ 5,000,000
Promissory Note Issued to RBL Capital Group [Member] | Subsequent Event [Member]
Agreement, Maximum Notes Payable to be Paid											$ 15,000,000
SBA Economic Injury Disaster Loan Program [Member]
Proceeds from Issuance of Unsecured Debt		$ 159,899

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Note 4 - Summary of Significant Accounting Policies (Details Textual) - USD ($)	3 Months Ended	6 Months Ended		12 Months Ended
	Mar. 31, 2020	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019
Cash, Uninsured Amount		$ 162,000		$ 134,000
Impairment of Intangible Assets, Finite-lived		0	$ 0
Goodwill, Impairment Loss		0		1,300,000
Long-term Debt, Total		$ 9,923,272		$ 9,251,547
Client Acquisition Costs [Member]
Finite-Lived Intangible Asset, Useful Life (Year)	4 years	4 years		4 years
Weighted Average [Member]
Merchant Contracts, Term (Year)		3 years
Russia and Cayman Islands [Member]
Cash, Uninsured Amount		$ 39,000		$ 30,000

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Note 4 - Summary of Significant Accounting Policies - Restricted Cash (Details) - USD ($)	Jun. 30, 2020	Dec. 31, 2019	Jun. 30, 2019	Dec. 31, 2018
Cash on consolidated balance sheet	$ 865,812	$ 486,604
Restricted cash	475,000	629,651
Total cash and restricted cash	$ 1,340,812	$ 1,116,255	$ 1,495,350	$ 2,249,551

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Note 5 - Intangible Assets (Details Textual) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019
Finite-Lived Intangible Assets, Net, Ending Balance	$ 4,703,406		$ 4,703,406		$ 5,678,649
Amortization of Intangible Assets, Total	$ 679,000	$ 649,000	$ 1,400,000	$ 1,400,000

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Note 5 - Intangible Assets - Intangible Assets (Details) - USD ($)	3 Months Ended	6 Months Ended	12 Months Ended
	Mar. 31, 2020	Jun. 30, 2020	Dec. 31, 2019
Intangible assets, cost		$ 20,308,876	$ 19,886,966
Intangible assets, accumulated amortization		(15,605,470)	(14,208,317)
Intangible assets, carrying value		4,703,406	5,678,649
Computer Software, Intangible Asset [Member]
Intangible assets, cost		2,378,248	2,343,888
Intangible assets, accumulated amortization		(2,306,565)	(2,240,695)
Intangible assets, carrying value		$ 71,682	$ 103,193
Intangible assets, useful life (Year)		3 years	3 years
Portfolios and Client Lists [Member]
Intangible assets, cost		$ 7,714,665	$ 7,714,665
Intangible assets, accumulated amortization		(6,195,599)	(5,614,880)
Intangible assets, carrying value		$ 1,519,066	$ 2,099,785
Intangible assets, useful life (Year)		4 years	4 years
Client Acquisition Costs [Member]
Intangible assets, cost		$ 8,625,568	$ 8,238,018
Intangible assets, accumulated amortization		(5,512,910)	(4,762,347)
Intangible assets, carrying value		$ 3,112,658	$ 3,475,671
Intangible assets, useful life (Year)	4 years	4 years	4 years
PCI Certifiction [Member]
Intangible assets, cost		$ 449,000	$ 449,000
Intangible assets, accumulated amortization		(449,000)	(449,000)
Intangible assets, carrying value
Intangible assets, useful life (Year)		3 years	3 years
Trademarks [Member]
Intangible assets, cost		$ 703,586	$ 703,586
Intangible assets, accumulated amortization		(703,586)	(703,586)
Intangible assets, carrying value
Intangible assets, useful life (Year)		3 years	3 years
Internet Domain Names [Member]
Intangible assets, cost		$ 437,810	$ 437,810
Intangible assets, accumulated amortization		(437,810)	(437,810)
Intangible assets, carrying value
Intangible assets, useful life (Year)		3 years	3 years

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Note 5 - Intangible Assets - Estimated Aggregate Future Amortization Expense (Details) - USD ($)	Jun. 30, 2020	Dec. 31, 2019
2020 (remainder of year)	$ 567,754
2021	1,135,508
2022	1,135,508
2023	1,123,561
2024	741,075
Balance	$ 4,703,406	$ 5,678,649

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Note 6 - Accrued Expenses (Details Textual) - USD ($)	Jun. 30, 2020	Dec. 31, 2019
Accrued Liabilities, Current, Total	$ 2,121,161	$ 1,800,344
Other Accrued Liabilities, Current	230,846	91,921
Tranche From ESOUSA [Member]
Other Accrued Liabilities, Current	136,000
Chief Executive Officer [Member]
Accrued Bonuses	1,200,000	1,000,000
Employees [Member]
Accrued Bonuses	$ 362,000	$ 339,000

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Note 6 - Accrued Expenses - Accrued expenses (Details) - USD ($)	Jun. 30, 2020	Dec. 31, 2019
Accrued professional fees	$ 283,071	$ 276,239
PayOnline accrual		69,039
Accrued interest	89,573	43,021
Accrued bonus	1,516,808	1,318,060
Accrued foreign taxes	863	2,064
Other Accrued Liabilities, Current	230,846	91,921
Total accrued expenses	$ 2,121,161	$ 1,800,344

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Note 7 - Notes Payable (Details Textual) - USD ($)	Aug. 11, 2020	Aug. 01, 2020	May 18, 2020	May 07, 2020	Apr. 28, 2020	Apr. 23, 2020	Mar. 27, 2020	Dec. 19, 2019	May 18, 2017	Jun. 30, 2014	Aug. 03, 2020	Jun. 30, 2020	Dec. 31, 2019	May 02, 2016
Agreement, Maximum Notes Payable to be Paid												$ 10,082,549	$ 9,431,157
Proceeds from Paycheck Protection Program Under CARES Act				$ 491,493
Payments for (Proceeds from) Deposit on Loan			$ 159,899
Esousa Holdings LLC [Member]
Sale of Promissory Note, Percent of Gross Proceeds of Equity Sale Used to Finance Purchase of Note							88.00%
Sale of Promissory Note, Periodic Purchase Amount							$ 148,000
Proceeds from Sale of Notes Payable					$ 143,000		148,000
Esousa Holdings LLC [Member] | Subsequent Event [Member]
Stock Issued During Period, Shares, New Issues (in shares)	66,190
RBL Capital Group, LLC [Member] | Subsequent Event [Member]
Proceeds from Sale of Notes Payable	$ 707,000
Promissory Note Issued to RBL Capital Group [Member]
Agreement, Maximum Notes Payable to be Paid						$ 5,000,000	$ 2,000,000
Promissory Note Issued to RBL Capital Group [Member] | Subsequent Event [Member]
Agreement, Maximum Notes Payable to be Paid											$ 15,000,000
RBL Capital Group, LLC [Member]
Agreement, Maximum Notes Payable to be Paid												$ 9,431,157	$ 9,431,157
RBL Capital Group, LLC [Member] | RBL Loan Agreement [Member]
Debt Instrument, Term (Month)										1 year 180 days
Line of Credit Facility, Maximum Borrowing Capacity										$ 10,000,000				$ 15,000,000
RBL Capital Group, LLC [Member] | RBL Loan Agreement [Member] | Prime Rate [Member]
Debt Instrument, Basis Spread on Variable Rate										10.65%
RBL Capital Group, LLC [Member] | RBL Loan Agreement [Member] | Minimum [Member]
Debt Instrument, Interest Rate, Effective Percentage										13.90%
RBL Capital Group, LLC [Member] | RBL Term Note [Member]
Proceeds from Lines of Credit, Total								$ 1,000,000
Agreement, Maximum Notes Payable to be Paid								$ 9,431,157
Debt Instrument, Interest Rate, Stated Percentage								14.19%
Debt Instrument, Late Charge if Not Paid Within 10 Days, Percent								5.00%
RBL Capital Group, LLC [Member] | RBL Term Note [Member] | Debt Instrument, Redemption, Period One [Member]
Debt Instrument, Periodic Payment, Interest								$ 117,329
RBL Capital Group, LLC [Member] | RBL Term Note [Member] | Debt Instrument, Redemption, Period Two [Member]
Debt Instrument, Periodic Payment, Interest								111,523
RBL Capital Group, LLC [Member] | RBL Term Note [Member] | Debt Instrument, Redemption, Period Three [Member]
Debt Instrument, Periodic Payment, Total								$ 258,620
Priority Payment Systems LLC [Member]
Proceeds from Issuance of Debt						$ 5,000,000			$ 2,000,000
Priority Payment Systems LLC [Member] | Subsequent Event [Member]
Proceeds from Issuance of Debt		$ 15,000,000

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Note 7 - Notes Payable - Notes Payable (Details) - USD ($)	Jun. 30, 2020	Dec. 31, 2019
Long-term debt, gross	$ 10,082,549	$ 9,431,157
Long-term debt, gross	10,082,549	9,431,157
Less: deferred loan costs	(159,277)	(179,610)
Subtotal	9,923,272	9,251,547
Less: current portion	(936,391)	(909,086)
Long term debt	8,986,881	8,342,461
RBL Capital Group, LLC [Member]
Long-term debt, gross	9,431,157	9,431,157
Long-term debt, gross	9,431,157	9,431,157
SBA Loans [Member]
Long-term debt, gross	159,899
Long-term debt, gross	159,899
Paycheck Protection Program CARES Act [Member]
Long-term debt, gross	491,493
Long-term debt, gross	$ 491,493

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Note 7 - Notes Payable - Scheduled Notes Payable Principal Repayment (Details) - USD ($)	Jun. 30, 2020	Dec. 31, 2019
2020 (remainder of year)	$ 936,391
2021	2,353,216
2022	2,470,767
2023	3,418,653
2024	763,380
thereafter	140,141
Balance	$ 10,082,549	$ 9,431,157

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Note 8 - Concentrations (Details Textual) - Revenue Benchmark [Member] - Customer Concentration Risk [Member]	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Number of Major Customers	2	2	2	2
Concentration Risk, Percentage			5.00%
Priority Payment Systems LLC [Member]
Concentration Risk, Percentage	27.00%	46.00%	33.00%	49.00%
BIN and ICA [Member]
Concentration Risk, Percentage	50.00%	38.00%	46.00%	35.00%
First Data Corp [Member]
Concentration Risk, Percentage	10.00%	8.00%	10.00%	7.00%

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Note 9 - Commitments and Contingencies (Details Textual)									1 Months Ended	12 Months Ended
	Mar. 01, 2021 USD ($)	Jul. 07, 2020 USD ($)	Feb. 25, 2020 USD ($) shares	Sep. 26, 2019 USD ($) ft²	Jun. 01, 2019 USD ($) ft²	Mar. 11, 2019 USD ($) ft²	Oct. 05, 2017	Aug. 01, 2017 USD ($)	May 31, 2013 USD ($) ft²	Dec. 31, 2016 USD ($)	Jun. 30, 2020 USD ($)	Mar. 31, 2018 shares	Jul. 18, 2017 shares	Aug. 06, 2014 shares
Operating Leases, Future Minimum Payments, Remainder of Fiscal Year											$ 122,000
Reverse Stock Split [Member]
Stockholders' Equity Note, Stock Split, Conversion Ratio							10
Lawsuit Against Aptito.com, Inc. and Shareholders of Aptito.com, Inc. [Member] | Aptito, LLC [Member]
Number of Parent's Shares in Dispute Related to Acquisition (in shares) | shares												125,000	125,000	125,000
Lease Agreement for Office at Florida [Member]
Area of Real Estate Property (Square Foot) | ft²				5,875					4,101
Periodic Lease and Rental Expense, Per Month				$ 16,156				$ 14,354	$ 16,800	$ 19,448
Periodic Lease and Rental Expense, Annual				$ 193,875				$ 172,248		$ 233,377
Lessee, Operating Lease, Term of Contract (Year)				5 years				5 years
Lease Agreement for Office at Florida [Member] | Forecast [Member]
Additional Periodic Lease and Rental Expense, Per Month	$ 2,000
Lease Agreement for Office at Florida [Member] | Subsequent Event [Member]
Periodic Lease and Rental Expense, Per Month		$ 11,500
Lease Agreement for Office in Yekaterinburg, Russia [Member]
Area of Real Estate Property (Square Foot) | ft²					1,654
Periodic Lease and Rental Expense, Annual					$ 21,000
Lease Agreement for Office in Moscow Russia [Member]
Area of Real Estate Property (Square Foot) | ft²						1,600
Periodic Lease and Rental Expense, Annual						$ 50,900
Processing Provider 1 [Member]
Minimum Monthly Fees Per Month											$ 150,000
Chief Legal Officer and Corporate Secretary [Member]
Annual Base Salary			$ 250,000
Employment Agreement, Term (Year)			5 years
Employment Agreement, Renewal Term (Year)			1 year
Employment Agreement, Signing Bonus, Shares (in shares) | shares			10,000
Employment Agreement, Bonus Percent			50.00%

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Note 9 - Commitments and Contingencies - Minimum Lease Payments for North American Transaction Solutions Segment (Details) - USD ($)	Jun. 30, 2020	Dec. 31, 2019
2020 (remainder of year)	$ 86,124
2021	172,248
2022	100,478
Total	358,850
Amount representing imputed interest	(42,732)
Total operating lease liability	316,118
Current portion of operating lease liability	(68,859)	$ (133,727)
Operating lease liability (net of current portion)	$ 247,259	$ 247,259
Remaining term on Lease (Year)	2 years
Incremental borrowing rate	12.00%

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Note 10 - Related Party Transactions (Details Textual) - USD ($)				3 Months Ended		6 Months Ended
	Aug. 11, 2020	Apr. 28, 2020	Mar. 27, 2020	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Aug. 03, 2020	Jul. 01, 2020	Apr. 23, 2020	Dec. 31, 2019
Due to Related Parties, Current, Total				$ 81,591		$ 81,591					$ 126,662
Agreement, Maximum Notes Payable to be Paid				10,082,549		10,082,549					9,431,157
Esousa Holdings LLC [Member]
Sale of Promissory Note, Percent of Gross Proceeds of Equity Sale Used to Finance Purchase of Note			88.00%
Sale of Promissory Note, Periodic Purchase Amount			$ 148,000
Proceeds from Sale of Notes Payable		$ 143,000	148,000
Promissory Note Issued to RBL Capital Group [Member]
Agreement, Maximum Notes Payable to be Paid			$ 2,000,000							$ 5,000,000
Subsequent Event [Member] | Esousa Holdings LLC [Member]
Stock Issued During Period, Shares, New Issues (in shares)	66,190
Subsequent Event [Member] | RBL Capital Group, LLC [Member]
Proceeds from Sale of Notes Payable	$ 707,000
Subsequent Event [Member] | Promissory Note Issued to RBL Capital Group [Member]
Agreement, Maximum Notes Payable to be Paid								$ 15,000,000
Prime Portfolios, LLC [Member]
Payments for Commissions				18,000		58,000	$ 36,000
Key Members of Management Owned Companies [Member]
Payments for Commissions				186,000	$ 195,000	412,000	$ 365,000
Chief Executive Officer [Member]
Due to Related Parties, Current, Total				$ 61,000		$ 61,000					$ 127,000
Chief Executive Officer [Member] | Subsequent Event [Member]
Due to Related Parties, Current, Total									$ 74,000

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Note 11 - Stockholders' Equity (Details Textual)						3 Months Ended		6 Months Ended		12 Months Ended
	Oct. 23, 2019 shares	Nov. 27, 2018 shares	Oct. 05, 2017	Oct. 02, 2017 shares	Jun. 12, 2015 shares	Jun. 30, 2020 USD ($) $ / shares shares	Jun. 30, 2019 USD ($)	Jun. 30, 2020 USD ($) $ / shares shares	Jun. 30, 2019 USD ($)	Dec. 31, 2019 shares	Jun. 13, 2016 shares
Increase (Decrease) in Common Stock Shares Authorized (in shares)				(300,000,000)	100,000,000
Common Stock, Shares Authorized (in shares)				100,000,000	300,000,000	100,000,000		100,000,000		100,000,000	400,000,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance (in shares)						314,218		314,218		314,218
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term (Year)								153 days
Share-based Payment Arrangement, Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance (in shares)						154,005		154,005
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Ending Balance (in dollars per share) | $ / shares						$ 10.73		$ 10.73
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term (Year)								7 years 211 days		8 years 29 days
Plan 2013 [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized (in shares)	177,000	178,900
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized (in shares)	950,000	773,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant (in shares)						153,709		153,709		252,436
Plan 2013 [Member] | Board of Directors [Member]
Share-based Payment Arrangement, Expensed and Capitalized, Amount, Total | $						$ 7,500	$ 15,000	$ 15,000	$ 30,000
Reverse Stock Split [Member]
Stockholders' Equity Note, Stock Split, Conversion Ratio			10

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Note 11 - Stockholders' Equity - Change in Stockholders' Equity (Details) - USD ($)	3 Months Ended				6 Months Ended
	Jun. 30, 2020	Mar. 31, 2020	Jun. 30, 2019	Mar. 31, 2019	Jun. 30, 2020	Jun. 30, 2019
Balance	$ 2,834,345	$ 4,040,659	$ 7,462,098	$ 8,596,466	$ 4,040,659	$ 8,596,466
Share based compensation	7,500	45,897	2,005,840	15,006
Net loss	(338,414)	(1,378,026)	(1,577,672)	(1,134,813)	(1,716,441)	(2,712,483)
Comprehensive loss - foreign currency translation	(65,990)	130,813	(5,537)	(14,561)	64,824	(20,099)
Expenses paid in connection with ESOUSA transaction		(5,000)
ESOUSA transaction	151,482
Balance	$ 2,588,922	$ 2,834,345	$ 7,884,729	$ 7,462,098	$ 2,588,922	$ 7,884,729
Common Stock [Member]
Balance (in shares)	4,125,754	4,111,082	3,865,467	3,863,019	4,111,082	3,863,019
Balance	$ 412.13	$ 410.66	$ 386.55	$ 386.30	$ 410.66	$ 386.30
Share based compensation (in shares)	4,054	14,672	319,047	2,448
Share based compensation	$ 0.41	$ 1.47	$ 23.90	$ 0.24
Net loss
Comprehensive loss - foreign currency translation
Expenses paid in connection with ESOUSA transaction
ESOUSA transaction (in shares)	65,862
ESOUSA transaction	$ 6.59
Balance (in shares)	4,195,670	4,125,754	4,184,514	3,865,467	4,195,670	4,184,514
Balance	$ 419.13	$ 412.13	$ 410.45	$ 386.55	$ 419.13	$ 410.45
Additional Paid-in Capital [Member]
Balance	185,337,965	185,297,069	183,261,238	183,246,232	185,297,069	183,246,232
Share based compensation	7,500	45,896	2,005,816	15,006
Net loss
Comprehensive loss - foreign currency translation
Expenses paid in connection with ESOUSA transaction		(5,000)
ESOUSA transaction	151,475
Balance	185,496,940	185,337,965	185,267,054	183,261,238	185,496,940	185,267,054
AOCI Attributable to Parent [Member]
Balance	(2,143,374)	(2,274,187)	(2,246,724)	(2,232,163)	(2,274,187)	(2,232,163)
Share based compensation
Net loss
Comprehensive loss - foreign currency translation	(65,990)	130,813	(5,537)	(14,561)
Expenses paid in connection with ESOUSA transaction
ESOUSA transaction
Balance	(2,209,364)	(2,143,374)	(2,252,261)	(2,246,724)	(2,209,364)	(2,252,261)
Noncontrolling Interest [Member]
Balance	(243,227)	(231,999)	(139,703)	(125,737)	(231,999)	(125,737)
Share based compensation
Net loss	(13,724)	(11,228)	(40,225)	(13,966)
Comprehensive loss - foreign currency translation
Expenses paid in connection with ESOUSA transaction
ESOUSA transaction
Balance	(256,951)	(243,227)	(179,928)	(139,703)	(256,951)	(179,928)
Retained Earnings [Member]
Balance	(180,117,432)	(178,750,634)	(173,413,099)	(172,292,252)	(178,750,634)	(172,292,252)
Share based compensation
Net loss	(324,690)	(1,366,798)	(1,537,447)	(1,120,847)
Comprehensive loss - foreign currency translation
Expenses paid in connection with ESOUSA transaction
ESOUSA transaction
Balance	$ (180,442,122)	$ (180,117,432)	$ (174,950,546)	$ (173,413,099)	$ (180,442,122)	$ (174,950,546)

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Note 12 - Warrants and Options (Details Textual) - USD ($) $ / shares in Units, $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance (in shares)	314,218	314,218
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term (Year)	153 days
Non-Incentive Plan Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance (in shares)	323,498
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Ending Balance (in dollars per share)	$ 21.84
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Intrinsic Value	$ 0
Warrants to Purchase Common Stock [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights (in shares)	728,583
Class of Warrant or Right, Exercise Price of Warrants or Rights (in dollars per share)	$ 6.18	$ 6.18
Warrants and Rights Outstanding, Remaining Contractual Term (Year)	2 years 182 days	3 years
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Ending Balance (in dollars per share)	$ 3.27
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Ending Balance (in dollars per share)	$ 134

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Note 13 - Subsequent Event (Details Textual) - USD ($)	Aug. 11, 2020	Apr. 28, 2020	Mar. 27, 2020	Aug. 03, 2020	Jun. 30, 2020	Apr. 23, 2020	Dec. 31, 2019
Agreement, Maximum Notes Payable to be Paid					$ 10,082,549		$ 9,431,157
Esousa Holdings LLC [Member]
Proceeds from Sale of Notes Payable		$ 143,000	$ 148,000
Subsequent Event [Member] | RBL Capital Group, LLC [Member]
Proceeds from Sale of Notes Payable	$ 707,000
Subsequent Event [Member] | Esousa Holdings LLC [Member]
Stock Issued During Period, Shares, New Issues (in shares)	66,190
Subsequent Event [Member] | Mullen [Member]
Receivable with Imputed Interest, Face Amount	$ 500,000
Receivable with Imputed Interest, Effective Yield (Interest Rate)	14.00%
Promissory Note Issued to RBL Capital Group [Member]
Agreement, Maximum Notes Payable to be Paid			$ 2,000,000			$ 5,000,000
Promissory Note Issued to RBL Capital Group [Member] | Subsequent Event [Member]
Agreement, Maximum Notes Payable to be Paid				$ 15,000,000