UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-K/A




(Mark
One)


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




For the
fiscal year ended




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




For the
transition period from    April 1,
2010to December 31,
2010




Commission
file number 000-51108





Net
      Element, Inc.(Exact
      name of registrant as specified in its
charter)




Delaware
                    
                    20-0715816(State
      or other jurisdiction of incorporation or
                      organization)
                    
                    (IRS
      Employer Identification
Number)




1450 S.
Miami Avenue,


Miami, Florida
33130


(Address
of principal executive offices)





(305)
507-8808


(Registrant’s
telephone number, including area code)




Securities
registered under Section 12(b) of the Exchange Act: None




Securities
registered under Section 12(g) of the Exchange Act:




Common
      Stock, par value $0.001 per share(Title
      of class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


o
YES      x NO





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


o
YES     x NO





Note – Checking the box above
will not relieve any registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.




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.


x    
YES     o NO




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





x YES (None Required)
o NO




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x




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





Large
      accelerated filer o
              Accelerated
      filer oNon-accelerated
      filer o (Do
      not check if a smaller reporting company)
              Smaller
      reporting company    x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).


o
YES            x NO





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.





Note. —If a determination as
to whether a particular person or entity is an affiliate cannot be made without
involving unreasonable effort and expense, the aggregate market value of the
common stock held by non-affiliates may be calculated on the basis of
assumptions reasonable under the circumstances, provided that the assumptions
are set forth in this Form.





The aggregate market value
of the voting common equity held by non-affiliates was $218,562 based upon the
last traded price of $0.01 per share on January 21, 2011.




Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.





At January 31, 2011, the
number of shares outstanding of the issuer’s common stock was 642,119,111
shares.




DOCUMENTS
INCORPORATED BY REFERENCE




NONE








Explanatory Note





Net
Element, Inc. is filing this amended Annual Report on Form 10-K/A in
connection with the correction of typographical errors and certain other
non-material disclosures and formatting changes to financial statement tabular
presentations. The Annual Report is amended and restated in its entirety for the
convenience of the reader.




Net
Element, Inc. is filing this Annual Report on Form 10-K for the transition
period from April 1, 2010 to December 31, 2010 as a result of a change in its
fiscal year end from March 31 to December 31. Additionally, included in this
Annual Report is information relating to the Company’s acquisitions of
Motorsport, LLC and Music1, LLC, each effective as of February 1, 2011, as more
fully described herein. Net Element, Inc. had previously registered its
securities pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) and has been a reporting company subject to the
requirements of Section 13 of the Exchange Act since 2005.





Defined
Terms





Net
Element, Inc. is a corporation organized under the laws of the State of
Delaware. As used in this report, unless the context otherwise requires, the
terms “Net Element,” “Company,” “we,” “us,” “our” and “group” refer to Net
Element, Inc. and, as applicable, its majority-owned and consolidated
subsidiaries.





Forward-Looking
Statements




This
report contains forward-looking statements that reflect the current views of our
management with respect to future events. Forward-looking statements generally
are identified by the words “expects,” “anticipates,” “believes,” “intends,”
“estimates,” “aims,” “plans,” “will,” “will continue,” “seeks” and similar
expressions. Forward-looking statements are based on current plans, estimates
and projections, and therefore you should not place too much reliance on them.
Forward-looking statements speak only as of the date they are made, and we
undertake no obligation to update any forward-looking statement in light of new
information or future events, although we intend to continue to meet our ongoing
disclosure obligations under the U.S. securities laws and under other applicable
laws. Forward-looking statements involve inherent risks and uncertainties, most
of which are difficult to predict and are generally beyond our control. We
caution you that a number of important factors could cause actual results or
outcomes to differ materially from those expressed in, or implied by, the
forward-looking statements. These factors include, among other factors: the
development or acquisition of profitable operating businesses, attracting and
retaining competent management and other personnel, successful implementation of
our business strategies, and successful integration and promotion of any
business developed or acquired. If these or other risks and uncertainties
materialize, or if the assumptions underlying any of these statements prove
incorrect, our actual results may be materially different from those expressed
or implied by such statements.




World
Wide Web addresses contained in this report are for explanatory purposes only
and they (and the content contained therein) do not form a part of and are not
incorporated by reference into this report.


i





NET
ELEMENT, INC.





Form
10-K


For the
Year Ended December 31, 2010


INDEX




PageNo.PART
      IItem
      1.
                Business
                
                1Item
      1B.
                Unresolved
      Staff Comments
                
                21Item
      2.
                Properties
                
                21Item
      3.
                Legal
      Proceedings
                
                21Item
      4.
                (Removed
      and Reserved)
                
                21PART
      IIItem
      5.
                Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
                
                21Item
      6.
                Selected
      Financial Data
                
                24Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                24Item
      7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                
                36Item
      8.
                Financial
      Statements and Supplementary Data
                
                36Item
      9.
                Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
                
                54Item
      9A.
                Controls
      and Procedures
                
                54Item
      9B.
                Other
      Information
                
                56PART
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                
                57Item
      11.
                Executive
      Compensation
                
                62Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                
                65Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence.
                
                66Item
      14.
                Principal
      Accounting Fees and Services.
                
                68PART
      IVItem
      15.
                Exhibits,
      Financial Statement Schedules
                
                69Signatures
                
                74




ii


PART I





Item
1.   Business.




Development
of Business – Overview




Net Element, Inc. (formerly TOT Energy, Inc.) is an online media and
technology company. Since April 1, 2010, we have pursued a strategy to develop
and/or acquire technology and applications for use in the online media industry.
In furtherance of this strategy, on December 14, 2010, we acquired Openfilm,
LLC, a Florida limited liability company, engaged in the development of
technology and operation of a website that supports the advancement of
independent film on the Internet. Additionally, on February 1, 2011, we acquired
Motorsport, LLC, a Florida limited liability company that holds 80% of the
outstanding common stock of Motorsport.com, Inc., a Florida corporation engaged
in the operation of a news and information website relating to the international
motorsport industry, and Music1, LLC, a Florida limited liability company, that
owns 97% of the membership interests of A&R Music Live, LLC, a Georgia
limited liability company that owns and operates two websites that provide an
online social community and marketplace for musicians, songwriters, producers
and record companies and an opportunity to showcase artist talents. As a result
of these acquisitions, we now operate several online media websites in the film,
auto racing and emerging music talent markets.
  We
believe that the technology platforms and development expertise acquired from
Openfilm will enable us to enhance the digital distribution of content in a
variety of industries. Accordingly, we intend to explore the possibility of
acquiring other internet portal properties and companies with similar goals of
connecting people in various vertical markets, such as the medical, music, film,
sports and legal markets.




Net
Element, Inc. was organized on February 6, 2004 under the laws of the State of
Delaware under the name Splinex Technology, Inc., which was a wholly-owned
subsidiary of Splinex, LLC, a Florida limited liability company, and
was spun-off pursuant to a merger with Ener1 Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Ener1, Inc., (Nasdaq: HEV), a
Florida corporation, co-founded by our President, Mike Zoi, that designs,
develops and manufactures high-performance, rechargeable, lithium-ion batteries
and battery systems in the transportation and energy markets. The Company
initially intended to develop advanced technologies in the three-dimensional or
3D computer graphics industry. Since October 28, 2003 (“Inception”), the date of
formation of Splinex, LLC, through December 17, 2007, we operated in a
development phase typical of a software company and focused on developing
technologies and products and securing intellectual property rights while we
developed relationships with potential customers and resellers. Under an
agreement effective April 1, 2004 (the “Contribution Agreement”), Splinex, LLC
contributed substantially all of its assets, liabilities and operations to the
Company. Due to lack of significant sales, we substantially reduced our
workforce and overhead costs beginning in September 2005. From September 2005
through July 2007, Ener1 Group, Inc., a related party, loaned us money to fund
our operations. In July 2007, Ener1 Group, Inc. stopped funding our
operations.




On
December 17, 2007, (1) certain holders, who had received shares in the Company
as distributions from Splinex LLC, transferred their ownership of 35,162,334
shares of common stock of the Company to Splinex LLC for nominal consideration,
and (2) Bzinfin, S.A., a British Virgin Islands limited corporation (indirectly
owned by an affiliate of Ener1 Group, Inc., a Florida company of which Mike Zoi
(our current Chief Executive Officer and President) is a shareholder and
director and which is the majority shareholder of Ener1, Inc.) and Ener1 Group
assigned debt obligations of the Company to Splinex LLC in the amount of
$2,805,207 and $845,864, respectively. Under a Purchase Agreement dated December
17, 2007, TGR Capital, LLC (which changed its name to Enerfund, LLC in September
2008), a Florida limited liability company (“Enerfund”), which is wholly-owned
by Mike Zoi, acquired all of the membership interests in Splinex LLC, thereby
giving Enerfund control of Splinex LLC.




Under an
Exchange Agreement dated December 18, 2007, we agreed to issue 113,500,000 newly
issued shares of the Company to Splinex LLC of which 8,500,000 shares were
issued to Bzinfin and 2,125,000 were issued to a former affiliate of Splinex,
LLC. Splinex LLC owned 98,157,334 shares of the Company as of December 17, 2007
and an aggregate of 201,032,334 shares after the completion of the Exchange
Agreement on December 18, 2007. We had 100,757,769 shares outstanding at
December 17, 2007 and 214,257,769 shares outstanding after the completion of the
Exchange Agreement. In June 2008, Splinex, LLC changed its name to TGR Energy,
LLC.




Until
December 31, 2010, short term financing was provided by TGR Energy, LLC (“TGR”),
an entity controlled by our president, Mike Zoi, pursuant to a Subscription
Agreement dated August 7, 2008 (the “Subscription Agreement”). TGR agreed to
provide up to $2,000,000 (the “Investment Amount”) in exchange for up to
100,000,000 shares of common stock and warrants to purchase up to 50,000,000
shares of common stock at an exercise price of $0.05 per share. Pursuant to the
Subscription Agreement, TGR funded the Investment Amount as required in our
operational budget. On January 12, 2010, TGR agreed to increase its funding
commitment from $2,000,000 to $4,000,000 in exchange for up to an additional
100,000,000 shares of our common stock and warrants to purchase up to 50,000,000
shares of our common stock at an exercise price of $0.05 per share for a period
of five years from date of issuance. TGR has funded the full amount required
under the Subscription Agreement.





On
December 31, 2010, we entered into a Subscription Agreement with Enerfund, LLC
(a company controlled by Mike Zoi) (the “Enerfund Subscription Agreement”)
pursuant to which we received an aggregate of $2,000,000 in exchange for
200,000,000 shares of our common stock and warrants to purchase 100,000,000
shares of our common stock at an exercise price of $0.05 per share for a period
of five years from date of issuance. The proceeds of the Enerfund Subscription
Agreement will be used to fund our operations.


1





On July 16, 2008, we entered into a Joint Venture Agreement (the
“JV Agreement”) with Evgeny Bogorad (“Bogorad”), owner of Sibburnefteservis,
Ltd. of Novosibirsk, Russia, an oil services company (“SIBBNS”). Pursuant to the
JV Agreement, Bogorad contributed certain of SIBBNS’ assets and personnel to a
joint venture company named TOT-SIBBNS, Ltd., a Russian corporation
(“TOT-SIBBNS”). An independent appraisal company appraised the contributed
assets at USD$6,221,881.We ended development stage activity on July 16, 2008
when we acquired a 75% interest in the TOT-SIBBNS joint venture and began
operations in the oil and gas service industry, including the exploration,
development, production, and marketing of crude oil and natural gas in Russia
and Kazakhstan. At the closing on July 16, 2008, we issued to Bogorad 3,000,000
shares of our common stock in exchange for a 75% interest in
TOT-SIBBNS.





TOT-SIBBNS
obtained its first contract and began drilling operations in the Fall 2008.
However, financial constraints and the declining price of oil resulted in a
suspension of drilling operation in January 2009. Drilling operations did not
recommence during the Winter 2009 and most employees were furloughed in April
2009.





TOT-SIBBNS
had expectations of continuing exploratory drilling (both through its existing
customer and new customers) for the 2009/2010 drilling season as the price of
oil had risen significantly and TOT-SIBBNS was able to secure an additional
drilling contract in November 2009. However, in January 2010, it became
questionable whether activities with TOT-SIBBNS’ initial customer would
recommence in the short term, and there remained uneasiness in the market over
the continued improvement in crude oil prices, which had a negative impact on
the exploratory drilling market in Russia at that time. Accordingly, on January
27, 2010, after several weeks of exploring other business opportunities, we
altered our business focus and decided to exercise our option to unwind the
joint venture and pursue other development opportunities.




We
executed an unwind agreement with TOT-SIBBNS whereby we exchanged our 75%
interest in TOT-SIBBNS for the 3,000,000 shares given to Evgeny Bogorad in 2008.
The unwind of the joint venture was consummated as of March 31, 2010. The unwind
of the TOT-SIBBNS joint venture has been accounted for using the guidance
provided in ASC 845 (previously APB 29), as a disposal “other than by sale”
similar to a spin-off transaction, with the shares received reflected as
treasury stock and recorded on our balance sheet at its carrying basis in the
net assets of the joint venture as of March 31, 2010.





Korlea-TOT
Energy s.r.o. (“KORLEA-TOT”) is our 51% joint venture with Korlea
Invest Holding AG of Switzerland (“Korlea”) who is a provider and trader of
energy assets in the Czech Republic. The joint venture, Korlea-TOT, established
as of July 17, 2008, was expected to assist in the marketing of oil assets
sourced by us and our contacts and affiliates. There has been no activity to
date with this joint venture. Accordingly, in November 2010, we sent Korlea
notice of our intention to unwind this arrangement. We intend to sell our
ownership in the KORLEA-TOT joint venture to Korlea in exchange for a cash
payment equal to 51% of the cash balance in the joint venture on the date of
unwind. Consummation of this transaction will be subject to obtaining certain
approvals and making certain filings overseas. It is expected that this
transaction will be completed during the first quarter of 2011.





Since
April 1, 2010, we have engaged in the development of an alternative energy
services business and we have concurrently pursued a strategy to develop and/or
acquire technology and applications for use in the online media industry. In
furtherance of this strategy, we acquired Openfilm, LLC, a Florida limited
liability company, engaged in the development of technology and operation of a
website that supports the advancement of independent film on the Internet, as
more fully described below. We believe that our technology platforms and
development expertise will enable us to enhance the digital distribution of
content in a variety of industries. Accordingly, in addition to our acquisition
of Openfilm, we intend to explore the possibility of acquiring other internet
portal properties and companies with similar goals of connecting people in
various vertical markets, such as the medical, music, film, sports and legal
markets. In this regard, on February 1, 2011, we acquired Motorsport, LLC and
Music1, LLC, each as more fully described below. As of December 31, 2010, we
have terminated our efforts to develop an alternative energy services business
in order to focus on our growing online media businesses.




In
pursuing our strategy to develop an online media company, from time to time, we
may be engaged in various discussions to acquire businesses or formulate joint
venture or other arrangements. Our policy is not to disclose discussions or
potential transactions until definitive agreements have been executed. Where
appropriate, acquisitions will be financed with equity shares and this may
result in substantial dilution to existing stockholders.


2





Several
factors raise significant doubt as to our ability to continue operating as a
going concern. These factors include our history of net losses and, from March
31, 2010 until December 14, 2010, due to the unwind of the TOT-SIBBNS joint
venture, we had no significant operations until the acquisition of Openfilm.
Additionally, as of December 31, 2010, we had a working capital deficit.
Management recognizes that we must raise capital sufficient to fund business
activities until such time as we can generate sufficient revenues and net cash
flows in amounts necessary to enable us to continue contemplated operations, of
which there can be no assurance. We are dependent upon TGR, Enerfund or Mike Zoi
(as a result of his controlling interest in TGR and Enerfund and our dependence
on the continued support of our operations by Mr. Zoi) to fund our operations.
Our independent auditors’ report on our financial statements for the year ended
December 31, 2010 contains an explanatory paragraph about our ability to
continue as a going concern. Management believes that our current operating
strategy, as described in the preceding paragraphs and the proceeds received
from the Enerfund Subscription Agreement and expected continued financial
support from Mr. Zoi, provides the opportunity for us to continue as a going
concern; however, there is no assurance this will occur and Mr. Zoi is not
obligated to continue to fund our operations.





On
November 11, 2010, our Board of Directors adopted a resolution changing our
fiscal year end from March 31 to December 31. Management believes that this
change will allow better alignment of our annual planning and budget processes
with our new business strategy as we are no longer engaged in the seasonal oil
and gas business.





Recent
Acquisitions





Openfilm





As part
of our strategy to develop an online media company, on December 14, 2010, we
entered into a purchase agreement (the “Openfilm Purchase Agreement”) with the
members of Openfilm, LLC, a Florida limited liability company engaged in the
development of technology and operation of a website that supports the
advancement of independent film on the Internet. Mike Zoi, our President,
through his control of Enerfund, LLC and MZ Capital, LLC, both Florida limited
liability companies, held approximately 70% of Openfilm’s outstanding membership
interests prior to the acquisition by the Company. Pursuant to the Openfilm
Purchase Agreement, we acquired all of the outstanding membership interests in
Openfilm by exchanging for such interests an aggregate of 107,238,421 shares of
our common stock to the security holders of Openfilm, of which 45,937,500 shares
were issued to Enerfund (a company controlled by Mike Zoi), 29,062,500 shares
were issued to MZ Capital, LLC (a company controlled by Mike Zoi), 24,950,000
shares were issued to Dmitry Kozko, CEO of Openfilm, and an aggregate of
7,288,421 shares were issued to the remaining seven non-controlling security
holders of Openfilm. Upon completion of the acquisition transaction on December
14, 2010, Openfilm became a wholly-owned subsidiary of the Company.
Additionally, in connection with the acquisition of Openfilm, we established
NetLab Systems, LLC (NetLab), a Florida limited liability company, and
transferred the ownership of certain intellectual property assets from Openfilm
to NetLab. Openfilm and NetLab entered into a Technology Transfer and License
Agreement granting Openfilm the right to use certain technology transferred to
NetLab. For more information, see “– Licensing Arrangement between Openfilm and
NetLab” below. Research and development activities are conducted primarily
through Zivos, LLC, a Ukrainian limited liability company and wholly-owned
subsidiary of Openfilm. Up until the date of acquisition, Openfilm operations
were funded primarily by entities controlled by our President, Mike
Zoi.





Motorsport.com





On
February 1, 2011, we entered into a purchase agreement (the “Motorsport Purchase
Agreement”) with Enerfund, LLC, an entity controlled by Mike Zoi, to purchase
all of the issued and outstanding interests of Motorsport, LLC, a Florida
limited liability company that held 80% of the outstanding common stock of
Motorsport.com, Inc., a Florida corporation engaged in the operation of a news
and information website relating to the international motorsport industry.
Motorsport, LLC purchased the interest of Motorsport.com, Inc. on December 17,
2010. The remaining 20% of the outstanding common stock of Motorsport.com, Inc.
is held by the original stockholders (4 persons) of Motorsport.com,
Inc.





Purchase Price. Pursuant to
the Motorsport Purchase Agreement, on February 1, 2011, we paid Enerfund an
aggregate of $130,000 (excluding a $20,000 contingent payment relating to the
purchase of certain domain names) and agreed to take over responsibility for the
obligations contained in the purchase agreement of December 17, 2010, which
includes, among other things, the aggregate payment to the original stockholders
of Motorsport.com, Inc. of an additional $450,000 payable in four quarterly
installments commencing on December 1, 2013. In the event the domain names and
related registrations are unable to be purchased on or before June 16, 2011,
then we will not have to make the contingent payment ($20,000). The original
sellers have a security interest in the domains of Motorsport.com, Inc. as
collateral for payment of the additional purchase price. Failure to pay the
additional purchase price when due may result in forfeiture of the shares in
Motorsport.com, Inc. held by us.


3





Purchase Option on Outstanding
Shares. In addition, we will have the option until December 16, 2018 to
purchase the remaining interests of Motorsport.com, Inc. currently held by the
original stockholders. We may exercise this option at any time upon thirty days
prior written notice and the payment, in cash or preferred stock of
Motorsport.com, Inc., as follows:





(i)
            until
      December 16, 2015: $0.1075 per
share;


(ii)
            from
      December 17, 2015 through December 16, 2016: $0.1185 per
      share;


(iii)
            from
      December 17, 2016 through December 16, 2017: $0.1305 per share;
      and


(iv)
            from
      December 17, 2017 through December 16, 2018: $0.1435 per
      share.





At our
option, we can pay the foregoing purchase price for the additional shares held
by the original sellers in either (i) cash or (ii) preferred stock of
Motorsport.com, Inc., which preferred stock will have a dividend payment equal
to 2.5% of the value of the preferred stock on the date of issuance payable
quarterly from the date of issuance. We may redeem any preferred stock issued at
any time upon the payment in full of the value of the preferred stock as of the
date of issuance.




Music1





In
furtherance of our strategy to become an online media company, on February 1,
2011, we acquired Music1, LLC, a Florida limited liability company, from
Enerfund (an investment company controlled by Mike Zoi), for an aggregate
purchase price of $15,000. Music1, LLC owns 97% of the membership interests of
A&R Music Live, LLC, a Georgia limited liability company that owns and
operates two websites that provide an online social community and marketplace
for musicians, songwriters, producers and record companies and an opportunity to
showcase artist talents. Music1, LLC purchased its interest in A&R Music
Live, LLC on November 8, 2010. The remaining 3% of the membership interests of
A&R Music Live, LLC is owned by Stephen Strother, the Founder and President
of Music1. We are required to invest at least $500,000 in Music1 by December 31,
2012 (which amount may include salaries and other expenses of Music1). In the
event such amount is not invested in Music1 by December 31, 2012 or the
employment agreement of Mr. Strother is terminated other than for cause or good
reason on or before May 7, 2012, then Mr. Strother will have the right to
repurchase Music1 for $1.00. Additionally, Mr. Strother has granted a royalty
free license to Music1 to use certain technology owned by him for the term of
his employment agreement. For more information, see “ – License Agreement with
Stephen Strother” below.








Business
Description




As a
result of the acquisitions described above, we operate several online media
websites in the film, auto racing and emerging music talent markets, as more
fully described below. We intend to continue to seek additional opportunities to
exploit our technologies in other vertical markets, such as legal and
medical.





Openfilm
Development of Business





Openfilm,
LLC was formed as a Florida limited liability company on November 16, 2007 under
the name Zivos, LLC. On April 9, 2008, Zivos, LLC changed its name to Openfilm,
LLC. Openfilm is an online media company that supports a community of
independent film enthusiasts and filmmakers. Openfilm owns and operates a
website ( www.Openfilm.com ),
which is based on a proprietary video platform (licensed to Openfilm by NetLab)
and certain know-how and methods developed by Openfilm that unite elements of
the film industry that are of most interest and value to Openfilm’s users in a
single location. Openfilm derives revenues from video advertising, video content
syndication, display advertising and membership fees, as well as, contest entry
fees, as discussed more fully below.


4





Openfilm
has developed an award-winning website that currently showcases over 7,200 films
of various lengths and genres, aggregated from film festivals, film schools and
independent filmmakers from around the world. Films are displayed online in
large HD video format and filmmakers are able to upload their films and interact
with other users through a networking platform.





Openfilm
offers aspiring filmmakers an opportunity to have their work seen by a
distinguished group of Hollywood insiders who make up the Openfilm Advisory
Board, including actor James Caan (Chairman), fellow Godfather co-star Robert
Duvall, director Marc Rydell and actor and filmmaker Scott Caan. Advisory Board
members act as a group of “mentors” who interact with Openfilm’s premium members
through online web chats that are held on a periodic basis. The Advisory Board
members also serve as judges for various competitions promoted by
Openfilm.





The
proprietary technologies and software platform developed for Openfilm have
applications in many other vertical online markets that will enable Openfilm and
NetLab to generate revenues through the sale of software licensing, market
reports, e-commerce transactions, festival services and others products and
services. Openfilm believes that it is well positioned to capitalize on the
rapidly growing independent film market (estimated by eMarketer, Inc., an
independent digital marketing research company, to be in excess of $4 billion
annually), as well as the online advertising market (estimated by eMarketerTM to
be approximately $25.8 billion in 2010).





Openfilm.com
Website





Openfilm.com is an online
platform created from various proprietary technologies that provides a unique
value proposition for independent filmmakers, advertisers, film festivals, film
schools and viewers. The website provides its community of filmmakers and film
enthusiasts with an opportunity to interact with each other and directly with
“Hollywood insiders” who comprise our Advisory Board. Poised to capitalize on
the emerging online video market, Openfilm believes its software (licensed from
NetLab) will transform the way independent films are discovered, produced and
distributed.





Openfilm.com
offers filmmakers free basic services, including unlimited uploads and streaming
of approved premium HD video content. In addition, Openfilm provides a revenue
sharing program for filmmakers, including advertising revenues derived from
distribution of their film content, thus allowing Openfilm to attract some of
the best content creators in the world, as well as their existing fan
bases.





Content





Openfilm
has aggregated a content library of over 7,200 independently produced films from
film schools, festivals, organizations and independent filmmakers. All content
goes through various screenings to ensure it meets specified quality and
copyright standards. The films are then converted to HD formats to ensure they
will be seen in the highest quality on the Internet. The Openfilm library
consists of short, feature-length and animated works.





Recognition
and awards





To date,
Openfilm has been recognized by industry publications and has received the
following industry awards:




·
            Movie Maker Magazine named
      Openfilm one of the “top 50 websites for filmmakers” – June
      2009


·
            13thAnnual Webby Award Official
      Honoree – May 2009


·
            Reelseo.com named Openfilm “The
      Lexus of Video Sharing Social Communities” – February
      2009


·
            Video Maker Magazine named
      Openfilm “Video Sharing Site of 2008” – December
    2008




Openfilm
Growth Strategy





Openfilm
intends to grow its membership base organically and through premium upgrades in
membership status, and also to acquire online properties with targeted
communities that will maximize traffic to the Openfilm website. Maximization of
traffic to the Openfilm website will increase membership enrollment and provide
an enhanced value proposition for advertisers.


5





Additionally,
Openfilm (in conjunction with NetLab) intends to provide services to film
festivals and other film related enterprises, as well as other vertical markets
that would benefit from the technology and know-how developed for
Openfilm.





Revenue
Streams





Openfilm
has identified several revenue streams that it intends to develop further as
resources permit as follows:





Advertising





Openfilm
believes it is in a strong position to monetize its video content library
through targeted advertising based on user behaviors and also through direct
sales and distribution of films uploaded by its members. Openfilm utilizes
proprietary technology (licensed from NetLab) that tracks online user activity
on its website (in accordance with applicable Openfilm website privacy policies)
and builds profiles based on the content metadata accessed to determine the
interests of users. Based on user activity, targeted advertisements can be
offered to specific users at different areas of the website or imbedded within
the accessed content. Accordingly, multiple products and services can be offered
to users that would be of interest to them based on their activity on the
Openfilm website.




Openfilm
will offer the two most commonly used ad monetization tools for video websites,
but will bundle them with NetLab’s proprietary technology to create higher
return on investment (ROI) for advertisers. Openfilm believes it can
significantly increase click-through-rates (CTR) using NetLab’s proprietary
technology and know-how as compared with currently available methods used on
other websites. Openfilm’s behavior tracking system will further add to CTR and
enhance the user’s experience on the website. Several types of advertising
opportunities are offered through the Openfilm website:




Display Ads – traditional
banner advertising placed throughout the site will be offered in standard sizes
with a minimum insertion fee and specified rates for CPM (cost per 1,000 views).
Premium subscription members will have the option to turn off banner
advertisement exposure.




Video Insertions – small
segmented video commercials inserted into video content, similar to how
commercials are displayed on Television, and include video pre-roll, post roll,
or mid-roll insertions. The current standard compensation metric is also based
on CPM. Currently Openfilm has an arrangement with the leading ad provider in
the market to provide insertion ads until Openfilm can fully launch its behavior
tracking system, which will enable Openfilm to better target and place
ads.




Video Overlay Ads – ads that
play every 90 seconds located primarily at the bottom of film content that
generate multiple impressions per content view. These ads are currently provided
by ScanScout, the largest provider of overlay ads.





Currently,
over 80% of all Openfilm.com advertising can be found on video content pages.
Openfilm expects to be able to provide advertising opportunities with respect to
approximately 70% of all traffic to its website.





Other
revenue opportunities are available through sponsorship of a particular channel
(content categories or groupings created by users) or event on Openfilm.com.
Rates will generally be based on monthly CPM exposure.





Membership
Fees





Openfilm
offers viewers and filmmakers three levels of membership enrollment – Free, Plus
and Pro membership plans. Free membership allows users to upload films and
videos and comment on content of other members, and also view live web chats and
vote on and rate film content submissions. Premium membership services require
payment of a monthly fee and are currently available at two distinct
levels:


6





§
            “Plus”
      membership enrollment at $2.95 per month allows members all of the
      benefits of free membership plus access to a comprehensive database of
      film festivals, the ability to submit to participating contests via the
      Openfilm website, the option to sell mobile versions of their film content
      and the ability to opt in or opt out of banner advertisements. A Plus
      membership also provides the ability to solicit and accept donations to
      fund member projects and to request that Openfilm assist in obtaining
      third party syndication of the member’s
work.





§
            “Pro”
      memberships enrollment at $9.95 per month allows members to enjoy all of
      the benefits of Plus membership as well as priority uploading of new
      content, the ability to submit questions and participate in the Openfilm
      Live web chats, access to detailed earnings reports relating to the
      member’s content, direct sales of digital versions of content and other
      premium services.





All
members are afforded the opportunity to win a contract to produce a
feature-length film in conjunction with Openfilm Studios. Premium members also
have the ability to interact with Openfilm Advisory Board Members and other
celebrity guests through live web chat forums, email, and blogs. Interaction
with Advisory Board Members ranges from viewing a filmmaker’s work to chatting
with them live online or via e-mail and blogs.





Film
Festival Services




Openfilm
intends to attract independent filmmakers who actively submit to film festivals.
Film festivals attract submissions in return for potential exposure and cash
prizes to the filmmaker. There are over 6,000 Film Festivals and contests around
the world, each with average annual submissions in the hundreds. Most of these
annual entries are submitted via regular post. Very few film festivals have the
capability to receive submissions by electronic means. Openfilm has developed
software that it believes will streamline the electronic submission process,
which can be utilized with all festival formats.





The
Openfilm film festival solution incorporates patent pending software (licensed
from NetLab), the Contest System (using Launchpad), which provides film
festivals and sponsoring brands a secure online solution for hosting and
conducting competitions, including submission processing and management
applications and database reporting and analysis tools. Openfilm already
maintains a database on its website that consists of more than 2,000 film
festivals with descriptions and details for submission of content.





Designed
to meet the high demand of the film festival marketplace, the Contest System
provides easy-to-use functionality that Openfilm believes will transform the
film festival market into a predominantly online market, which will also
increase the reach and accessibility of each of the film festivals. The Contest
System will reduce administrative work and redundancies and streamline the
submission and tracking process. The Contest System also contains a judging
module, which is intended to assist judges in their review and evaluation
functions.





Openfilm
believes that through the use of the Contest System, film festivals and brands
will be provided with an added value proposition to offer their sponsors and
brands in a more streamlined, controlled and targeted environment.





The
Contest System can be modified for other contest applications. The Contest
System includes a “know-how” comparison module, which allows individuals to
upload their content and match the content to current and upcoming contests in
the database, thus ensuring compatibility with format and other contest
criteria.





Contest
Entry Fees





Contest
Entry Fees relate to the submission of films for participation in Openfilm
Studios competitions. Currently, competitions are limited to Short Film
submissions on a semi-annual basis. These contests provide the filmmaker with
the opportunity to win a management and production contract with Openfilm
Studios. Short Film entries will be accompanied by a fee that Openfilm believes
is substantially lower than comparable offline competitions. For more
information, see “ – Openfilm Studios” below.


7





Sponsorships
of Celebrity Chats





Openfilm
expects celebrity chats to be sponsored for a fee by a variety of companies. To
secure celebrity participation beyond Openfilm’s current Advisory Board members
(Advisory Board members have committed to participate in two chats per year),
Openfilm may share revenues generated from the chats with certain celebrities.
Openfilm believes that the celebrity’s participation will result in increased
traffic to the website and consequently increased subscriptions from the
celebrity’s own fan base and increased advertising revenues. Openfilm may pay a
small fee to the guest celebrity or share membership revenues for a brief period
leading up to the celebrity’s appearance.





Other Potential Revenue Streams





Openfilm
has identified other potential sources of revenue that it is currently
exploring, such as:




Guest Lectures – Using the
Openfilm platform to invite filmmakers and industry experts to conduct online
seminars. Participants would be charged an access fee to view and interact with
the expert on a real-time basis. Separate fees will be charged for those
desiring to view archived sessions. Current system processes allow Openfilm to
run up to 1,000 simultaneous sessions.





Online Education – Through
guest lectures, especially those conducted by professors, Openfilm can provide
educational seminars in various film industry areas and may seek to obtain
educational accreditation to offer online courses to institutions of higher
learning.




Targeted Screenings – The
Openfilm platform is available for public or private screenings of content,
whereby filmmakers can arrange screenings of their work for a predetermined
group and time with full chat capabilities. This service will help filmmakers
and other industry professionals discuss films and content in real-time with a
specifically targeted audience prior to distribution or production.




Motion Picture Studios – The
Openfilm platform will be able to test market films for major motion picture
studios. Upon releasing and marketing a trailer or segment of film, the Openfilm
platform, along with its community of users, can be exposed to new content for
feedback analysis. Public or private options can be accommodated, as well as
detailed customized reporting metrics.




Market Reports – As a result
of the large collection of information from the Openfilm behavior tracking
system and contest management solutions, Openfilm will be able to compile market
trend and other reports for brands/advertisers and major motion picture
studios.




E-commerce distribution of
videos – Similar to the Apple® iTunes model, which revolutionized the way
music is distributed online, Openfilm’s platform allows filmmakers to sell their
own content on the Openfilm website. Content creators will be able to sell their
own content for the price they determine and pay Openfilm a small fee.
Additionally, Openfilm can offer all types of distribution models, from mobile
downloads to downloads via television sets, and through other devices and
platforms.





Openfilm
Studios





Openfilm
has held contests accepting short film submissions from filmmakers who desire an
opportunity to win a financing and management contract to produce a feature film
with Openfilm Studios, a movie production company and wholly-owned subsidiary of
Openfilm. Openfilm Studios may raise additional funding for the feature film
production through co-production partnerships. Openfilm Studios may also sell
films it produces to film studios or distribution companies for distribution to
theatrical venues, for DVD production, network and cable broadcast, and device
downloads. Openfilm Studios intends to acquire and produce scripts and films not
associated with contests.





Openfilm
intends to promote a semi-annual competition through its website. Registered
users will be able to vote on films submitted. The voting cycle will be open for
one month after all submissions are received. The finalists will be presented to
the Advisory Board for further review and evaluation. Openfilm premium
subscribers will be invited to view select online evaluation and award events.
Winner(s) will be awarded financing and management contracts. Runners-up will be
given additional opportunities to collaborate with Openfilm
Studios.


8





Films
produced by Openfilm Studios will be distributed through various methods through
Openfilm’s distribution partners. Revenues received from contest winner
collaboration will be shared with the winning filmmaker. Openfilm is currently
looking for a strategic partner to help evolve and finance its Openfilm Studios
business. In addition to contest winners, Openfilm Studios intends to produce
films in conjunction with various collaborators, including independent
filmmakers, and engage in film distribution activities through traditional
sources as projects are completed.





Openfilm
Distribution Arrangements





Openfilm
has secured distribution partnerships to create additional revenue sources for
both Openfilm and its filmmaker members. These partnerships include arrangements
with TiVo, Inc. – owner of the TiVo® digital video recording device, MiniWeb
Technologies Limited – a 9 million member TV/Internet video distribution
services company based in the UK (which recently released an application called
Woomi for Samsung “internet-ready” TVs and DVD players that also allows Openfilm
content to be viewed by these devices), Boxee, Inc. – a digital device company
that provides Internet and social applications through TV sets, and others. Most
of these distribution arrangements permit Openfilm and its filmmakers to
distribute content that includes embedded advertising that can yield additional
revenues to Openfilm and its filmmaker members. Openfilm also has an agreement
with HCCTV (Houston Community College Television on local Comcast channel 12), a
Houston-based cable channel with over 700,000 subscribers.





Online
Video Viewing Market





According
to comScore, Inc., a leading digital information service, more than 172 million
U.S.-based Internet users viewed over 5.2 billion video content sessions online
during December 2010 for an average of approximately 14.6 hours per viewer.
Google (including its YouTube subsidiary) serviced approximately 83.5% of all
videos viewed online by U.S. viewers during the month. According to comScore,
approximately 84.6% of the total U.S. Internet audience viewed online video
during December 2010.





Although
there is a wide spectrum of video-related websites, we believe that Openfilm
serves a unique and growing audience. While YouTube is the market leader in
viewed videos, a significant portion of videos uploaded are of low production
quality. HuluTM, a collaboration of film studios and television broadcast
networks, primarily offers a selection of network TV shows, clips and movies
from its affiliates. Openfilm believes that it is currently the premiere
destination for independently produced, high quality video content and that its
product and service offerings present an attractive alternative for consumers in
this market space.




Online
Video Advertising Market





According
to eMarketerTM, total online advertising expenditures for 2010 were in excess of
$25.8 billion and are expected to grow substantially over the next several
years, approaching $30 billion by 2012. Openfilm believes that as companies
become more aware of the ROI metrics offered online compared to television,
which is currently estimated as a $58.6 billion market in terms of advertising
expenditures, advertisers will increasingly gravitate toward targeted online
advertising to reach selected audiences. TV advertisement is mostly made up of
video ads. In comparison, online video ads are estimated to represent
approximately $1.5 billion of the total online advertising market. According to
comScore, American online users viewed approximately 5.2 billion video
advertisements during the month of December 2010. Openfilm believes that online
video advertising will ultimately dominate the online advertising marketplace.
Current online industry efforts are focusing on replicating the traditional
cable television model, which includes charging for content viewership. Whether
such efforts prove successful or another model emerges, Openfilm believes that
it is well positioned to become a significant market
participant.


9





Openfilm
is working with the top video ad networks, including Tremor Media, Inc. (ranked
second largest online advertiser and number one among video advertisers), which
supplies a significant portion of advertising content on the Openfilm website on
behalf of Openfilm, including targeted marketing to its viewer audience.
Openfilm also has advertising relationships with other online video advertisers,
such as SpotXchange (5th largest
online advertiser) and ScanScout (8th largest
online advertiser, which was acquired by TremorMedia in November
2010).





Since the
average online video viewer watched 14.6 hours of video content during the month
of December 2010, Openfilm believes that during that period of time the viewer
can be exposed to approximately 500 targeted ads. With the assistance of the
Openfilm platform, Openfilm believes that its products and services present a
compelling value proposition for advertisers.





Motorsport.com
Development of Business





In 1993,
Tom Haapanen developed the concept to facilitate and distribute free motorsport
news and content on the emerging Internet, and was joined by Jack Durbin soon
thereafter. Operating under the brand name Motorsport News International (MNI),
in 1994, the motorsport.com domain name was registered and the MNI website began
operations as one of the first motorsport news websites on the
Internet.





Motorsport.com,
Inc. was formed as a Florida corporation on April 9, 1999, and since inception
has operated a website (www.Motorsport.com)
that distributes content related to the motor sports industry to racing
enthusiasts all over the world. Motorsport.com derives revenues primarily from
display advertising.





In 1999,
with the addition of Eric Gilbert, responsible for art direction, graphic
design, photography, advertising sales and business development, the website was
transformed from a text only website into a graphic-based interface and a
database-driven site with a multi-channel navigation structure, including, News,
Features, Photos, Statistics, Directory, Online Competitions and Forums. New
types of content were also added, such as news articles, exclusive news and
feature stories, and photos. Additionally, at this time, Motorsport.com’s
advertising-based business model took shape and the website began providing
advertisers the opportunity to offer placement of ads and site-specific
campaigns.





From
February 2000 through January 2003, average daily page view traffic grew from
approximately 5,000 to approximately 25,000. During that time, Motorsport.com
established its reputation as a reliable source of news and content by covering
major international racing series and events. It became the first online-only
media company to obtain media credentials from prestigious events such as the
“24 Hours of Le Mans®,” the “Indianapolis 500,” the “24 Hours of Daytona®” and
the “NASCAR Daytona 500®.” Nancy Knapp Schilke joined Motorsport.com in the
summer of 2001 as Editor in Chief responsible for text content, news editing and
publishing and relations with race series and organizers. Jack Durbin is
responsible for news editing and day-to-day business operations. Each of Jack
Durbin, Eric Gilbert and Nancy Knapp Schilke provide services to Motorsport
pursuant to consulting agreements, which are discussed in more detail in “Item
11. Executive Compensation – Employment/Consulting Agreements.”





With a
full redesign and enhancements to the website in 2003, Motorsport.com traffic
grew from an average of approximately 25,000 daily page views to an average of
approximately 130,000 daily page views in 2010. During the past eight years,
Motorsport.com consolidated its reputation with racing series and event
organizers, as well as race teams and drivers. It has become a reputable and
reliable source of information, news and content for the racing
community.





Motorsport.com
has won the American Auto Racing Writers and Broadcasters Association (AARWBA)
Award for Best Professional Racing Website for six straight years (2004 to
2009).





Motorsport.com
has been in operation for over ten years and is a mature online media company
with a well-established brand name. According to Google Analytics,
Motorsport.com received approximately 46 million page views in 2010 from 2.5
million unique visitors (an average of approximately four million page views per
month from approximately 260,000 unique visitors per month).




10





Content





Most of
the content on Motorsport.com is in text format (news articles, stories, race
reports, interviews, feature stories) and photo images, as well as, statistical
information. In 2010, Motorsport.com featured approximately 42,000 news articles
and 143,000 photo images. Additionally, Motorsport.com has an archived content
database of approximately 397,000 news articles (dating back to 1994) and
approximately 1,076,000 photos (dating back to 1901). News and photos account
for the bulk of page views on the website.





News
content is obtained from Motorsport.com regular contributors, special guest
contributors, press releases and other press material from race teams, events,
drivers, series, manufacturers and news organizations. Magazine content is
obtained primarily from Motorsport.com regular contributors, and, to a lesser
extent, from special guest contributors. Most news content is provided free of
charge. In addition, Motorsport.com also offers free email newsletters sent on a
daily basis to subscribers.





The photo
content consists of a database of more than one million photos and is
obtained from Motorsport.com regular photographers, guest photographers,
copyright-free for media use photo material (primarily from race teams, events,
drivers, series, manufacturers, etc.) and photo agencies.





Statistical
content is derived primarily from publicly available records and
databases.





Motorsport.com
also sponsors two competitions (F1 Pick 6 and F1 PP) among fans to determine who
could predict the top ten finishing positions in various Formula
1 races. In 2010, 1,150 distinct users participated in these
competitions.





The
Motorsport.com website also hosts various forums where racing enthusiasts can
participate in real-time discussions and share stories, opinions and photos with
others in the forum community.





Growth
Strategy





We
believe that through our proprietary online platforms and technologies developed
initially for Openfilm, that we can transform the Motorsport.com website into
the premier destination for motor racing enthusiasts and advertisers on the
Internet. We intend to expand Motorsport.com’s media offerings to include video
content and brand leveraging similar to that employed by Openfilm. We believe
that we can increase the brand and traffic of Motorsport.com and obtain
additional content and partnerships with companies that are looking for
additional distribution channels and cross promotion opportunities. We also
believe that we can provide a compelling value proposition for
advertisers.





With our
proprietary technologies and know-how, we intend to offer user generated content
on the Motorsport.com website in the form of uploaded racing related videos and
images and more interactive features. Users will be able to place comments at
various points within a video upload and other users will be able to preview and
then jump forward to that point if they find the comments of interest. Users
will also be able to cross reference their content with content already found on
the website, thus generating more views using relevant navigation by other
users. For example, a captured photo of an event can be uploaded and tagged,
which will be automatically matched and distributed to those users on the
website that our proprietary system determines would be interested in the photo
based on similar preferences and other criteria.





Motorsport.com
also intends to develop social media content and tools, both online, offline and
at race events, which will enable users to follow their favorite profiles,
users, teams, drivers, tracks and sponsors, as well as, other control and
interactive features.





Revenue
Streams





Advertising





Motorsport.com
revenues are derived primarily from display advertising placement on the
website. Motorsport.com currently partners with Google Adsense in America and
Xprima in Canada with respect to display advertising. Motorsport.com intends to
leverage the technologies and relationships developed by OpenFilm to increase
the CPM return on traffic generated through the Motorsport.com website and
is developing additional advertising programs.


11





Motorsport.com
intends to offer racing related classified ads as a means of offering a
value-added service for our users and increasing revenue by offering to sell
related services such as premium ad placement, bold headlines, additional
photos, and other premium ad services.





Subscription
Services





Additional
subscription-based revenue streams are currently being developed that will offer
users multiple levels of membership, including premium content, personal fan
pages, e-mail accounts, fantasy racing, product promotion and other services.
Merchandise will also be showcased throughout the website based on relevancy,
navigation and interest preferences determined by our proprietary
systems.




Music1
Development of Business





A&R
Music Live, LLC was originally formed under the name A&R Music1.com, LLC on
June 22, 2001 and changed its name to A&R Music Live, LLC on September 11,
2009. Music1 owns and operates two websites (www.arlive.com and
www.music1.com)
engaged principally in the discovery and promotion of new and emerging musical
artists. Music1 provides two complimentary artist discovery
services:





·
            A&R
      Live Hookup Service (www.arlive.com) provides
      unsigned artists, producers and songwriters (“Artists”) the opportunity to
      speak directly with record company personnel (also known as A&R
      (artist and repertoire)) responsible for scouting, signing and recording
      of artists on a record company roster, learn the music business, and have
      their music reviewed live by record company A&R and receive feedback
      and the possibility of a record company contract.





·
            Through
      the Music1 Artist Discovery Service (www.music1.com), members are
      afforded the opportunity to discover new music and Artists, create
      communities of fans, and distribute their content via Internet and mobile
      media platforms.





A&R
Live Hookup Service





A&R
Live Hookup Service provides Artists an opportunity to speak directly with
record company A&R, learn the music business and have their music reviewed
live by record company A&R and receive feedback and the possibility of a
record company contract. Users of this service come from all over the world and
pay a fee for access to industry A&R professionals, and can participate by
phone, Internet or mobile devices. Music1 currently supports and promotes the
following music genres: Adult Contemporary, Alternative, Christian, Country,
Dance, Gospel, Hip Hop, Jazz, Neo-soul, Pop, Rap, R&B and Rock.





The
A&R Live Hookup Service has hosted more than 2300 online music listening
sessions and workshops with top industry executives since 2001. Even Grammy
award-winning recording artists, such as India Arie and TLC, have used
Music1’s services to advance their careers before they became top industry acts.
Other attendees of listening sessions and workshops have landed major label
production work and television licensing deals that featured their music on
internationally broadcasted TV shows on MTV and Oprah’s Oxygen network. Most
recently, Emphatic, a rock band from Omaha, Nebraska, signed a major record deal
with Atlantic Records as a result of having their music showcased on the A&R
Live Hookup Service. Emphatic's first album with Atlantic Records is scheduled
for release in the first quarter of 2011.





Record
executives and alumni who have reviewed music on the A&R Live Hookup Service
have worked with some of the biggest names in the American music industry. Since
2001, A&R from, or formerly associated with, the following companies have
reviewed music from aspiring talent on the A&R Live Hookup Service:
Aftermath Entertainment, Asylum Records, Atlantic Music Group, ASCAP, Bad Boy
Entertainment, BMG Publishing, BMI, Capitol Records, Cherry Lane Music
Publishing, Compadre Records, Def Jam Recordings, Disney Music Publishing,
Geffen Records, Island Def Jam Records, Hidden Beach Recordings, Interscope
Records, J-Records, Jive Records, Koch Records, Maverick Records, Motown
Universal, Music World Entertainment, MTV's The Real World, RCA Music Group,
SESAC, Shady Records, So So Def, Interscope, Universal Music Group, TVT Records,
Verity-Gospel Centric Records, Warner Bros. Records and others. In some cases,
Music1 will pay a small stipend to A&Rs for their appearance at a listening
session or workshop.


12





Music1
Artist Discovery Service





Music1’s
artist discovery service provides members with the tools and opportunity to
discover new music and Artists, create communities of fans around Music1
industry and user-generated content, and distribute content via the Music1 Radio
Player that can be shared via the Internet and mobile media
devices.





Members
develop a profile on the Music1.com website, which permits them to upload music,
photos, event dates, biographical information and videos. Members have the
option of making their songs available for sale to fans or for inclusion in
fan-created playlists and Stream Shows in order to follow their favorite Music1
Artists.





The
Music1 Stream Show allow members to create personal radio shows by utilizing the
content of the social network. Music1 Stream Shows combine various groups of
users, such as Artists (who provide songs), Stream Show personalities (who
create stream shows), and listeners (general audience). Through Music1 Stream
Shows, Artists are provided the opportunity to promote new material, Stream Show
personalities can promote radio shows and events, and listeners can enjoy a vast
selection of personal streamed stations of independent music. Listeners can
become fans of particular Artists and Stream Show personalities, purchase music,
share their favorite Artist's content on other social networks, and communicate
directly with Artists and Stream Show hosts.





Music1
Artists benefit by having their music promoted to fans and potential consumers
throughout the Internet, and by showcasing their talent directly to record
company A&Rs, who are looking to sign new acts. Music1 Artists, fans and
Stream Show personalities, receive valuable social activity stream data on who
is listening, sharing and purchasing their content. Once Music1 users reach a
certain visitor traffic threshold for their content and Music1 generates
advertising revenues as a result of that traffic, then they may qualify for a
share of advertising revenue.





Music1
intends to provide record company partners with reports to help identity top
performing Music1 Artists based on fan volume and activity reports generated by
proprietary and integrated tracking tools across the web and mobile devices.
Record company executives can track specific Music1 Artists popularity and
traffic demographics, and receive notifications when specified targets have
been achieved, activity reports and music and video streams into their
dashboards (an online control panel allowing customization of the user
experience). Record company executives can also communicate with Music1 Artists
directly and scout them for record deal consideration.





Revenue
Streams





Music1
derives revenues from advertising and targeted marketing/sponsorship
arrangements, selling access to social analytic data, music review services,
talent placement fees, music content syndication, music licensing and
publishing, music sales and membership subscriptions for premium
services.





·
            Social analytic data –Music1 provides marketing and fan tracking data through paid
      premium services to Artists and members of Music1 to help identity the
      demographics of their fan bases. Music1 enables advertisers to reach and
      target their audiences more effectively by providing general demographic
      data of members and visitors to the Music1
  website.





·
            Music Review Services –Music1 offers Artists several ways to have their music reviewed by
      record company A&R:





o
            A&R
      Live Hookup Service is a unique workshop and music review session that
      enable Artists to speak live with record company A&R, learn the music
      business, pitch their Music1 promotional profile, and have their music
      heard for possible record deal consideration and receive immediate
      feedback. Each A&R Live Hookup session includes a moderator, record
      company A&R and up to 10 Artists. The A&R Live Hookup Service is
      hosted by phone teleconference through the Arlive.com website. Record
      company A&R review Artists’ music, answer questions about the industry
      and career options, and provide insider tips on how to manage their
      careers and maneuver through the music industry process. A&R interest
      in an Artist will typically result in follow-up requests for content and
      discussions relating to the Artist’s career path. Artists pay a
      registration fee on arlive.com to attend A&R Live Hookup sessions.
      Record company A&R may be paid a small stipend for their time,
      consultation and participation. Attendee registration fees are determined
      by the level of participation (e.g., view-only, content upload and review,
      etc.) and the number of songs an Artist chooses to have reviewed in
      addition to the workshop
segment.


13





o
            VIP
      Private 1-off Hookup is an exclusive one-on-one A&R Live service that
      includes a music consultant, one attendee, and a record company A&R,
      in which an Artist can talk one-on-one with record company A&R, learn
      the music business and have their music heard for deal consideration and
      receive immediate one-on-one feedback. These sessions average
      approximately 45 minutes and involves up to four Artist songs. The Arlive
      follow-up system automates and manages the exchange of music and follow-up
      between an Artist and an interested record company A&R. Artists pay a
      registration fee to participate, create a promotional profile and upload
      their music, photos, videos and biographical information. Record company
      A&R may be paid a small stipend for their time, consultation and
      participation.





o
            Quick
      Demo Review, which is licensed to Music1, enables an Artist to register,
      upload their music and receive a recorded music review by a specific
      record company A&R. Attendees can register and upload up to three
      songs for review by a record company A&R. Reviews are conducted
      generally within three to ten business days and feedback is provided
      through the Quick Demo Review system. If an A&R is interested in an
      Artist’s music, he or she may request additional submissions from the
      Artist through the Arlive follow-up system which automates and manages the
      exchange of music and follow-up between Artists and record company
      A&R. Registration fees are charged depending on the number of songs
      uploaded by the Artist. Record company A&R may be paid a small stipend
      for their time, consultation and
participation.





·
            Talentplacementfees–Music1 provides talent
      placement services bringing together Artists and A&Rs for possible
      collaboration. If a project or contractual relationship develops, Music1
      will be entitled to a fee generally based on a percentage of the value of
      the project or contract, which is standard in the music
      industry.





·
            Contentsyndication– Music1 intends to
      receive distribution and other fees in connection with the non-record
      company commercial syndication and distribution of Artists’ content
      through revenue sharing arrangements with the
  Artist.





·
            Musiclicensing andpublishing–Music1 intends to
      create a publishing company and enter into music publishing agreements
      with its most talented Artists, who have created original content. Music1
      intends to provide licensing services on behalf of Artists and assist in
      the distribution of content in exchange for royalty fees.





·
            MP3 E-commercesales–Similar to other
      popular online music distribution models, Music1's platform allows Artists
      to sell and distribute their own content through the Music1 website.
      Artists are given the opportunity to sell their content at any price
      determined by them. Music1receives a small fee for each sale.
      Additionally, Music1 can offer Artists a variety of distribution models,
      including mobile downloads to other devices and
  platforms.





·
            Premiumservicesmembershipfees–Music1 offers Artists
      and member’s two levels of membership enrollment. Free membership allows
      users to upload music and videos and comment on content of other members
      and Artists, and rate content submissions. Premium membership allows
      members all of the benefits of free membership plus the opportunity to
      retain MP3 sales profits, access to a comprehensive database of music
      festivals, control of privacy settings on how their content is used, the
      ability to participate in contests via the Music1 website, the option to
      sell mobile versions of their music content, receive social and fan
      tracking analytics on the usage of their content and have this data
      transmitted to record company partners and prospects to gauge fan
      preference and loyalty, access to detailed earnings reports and other
      analytics relating to the member’s content, and assistance with direct
      sales of digital versions of
content.


14




Advertising





Music1
believes it is in a strong position to monetize its video and music content
library through targeted advertising based on user behaviors and also through
direct sales and distribution of content uploaded by its members. Music1
utilizes proprietary technology (licensed from NetLab) that tracks online user
activity on its website (in accordance with applicable Music1 website privacy
policies) and builds profiles based on the content metadata accessed to
determine the interests of users. Based on user activity, targeted
advertisements can be offered to specific users at different areas of the
website or embedded within the accessed content. Accordingly, multiple products
and services can be offered to users that would be of interest to them based on
their activity on the Music1 website.





Music1
will offer the two most commonly used ad monetization tools for video websites,
but will bundle them with NetLab’s proprietary technology to create higher
return on investment (ROI) for advertisers. Music1 believes it can significantly
increase click-through-rates (CTR) using NetLab’s proprietary technology and
know-how as compared with currently available methods used on other websites.
Music1's behavior tracking system (currently under development with
NetLab) will further add to CTR and enhance the user’s experience on the
website. Several types of advertising opportunities will be offered
through the Music1 website:





·
            Display
      Ads – traditional banner advertising placed throughout the site will be
      offered in standard sizes with a minimum insertion fee and specified rates
      for CPM (cost per 1,000 views). Premium subscription members will have the
      option to turn off banner advertisement
  exposure.





·
            Video
      Insertions – small segmented video commercials inserted into video
      content, similar to how commercials are displayed on Television, and
      include video pre-roll, post roll, or mid-roll insertions. The current
      standard compensation metric is also based on CPM. Music1 expects to be
      able to leverage the Openfilm model and relationships with leading ad
      providers in the market.





·
            Video
      Overlay Ads – ads that play every 90 seconds located primarily at the
      bottom of film content that generate multiple impressions per content
      view.





As a
consequence of the nature of our proprietary music discovery method, we are able
to collect more information on which images, songs, texts and video content is
viewed and those that are not, thus creating even higher targeting capability
based on user preference. This will allow us to introduce and leverage a CPA
(cost per action) or CPL (cost per lead) model of monetization, which will
result in higher revenue potential.





Current
Market Environment





According
to the RIAA (Recording Industry Association of America), the total U.S. revenue
for online and mobile digital music sales has steadily increased since its
official tracking began in 2004 from $190.4 million to $3.12 billion in 2009.
Physical sales (CD's) have steadily decreased from $13.35 billion to $7.39
billion during this same period.





According
to a November 16, 2010 Morgan Stanley Research report – “Ten Questions Internet
Execs Should Ask & Answer” – presented at the Web 2.0 Summit in San
Francisco, global unit shipments of smartphones have been rapidly rising since
2005 and are expected to overtake desktop PCs and notebook PCs as the platform
of choice by 2012. It is anticipated that in the near term, people will use
mobile devices over PC's to connect to the Internet.





According
to the International Federation of the Phonographic Industry (IFPI) Digital
Music Report 2010, the music business is continuing to lead the creative
industries into the digital revolution. In 2009, for the first time, more than a
quarter of the recorded music industry’s global revenues (27%) came from digital
channels – a market worth an estimated $4.2 billion, up 12 percent from 2008. In
the U.S., the world’s largest music market, online and mobile revenues now
account for around 40 percent of music sales. Consumer choice has been
transformed as companies have licensed more than 11 million tracks to
approximately 400 music distribution services worldwide.


15





These
reports illustrate that consumer preference and purchasing trends support
distribution of digital music content via the Internet and mobile platforms, and
the continued development of technology infrastructure to access and support
these markets.




Proprietary
Technologies





In
connection with the acquisition of Openfilm, we transferred certain intellectual
property assets of Openfilm to our wholly-owned subsidiary, NetLab Systems, LLC,
a Florida limited liability company, in order to better protect and manage our
proprietary technologies and further exploit them for other vertical markets,
including Motorsport and Music1. Each of the proprietary technologies used by
Openfilm is subject to a Technology Transfer and License Agreement with NetLab.
For more information, see “– Licensing Arrangement between Openfilm and NetLab”
below. It is expected that similar licensing arrangement’s will be entered into
with each of Motorsport and Music1 upon development of applications for their
respective websites.





We
believe that in the online video sector, only a small percentage of the hundreds
of Internet portals are able to employ proprietary technologies because most
systems are generally built on open source coding platforms. We believe that as
a result of the proprietary technology used by Openfilm (licensed from NetLab)
combined with its “know-how,” Openfilm can better serve its target markets and
members. Further, we believe that these technologies allow us to build scalable
systems that can be implemented in virtually any market, including those served
by Motorsport and Music1.





The
Openfilm Contest Management System, called Launchpad (licensed from
NetLab), uses various methods and algorithms to conduct and manage online
contests of any form. The system enables Openfilm to “white label” online
contests, with robust backend functionality that allows control of the contest
with minimal technical training. We believe that Launchpad controls allow
contest hosts to receive, filter and judge submissions quicker, more easily and
more efficiently. Submissions can be in the form of video files, audio and other
common digital formats. The system is designed to provide scalability in
functionality and application processing. We believe that the Launchpad contest
platform enables optimum engagement of consumers and more effective capturing of
data and management of content.





Although
Film Festivals are considered natural consumers of the Launchpad platform, as it
will help them significantly reduce administrative expenses and streamline the
submission and judging process, it can also be an effective tool in the
corporate and education sectors and other areas that may need a resource or
talent management system.





Subconscious user behavior
tracking is another proprietary system owned by NetLab, which monitors
viewers as they interact with Internet websites. Content on the website is coded
using mathematical algorithms to arrange content based on its collective and/or
average evaluations. The resulting data gathered through user experiences can be
used in a variety of ways. This preference monitoring system will assist
Openfilm’s advertising clients in directed marketing campaigns and will provide
Openfilm with effective and reliable audience participation in its offerings.
Additionally, user behavior tracking will yield profiles for each user, allowing
the best possible video recommendations system to evolve. NetLab engineers are
developing similar applications for use in Motorsport’s and Music1’s
businesses.





Openfilm
currently offers, to a limited extent, video with programmable story lines that
allow content creators to offer interactive experiences for their viewers, such
as selection of alternative movie endings. The Openfilm interactive system
(licensed from NetLab) allows digital product placement of any branded item into
any frame of content. Dynamic tracking of the insertion and user interaction is
expected to result in valuable brand placement optimization and advertisers will
be able to determine the best frames within videos to place their brand for
maximum exposure and return on investment.





Music
Brain (developed by NetLab for Music1) is a tool for predicting musical user
preferences based on visual user preferences. The voting for songs and images,
and other metrics are used to identify user preferences and apply them in other
intuitive situations. Music Brain suggests playlists and songs for a particular
user based on prior preference metrics and behaviors. Music Brain utilizes
advanced mathematical algorithms and implements psychological models for
accurate prediction of song preferences.


16





NetLab is
currently developing additional technology that is intended to allow Artists’
music to be automatically distributed to listeners based on behaviors,
navigation, preferences and interaction with content on the
website.





Other
Technology Advancements





Showcasing
quality content is one of the highest priorities on the Internet. Openfilm
utilizes a unique submission processing system (licensed from NetLab), which
converts videos into High Definition (HD) and allows publication in multiple
resolutions. Additionally, Openfilm products and services provide a wide array
of tools that permit content owners to enhance and control various aspects of
the distribution and viewing process and to generate a variety of useful
analytical reports.





Through
the reach of the Openfilm website and other online syndication partners,
Openfilm’s content providers are able to offer their content for sale through
various methods including desktop downloads and on mobile devices.





A 3-D
viewing experience will also be available through the Openfilm video player
later in 2011 as this method of delivery gains market acceptance.





Technology
Diversification





The
online software currently utilized by Openfilm (licensed from NetLab) was
designed with scalability to enable it to be utilized across different vertical
markets, including Motorsport and Music1. This platform and its proprietary
technological advantages can be adapted to other markets, such as sports,
education, government and corporate applications, music and other sources and
uses of online content.





The
algorithms of classification users' feedback developed for Music Brain can be
also used for other applications, such as analysis of user's activity on the
website to identify groups of users with similar behavior and deliver them
content with high probability that the user group will like it. Another
application of this technology is the development of various business
intelligence tools such as data mining and predictive analytics.





Due to a
variety of technological innovations and advantages, many of which are eligible
for patent protection, we believe that our online media businesses and NetLab
will be able to generate revenue from various sources, maximizing utilization of
these technologies in various markets. Multiple revenue streams leave no
dependency on one business model. The platform utilized by Openfilm and other
NetLab technologies are built on broad principles, with flexibility, scalability
and adaptability in mind.





We will
generally rely on a combination of trade secret, copyright, trademark and patent
law to protect our proprietary rights in the intellectual property. Although
Openfilm, Motorsport, Music1 and other customers will utilize NetLab’s
proprietary platforms and other products in object code form, no assurance can
be given that unauthorized third parties will not be able to copy such software.
In addition, there can be no assurance that our competitors will not
independently utilize existing technologies to develop products that are
substantially equivalent or superior to ours. We could incur substantial costs
in defending ourself or our licensees in litigation brought by third
parties, or in seeking a determination of the scope and validity of the
proprietary intellectual property rights of others.





Development
Team





Our
technology development team consists of more than 35 engineers. The majority of
the team has been working together for the past three years to enhance the
Openfilm website and develop new proprietary features that will bring additional
functionality to users and revenue sources to Openfilm, as well as, Motorsport,
Music1 and others. Development activities are conducted primarily offshore in
Dnepropetrovsk, Ukraine through Openfilm’s wholly-owned subsidiary, Zivos, LLC,
a Ukranian company. We believe that overall research and development costs are
significantly less than comparable facilities and staff in the United
States.




17




Licensing
Arrangement between Openfilm and NetLab





In
connection with the acquisition of Openfilm and the transfer of certain
technologies to NetLab, Openfilm and NetLab entered into a Technology Transfer
and License Agreement whereby Openfilm has been granted a perpetual,
non-exclusive license to use, modify and enhance certain of the NetLab
technologies used in conjunction with the Openfilm website. Openfilm is required
to pay to NetLab a license fee equal to five percent of the gross revenue
generated by Openfilm’s use of the licensed NetLab technologies. The initial
term of this arrangement is ten years with automatic one year renewals unless
sooner terminated in the event of breach or upon 30 days prior written notice
after the initial term. It is expected that similar arrangements will be entered
into with Motorsport and Music1 upon delivery of applications for use on their
respective websites.





License
Agreement with Stephen Strother





In
connection with the acquisition of Music1, Stephen Strother entered into a
License Agreement with Music1 granting Music1 a world-wide royalty-free license
and rights to use certain technology and other intellectual property owned by
Mr. Strother, including the Quick Demo Review technology, which enhances the
functionality of the Music1 online services, and Around the Block, which is an
online music video series utilizing technology developed by Mr.
Strother.  For more information about Quick Demo Review, see “Item 1.
Business – Business Description – Music1 Development of Business – Revenue
Streams.”





Research
and Development





Management
believes that our future success depends in part upon the timely enhancement of
existing products and the development of new products and applications. We are
currently developing new software products relating to information management
with broad applications in the commercial, government and education markets and
enhancing existing products to improve price and performance, expand product
capabilities, simplify user interfaces, help define and support emerging
industry standards, and develop interoperability with most products and devices
commonly used in our targeted markets. Up until the date of acquisition,
Openfilm operations, including research and development costs, were funded
primarily by entities controlled by our President, Mike Zoi. Since the date of
acquisition of Openfilm, research and development costs were funded pursuant to
the Subscription Agreement with TGR and the Enerfund Subscription Agreement. It
is expected that revenues received pursuant to the licensing arrangements with
our online media businesses will significantly contribute to NetLab’s funding
requirements in the future.  Additionally, we may pursue other
external research and development funding sources and collaborative
partners.





For
fiscal 2010 (April 1, 2010 through December 31, 2010), fiscal 2009 and fiscal
2008, the research and development expense of Openfilm and NetLab was
approximately $443,819, $483,013, and $187,402, respectively.





Regulation





We do not
believe that we are required to obtain government approval of our products or
services. However, since Openfilm, Motorsport and Music1 collect, or intend to
collect, certain information from members and users on their respective
websites, such entities will be subject to current and future government
regulations regarding the collection, use and safeguarding of consumer
information over the Internet.





Our
businesses are subject to the California Online Privacy Protection Act of 2003
(CA OPPA), which requires website operators to post its privacy policy on its
website and to include certain disclosures relating to the type of information
collected, how it is used and how users can review and make changes to the
information collected. We believe that we are currently in compliance with the
CA OPPA.


18






In recent
years, the Federal government has proposed several pieces of legislation designed to regulate information obtained online and
safeguard personal and confidential consumer information from theft or
compromise. Although none of such legislation has yet been enacted, we believe
that consumer protection initiatives similar to the Privacy Act of 2005, the
Information Protection and Security Act, the Identity Theft Prevention Act of
2005, the Online Privacy Protection Act of 2005, the Consumer Privacy Protection
Act of 2005, the Anti-phishing Act of 2005, and the Social Security Number
Protection Act of 2005, will be enacted in the near future, compliance with
which may result in significant efforts and increased costs.





Competition





Openfilm





Many of
the companies with whom Openfilm competes or expects to compete have
substantially greater financial resources, research and development
capabilities, sales and marketing staffs and distribution channels and are
better known than Openfilm. We believe that the principal factors affecting
Openfilm’s ability to compete are the accessibility, functionality and ease of
use of the Openfilm website, and the compelling nature of the value proposition
to advertisers and brands, as well as, the performance and unique features of
the Openfilm platform and other applications and solutions offered by Openfilm,
the effectiveness of marketing efforts, the success of its video contests and
film production and  distribution abilities and pricing of membership
and other offers.





Openfilm
believes that it can successfully differentiate itself from its competitors due
to the proprietary technology licensed from NetLab, its unique focus on
independent filmmakers and their content, and its Celebrity Advisory Board.
Openfilm’s tiered membership model allows flexibility for users and promotes
migration from lower value membership plans to premium membership
plans.





Other
competitive advantages include the ability of independent filmmakers to submit
their films on Openfilm’s website, receive valuable feedback from Advisory Board
members and to participate in online contests.  Films that are
showcased on the Openfilm website undergo a rigorous screening process to ensure
they meet quality standards of production and artistic merit.





We
believe that the proprietary technologies (licensed from NetLab), which are
utilized by Openfilm are not commonly found in the online video-sharing world
and thus provide a distinct competitive advantage for Openfilm primarily because
of the ability of Openfilm to deploy customized solutions for its members,
advertisers and others.





Motorsport





Motorsport.com
competes with other websites aimed at motorsport fans, providing news, event
photos and merchandise. According to Alexa.com©, as of December 31, 2010,
Motorsport.com was ranked 40,910 for most trafficked websites world-wide,
19th
in relation to all racing related websites (out of 4,312) and 3rd in
relation to all racing news and media websites (out of 118). The rank is is
calculated using a combination of average daily visitors and page views over the
past month.





Motorsport.com
competes with other, well-established companies, such as Autosport.com, based in
the UK and part of Haymarket Publishing, which has the advantage of viewer
support from traditional weekly print magazines, including Autosport magazine
and F1 Racing magazine, and Crash.net, which is an online media publishing house
and multimedia agency (Crash Media) that also has the support of publications
like Autocourse, Rallycourse and Motocourse.





Additionally,
Motorsport.com competes with websites that are sponsored by cable TV channels,
such as Speedtv.com, a U.S.-based motorsport portal that has the advantage of
support from its related cable TV channel in the U.S. and Canada.





Other
competitors of Motorsport.com include racing series sites (Formula1.com,
NASCAR.com, etc.), sports websites that also cover motor racing (espnf1.com, BBC
Sport, sports.yahoo.com, itv.com F1 Sport, etc.), and vertical motor racing
sites that focus on only one form of racing (jayski.com, Planet F1,
etc.)


19





Motorsport.com
also competes with hundreds of smaller websites and independent blogs around the
globe due to the low barriers and costs to enter this market on the
Internet.





Motorsport.com
competes primarily on the basis of the content and services offered, the
relevance of news and photos, reliability, brand loyalty, functionality and ease
of use of website features, and in the future, the perceived value and cost of
premium membership and other fee-based services.





Music1





The
current market for services to independent artists is highly
competitive.  Music1 believes it is uniquely positioned to capitalize
on the rapidly growing online and mobile music markets and distribution of
content primarily through its new artist discovery service.  Music1
combines proprietary technology (primarily developed by NetLab), knowledge and
connections to the music industry, to provide artists with superior
opportunities to connect to the decision-makers at record
companies.





Music1
competes with a variety of web-based companies in its market, some of which are
larger and more well established, includingPurevolume
(USA), an artist discovery and promotion website, Reverbnation, an Artist
discovery and social networking site, iTunes’ Ping, an Artist discovery, social
networking and e-commerce site, Myspace (USA), also the home of Myspace Music,
which offers a growing catalogue of freely streamable audio and video
content, and other music content sharing websites and social entertainment
marketing websites.





Music1
competes primarily on the basis of the content and services offered, its unique
relationships with, and access to, A&Rs, brand loyalty, functionality and
ease of use of website features, including social networking, and access to new
Artists, and the perceived value of membership and other fee-based
services.





Employees





We
conduct operations from our Miami, Florida headquarters, our Ukrainian technical
facility and our California satellite office. Our Miami headquarters provides
operations, finance, IT, legal, human resources and business development
resources to our operating businesses. As of December 31, 2010, there were 12
people in our Miami headquarters, including our senior executive officers, the
senior management of Openfilm and various support staff. As of February 1, 2011,
six additional administrative personnel were added from Motorsport and
Music1.





Our
technology development is conducted primarily in facilities located in
Dnepropetrovsk, Ukraine through Openfilm’s wholly-owned subsidiary, Zivos, LLC,
a Ukranian company.  This facility includes 35 highly skilled
engineers and technology professionals, as well as, management and financial
personnel and support staff.





Our
satellite office in Los Angeles, California accommodates our Advisory Board
members and others during live studio chats, and includes Openfilm’s director of
communications, director of business development and one marketing support
person.





Reports
to Security Holders





We are
required to file reports with the Securities and Exchange Commission, including
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Periodic Reports
on Form 8-K. We also file Information Statements on Schedule 14C in lieu of
Proxy Statements on Schedule 14A since the majority of our voting securities are
held by entities controlled by our President, Mike Zoi.




The
public may read and copy any materials we file with, or furnish to, the SEC at
the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549 on
official business days during the hours of 10 a.m. to 3 p.m. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information on its website at http://www.sec.gov.


20




We will
make available free of charge on our website (www.netelement.com),
our public reports as soon as reasonably practicable after they are filed with,
or furnished to, the SEC.Alternatively, we will provide
electronic or paper copies of our public filings free of charge upon
request.




Item 1B. Unresolved Staff
Comments.





None.





Item
2. Description of Property.





We lease approximately 6,500 square feet of office
space in Miami, Florida at an annual rental of $187,785. The current lease term
expires December 31, 2011 and may be extended for an additional year at our
option at an annual rental of approximately $201,695. Our corporate headquarters
and Openfilm, Motorsport and Music1 operations are conducted at this location.
We believe that this facility is adequate for our anticipated
needs.





Zivos,
LLC leases approximately 1,600 square feet of office space in Dnipropetrovsk,
Ukraine, where it conducts primarily research and development activities, at an
annual rental of approximately $12,000 (not including utilities). The current
lease term expires July 31, 2011. We believe that this facility is adequate for
our anticipated needs.





Openfilm
subleases approximately 450 square feet of office space in Los Angeles, CA,
which is used primarily for marketing, public relations and celebrity chat
(studio) activities. The lease term is month to month and the monthly rent is
approximately $1,500.  We believe that this facility is adequate for
our anticipated needs.





Item
3. Legal Proceedings.





From time
to time, we may be involved in litigation relating to claims arising in the
normal course of operations. We are not currently a party to any such
proceedings.





Item
4. (Removed and Reserved)





PART
II





Item
5. Market for Common Equity and Related Stockholder Matters and Purchases of
Equity Securities.





There
currently is no established public trading market for our common stock. The
number of shareholders of record of our common stock at December 31, 2010 was
205. The number of shareholders of record does not include beneficial owners of
common stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries. The principal markets for our
stock were the Over The Counter Bulletin Board (OTCBB) and Pink Sheets LLC. On
December 30, 2010, the price of our common stock last traded at $0.01 per share
on the OTCBB.





The
following table sets forth the high and low prices for our common stock for the
quarterly periods indicated as reported by the OTCBB. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.




Fiscal Year
                        
                        Quarter Ended
                        
                        High
                        
                        
                        Low2008*
                        
                        June
      30, 2008
                        
                        $
                        0.12
                        
                        
                        $
                        0.12September
      30, 2008
                        
                        $
                        0.13
                        
                        
                        $
                        0.13December
      31, 2008
                        
                        $
                        0.07
                        
                        
                        $
                        0.07March
      31, 2009
                        
                        $
                        0.30
                        
                        
                        $
                        0.072009*
                        
                        June
      30, 2009
                        
                        $
                        0.22
                        
                        
                        $
                        0.22September
      30, 2009
                        
                        $
                        0.23
                        
                        
                        $
                        0.23December
      31, 2009
                        
                        $
                        0.15
                        
                        
                        $
                        0.15March
      31, 2010
                        
                        $
                        0.15
                        
                        
                        $
                        0.152010*
                        
                        June
      30, 2010
                        
                        $
                        0.15
                        
                        
                        $
                        0.09September
      30, 2010
                        
                        $
                        0.09
                        
                        
                        $
                        0.01December
      31, 2010
                        
                        $
                        0.01
                        
                        
                        $
                        0.01




21





* Note:
Fiscal 2010 reflects the nine month transition period from April 1 through
December 31, 2010 as we changed to a calendar year financial year. Accordingly,
fiscal 2009 reflects the period from April 1, 2009 through March 31, 2010 and
fiscal 2008 reflects the period from April 1, 2008 through March 31,
2009.





We have
not paid any cash dividends during the last two fiscal years and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future.





Plan Shares Outstanding





The
following table sets forth information as of December 31, 2010 with respect to
the Company’s 2004 Stock Option Plan, approved by our security holders. The 2004
Stock Option Plan authorizes the issuance of a maximum of 10,000,000 shares
underlying options. We previously granted options to purchase a total of
4,825,000 shares of common stock, of which options to purchase 4,737,500 shares
of common stock expired unexercised.




Plan Category
                      
                      Number of Securities to
                        be Issued Upon Exercise
                        of Outstanding Options,
                        Warrants and Rights
                      
                      
                      Weighted-average
                        exercise price of
                        outstanding options,
                        warrants and rights
                      
                      
                      Number of securities
                        remaining available for
                        future issuance under
                        equity compensation
                        plans (excluding
                        securities reflected in
                        the first column)Equity
      compensation plans
                        approved
      by security holders
                      
                      
                      1,200,000
                      
                      
                      $
                      0.25
                      
                      
                      
                      3,975,000





Recent
Sales of Unregistered Securities





On August
7, 2008, our Board of Directors approved a Subscription Agreement dated August
7, 2008 (the “Subscription Agreement”) with TGR, wherein TGR committed to invest
up to $2,000,000 (the “Investment Amount”) in exchange for up to 100,000,000
shares of our common stock for $0.02 per share. In addition, we granted TGR
warrants to purchase up to 50,000,000 shares of common stock for $0.05 per
share. These warrants may be exercised within five years from the date of grant.
The shares and warrants are issuable under the Subscription Agreement upon the
funding from time to time by TGR. The valuation date to determine the
appropriate compensation charge is the last day of the quarter then ended. The
Subscription Agreement was amended on January 12, 2010 to increase the
Investment Amount by an additional $2,000,000 to $4,000,000 in exchange for up
to an additional 100,000,000 shares of common stock and 50,000,000 warrants to
purchase common stock for $0.05 per share for a period of 5 years from date of
issuance.  TGR has funded the full amount required under the
Subscription Agreement.





For the
twelve months ended March 31, 2010, TGR was issued an aggregate of 16,186,515
shares of our common stock and fully vested warrants to purchase 8,093,757
shares of our common stock at an exercise price of $0.05 per share pursuant to
the terms of the Subscription Agreement. These issuances were in exchange for
financings under the Subscription Agreement in the aggregate amount of
$323,730.





For the
nine months ended December 31, 2010, TGR was issued 101,088,150 shares of our
common stock and fully vested warrants to purchase 50,544,075 shares of our
common stock for $0.05 per share in exchange for funding of $2,021,763 provided
during the nine months ended December 31, 2010 under the terms of a Subscription
Agreement.  The Subscription Agreement was fully subscribed at
December 31, 2010.


22





On
December 31, 2010, we entered into a Subscription Agreement with Enerfund, LLC
(a company controlled by Mike Zoi) (the “Enerfund Subscription Agreement”)
pursuant to which we received an aggregate of $2,000,000 in exchange for
200,000,000 shares of our common stock and warrants to purchase 100,000,000
shares of our common stock at an exercise price of $0.05 per share for a period
of five years from date of issuance. However, we did not have sufficient
authorized shares of common stock to fully issue these securities to Enerfund as
of December 31, 2010. Accordingly, this transaction has been accounted for as
a purchase by
Enerfund as ofDecember 31, 2010of112,000,000 shares ofourcommon stock
and fully vested warrants to purchase56,000,000 shares ofourcommon stock
for $0.05 per sharein exchange for
$1,120,000.The balance of the
proceeds of $880,000 has been accounted for as an advance until we can
issue the
balance of the sharesand warrants, which is
expected on or about March 1, 2011, and appears on our balance sheets as
a stock subscription liability.The proceeds
of the Enerfund Subscription Agreement will be used to fund our
operations.





Through
May 15, 2009, Mr. New’s base salary was $140,000 with a $30,000 bonus payable
quarterly for meeting agreed upon objectives.  On May 15, 2009, Mr.
New’s base salary was reduced from $140,000 to $91,000 and his bonus was reduced
from $30,000 to $19,500 annually. To partially offset the reduction in salary,
we provided Mr. New with 25,000 shares of fully vested common stock in lieu of
his March 31, 2009 cash bonus and 200,000 shares of common stock which vested
monthly from April 1, 2009 to September 30, 2009.  On March 31, 2010,
Mr. New was granted 250,000 fully vested shares of our common stock and a
compensation charge of $37,500 was recorded based on the fair value of the stock
issued on the date of grant.





Other
employees (other than officers and directors) receiving salary reductions were
granted a total of 50,000 shares of common stock which vested monthly between
April 1, 2009 and September 30, 2009.





Pursuant
to a Stock Purchase Agreement dated November 23, 2009, TGR agreed to sell to
Dune Capital Group ("Dune") an aggregate of 5,000,000 shares of common stock of
the Company held by TGR for a purchase price of $0.10 per share or an aggregate
of $500,000. The purchase price is required to be paid on or before April
1, 2010. Dune paid $300,000 on November 23, 2009. In order to ensure compliance
with obligations under Section 16 of the Securities Exchange Act of 1934, prior
to the issuance of shares to Dune by TGR, TGR assigned this Purchase Agreement
to us. Accordingly, we received $300,000 pursuant to this agreement and issued
an aggregate of 3,000,000 shares of our common stock to Dune on January 12,
2010.  On April 28, 2010, we agreed to terminate the Stock Purchase
Agreement with Dune and rescind the prior issuance of common stock. We refunded
$300,000 to Dune in exchange for return of the 3,000,000 shares of common stock
previously issued.





On
November 1, 2008, we entered into a Letter Agreement with Olympus Securities LLC
(the “Agreement”). Under the Agreement, Olympus was appointed our exclusive
financial advisor and investment banker (collectively, the “Services”) for a
period of seven (7) months. After expiration of this initial term, the Agreement
is to automatically continue on a month-to-month basis, with each party having
the right to terminate on thirty (30) days notice. The Agreement included a fee
of one thousand dollars ($1,000) per month in return for the Services, except
for the first month, where, instead of the monthly fee, we granted five (5) year
warrants to Olympus to purchase one million (1,000,000) shares of our common
stock at ten cents ($.10) per share. The warrants were valued at $149,999 and
were to be amortized over the seven-month term of the Agreement. The Agreement
contains other provisions relating to payments of cash, stock and warrants in
connection with any future financing or investment transaction completed through
Olympus. We have has not yet paid a cash fee or provided the abovementioned
warrants to Olympus due to the failure by Olympus to provide meaningful
investment banking services until world financial markets stabilized and, more
recently, due to the unwind of the TOT-SIBBNS joint venture.  We have
amortized the warrant charge of $149,999 during the twelve months ended
March 31, 2009 and accrued this amount in the financial statements at
December 31, 2010 and March 31, 2010.





At
December 31, 2010, we had options to purchase 1,200,000 shares of common stock
outstanding under our stock option plan, of which options to purchase 1,005,556
shares of common stock are vested, with an exercise price of $0.25 per share and
with a remaining weighted average contractual term of 4.28 years. We also had
warrants to purchase 156,000,000 shares of common stock outstanding at December
31, 2010 with a strike price of $0.05 per share and a remaining average
contractual term of 4.38 years.


23





We
entered into a Sponsorship Agreement with American Speed Factory dated April 22,
2009, whereby we received certain marketing and promotional services and
sponsorship rights to display our  logo in connection with the 2009
Ferrari Challenge racing season in exchange for the issuance of 500,000 shares
of our restricted stock.





Pursuant
to the Openfilm Purchase Agreement, on December 14, 2010, we acquired all of the
outstanding membership interests in Openfilm by exchanging for such interests an
aggregate of 107,238,421 shares of our common stock to the security holders of
Openfilm, of which 45,937,500 shares were issued to Enerfund (a company
controlled by Mike Zoi), 29,062,500 shares were issued to MZ Capital, LLC (a
company controlled by Mike Zoi), 24,950,000 shares were issued to Dmitry Kozko,
CEO of Openfilm, and an aggregate of 7,288,421 shares were issued to the
remaining seven non-controlling security holders of Openfilm.





On
December 14, 2010, we issued 1,000,000 shares of common stock to Curtis Wolfe in
exchange for legal services provided on our behalf.





We
believe that each of the foregoing securities transactions were exempt from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended, by virtue of Section 4(2) of the Securities Act which exempts
transactions by an issuer not involving any public offering.





Purchases
of Equity Securities by the Issuer and Affiliated Purchasers





See
information described under “Recent Sales of Unregistered Securities”
above.





Item
6. Selected Financial Data.





Not
Applicable.





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





This Annual Report on Form 10-K contains forward
-looking statements. These statements relate to our expectations, hopes,
intentions or strategies regarding future events or future financial
performance. Any statements contained in this report that are not statements of
historical fact may be deemed forward-looking statements. In some cases,
forward-looking statements can be identified by terminology such as “may,”
“will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,”
“estimate,” “predict,” “potential” or “continue,” or the negative of such terms
or other comparable terminology. Forward-looking statements include but are not
limited to statements regarding: our future business plans; future sales of our
product and services; introduction of new products and services; expected hiring
levels; marketing plans; increases of selling, general and administrative costs;
financing requirements and capital raising plans; successful integration and
development of acquired businesses; regulatory and economic factors affecting
our businesses and other factors that may impact our acquisition and development
strategy, some of which are beyond our control and difficult to predict. These
statements are only predictions and are subject to a number of assumptions,
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied in the forward-looking statements. The following
important factors, in addition to those discussed in our other filings with the
Securities and Exchange Commission (the “Commission”) from time to time, and
other unforeseen events or circumstances, could affect our future results and
could cause those results or other outcomes to differ materially from those
expressed or implied in our forward-looking statements: general economic
conditions; competition; our ability to raise capital; our ability to control
costs; changes within our industries; new and upgraded products and services by
us or our competitors; employee retention; sovereign risk; legal and regulatory
issues; changes in accounting policies or practices; currency translation and
exchange risks; our ability to protect our proprietary technologies; our ability
to manage growth; our dependence on our major stockholder and president to
continue to fund operations; and the market acceptance of our products and
services.





All
forward-looking statements are based on information available to us on the date
of this filing, and we assume no obligation to update such statements, although
we will continue to comply with our obligations under the securities
laws.


24





The
following discussion should be read in conjunction with our other filings with
the Commission and the consolidated financial statements and related notes
included in this report.





General





We are
currently engaged in pursuing a strategy to develop and/or acquire technology
and applications for use in the online media industry. In furtherance of this
strategy, we acquired Openfilm in December 2010 and Motorsport and Music1 on
February 1, 2011. We believe that our technology platforms and development
expertise will enable us to enhance the digital distribution of content in a
variety of industries. Accordingly, we intend to explore the possibility of
acquiring other internet portal properties and companies with similar goals of
connecting people in various vertical markets, such as the medical, educational,
sports and legal markets. From time to time, we may be engaged in various
discussions to acquire businesses or formulate joint venture or other
arrangements. Our policy is not to disclose discussions or potential
transactions until definitive agreements have been executed. Where appropriate,
acquisitions will be financed with equity shares and this may result in
substantial dilution to existing stockholders.





Since the
unwind of the TOT-SIBBNS joint venture effective March 31, 2010, we have had no
significant operations until the acquisition of Openfilm on December 14, 2010.
Management recognizes that we must raise capital sufficient to fund business
activities until such time as we can generate sufficient revenues and net cash
flows in amounts necessary to enable us to continue operations, of which there
can be no assurance.





Until
December 31, 2010, short term financing was provided by TGR Energy, LLC (“TGR”),
an entity controlled by our president, Mike Zoi, pursuant to a Subscription
Agreement dated August 7, 2008 (the “Subscription Agreement”). TGR agreed to
provide up to $2,000,000 (the “Investment Amount”) in exchange for up to
100,000,000 shares of common stock and warrants to purchase up to 50,000,000
shares of common stock at an exercise price of $0.05 per share. Pursuant to the
Subscription Agreement, TGR funded the Investment Amount as required in our
operational budget. On January 12, 2010, TGR agreed to increase its funding
commitment from $2,000,000 to $4,000,000 in exchange for up to an additional
100,000,000 shares of our common stock and warrants to purchase up to 50,000,000
shares of our common stock at an exercise price of $0.05 per share for a period
of five years from date of issuance.  TGR has funded the full amount
required under the Subscription Agreement.





For the
fiscal year ended March 31, 2010, TGR was issued an aggregate of 16,186,515
shares of our common stock and fully vested warrants to purchase 8,093,757
shares of our common stock at an exercise price of $0.05 per share pursuant to
the terms of the Subscription Agreement.  These issuances were in exchange
for financings under the Subscription Agreement in the aggregate amount of
$323,730.  A compensation charge of $4,717,677 was recorded for the fiscal
year ended March 31, 2010. This amount is calculated as the difference between
the market price of our common stock at the end of each quarter in which shares
were issued and the subscription price of the common shares ($0.02) multiplied
by the number of shares issued, plus the Black-Scholes valuation of the warrants
issued as calculated at the end of each quarter.





For the
nine months ended December 31, 2010, TGR was issued 101,088,150 shares of our
common stock and fully vested warrants to purchase 50,544,075 shares of our
common stock for $0.05 per share in exchange for funding of $2,021,763 provided
during the nine months ended December 31, 2010 under the terms of a Subscription
Agreement.  A compensation charge of $1,620,787 was recorded for the
nine months ended December 31, 2010 as one of our officers is also a principal
of TGR and the securities issued were below market value as of the issue date.
This amount is calculated as the difference between the market price of our
common stock at the end of each quarter in which shares were issued and the
subscription price of the common shares ($0.02) multiplied by the number of
shares issued, plus the Black-Scholes valuation of the warrants issued as
calculated at the end of each quarter.




On
December 10, 2010, Openfilm entered into a loan agreement with Enerfund, LLC (a
company controlled by Mike Zoi) in the principal amount of $1,667,020. The
annual interest rate is 5% payable annually on December 31st.  The
loan matures on December 10, 2012 with accrued interest due at that
time.


25





On December 31, 2010, we
entered into a Subscription Agreement with Enerfund, LLC (a company controlled
by Mike Zoi) (the “Enerfund Subscription Agreement”) pursuant to which we
received an aggregate of $2,000,000 in exchange for 200,000,000 shares of our
common stock and warrants to purchase 100,000,000 shares of our common stock at
an exercise price of $0.05 per share for a period of five years from date of
issuance. However, we did not have sufficient authorized shares of common stock
to fully issue these securities to Enerfund as of December 31, 2010.
Accordingly, this transaction has been accounted for asa purchase by
Enerfund as of December 31, 2010 of 112,000,000 shares of our common stock and
fully vested warrants to purchase 56,000,000 shares of our common stock for
$0.05 per share in exchange for $1,120,000. A compensation charge of
$560,000 was recorded for the nine months ended December 31, 2010 as one of our
officers is also a principal of Enerfund.  This amount is calculated
as the Black-Scholes valuation of the warrants issued as of December 31,
2010.  The balance of the proceeds of $880,000 has been accounted for
as an advance until we can issue the balance of the shares and warrants, which
is expected on or about March 1, 2011, and appears on our balance sheets as
a stock subscription liability. The proceeds of the
Enerfund Subscription Agreement will be used to fund our
operations.





We
entered into a Sponsorship Agreement with American Speed Factory dated April 22,
2009, whereby we received certain promotional services and sponsorship rights to
display our logo in connection with the 2009 Ferrari Challenge racing season in
exchange for the issuance of 500,000 shares of our restricted stock.  This
arrangement was valued at $50,000, which amount was recorded as an advertising
expense for the quarter ended June 30, 2009.





Through
May 15, 2009, Mr. New’s base salary was $140,000 with a $30,000 bonus payable
quarterly for meeting agreed-upon objectives.  On May 15, 2009, Mr. New’s
base salary was reduced from $140,000 to 91,000 and his bonus was reduced from
$30,000 to $19,500 annually. To partially offset the reduction in salary, we
provided Mr. New with 25,000 shares of fully vested common stock in lieu of his
March 31, 2009 cash bonus and 200,000 shares of common stock which vest monthly
from April 1, 2009 to September 30, 2009.  A compensation charge of $12,500
was recorded for the quarter ended June 30, 2009 and a compensation charge of
$10,000 was recorded for the quarter ended September 30, 2009, which reflects
the market value per share ($0.10) on the first trading day after the date of
grant.  At March 31, 2010, we provided Mr. New with 250,000 shares of fully
vested common stock for services provided to us  under a salary
reduction.  A compensation charge of $37,500 was recorded for the quarter
ended March 31, 2010, which reflects the market value per share ($0.15) on the
first trading day after the date of grant.





Other
employees (other than officers and directors) receiving salary reductions were
granted a total of 50,000 shares of common stock vesting monthly between April
1, 2009 and September 30, 2009.  We recorded a compensation expense of
$2,347 for the quarter ended June 30, 2009 and a compensation expense
of $1,042 for the quarter ended September 30, 2009, to reflect the market
value of stock provided in lieu of cash compensation.  Both of these
charges were calculated using the price per share of common stock ($0.10) on the
first trading date after the date of grant.





Pursuant
to a Stock Purchase Agreement dated November 23, 2009, TGR agreed to sell to
Dune Capital Group ("Dune") an aggregate of 5,000,000 shares of common stock of
the Company held by TGR for a purchase price of $0.10 per share or an aggregate
of $500,000. The purchase price is required to be paid on or before April
1, 2010. In order to ensure compliance with obligations under Section 16 of
the Securities Exchange Act of 1934, prior to the issuance of shares to Dune by
TGR, TGR assigned this Purchase Agreement to us. Accordingly, we received
$300,000 pursuant to this agreement and issued an aggregate of 3,000,000 shares
of our common stock to Dune on January 12, 2010.  On April 28,
2010, we agreed to terminate the Stock Purchase Agreement with Dune and
rescind the prior issuance of common stock. We repurchased the 3,000,000 shares
of common stock previously issued to Dune for $300,000.  The redeemed
shares were accounted for as treasury stock.





At
December 31, 2010, we had options to purchase 1,200,000 shares of common stock
outstanding under our stock option plan, of which options to purchase 1,005,556
shares of common stock are vested, with an exercise price of $0.25 per share and
with a remaining weighted average contractual term of 4.28 years. We also had
warrants to purchase 156,000,000 shares of common stock outstanding at December
31, 2010 with a strike price of $0.05 per share and a remaining average
contractual term of 4.38 years.


26





As set
forth in our audited financial statements for the fiscal years ended December
31, 2010 and March 31, 2010, several factors raise significant doubt as to our
ability to continue operating as a going concern.  These factors
include our history of net losses and that as of March 31, 2010, due to the
unwind of the TOT-SIBBNS joint venture, we had no significant operations until
the acquisition of Openfilm effective as of December 14, 2010, and a working
capital deficit. We are dependent upon TGR or Mike Zoi (as a result of his
controlling interest in TGR and Enerfund and our dependence on the
continued support of our operations by Mr. Zoi) to fund our operations. Our
independent auditors’ report on our financial statements for the year ended
December 31, 2010 contains an explanatory paragraph about our ability to
continue as a going concern. Management believes that our current operating
strategy, as described in the preceding paragraphs and the proceeds received
from the Enerfund Subscription Agreement and expected continued financial
support from Mr. Zoi, provides the opportunity for us to continue as a going
concern; however, there is no assurance this will occur and Mr. Zoi is not
obligated to continue to fund our operations.





On
November 11, 2010, our Board of Directors adopted a resolution changing our
fiscal year end from March 31 to December 31 effective immediately. Accordingly,
the first 12-month fiscal year will run from January 1, 2011 through December
31, 2011. The nine-month period from April 1, 2010 through December 31, 2010 is
presented herein along with comparative financial information to assist in
period-to-period comparisons. Our Board believes that this change will allow
better alignment of our annual planning and budget processes with our new
business strategy as we are no longer engaged in the seasonal oil and gas
business.  Accordingly, “fiscal 2010” reflects the nine month
transition period from April 1 through December 31, 2010, “fiscal 2009” reflects
the period from April 1, 2009 through March 31, 2010 and “fiscal 2008” reflects
the period from April 1, 2008 through March 31, 2009.





Historical
Overview





On July
16, 2008, we entered into a Joint Venture Agreement (the “JV Agreement”) with
Evgeny Bogorad (“Bogorad”), owner of Sibburnefteservis, Ltd. of Novosibirsk,
Russia, an oil services company (“SIBBNS”). Pursuant to the JV Agreement,
Bogorad contributed certain of SIBBNS’ assets and personnel to a joint venture
company named TOT-SIBBNS, Ltd., a Russian corporation (“TOT-SIBBNS”). An
independent appraisal company appraised the contributed assets at USD
$6,221,881.We ended development stage activity on July 16, 2008 when we acquired
a 75% interest in the TOT-SIBBNS joint venture and began operations in the oil
and gas service industry, including the exploration, development, production,
and marketing of crude oil and natural gas in Russia and
Kazakhstan.  At the closing on July 16, 2008, we issued to Bogorad
3,000,000 shares of our common stock in exchange for a 75% interest in
TOT-SIBBNS.





TOT-SIBBNS
obtained its first contract and began drilling operations in the Fall 2008.
However, financial constraints and the declining price of oil resulted in a
suspension of drilling operation in January 2009. Drilling operations did not
recommence during the Winter 2009 and most employees were furloughed in April
2009.





TOT-SIBBNS
had expectations of continuing exploratory drilling (both through its existing
customer and new customers) for the 2009/2010 drilling season as the price of
oil had risen significantly and TOT-SIBBNS was able to secure an additional
drilling contract in November 2009. However, in January 2010, it became
questionable whether activities with TOT-SIBBNS’ initial customer would
recommence in the short term, and there remained uneasiness in the market over
the continued improvement in crude oil prices, which had a negative impact on
the exploratory drilling market in Russia at that time.  Accordingly,
on January 27, 2010, after several weeks of exploring other business
opportunities, we altered our business focus and decided to exercise its option
to unwind the joint venture and pursue other development
opportunities.





We
executed an unwind agreement with TOT-SIBBNS whereby we exchanged our 75%
interest in TOT-SIBBNS for the 3,000,000 shares given to Evgeny Borograd in
2008. The unwind of the joint venture was consummated as of March 31,
2010. The unwind of the TOT-SIBBNS joint venture has been accounted for
using the guidance provided in ASC 845 (previously APB 29), as a disposal “other
than by sale” similar to a spin-off transaction, with the shares received
reflected as treasury stock and recorded on our balance sheet at its carrying
basis in the net assets of the joint venture as of March 31,
2010. Operations of TOT-SIBBNS are included in our consolidated financial
statements at March 31, 2010 as discontinued operations, but are not included in
the consolidated financial statements subsequent to March 31, 2010.





KORLEA-TOT
is our 51% joint venture with Korlea Invest Holding AG of Switzerland
(“Korlea”), a provider and trader of energy assets in the Czech Republic. The
joint venture, Korlea-TOT, established as of July 17, 2008, was expected to
assist in the marketing of oil assets sourced by other TOT-Energy companies and
contacts.  There has been no activity to date with this joint venture.
Accordingly, in November 2010, we sent Korlea notice of our request to unwind
this arrangement. We intend to sell our ownership in the KORLEA-TOT joint
venture to Korlea in exchange for a cash payment equal to 51% of the cash
balance in the joint venture on the date of unwind.  Consummation of
this transaction will be subject to obtaining certain approvals and making
certain filings overseas. It is expected that this transaction will be completed
during the first quarter of 2011.


27





We had
intended to develop a downstream solar business to provide complete solar
solutions (design, installation, maintenance and finance) to commercial
customers. Although we commenced some activities in this regard during 2010, we
have, as of December 31, 2010, abandoned further development as a result of the
acquisition of Openfilm in order to focus on the development and operation of
our online media businesses.





As part
of our strategy to develop an online media company, on December 14, 2010, we
entered into a purchase agreement (the “Openfilm Purchase Agreement”) with the
members of Openfilm, LLC, a Florida limited liability company engaged in the
development of technology and operation of a website that supports the
advancement of independent film on the Internet.  Mike Zoi, our
President, through his control of Enerfund, LLC and MZ Capital, LLC, both
Florida limited liability companies, held approximately 70% of Openfilm’s
outstanding membership interests prior to the acquisition by us. Pursuant to the
Openfilm Purchase Agreement, we acquired all of the outstanding membership
interests in Openfilm by exchanging for such interests an aggregate of
107,238,421 shares of our common stock to the security holders of Openfilm, of
which 45,937,500 shares were issued to Enerfund (a company controlled by Mike
Zoi), 29,062,500 shares were issued to MZ Capital, LLC (a company controlled by
Mike Zoi), 24,950,000 shares were issued to Dmitry Kozko, CEO of Openfilm, and
an aggregate of 7,288,421shares were issued to the remaining seven
non-controlling security holders of Openfilm. Upon completion of the acquisition
transaction on December 14, 2010, Openfilm became a wholly-owned subsidiary.
Additionally, in connection with the acquisition of Openfilm, we established
NetLab Systems, LLC (NetLab), a Florida limited liability company, and
transferred the ownership of certain intellectual property assets from Openfilm
to NetLab. Openfilm and NetLab entered into a Technology Transfer and License
Agreement granting Openfilm the right to use certain technology transferred to
NetLab. Research and development activities are conducted primarily through
Zivos, LLC, a Ukrainian limited liability company and wholly-owned subsidiary of
Openfilm. Up until the date of acquisition, Openfilm operations were funded
primarily by entities controlled by our President, Mike Zoi.





On
February 1, 2011, we acquired from Enerfund (a company controlled by Mike
Zoi) an 80% interest in Motorsport.com, Inc., a company engaged in
providing news, community forums and information to the automobile racing
enthusiast market through its website (www.motorsport.com),
and a 97% interest in Music1, a company that provides opportunities for emerging
musical artists, songwriters and producers to be reviewed by record company
executives, as well as, an interactive website (www.music1.com) and
social community that permits the uploading and sharing of subscriber-created
music.





In connection with the
acquisitions of Motorsport and Music1, we assumed certain indebtedness to
Enerfundin the principal amount of $184,592 and $128,890, respectively.
The annual interest rate is 5% payable annually on December 31st.  The
loans mature on the third anniversary of each funding under the respective loan
agreement, which fundings occurred from October 2010 through January 2011, with
accrued interest due at that time.





Net
Element Results of Operations for the Nine Months Ended December 31, 2010
Compared to the Twelve Months Ended March 31, 2010





We
reported a net loss of $3,101,146, or $0.01 per share, for fiscal 2010 as
compared with a net loss of $6,596,834, or $0.02 per share, for fiscal
2009.  The net loss for fiscal 2010 does not include discontinued
operations (TOT-SIBBNS).  The net loss for fiscal 2009 includes a loss
from discontinued operations of $646,017 relating to the TOT-SIBBNS joint
venture.





Revenues
were $242 for fiscal 2010 as compared with $0 for fiscal 2009. Fiscal 2010
revenues reflect revenues received from Openfilm from the acquisition date of
December 14, 2010 through December 31, 2010. Fiscal 2009 revenues reflect
revenues received in connection with the TOT-SIBBNS joint venture, which was
unwound as of March 31, 2010. The fiscal 2010 revenues are primarily from
Openfilm membership fees and film contest entry fees.


28





The gross
margin for fiscal 2010 was ($37,920) reflecting advertising revenues of $242 and
cost of sales of $38,162 relating primarily to Openfilm for the period from
December 14, 2010 (the date of acquisition) through December 31,
2010.  Cost of sales consists of direct expenses to maintain and
operate our Openfilm.com web site.  The gross margin for fiscal 2009
was $0 as the company discontinued operations of TOT-SIBBNS, our oil services
joint venture business.





General
and administrative expenses were $3,066,261 for fiscal 2010 as compared with
$5,789,352 for fiscal 2009.  General and administrative expenses for
fiscal 2010 reflect salaries and professional fees and a non-cash compensation
expense ($2,216,391) for stock provided under the Subscription Agreement and the
Enerfund Subscription Agreement, as well as, Openfilm general and administrative
expenses of $37,807 for the period from December 14, 2010 (the date of
acquisition) through December 31, 2010.





General
and administrative expenses for fiscal 2009 were $5,789,352, which included
non-cash compensation expenses of $4,864,863 for stock provided under the
Subscription Agreement and, to a lesser extent, services rendered on behalf of
the Company paid in shares of common stock.  The non-cash compensation
expenses were higher for fiscal 2009 as compared with fiscal 2010 primarily due
to the intrinsic value charges from the stock provided under the Subscription
Agreement and the shortened fiscal year period in 2010. The following table sets
forth a comparative summary of general and administrative expenses for the
fiscal years ended December 31, 2010 and March 31, 2010.





G&ASummary Comparison:Category
                      
                      Nine Months
                        Ended
                        December 31,
                        2010
                      
                      
                      Twelve
                        Months Ended
                        March 31,
                        2010
                      
                      
                      VarianceNon-cash
      compensation expense from subscriptions agreements and share based
      compensation
                      
                      $
                      2,216,391
                      
                      
                      $
                      4,864,863
                      
                      
                      $
                      2,648,472Payroll
                      
                      
                      465,127
                      
                      
                      
                      602,420
                      
                      
                      
                      137,293Professional
      fees
                      
                      
                      226,285
                      
                      
                      
                      115,933
                      
                      
                      
                      (110,352
                      )Rent
                      
                      
                      37,970
                      
                      
                      
                      10,000
                      
                      
                      
                      (27,970
                      )Filing
      fees
                      
                      
                      35,604
                      
                      
                      
                      9,547
                      
                      
                      
                      (26,057
                      )Other
      expenses
                      
                      
                      84,884
                      
                      
                      
                      186,589
                      
                      
                      
                      101,705$
                      3,066,261
                      
                      
                      $
                      5,789,352
                      
                      
                      $
                      2,723,091





Payroll
expenses for fiscal 2010 were lower than fiscal 2009 primarily due to the
shortened fiscal year period in 2010. Professional fees and filing fees were
higher for fiscal 2010 as compared with fiscal 2009 primarily due to the
acquisition of Openfilm and related SEC filings.   Rent expense
increased in fiscal 2010 compared with fiscal 2009 due to our move to new
corporate headquarters at a higher monthly rental ($15,648 versus $1,000 per
month).





Other
income was $2,946 for fiscal 2010 as compared with an expense of $171,025 for
fiscal 2009, which reflected subscription income from Openfilm during fiscal
2010 for the period from December 14, 2010 (the date of acquisition) through
December 31, 2010 and expenses from discontinued operations ($80,688) of
TOT-SIBBNS and the write-off of a loan to TOT-SIBBNS ($90,282) during fiscal
2009.





On
December 10, 2010, Openfilm entered into a loan agreement with Enerfund LLC (a
company controlled by Mike Zoi) in the principal amount of $1,667,020. The
annual interest rate is 5% payable annually on December 31st.  The
loan matures on December 10, 2012 with accrued interest due at that
time.  The proceeds of this loan are being used to fund Openfilm
operations.


29





Going
Concern





Net
Element had a net loss of $3,101,146 for the nine months ended December 31,
2010 and $6,596,834 for the twelve months ended March 31, 2010, and further
losses are anticipated. We had a negative cash flow from operations of
$1,519,972 for the nine months ended December 31, 2010, and $747,945 for
the twelve months ended March 31, 2010. Net Element’s ability to continue
operating is limited without continued availability of financing, of which there
can be no assurance. These matters raise substantial doubt about our ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recovery of the recorded assets or the
classification of the liabilities that might be necessary should Net Element be
unable to continue as a going concern. We are dependent on continued
funding by entities controlled by our President, Mike Zoi, of which there
can be no assurance as Mr. Zoi is not obligated to continue such funding.
We will need to raise additional funds for operations during the
latter half of 2011.





Motorsport
Results of Operations for the Twelve Months Ended December 31, 2010 Compared to
the Twelve Months Ended December 31, 2009





Motorsport’s
net income for the year ended December 31, 2010 was $14,137, an increase of
$35,061, as compared with a net loss of $20,924 for the year ended December 31,
2009.  The increase in net income was primarily the result of an
increase in revenues of $47,849, from $32,917 in 2009 to $80,766 in 2010,
offset, in part, by an increase in professional fee expense of $10,167 and
internet connectivity of $2,525.  In 2010, revenues also increased as
a result of a 9% increase in net page views from the prior year
period.  During the year ended December 31, 2010, loans payable to
shareholders in the amount of $26,350 were repaid.





Pro
Forma Results




The following unaudited pro forma
condensed combined financial information gives pro forma effect toouracquisition of Motorsport,LLCand it’s 80% owned subsidiary
Motorsport.com,Inc.(both entities referred toas (“Motorsport”).The transaction has been accounted for
as a merger between entities under common control due to the commonality of
ownership between us and Motorsport.The acquisition of Music1 is not
considered the acquisition
of a significant business or subsidiary and as such financial statements and pro
forma results of Music1 are not required.
  The following unaudited pro forma
condensed consolidated financial statements and explanatory notes present howourfinancial statements may have appeared had
the acquisition occurred onApril1, 2009 (with respect to the results of
operations) or as of December 31, 2010 (with respect to the balance sheet
information). Adjustments to the pro forma presentation for thenine monthperiod ended December 31, 2010
andthe twelve month period
endedMarch 31, 2010
include recording the income earned between December 17 and December 31,
2010ofMotorsport,LLC, amortizing intangible assets and
eliminating equity of acquired entities.






These
unaudited pro forma condensed consolidated financial statements have been
derived from and should be read together with our historical financial
statements and related notes included in this annual report on Form
10-K.  Motorsport.com, Inc.’s historical financial statements for the
years ended December 31, 2010 and 2009 are included elsewhere in this
report.




The
unaudited pro forma condensed consolidated financial information has been
prepared by management, presented for illustrative purposes only, and do not
purport to represent what the results of our operations or financial
position  would have been had the acquisition occurred as of the dates
indicated, nor is it indicative of future financial position or results of
operations for any period.


30




Condensed
Consolidated Pro Forma Balance Sheet


December
31, 2010





Net Element, Inc.
                                                      
                                                      
                                                      Motorsport.com
                                                      
                                                      
                                                      Adjustments (1)
                                                      
                                                      
                                                      Pro FormaASSETSCurrent
      assetsCash
                                                      
                                                      $
                                                      2,500,253
                                                      
                                                      
                                                      $
                                                      1,309
                                                      
                                                      
                                                      $
                                                      22,704
                                                      
                                                      
                                                      $
                                                      2,524,266Accounts
      receivable
                                                      
                                                      
                                                      3,477
                                                      
                                                      
                                                      
                                                      6,470
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      9,947Prepaid
      expenses and other assets
                                                      
                                                      
                                                      172,531
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      172,531Total
      current assets
                                                      
                                                      
                                                      2,676,261
                                                      
                                                      
                                                      
                                                      7,779
                                                      
                                                      
                                                      
                                                      22,704
                                                      
                                                      
                                                      
                                                      2,706,744Property
      and equipment, net
                                                      
                                                      
                                                      151,416
                                                      
                                                      
                                                      
                                                      2,398
                                                      
                                                      
                                                      
                                                      (2,398
                                                      )
                                                      
                                                      
                                                      151,416Other
      assets
                                                      
                                                      
                                                      3,300
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      659,621
                                                      
                                                      
                                                      
                                                      662,921Total
      assets
                                                      
                                                      $
                                                      2,830,977
                                                      
                                                      
                                                      $
                                                      10,177
                                                      
                                                      
                                                      $
                                                      679,927
                                                      
                                                      
                                                      $
                                                      3,521,081LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)LiabilitiesAccounts
      payable and accrued expenses
                                                      
                                                      $
                                                      487,033
                                                      
                                                      
                                                      $
                                                      4,900
                                                      
                                                      
                                                      $
                                                      10,533
                                                      
                                                      
                                                      $
                                                      502,466Notes
      and accounts payable to related parties
                                                      
                                                      
                                                      49,999
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      581,307
                                                      
                                                      
                                                      
                                                      631,306Stock
      subscription liability
                                                      
                                                      
                                                      880,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      880,000Total
      current liabilities
                                                      
                                                      
                                                      1,417,032
                                                      
                                                      
                                                      
                                                      4,900
                                                      
                                                      
                                                      
                                                      591,840
                                                      
                                                      
                                                      
                                                      2,013,772Long
      term liabilitiesDue
      to related parties (non-current portion)
                                                      
                                                      
                                                      1,667,020
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,667,020Total
      long term liabilities
                                                      
                                                      
                                                      1,667,020
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,667,020Total
      liabilities
                                                      
                                                      
                                                      3,084,052
                                                      
                                                      
                                                      
                                                      4,900
                                                      
                                                      
                                                      
                                                      591,840
                                                      
                                                      
                                                      
                                                      3,680,792STOCKHOLDERS'
      EQUITY (DEFICIT)Preferred
      stock
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -Common
      stock
                                                      
                                                      
                                                      642,117
                                                      
                                                      
                                                      
                                                      1,420
                                                      
                                                      
                                                      
                                                      (1,420
                                                      )
                                                      
                                                      
                                                      642,117Treasury
      stock
                                                      
                                                      
                                                      (2,641,640
                                                      )
                                                      
                                                      
                                                      (500
                                                      )
                                                      
                                                      
                                                      500
                                                      
                                                      
                                                      
                                                      (2,641,640
                                                      )Paid
      in capital
                                                      
                                                      
                                                      28,143,518
                                                      
                                                      
                                                      
                                                      23,500
                                                      
                                                      
                                                      
                                                      (62,636
                                                      )
                                                      
                                                      
                                                      28,104,382Deferred
      compensation
                                                      
                                                      
                                                      (13,556
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (13,556
                                                      )Accumulated
      other comprehensive income
                                                      
                                                      
                                                      9,507
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      9,507Accumulated
      deficit
                                                      
                                                      
                                                      (26,420,933
                                                      )
                                                      
                                                      
                                                      (19,143
                                                      )
                                                      
                                                      
                                                      19,143
                                                      
                                                      
                                                      
                                                      (26,420,933
                                                      )Noncontrolling
      interest
                                                      
                                                      
                                                      27,912
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      132,500
                                                      
                                                      
                                                      
                                                      160,412Total
      stockholders’ equity (deficit)
                                                      
                                                      
                                                      (253,075
                                                      )
                                                      
                                                      
                                                      5,277
                                                      
                                                      
                                                      
                                                      88,087
                                                      
                                                      
                                                      
                                                      (159,711
                                                      )Total
      liabilities and stockholders' equity (deficit)
                                                      
                                                      $
                                                      2,830,977
                                                      
                                                      
                                                      $
                                                      10,177
                                                      
                                                      
                                                      $
                                                      679,927
                                                      
                                                      
                                                      $
                                                      3,521,081




(1)
            Reflects the issuance of notes
      payable to the shareholders of Motorsport.com, Inc. for an 80%
      interest  pursuant to the Motorsport Purchase
      Agreement.


31





Condensed
Consolidated Pro Forma Statement of Operations




For the period ended 12-31-10Net Element, Inc
                                        
                                        
                                        Motorsport.com
                                        
                                        
                                        Adjustments
                                          (2)
                                        
                                        
                                        Pro FormaSales
                                        
                                        $
                                        242
                                        
                                        
                                        $
                                        80,766
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        81,008Cost
      of sales
                                        
                                        
                                        38,162
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        38,162Gross
      Profit
                                        
                                        
                                        (37,920
                                        )
                                        
                                        
                                        80,766
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        42,846Operating
      ExpensesGeneral
      and administrative
                                        
                                        
                                        3,066,261
                                        
                                        
                                        
                                        66,629
                                        
                                        
                                        
                                        95,868
                                        
                                        
                                        
                                        3,228,758Income
      (loss) from operations
                                        
                                        
                                        (3,104,181
                                        )
                                        
                                        
                                        14,137
                                        
                                        
                                        
                                        (95,868
                                        )
                                        
                                        
                                        (3,185,912
                                        )Non-operating
      expenseOther
      income
                                        
                                        
                                        2,946
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,946Income
      (loss) before income tax provision
                                        
                                        
                                        (3,101,235
                                        )
                                        
                                        
                                        14,137
                                        
                                        
                                        
                                        (95,868
                                        )
                                        
                                        
                                        (3,182,966
                                        )Income
      tax provision
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Net
      income (loss) from continuing operations
                                        
                                        
                                        (3,101,235
                                        )
                                        
                                        
                                        14,137
                                        
                                        
                                        
                                        (95,868
                                        )
                                        
                                        
                                        (3,182,966
                                        )Net
      Loss attributable to the noncontrolling interest
                                        
                                        
                                        89
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        16,346
                                        
                                        
                                        
                                        16,435Net
      income (loss)
                                        
                                        
                                        (3,101,146
                                        )
                                        
                                        
                                        14,137
                                        
                                        
                                        
                                        (79,522
                                        )
                                        
                                        
                                        (3,166,531
                                        )Other
      comprehensive incomeForeign
      currency translation loss
                                        
                                        
                                        (465
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (465
                                        )Comprehensive
      income (loss)
                                        
                                        $
                                        (3,101,611
                                        )
                                        
                                        $
                                        14,137
                                        
                                        
                                        $
                                        (79,522
                                        )
                                        
                                        $
                                        (3,166,996
                                        )






Condensed
Consolidated Pro Forma Statement of Operations




For the period ended 3-31-10Net Element, Inc
                        
                        
                        Motorsport.com
                        
                        
                        Adjustments
                          (2)
                        
                        
                        Pro FormaSales
                        
                        $
                        -
                        
                        
                        $
                        32,917
                        
                        
                        $
                        -
                        
                        
                        $
                        32,917Cost
      of sales
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Gross
      Profit
                        
                        
                        -
                        
                        
                        
                        32,917
                        
                        
                        
                        -
                        
                        
                        
                        32,917Operating
      ExpensesGeneral
      and administrative
                        
                        
                        5,789,352
                        
                        
                        
                        53,841
                        
                        
                        
                        127,450
                        
                        
                        
                        5,970,643Loss
      from operations
                        
                        
                        (5,789,352
                        )
                        
                        
                        (20,924
                        )
                        
                        
                        (127,450
                        )
                        
                        
                        (5,937,726
                        )Non-operating
      expenseOther
      expense
                        
                        
                        (171,025
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (171,025
                        )Loss
      before income tax provision
                        
                        
                        (5,960,377
                        )
                        
                        
                        (20,924
                        )
                        
                        
                        (127,450
                        )
                        
                        
                        (6,108,751
                        )Income
      tax provision
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        -Net
      loss from continuing operations
                        
                        
                        (5,960,377
                        )
                        
                        
                        (20,924
                        )
                        
                        
                        (127,450
                        )
                        
                        
                        (6,108,751
                        )Net
      loss attributable to the noncontrolling interest
                        
                        
                        9,560
                        
                        
                        
                        -
                        
                        
                        
                        29,675
                        
                        
                        
                        39,235Net
      loss from discontinued operations
                        
                        
                        (646,017
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (646,017
                        )Net
      loss
                        
                        
                        (6,596,834
                        )
                        
                        
                        (20,924
                        )
                        
                        
                        (97,775
                        )
                        
                        
                        (6,715,533
                        )Other
      comprehensive incomeForeign
      currency translation loss
                        
                        
                        (26,903
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (26,903
                        )Comprehensive
      loss
                        
                        $
                        (6,623,737
                        )
                        
                        $
                        (20,924
                        )
                        
                        $
                        (97,775
                        )
                        
                        $
                        (6,742,436
                        )




(2)
            Reflects
      the pro forma effect on the consolidated results of operations arising
      from (i) increased depreciation and amortization from purchase accounting
      adjustments and (ii) increased interest expense from issuance of notes
      payable.


32





Liquidity
and capital resources





At
December 31, 2010, we had an accumulated deficit of $26,420,933 and cash of
2,500,253. We had a net loss of $3,101,146 for the nine months ended December
31, 2010 and $6,596,834 for the twelve months ended March 31, 2010, and further
losses are anticipated. We had a negative cash flow from operations of
$1,519,972 for the nine months ended December 31, 2010 and $747,945 for the
twelve months ended March 31, 2010.




We are
dependent upon receiving funds from our controlling stockholders, TGR Energy,
LLC and Enerfund, LLC, which are controlled by our president, Mike Zoi. Pursuant
to the Subscription Agreement, TGR was obligated to invest up to $4,000,000 to
fund working capital requirements in exchange for up to 200,000,000 shares of
our common stock and warrants to purchase up to 100,000,000 shares of common
stock with an exercise price of $0.05. The shares and warrants were issued
quarterly and we recorded an appropriate compensation expense as necessary
based on the fair value of the securities on the last day of each fiscal quarter
(the date of issuance). At December 31, 2010, TGR had fulfilled its investment
obligations under the Subscription Agreement.




On
December 10, 2010, Openfilm entered into a loan agreement with Enerfund LLC (a
company controlled by Mike Zoi) in the principal amount of $1,667,020. The
annual interest rate is 5% payable annually on December 31st.  The
loan matures on December 10, 2012 with accrued interest due at that
time.




On
December 31, 2010, we entered into a Subscription Agreement with Enerfund, LLC
(a company controlled by Mike Zoi) (the “Enerfund Subscription Agreement”)
pursuant to which we received an aggregate of $2,000,000 in exchange for
200,000,000 shares of our common stock and warrants to purchase 100,000,000
shares of our common stock at an exercise price of $0.05 per share for a period
of five years from date of issuance. However, we did not have sufficient
authorized shares of common stock to fully issue these securities to Enerfund as
of December 31, 2010. Accordingly, this transaction has been accounted for as a
purchase by Enerfund as of December 31, 2010 of 112,000,000 shares of our common
stock and fully vested warrants to purchase 56,000,000 shares of our common
stock for $0.05 per share in exchange for $1,120,000. A compensation charge
of $560,000 was recorded for the nine months ended December 31, 2010 as one of
our officers is also a principal of Enerfund.   This amount is
calculated as the Black-Scholes valuation of the warrants issued as of December
31, 2010.  The balance of the proceeds of $880,000 has been accounted
for as an advance until we can issue the balance of the shares and warrants,
which is expected on or about March 1, 2011, and appears on our balance sheets
as a stock subscription liability. The proceeds of the Enerfund Subscription
Agreement will be used to fund our operations. However, we will need to raise
additional capital to fund operations during the latter half of
2011.


33





On
February 1, 2011, we entered into a purchase agreement (the “Motorsport Purchase
Agreement”) with Enerfund, LLC, an entity controlled by Mike Zoi, to purchase
all of the issued and outstanding interests of Motorsport, LLC, a Florida
limited liability company that held 80% of the outstanding common stock of
Motorsport.com, Inc., a Florida corporation engaged in the operation of a news
and information website relating to the international motorsport
industry.  Motorsport, LLC purchased the interest of Motorsport.com,
Inc. on December 17, 2010. The remaining 20% of the outstanding common stock of
Motorsport.com, Inc. is held by the original stockholders (4 persons) of
Motorsport.com, Inc.  We paid Enerfund an aggregate of $130,000
(exclusive of a $20,000 contingent payment relating to the purchase of certain
domain names) and agreed to take over responsibility for the obligations
contained in the purchase agreement of December 17, 2010, which includes, among
other things, the aggregate payment to the original stockholders of
Motorsport.com, Inc. of an additional $450,000 payable in four quarterly
installments, without interest, commencing on December 1, 2013. In the event the
domain names and related registrations are purchased by June 16, 2011, then the
contingent amount ($20,000) will be paid. The original sellers have a security
interest in the domains of Motorsport.com, Inc. as collateral for payment of the
additional purchase price. Failure by us to pay the additional purchase
installments when due may result in forfeiture of the shares in Motorsport.com,
Inc. held by us.





In
addition, we have an option to purchase the remaining interests of
Motorsport.com, Inc. currently held by the original stockholders. The purchase
option expires on December 16, 2018.  We may exercise this option at
any time upon thirty days prior written notice and the payment, in cash or
preferred stock of Motorsport.com, Inc., as follows:





(v)
            until
      December 16, 2015:  $0.1075 per
share;


(vi)
            from
      December 17, 2015 through December 16, 2016: $0.1185 per
      share;


(vii)
            from
      December 17, 2016 through December 16, 2017: $0.1305 per share;
      and


(viii)
            from
      December 17, 2017 through December 16, 2018: $0.1435 per
      share.





We may
redeem the preferred stock issued at any time upon the payment in full of the
value of the preferred stock as of the date of issuance.




On
January 31, 2011, Motorsport entered into a loan agreement with Enerfund LLC (a
company controlled by Mike Zoi) in the principal amount of $184,592. The annual
interest rate is 5% payable annually on December 31st.  The
loan matures on the third anniversary of each funding under the loan agreement,
which fundings occurred from October 2010 through January 2011, with accrued
interest due at that time.





On February 1, 2011, we acquired Music1, LLC from
Enerfund for an aggregate purchase price of $15,000. We are required to invest
at least $500,000 in Music1 by December 31, 2012 (which amount may include
salaries and other expenses of Music1). In the event such amount is not invested
in Music1 by December 31, 2012 or the employment agreement of Mr. Strother is
terminated other than for cause or good reason on or before May 7, 2012, then
Mr. Strother will have the right to repurchase Music1 for
$1.00.





On
January 31, 2011, Music1 entered into a loan agreement with Enerfund LLC (a
company controlled by Mike Zoi) in the principal amount of $128,890. The annual
interest rate is 5% payable annually on December 31st.  The
loan matures on the third anniversary of each funding under the loan agreement,
which fundings occurred from October 2010 through January 2011, with accrued
interest due at that time.





Our
ability to continue operating is limited without continued availability of
financing, of which there can be no assurance. These matters raise substantial
doubt about our ability to continue as a going concern as set forth in our
audited financial statements included elsewhere in this Report. Management
believes that our current operating strategy, as described in the preceding
paragraphs and the proceeds received from the Enerfund Subscription Agreement
and expected continued financial support from Mr. Zoi, provides the opportunity
for us to continue as a going concern; however, there is no assurance this will
occur and Mr. Zoi is not obligated to continue to fund our
operations.


34





Critical
Accounting Policies and Estimates





Our
significant accounting policies are described more fully in Note 1 to Net
Element’s consolidated financial statements and Note 2 to Motorsport’s
consolidated financial statements. Management is required to make certain
estimates and assumptions during the preparation of our financial statements in
accordance with generally accepted accounting principles.  These estimates
and assumptions impact the reported amount of assets and liabilities as well as
disclosures regarding any contingencies.  Actual results could differ from
estimates and this could impact reported net income or the value of our assets
and liabilities.





In
applying estimates, management uses its judgment to determine the appropriate
assumptions to be used in the determination of certain estimates. Those
estimates are based on our historical experience, terms of existing contracts,
our observance of trends in the industry, information provided by outside
sources, trade journals and other sources, as appropriate.





Deferred
Taxes.  
Estimates of deferred income taxes and items giving rise to deferred tax assets
and liabilities reflect management’s assessment of actual future taxes to be
paid on items reflected in the financial statements, giving consideration to
both timing and the probability of the realization.  Actual income taxes
could vary from these estimates for a variety of reasons including changes in
tax law, operating results that vary from budget or the review of our tax
returns by the IRS.





Valuation of
Stock Based Compensation.   Stock based
compensation has been provided by the Company in order to preserve the cash flow
necessary to grow our business.  In addition, we entered into the
Subscription Agreement described above to strengthen our available sources of
capital.  We believe the estimate of stock based compensation is a
“critical accounting estimate” that significantly affects our results of
operations.  Management of the Company has discussed the development and
selection of this critical accounting estimate with our board of directors and
the board of directors has reviewed the Company’s disclosure relating to it in
this Report.





Capitalized
Website Costs. Openfilm
capitalizes certain software development costs. Generally, costs for developing
website application and infrastructure, creating the initial graphics of the
website, and adding upgrades and enhancements are capitalized whereas costs for
planning, adding content, and operating the website are expensed as incurred.
Net capitalized website costs are recorded at cost less accumulated
amortization. Amortization is provided for on a straight-line basis over the
expected useful life of the website. Openfilm evaluates the recoverability of
intangible assets periodically and takes into account events or circumstances
that warrant revised estimates of useful lives or that indicate impairment
exists.





Revenue.  Openfilm
recognizes revenue when the persuasive evidence of an arrangement exists, no
significant company obligations remain, collection of the related receivable is
reasonably assured, and the fees are fixed or determinable. Openfilm recognizes
revenue on a gross basis and publisher expenses that are directly related to a
revenue-generating event are recorded as a component of cost of revenue.
Additionally, fee revenue from transactions on Openfilm’s affiliate marketing
networks are recognized on a net basis where Openfilm acts as an agent in these
transactions and the payments to publishers are the contractual obligation of
the advertiser customers.





Off-balance
sheet arrangements





At
December 31, 2010, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4) of Regulation S-K promulgated under the Securities
Exchange Act of 1934, as amended.


35





Recently
Issued Accounting Pronouncements





In
December 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2010-29, “Business Combinations (Topic 805),
Disclosure of Supplementary Pro Forma Information for Business
Combinations”.  The objective of this ASU is to address diversity in
practice about the presentation of pro forma revenue and earnings disclosure
requirements for business combinations, and specifies that a public entity that
presents comparative financial statements should disclose revenue and earnings
of the combined entity as though the business combination(s) that occurred
during the current year had occurred as of the beginning of the comparable prior
annual reporting period only.  This ASU is effective prospectively for
business combinations on or after January 1, 2011.  As this ASU is
limited to supplemental disclosures, its adoption will not have an impact on our
financial condition or results of operations.





In
December, 2010, the FASB issued ASU 2010-28, “Intangibles—Goodwill and Other
(Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting
Units with Zero or Negative Carrying Amounts”. The objective of this ASU is to
address diversity in practice in the application of goodwill impairment testing
by entities with reporting units with zero or negative carrying amounts,
eliminating an entity’s ability to assert that a reporting unit is not required
to perform Step 2 because the carrying amount of the reporting unit is zero or
negative despite the existence of qualitative factors that indicate the goodwill
is more likely than not impaired. This ASU is effective for interim periods
after January 1, 2010.  The adoption of this ASU may require us to
report goodwill impairment charges sooner than under current
practice.





Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk.





We do not
have material exposure to market risks associated with changes in interest rates
related to cash equivalent securities held at December 31, 2010.





Item
8.  Financial Statements and Supplementary Data.





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


Net
Element, Inc.


Miami,
Florida




We have
audited the accompanying consolidated balance sheets of Net Element, Inc. (a
“Company”) as of December 31, 2010 and March 31, 2010, and the related
consolidated statements of operations, changes in stockholders’ deficiency in
assets, and cash flows for the nine and twelve months then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.




We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.


36




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Net Element, Inc. as of
December 31, 2010 and March 31, 2010, and the results of its operations and its
cash flows for the nine and twelve months then ended in conformity with
accounting principles generally accepted in the United States of
America.




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, Company has experienced recurring losses
and has an accumulated deficit and stockholders’
deficiency at December 31, 2010. These conditions raise substantial doubt
about its ability to continue as a going concern. Management’s plans regarding
those matters also are described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.




/s/
Daszkal Bolton LLP




Fort
Lauderdale, Florida




February
2, 2011


37




NET
ELEMENT, INC.
 CONSOLIDATED
BALANCE SHEETS
 
 December 31, 2010
                    
                    
                    March 31, 2010ASSETSCurrent
      assetsCash
                    
                    $
                    2,500,253
                    
                    
                    $
                    277,830Deposits
                    
                    
                    55,274
                    
                    
                    
                    8,000Contract
      receivable, net
                    
                    
                    3,477
                    
                    
                    
                    -Prepaid
      expenses and other assets
                    
                    
                    117,257
                    
                    
                    
                    20,152Total
      current assets
                    
                    
                    2,676,261
                    
                    
                    
                    305,982Fixed
      assetsFurniture
      and equipment
                    
                    
                    125,730
                    
                    
                    
                    -Computers
                    
                    
                    110,969
                    
                    
                    
                    12,319Leasehold
      improvements
                    
                    
                    19,944
                    
                    
                    
                    -Less:
      accumulated depreciation
                    
                    
                    (105,227
                    )
                    
                    
                    (5,530
                    )Total
      fixed assets (net)
                    
                    
                    151,416
                    
                    
                    
                    6,789Other
      AssetsDue
      from related parties
                    
                    
                    3,300
                    
                    
                    
                    -Total
      other assets
                    
                    
                    3,300Total
      assets
                    
                    $
                    2,830,977
                    
                    
                    $
                    312,771LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilitiesAccounts
      payable
                    
                    
                    61,422
                    
                    
                    
                    23,702Stock
      subscription liability
                    
                    
                    880,000
                    
                    
                    
                    -Due
      to related parties (current portion)
                    
                    
                    49,999
                    
                    
                    
                    -Accrued
      expenses
                    
                    
                    425,611
                    
                    
                    
                    920,559Total
      current liabilities
                    
                    
                    1,417,032
                    
                    
                    
                    944,261Long
      term liabilitiesDue
      to related parties (non-current portion)
                    
                    
                    1,667,020
                    
                    
                    
                    -Total
      long term liabilities
                    
                    
                    1,667,020
                    
                    
                    
                    -Total
      liabilities
                    
                    
                    3,084,052
                    
                    
                    
                    944,261COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      DEFICITPreferred
      stock ($.001 par value, 100,000,000 shares authorized and no shares issued
      and outstanding)
                    
                    
                    -
                    
                    
                    
                    -Common
      stock ($.001 par value, 800,000,000 shares authorized and 642,119,111 and
      320,778,512 shares issued and outstanding)
                    
                    
                    642,117
                    
                    
                    
                    320,778Treasury
      stock, at cost; 6,250,000 and 3,250,000 shares
                    
                    
                    (2,641,640
                    )
                    
                    
                    (2,341,640
                    )Paid
      in capital
                    
                    
                    28,143,518
                    
                    
                    
                    24,671,186Deferred
      compensation
                    
                    
                    (13,556
                    )
                    
                    
                    -Accumulated
      other comprehensive income
                    
                    
                    9,507
                    
                    
                    
                    9,972Accumulated
      deficit
                    
                    
                    (26,420,933
                    )
                    
                    
                    (23,319,787
                    )Noncontrolling
      interest
                    
                    
                    27,912
                    
                    
                    
                    28,001Total
      deficit
                    
                    
                    (253,075
                    )
                    
                    
                    (631,490
                    )Total
      liabilities and stockholders' deficit
                    
                    $
                    2,830,977
                    
                    
                    $
                    312,771
 
 See
accompanying notes.
  38




NET
ELEMENT, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


Nine Months Ended
                  
                  
                  Twelve Months EndedDecember 31, 2010
                  
                  
                  March 3l, 2010Sales
                  
                  $
                  242
                  
                  
                  $
                  -Cost
      of sales
                  
                  
                  38,162
                  
                  
                  
                  -Gross
      Profit
                  
                  
                  (37,920
                  )
                  
                  
                  -Operating
      ExpensesGeneral
      and administrative
                  
                  
                  3,066,261
                  
                  
                  
                  5,789,352Loss
      from operations
                  
                  
                  (3,104,181
                  )
                  
                  
                  (5,789,352
                  )Non-operating
      expenseOther
      income (expense)
                  
                  
                  2,946
                  
                  
                  
                  (171,025
                  )Loss
      before income tax provision
                  
                  
                  (3,101,235
                  )
                  
                  
                  (5,960,377
                  )Income
      tax provision
                  
                  
                  -
                  
                  
                  
                  -Net
      loss from continuing operations
                  
                  
                  (3,101,235
                  )
                  
                  
                  (5,960,377
                  )Net
      loss attributable to the noncontrolling interest
                  
                  
                  89
                  
                  
                  
                  9,560Net
      loss from discontinued operations
                  
                  
                  -
                  
                  
                  
                  (646,017
                  )Net
      loss
                  
                  
                  (3,101,146
                  )
                  
                  
                  (6,596,834
                  )Other
      comprehensive incomeForeign
      currency translation loss
                  
                  
                  (465
                  )
                  
                  
                  (26,903
                  )Comprehensive
      loss
                  
                  $
                  (3,101,611
                  )
                  
                  $
                  (6,623,737
                  )Net
      loss per share from continuing operations - basic and
    diluted
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.02
                  )Net
      loss per share from discontinued operations - basic and
      diluted
                  
                  $
                  -
                  
                  
                  $
                  (0.00
                  )Net
      loss per share - basic and diluted
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.02
                  )Weighted
      average number of common shares outstanding - basic and
      diluted
                  
                  
                  335,761,892
                  
                  
                  
                  309,714,392


See
accompanying notes.


39





NET
ELEMENT, INC.


CONSOLIDATED
STATEMENT OF CHANGES IN


STOCKHOLDERS’
DEFICIENCY IN ASSETS


Additional
                                    
                                    
                                    
                                    
                                    
                                    AccumulatedOther
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    Total Stockholders’Preferred Stock
                                    
                                    
                                    Common Stock
                                    
                                    
                                    Treasury
                                    
                                    
                                    Paid in
                                    
                                    
                                    Deferred
                                    
                                    
                                    Comprehensive
                                    
                                    
                                    Non-controlling
                                    
                                    
                                    Accumulated
                                    
                                    
                                    Equity (Deficiency)Shares
                                    
                                    
                                    Amount
                                    
                                    
                                    Shares
                                    
                                    
                                    Amount
                                    
                                    
                                    Stock
                                    
                                    
                                    Capital
                                    
                                    
                                    Compensation
                                    
                                    
                                    Income
                                    
                                    
                                    interest
                                    
                                    
                                    Deficit
                                    
                                    
                                    in AssetsBalance
      March 31, 2009
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    300,583,108
                                    
                                    
                                    
                                    300,583
                                    
                                    
                                    
                                    (62,500
                                    )
                                    
                                    
                                    19,940,319
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (1,176,614
                                    )
                                    
                                    
                                    37,561
                                    
                                    
                                    
                                    (16,722,953
                                    )
                                    
                                    
                                    2,316,397Stock
      options vested
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    33,791
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    33,791Shares
      and warrants to be issued pursuant to subscription
    agreement
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    16,186,515
                                    
                                    
                                    
                                    16,187
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,025,220
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,041,407Shares
      issued as executive compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    508,889
                                    
                                    
                                    
                                    508
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    62,880
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    63,388Shares
      issued for advertising and promotion
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    500,000
                                    
                                    
                                    
                                    500
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    49,503
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    50,003Shares
      issued pursuant to purchase agreement
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3,000,000
                                    
                                    
                                    
                                    3,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    297,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    300,000Net
      loss from discontinued operations
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (646,017
                                    )
                                    
                                    
                                    (646,017
                                    )Shares
      received on disposal of TOT-SIBBNS Joint Venture
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,279,140
                                    )
                                    
                                    
                                    (737,526
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,213,489
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (1,803,177
                                    )Foreign
      currency exchange
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (26,903
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (26,903
                                    )Net
      loss
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (9,560
                                    )
                                    
                                    
                                    (5,950,817
                                    )
                                    
                                    
                                    (5,960,377
                                    )Balance
      March 31, 2010
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    
                                    320,778,512
                                    
                                    
                                    $
                                    320,778
                                    
                                    
                                    $
                                    (2,341,640
                                    )
                                    
                                    $
                                    24,671,187
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    9,972
                                    
                                    
                                    $
                                    28,001
                                    
                                    
                                    $
                                    (23,319,787
                                    )
                                    
                                    $
                                    (631,488
                                    )Stock
      options vested
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    25,463
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    25,463Shares
      issued as executive compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,014,028
                                    
                                    
                                    
                                    1,013
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    9,126
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    10,139Deferred
      compensation with respect to business acquired
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (13,556
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (13,556
                                    )Shares
      and warrants to be issued pursuant to subscription
    agreements
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    213,088,150
                                    
                                    
                                    
                                    213,088
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,109,463
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,322,551Shares
      repurchased pursuant to purchase agreement
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (300,000
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (300,000
                                    )Shares
      issued pursuant to purchase agreement
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    107,238,421
                                    
                                    
                                    
                                    107,238
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (1,671,721
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (1,564,484
                                    )Foreign
      currency exchange
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (465
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (465
                                    )Net
      loss
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (89
                                    )
                                    
                                    
                                    (3,101,146
                                    )
                                    
                                    
                                    (3,101,235
                                    )Balance
      December 31, 2010
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    
                                    642,119,111
                                    
                                    
                                    $
                                    642,117
                                    
                                    
                                    $
                                    (2,641,640
                                    )
                                    
                                    $
                                    28,143,518
                                    
                                    
                                    $
                                    (13,556
                                    )
                                    
                                    $
                                    9,507
                                    
                                    
                                    $
                                    27,912
                                    
                                    
                                    $
                                    (26,420,933
                                    )
                                    
                                    $
                                    (253,075
                                    )


See
accompanying notes.


40





NET
ELEMENT, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Nine Months
            
            
            Twelve MonthsEnded
            
            
            EndedDecember 31, 2010
            
            
            March 31, 2010Cash
      flows from operating activities:Net
      loss
            
            $
            (3,101,146
            )
            
            $
            (6,596,834
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Loss
      from discontinued operations
            
            
            -
            
            
            
            646,017Decrease
      in noncontrolling interests
            
            
            (89
            )
            
            
            (9,560
            )Depreciation
            
            
            8,763
            
            
            
            1,020Share
      based compensation
            
            
            2,220,154
            
            
            
            4,751,474Changes
      in assets and liabilities, net of acquistions and the effect of
      consolidation of equity affiliates:Prepaid
      expenses and other assets
            
            
            (97,104
            )
            
            
            (18,354
            )Deposits
            
            
            (27,275
            )
            
            
            (2,000
            )Trade
      receivables
            
            
            (40
            )
            
            
            -Related
      party receivables
            
            
            (2,000
            )
            
            
            -Related
      party payables
            
            
            71,840
            
            
            
            -Accounts
      payable
            
            
            (2,366
            )
            
            
            23,110Accrued
      expenses
            
            
            (590,709
            )
            
            
            457,182Total
      adjustments
            
            
            1,581,174
            
            
            
            5,848,889Net
      cash used in operating activities of continuing operations
            
            
            (1,519,972
            )
            
            
            (747,945
            )Cash
      flows from investing activitiesCash
      acquired in acquisition of Openfilm
            
            
            168,655
            
            
            
            -Purchase
      of equipment
            
            
            (139,495
            )
            
            
            (1,157
            )Net
      cash provided by (used in) investing activities of continuing
      operations
            
            
            29,160
            
            
            
            (1,157
            )Cash
      flows from financing activities:Repurchase
      of common stock
            
            
            (300,000
            )
            
            
            -Cash
      received from subscription liability
            
            
            880,000
            
            
            
            -Payments
      on related party note
            
            
            (8,063
            )
            
            
            -Contributed
      capital from equity investors
            
            
            3,141,763
            
            
            
            737,114Net
      cash provided by financing activities of continuing
    operations
            
            
            3,713,700
            
            
            
            737,114Cash
      Flows from discontinued operationsNet
      cash used in discontinued operations
            
            
            -
            
            
            
            216,751Effect
      of exchange rate changes on cash
            
            
            (465
            )
            
            
            (26,903
            )Net
      increase in cash
            
            
            2,222,423
            
            
            
            177,860Cash
      at beginning of period
            
            
            277,830
            
            
            
            99,971Cash
      at end of period
            
            $
            2,500,253
            
            
            $
            277,831Supplemental
      Disclosure of Cash Flow InformationCash
      paid during the year for:Interest
            
            $
            -
            
            
            $
            -Income
      taxes
            
            $
            -
            
            
            $
            -Non-cash
      investing and financing activities:Common
      stock received on disposal of TOT-SIBBNS joint venture
            
            $
            -
            
            
            $
            2,279,140Common
      stock issued for acquisition of Openflm LLC
            
            $
            1,255,941
            
            
            $
            -





See
accompanying notes.


41





NET
ELEMENT, INC.





NOTES TO
FINANCIAL STATEMENTS





NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Organization
and Basis of Presentation





Net
Element, Inc. (“we,” “us,” “our” or the “Company”), formerly TOT Energy, Inc.,
was organized on February 6, 2004 under the laws of the State of Delaware under
the name Splinex Technology, Inc., which was a wholly-owned subsidiary of
Splinex, LLC, a Florida limited liability company, and was spun-off
pursuant to a merger with Ener1 Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of Ener1, Inc., a Florida corporation of which Mike Zoi
(our current Chairman and Chief Executive Officer) is a shareholder and
director. Under a Purchase Agreement dated December 17, 2007, TGR Capital, LLC
(which changed its name to Enerfund, LLC in September 2008), a Florida limited
liability company (“Enerfund”), which is wholly-owned by Mike Zoi, acquired all
of the membership interests in Splinex LLC, thereby giving Enerfund control of
Splinex LLC (which subsequently changed its name to TGR Energy, LLC).





On July
16, 2008, we entered into a Joint Venture Agreement (the “JV Agreement”) with
Evgeny Bogorad (“Bogorad”), owner of Sibburnefteservis, Ltd. of Novosibirsk,
Russia, an oil services company (“SIBBNS”). We ended
development stage activity on July 16, 2008 when we acquired a 75% interest in
the TOT-SIBBNS joint venture and began operations in the oil and gas service
industry, including the exploration, development, production, and marketing of
crude oil and natural gas in Russia and Kazakhstan. At the closing on July 16,
2008, we issued to Bogorad 3,000,000 shares of our common stock in exchange for
a 75% interest in TOT-SIBBNS. On
January 27, 2010, the Company altered its business focus and decided to exercise
its option to unwind the joint venture and pursue other development
opportunities. We
executed an unwind agreement with TOT-SIBBNS whereby we exchanged our 75%
interest in TOT-SIBBNS for the 3,000,000 shares given to Evgeny Bogorad in 2008.
The unwind of the joint venture was consummated as of March 31, 2010.





Since
April 1, 2010, we attempted to engage in the development of an alternative
energy services business, which activities were terminated as of December 31,
2010. Concurrently, we have pursued a strategy to develop and/or acquire
technology and applications for use in the online media industry. During
September 2010, we changed our name to Net Element, Inc. in furtherance of our
shift in business focus.





As part
of our strategy to develop an online media company, on December 14, 2010, we
entered into a purchase agreement (the “Openfilm Purchase Agreement”) with the
members of Openfilm, LLC, a Florida limited liability company engaged in the
development of technology and operation of a website that supports the
advancement of independent film on the Internet. Mike Zoi, our President,
through his control of Enerfund, LLC and MZ Capital, LLC, both Florida limited
liability companies, held approximately 70% of Openfilm’s outstanding membership
interests prior to the acquisition by the Company. Pursuant to the Openfilm
Purchase Agreement, we acquired all of the outstanding membership interests in
Openfilm by exchanging for such interests an aggregate of 107,238,421 shares of
our common stock to the security holders of Openfilm, of which 45,937,500 shares
were issued to Enerfund (a company controlled by Mike Zoi), 29,062,500 shares
were issued to MZ Capital, LLC (a company controlled by Mike Zoi), 24,950,000
shares were issued to Dmitry Kozko, CEO of Openfilm, and an aggregate of
7,288,421 shares were issued to the remaining seven non-controlling security
holders of Openfilm. Upon completion of the acquisition transaction on December
14, 2010, Openfilm became a wholly-owned subsidiary of the Company.
Additionally, in connection with the acquisition of Openfilm, we established
NetLab Systems, LLC (NetLab), a Florida limited liability company, and
transferred the ownership of certain intellectual property assets from Openfilm
to NetLab. Openfilm and NetLab entered into a Technology Transfer and License
Agreement granting Openfilm the right to use certain technology transferred to
NetLab. Research and development activities are conducted primarily through
Zivos, LLC, a Ukrainian limited liability company and wholly-owned subsidiary of
Openfilm.


42





Basis of
Consolidation





The
audited financial statements include the accounts of Net Element, Inc., the
accounts of our wholly owned subsidiary, Openfilm, LLC and its subsidiaries
Openfilm, Inc., Openfilm Studios, LLC and Zivos, LLC (Ukrainian), the accounts
of our wholly owned subsidiary Netlab Systems LLC, the accounts of our wholly
owned subsidiary Net Element Capital, the accounts of the Company’s 75%
discontinued operations joint venture, TOT- SIBBNS, a limited liability company
formed under the laws of Russia (also known as the Russian Federation) the
accounts of our wholly owned subsidiary Green1, LLC, and the accounts of our 51%
joint venture, Korlea-TOT, a limited liability company formed under the laws of
the Czech Republic. All material intercompany accounts and transactions have
been eliminated in this consolidation.





On
November 11, 2010, our Board of Directors adopted a resolution changing our
fiscal year end from March 31 to December 31. Management believes that this
change will allow better alignment of our annual planning and budget processes
with our new business strategy as we are no longer engaged in the seasonal oil
and gas business. In this regard, the financial statements included herein cover
the fiscal year periods from April 1, 2009 to March 31, 2010 and April 1, 2010
to December 31, 2010.





Effective
March 31, 2010, we have deconsolidated the TOT-SIBBNS joint venture (see Note
12).





Business
Activities





We are
working to build a diversified portfolio of on-line media assets. To this end,
from time to time, we may be engaged in various discussions to acquire
businesses or formulate joint venture or other arrangements with companies
located around the world. Where appropriate, we will finance acquisitions with
equity shares and this may result in substantial dilution to existing
stockholders. Prior to the acquisition of Openfilm, LLC on December 14, 2010, we
were engaged in the oil services and alternative energy businesses.





Until
March 31, 2010, TOT-SIBBNS provided exploration services to oil exploration and
production companies located in and around Novosibirsk, Russia. TOT-SIBBNS owned
and operated four oil-drilling rigs that generated the majority of the revenues
of TOT-SIBBNS. TOT-SIBBNS used this equipment for drilling exploratory wells for
fees. In addition, TOT-SIBBNS provided engineering services and well remediation
services on a contract fee basis.





KORLEA-TOT
is our 51%-owned joint venture with Korlea Invest Holding AG of Switzerland
(“Korlea”) who is a provider and trader of electricity in the Czech Republic.
Korlea-TOT was expected to assist in the marketing of oil assets sourced by our
other companies and contacts. There has been no activity to date with this joint
venture. Accordingly, in November 2010, we sent Korlea notice of our intention
to unwind this arrangement. We intend to sell our ownership in the KORLEA-TOT
joint venture to Korlea in exchange for a cash payment equal to 51% of the cash
balance in the joint venture on the date of unwind. Consummation of this
transaction will be subject to obtaining certain approvals and making certain
filings overseas. It is expected that this transaction will be completed during
the first quarter of 2011.





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
balance sheet date and the reported amounts of expenses for the period
presented. Actual results could differ from those estimates.


43





Cash and
Cash Equivalents





Cash and
cash equivalents include highly liquid money market investments purchased with
an original maturity of three months or less. At December 31, 2010 and March 31,
2010, we had no cash equivalents. We maintain our U.S. Dollar-denominated cash
in a bank deposit account, the balance of which, at times, may exceed federally
insured limits. Bank accounts in the United States are guaranteed by the Federal
Deposit Insurance Corporation (FDIC) up to $250,000. At December 31, 2010, we
had one account at a United States financial institution with a balance of
$2,341,186. At March 31, 2010, the United States bank balances did not exceed
the FDIC limit. The Company also maintains bank balances in the Czech Republic
and at December 31, 2010, the overseas bank balance was $83,361. At March 31,
2010, the overseas bank balance was $84,009. The non-United States bank balances
are not insured and there is risk of loss in the event such banks should
fail.




Fixed
Assets





We
depreciate our furniture and equipment over a term of 5 years. Computers and
software are depreciated over terms between 2 and 3 years. Leasehold
improvements are depreciated over the terms of each lease. All of our assets are
depreciated on a straight-line basis for financial statement
purposes.





Foreign
Currency Transactions





Some of
our operations are conducted outside the United States and we use foreign
currencies to operate our consolidated foreign subsidiaries. Quarterly income
and expense items are translated into U.S. dollars using the average interbank
rate for the period. Assets and liabilities are translated into U.S. dollars
using the interbank rate as of the balance sheet date. Equity items are
translated at their historical rate. We do not engage in any currency hedging
activities.




Revenue
Recognition




We
recognize revenue when four basic criteria are met: persuasive evidence of a
sales arrangement exists; performance of services has occurred, the sales price
is fixed or determinable, and collectability is reasonably assured. We consider
persuasive evidence of a sales arrangement to be the receipt of a signed
contract or insertion order. 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.




Our
revenues for the fiscal year ended December 31, 2010 are principally derived
from the following services:




Advertising Revenue.Advertising
revenue is generated by performance-based Internet advertising, such as
cost-per-click, or CPC, in which an advertiser pays only when a user clicks on
its advertisement that is displayed on our owned and operated websites; fees
generated by users viewing third-party website banners and text-link
advertisements; fees generated by enabling customer leads or registrations for
partners; and fees from referring users to, or from users making purchases on,
sponsors' websites. In determining whether an arrangement exists, we ensure that
a binding arrangement is in place, such as a standard insertion order or a fully
executed customer-specific agreement. Obligations pursuant to our advertising
revenue arrangements typically include a minimum number of impressions or the
satisfaction of the other performance criteria. Revenue from performance-based
arrangements, including referral revenues, is recognized as the related
performance criteria are met.




In
certain cases, we record revenue based on available and preliminary information
from third parties. Amounts collected on the related receivables may vary from
reported information based upon third party refinement of estimated and reported
amounts owing that occurs typically within 30 days of the period end.




Subscription Services and Social
Media Services.    Subscription
services revenue is generated through the sale of memberships to access content
available on certain owned and operated websites and to be eligible to enter our
contests. The majority of Openfilm’s memberships have a one month term and renew
automatically at the end of each month, if not previously cancelled. Membership
revenue is recognized as billed, and classified as other
income.


44





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 be
anti-dilutive.





At
December 31, 2010 and March 31, 2010, we had outstanding vested stock options to
purchase 1,005,556 and 750,926 shares of common stock, respectively, and
warrants to purchase 156,000,000 and 49,455,925 shares of common stock,
respectively. These common stock equivalents have been excluded from the diluted
earnings per share calculation because their inclusion would be
anti-dilutive.





At
December 31, 2010, we had 1,005,556 exercisable options to purchase common
stock. We recorded a compensation expense of $25,464 related to the vesting of
options for the nine months ended December 31, 2010. There were no new options
issued during the nine months ended December 31, 2010.





At
March 31, 2010, we had 750,926 exercisable options to purchase common stock. We
recorded a compensation expense of $33,791 related to the vesting of options for
the twelve months ended March 31, 2010. There were no new options issued during
the twelve months ended March 31, 2010.





During
the nine months ended December 31, 2010, we issued 101,088,150 shares of common
stock and warrants to purchase 50,544,075 shares of common stock in exchange for
$2,021,763 pursuant to the terms of our Subscription Agreement with TGR Energy,
LLC (see Notes 8, 9 and 11).





During
the twelve months ended March 31, 2010, we issued 16,186,515 shares of common
stock and warrants to purchase 8,093,757 shares of common stock in exchange for
$323,730 pursuant to the terms of our Subscription Agreement with TGR Energy,
LLC (see Notes 8, 9 and 11).





On
December 31, 2010, we entered into a Subscription Agreement with Enerfund, LLC
(a company controlled by Mike Zoi) (the “Enerfund Subscription Agreement”)
pursuant to which we received an aggregate of $2,000,000 in exchange for
200,000,000 shares of our common stock and warrants to purchase 100,000,000
shares of our common stock at an exercise price of $0.05 per share for a period
of five years from date of issuance. We recorded a compensation charge of
$560,000 during the nine-months ended December 31, 2010 based on the
Black-Sholes value of warrants issued. We issued 112,000,000 shares of common
stock and warrants to purchase 56,000,000 shares of common stock in exchange for
$1,120,000 pursuant to the terms of the Enerfund Subscription Agreement, but
have deferred the balance of the issuance of 88,000,000 shares of common stock
and warrants to purchase 44,000,000 shares of common stock as a consequence of
not having a sufficient number of shares authorized. (See notes 8, 9 and
11)





Fair
Value of Financial Instruments





Our
financial instruments consist mainly of cash deposits, short-term payables and
borrowings under related party payables. We believe that the carrying amounts of
third-party financial instruments approximate fair value, due to their
short-term maturities.


45





Impairment
of Long-Lived Assets





We review
our long-lived assets for impairment whenever events or changes indicate that
the carrying amount of an asset or group of assets may not be recoverable. No
impairment losses were recorded during the nine months ended December 31, 2010
or the twelve months ended March 31, 2010.





Recent
Accounting Pronouncements





In
December 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2010-29, “Business Combinations (Topic 805),
Disclosure of Supplementary Pro Forma Information for Business Combinations”.
The objective of this ASU is to address diversity in practice about the
presentation of pro forma revenue and earnings disclosure requirements for
business combinations, and specifies that a public entity that presents
comparative financial statements should disclose revenue and earnings of the
combined entity as though the business combination(s) that occurred during the
current year had occurred as of the beginning of the comparable prior annual
reporting period only. This ASU is effective prospectively for business
combinations on or after January 1, 2011. As this ASU is limited to supplemental
disclosures, its adoption will not have an impact on our financial condition or
results of operations.





In
December, 2010, the FASB issued ASU 2010-28, “Intangibles—Goodwill and Other
(Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting
Units with Zero or Negative Carrying Amounts”. The objective of this ASU is to
address diversity in practice in the application of goodwill impairment testing
by entities with reporting units with zero or negative carrying amounts,
eliminating an entity’s ability to assert that a reporting unit is not required
to perform Step 2 because the carrying amount of the reporting unit is zero or
negative despite the existence of qualitative factors that indicate the goodwill
is more likely than not impaired. This ASU is effective for interim periods
after January 1, 2010. The adoption of this ASU may require us to report
goodwill impairment charges sooner than under current practice.




NOTE 2.
GOING CONCERN CONSIDERATIONS




Our
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 had negative cash flows from
continuing operating activities of $1,519,972 for the nine months ended December
31, 2010, and had an accumulated deficit of $26,420,933 and stockholders’deficiency of $253,075 at December 31, 2010. We remain dependent
upon TGR Energy, LLC, Enerfund, LLC or Mike Zoi (as a result of his controlling
interest in TGR and Enerfund and our historical dependence on the Subscription
Agreements with TGR and Enerfund) to fund our operations.





Management
is continuing with its plan to build a diversified portfolio of online media
assets. Management believes that its current operating strategy, combined with
continued funding by our primary stockholder, will provide the opportunity for
us to continue as a going concern; however, there is no assurance this will
occur. The accompanying consolidated financial statements do not include any
adjustments that might be necessary if we are unable to continue as a going
concern.




NOTE 3.
SEGMENT INFORMATION





At
December 31, 2010, our sole reportable business segment was Openfilm and its
subsidiaries. Until March 31, 2010, our sole reportable business segment was the
energy services sector. Our accounting policies for segments are the same as
those described in the summary of significant accounting policies.




NOTE 4.
ACQUISITION OF OPENFILM, LLC





On
December 14, 2010, we entered into an agreement to purchase all of the
outstanding membership interest in Openfilm, LLC, a Florida limited liability
company engaged in the development of technology and operation of a website that
supports the advancement of independent film on the Internet. Mike Zoi, our
President, through his control of Enerfund, LLC and MZ Capital, LLC, both
Florida limited liability companies, held approximately 70% of Openfilm’s
outstanding membership interests prior to the acquisition. In connection with
the purchase, we issued 107,238,421 shares of our common stock members of
Openfilm, of which 45,937,500 shares were issued to Enerfund (a company
controlled by Mike Zoi), 29,062,500 shares were issued to MZ Capital, LLC (a
company controlled by Mike Zoi), 24,950,000 shares were issued to Dmitry Kozko,
CEO of Openfilm, and an aggregate of 7,288,421 shares were issued to the
remaining seven non-controlling security holders of Openfilm. Upon completion of
the acquisition transaction on December 14, 2010, Openfilm became a wholly-owned
subsidiary of the Company.


46





The net
assets of Openfilm have been recorded at book basis (“carryover historical
cost”) as the transaction has been accounted for as a merger of entities under
common control.





Cash
                        
                        $
                        168,655Accounts
      receivable
                        
                        
                        3,437Property
      & equipment
                        
                        
                        13,895Other
      assets
                        
                        
                        37,316Accounts
      Payable
                        
                        
                        (135,845
                        )Notes
      Payable
                        
                        
                        (1,651,942
                        )Net
      deficiency in assets
                        
                        $
                        (1,564,484
                        )




Pro Forma Results




The
following table presents the estimated unaudited pro forma consolidated results
as if the business combination occurred on April 1, 2009. The pro forma
information is presented for informational purposes only and is not indicative
of the results of operations that would have been achieved if the acquisition
had taken place on April 1, 2009:




Year Ended
                  
                  
                  Period EndedMarch 31,
                  
                  
                  December 31,2010
                  
                  
                  2010Net
      sales
                  
                  $
                  7,492
                  
                  
                  $
                  35,430Loss from
      operations
                  
                  
                  (6,757,342
                  )
                  
                  
                  (4,220,933
                  )Net
      loss
                  
                  
                  (7,562,619
                  )
                  
                  
                  (4,209,980
                  )




NOTE 5.
JOINT VENTURES





On July
18, 2008, we executed an agreement to acquire a 75% controlling interest in
TOT-SIBBNS, a limited liability company organized under the laws of the Russian
Federation. Pursuant to the Joint Venture Agreement, the owner (the “JV
Partner”) of Sibburnefteservis, Ltd. of Novosibirsk, Russia (“SIBBNS”)
contributed certain assets of SIBBNS to TOT SIBBNS in exchange for 3,000,000
shares of our common stock. The assets were appraised at more than $6 million at
the time of contribution and we were obligated to issue an additional 2,000,000
shares to the JV Partner if TOT SIBBNS achieved $10,000,000 in cumulative
revenues.





On or
about January 27, 2010, we determined to unwind the TOT-SIBBNS joint venture. We
executed an unwind agreement with TOT-SIBBNS whereby we exchanged our 75%
interest in TOT-SIBBNS for the 3,000,000 shares given to Evgeny Borograd in
2008. The unwind of the joint venture was consummated as of March 31, 2010. The
unwind of the TOT-SIBBNS joint venture has been accounted for using the guidance
provided in ASC 845 (previously APB 29), as a disposal “other than by sale”
similar to a spin-off transaction, with the shares received reflected as
treasury stock and recorded on our balance sheet at its carrying basis in the
net assets of the joint venture as of March 31, 2010.





We formed
a joint venture, Korlea-TOT Energy s.r.o., in July 2008 with its Czech Republic
partner Korlea Invest. We invested $56,000 to provide the 51% of share capital
that we own for this limited liability company in the Czech Republic. We
financed this investment through a related party note with Kazo, LLC. We issued
Alexander Kaplan 350,000 newly issued shares of Company stock for his assistance
in completing this transaction. There has been no activity to date with this
joint venture. Accordingly, in November 2010, we sent Korlea notice of our
intention to unwind this arrangement. We intend to sell our ownership in the
KORLEA-TOT joint venture to Korlea in exchange for a cash payment equal to 51%
of the cash balance in the joint venture on the date of unwind. Consummation of
this transaction will be subject to obtaining certain approvals and making
certain filings overseas. It is expected that this transaction will be completed
during the first quarter of 2011.


47





NOTE 6.
BUILDING, MACHINERY AND EQUIPMENT




Building,
machinery and equipment consisted of the following at December 31, 2010 and
March 31, 2010:





December 31, 2010
                
                
                March 31, 2010Furniture
      and equipment
                
                $
                125,730
                
                
                $
                -Computers
                
                
                110,969
                
                
                
                12,319Leasehold
      improvements
                
                
                19,944
                
                
                
                -Less
      accumulated depreciation
                
                
                (105,227
                )
                
                
                (5,530
                )Total
      fixed assets (net)
                
                $
                151,416
                
                
                $
                6,789





Depreciation
expense for continuing operations was $8,763 and $1,020 for the nine months
ended December 31, 2010 and the twelve months ended March 31, 2010,
respectively. Total depreciation expense for continuing and discontinued
operations was $8,763 and $554,327 for the nine months ended December 31, 2010
and the twelve months ended March 31, 2010, respectively (See Note
12).





NOTE 7.
ACCRUED EXPENSES





Accrued
expenses represent expenses that are owed at the end of the period and either
have not been billed by the provider or are expenses that are estimated for
services provided. At December 31, 2010 and March 31, 2010, accrued expenses
consisted of the following:





December 31, 2010
            
            
            March 31, 2010Accrued
      professional fees
            
            $
            152,068
            
            
            $
            31,468Promotion
      Expense
            
            
            50,000
            
            
            
            -Accrued
      interest
            
            
            32,201
            
            
            
            -Accrued
      payroll
            
            
            17,710
            
            
            
            723,428Other
      accrued expenses
            
            
            173,632
            
            
            
            165,663$
            425,611
            
            
            $
            920,559





NOTE 8.
STOCKHOLDERS’ EQUITY





We are
authorized to issue 800,000,000 shares of common stock, par value of $0.001 per
share and we are seeking to increase our authorized common shares to
2,500,000,000 (See note 13). Each holder of common stock is entitled to one vote
for each share held. We are authorized to issue 100,000,000 shares of preferred
stock, par value $0.001 per share, which may be divided into series with the
designations, powers, preferences, and relative rights and any qualifications,
limitations or restrictions as determined by our board of
directors.


48





Pursuant
to a Stock Purchase Agreement dated November 23, 2009, TGR agreed to sell to
Dune Capital Group ("Dune") an aggregate of 5,000,000 shares of common stock of
the Company held by TGR for a purchase price of $0.10 per share or an aggregate
of $500,000. The purchase price is required to be paid on or before April 1,
2010. In order to ensure compliance with obligations under Section 16 of the
Securities Exchange Act of 1934, prior to the issuance of shares to Dune by TGR,
TGR assigned this Purchase Agreement to the Company. Accordingly, we received
$300,000 pursuant to this agreement and issued an aggregate of 3,000,000 shares
of our common stock to Dune on January 12, 2010. On April 28, 2010, we agreed to
terminate the Stock Purchase Agreement with Dune and rescind the prior issuance
of common stock. We repurchased the 3,000,000 shares of common stock previously
issued to Dune for $300,000. The redeemed shares were accounted for as
treasury stock.





For the
fiscal year ended March 31, 2010, TGR was issued an aggregate of 16,186,515
shares of our common stock and fully vested warrants to purchase 8,093,757
shares of our common stock at an exercise price of $0.05 per share pursuant to
the terms of the Subscription Agreement. These issuances were in exchange for
financings under the Subscription Agreement in the aggregate amount of $323,730.
A compensation charge of $4,717,677 was recorded for the fiscal year ended March
31, 2010. This amount is calculated as the difference between the market price
of our common stock at the end of each quarter in which shares were issued and
the subscription price of the common shares ($0.02) multiplied by the number of
shares issued, plus the Black-Scholes valuation of the warrants issued as
calculated at the end of each quarter.





During
the nine months ended December 31, 2010, TGR was issued 101,088,150 shares of
our common stock and fully vested warrants to purchase 50,544,075 shares of our
common stock $0.05 per share in exchange for funding of $2,021,763 provided
under the terms of a Subscription Agreement. A compensation charge of $1,620,787
was recorded for the nine months ended December 31, 2010 as one of our officers
is also a principal of TGR and the securities issued were below market value as
of the issue date. This amount is calculated as the difference between the
market price of our common stock at the end of each quarter in which shares were
issued and the subscription price of the common shares ($0.02) multiplied by the
number of shares issued, plus the Black-Scholes valuation of the warrants issued
as calculated at the end of each quarter. This subscription agreement for
$4,000,000 was fully subscribed at December 31, 2010.





On December 31, 2010, we
entered into a Subscription Agreement with Enerfund, LLC (a company controlled
by Mike Zoi) (the “Enerfund Subscription Agreement”) pursuant to which we
received an aggregate of $2,000,000 in exchange for 200,000,000 shares of our
common stock and warrants to purchase 100,000,000 shares of our common stock at
an exercise price of $0.05 per share for a period of five years from date of
issuance. However, we did not have sufficient authorized shares of common stock
to fully issue these securities to Enerfund at December 31, 2010. Accordingly,
this transaction has been accounted for asa purchase by Enerfund as of
December 31, 2010 of 112,000,000 shares of common stock and fully vested
warrants to purchase 56,000,000 shares of common stock for $0.05 per share in
exchange for $1,120,000. A compensation charge of $560,000 was recorded for the
nine months ended December 31, 2010 as one of our officers is also a principal
of Enerfund. This amount is calculated as the Black-Scholes valuation of the
warrants issued as of December 31, 2010. The balance of the proceeds of $880,000
has been accounted for as an advance until we can issue the balance of the
shares and warrants, which is expected on or about March 1, 2011, and appears on
our balance sheets as a stock subscription liability.





At
December 31, 2010, we had options to purchase 1,200,000 shares of common stock
outstanding under its stock option plan, of which options to purchase 1,005,556
shares of common stock are vested, with an exercise price of $0.25 per share and
with a remaining weighted average contractual term of 4.28 years. We also had
warrants to purchase 156,000,000 shares of common stock outstanding at December
31, 2010 with a strike price of $0.05 per share and a remaining contractual term
of 4.38 years pursuant to Subscription Agreements with TGR Energy and Enerfund,
LLC.




NOTE 9.
STOCK OPTIONS AND STOCK GRANTS





For the
periods ended December 31, 2010 and March 31, 2010, there were no new options
issued. We recorded compensation charges of $25,464 and $33,791 for the periods
ending December 31, 2010 and March 31, 2010, respectively, based on the vesting
of previously issued options.




During
the periods ended December 31, 2010 and March 31, 2010, we issued 1,014,028 and
508,889 shares of restricted stock, respectively, to employees in lieu of
cash compensation. We recorded a charge of $10,140 for the period ended December
31, 2010 and $63,388 for the period ended March 31,
2010, based on the fair value of the shares issued.


49





We issued
500,000 shares of restricted common stock to American Speed Factory in exchange
for an agreement to promote and advertise TOT-Energy in the Ferrari Challenge
Racing Series. We recorded a $50,000 promotion expense for the twelve months
ended March 31, 2010 to reflect the services provided in exchange for common
shares.





Pursuant
to the Openfilm Purchase Agreement, on December 14, 2010, we acquired all of the
outstanding membership interests in Openfilm by exchanging for such interests an
aggregate of 107,238,421 shares of our common stock to the security holders of
Openfilm, of which 45,937,500 shares were issued to Enerfund (a company
controlled by Mike Zoi), 29,062,500 shares were issued to MZ Capital, LLC (a
company controlled by Mike Zoi), 24,950,000 shares were issued to Dmitry Kozko,
CEO of Openfilm, and an aggregate of 7,288,421 shares were issued to the
remaining seven non-controlling security holders of Openfilm.




On
December 14, 2010, we issued 1,000,000 shares of common stock to Curtis Wolfe in
exchange for legal services provided on behalf of the Company. We recorded an
expense of $10,000, the fair value of the legal services received





NOTE 10. INCOME TAXES




Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts of assets and liabilities used for income tax purposes. At December
31, 2010 and March 31, 2010, we had cumulative federal net operating loss carry
forwards (NOL) of approximately $6.6 million and $5.5 million, respectively. We
have determined that the net operating loss may not be realized, and have
recorded a valuation allowance for the full amount of the tax loss
carryforward.





Pursuant
to Sections 382 and 383 of the Internal Revenue Code, annual use of any of our
net operating loss and credit carry forwards will be limited. The tax loss
carryforward amounts begin to expire in December 2025.





The net
provision (benefit) for income taxes consisted of the following at December 31,
2010 and March 31, 2010:





December 31,
                            
                            
                            March 31,2010
                            
                            
                            2010Current
      Federal income taxes
                            
                            $
                            -
                            
                            
                            $
                            -Deferred
      income tax benefitDomestic
                            
                            
                            (814,492
                            )
                            
                            
                            (2,136,513
                            )Foreign
                            
                            
                            -
                            
                            
                            
                            (155,044
                            )Valuation
      allowance
                            
                            
                            814,492
                            
                            
                            
                            2,291,557Total
      income tax provision
                            
                            $
                            -
                            
                            
                            $
                            -




Significant
components of our deferred tax assets at December 31, 2010 and March 31, 2010
are as follows:




December 31,
                                
                                
                                March 31,2010
                                
                                
                                2010Net
      operating loss carry forwards
                                
                                $
                                2,474,037
                                
                                
                                $
                                1,659545Accrued
      compensation and other
                                
                                
                                13,765
                                
                                
                                
                                272,2262,487,802
                                
                                
                                
                                1,931,771Valuation
      allowance for deferred tax assets
                                
                                
                                (2,487,802
                                )
                                
                                
                                (1,931,771
                                )Net
      deferred tax asset
                                
                                $
                                -
                                
                                
                                $
                                -




50




Reconciliation
between actual income taxes and amounts at December 31, 2010 and March 31, 2010
computed by applying the federal statutory rate of 34% to pre-tax loss is
summarized as follows:


December 31,
                                
                                
                                March 31,2010
                                
                                
                                2009U.
      S. Federal statutory rate on loss before income taxes
                                
                                
                                34.0
                                %
                                
                                
                                34.0
                                %Compensation
      Related Permanent Differences
                                
                                
                                -17.8
                                %
                                
                                
                                .0
                                %State
      income tax, net of federal tax benefit
                                
                                
                                1.7
                                %
                                
                                
                                3.6
                                %Increase
      in valuation allowance
                                
                                
                                -17.9
                                %
                                
                                
                                -37.6
                                %Total
      income tax provision
                                
                                
                                0.0
                                %
                                
                                
                                0.0
                                %





In the
past, we have been delinquent in the filing of our federal tax returns for
several years. Although we did not owe tax due to a lack of profits, we incurred
penalties and interest in the amount of $51,972 for the failure to file returns.
We are in the process of appealing this assessment.




NOTE 11.
RELATED PARTY TRANSACTIONS





On August
7, 2008, we and TGR, which held 94% of our outstanding common stock, entered
into the Subscription Agreement described above pursuant to which TGR has agreed
to provide funding of up to $2,000,000 (the “Investment Amount”) in exchange for
up to 100,000,000 shares of our common stock and warrants to purchase up to
50,000,000 shares of our common stock at an exercise price of $0.05 per share.
Pursuant to the Subscription Agreement, TGR will fund the Investment Amount as
required in our operational budget. TGR’s obligation to fund the Investment
Amount will be reduced by any future third party funding or investments in the
Company on terms no less favorable than those contained in the Subscription
Agreement. On January 12, 2010, TGR agreed to increase the Investment Amount
from $2,000,000 to $4,000,000 in exchange for up to an additional 100,000,000
shares of our common stock and warrants to purchase up to 50,000,000 shares of
our common stock at an exercise price of $0.05 per share for a period of five
years from date of issuance.




For the
fiscal year ended March 31, 2010, TGR was issued an aggregate of 16,186,515
shares of common stock and fully vested warrants to purchase 8,093,757 shares of
common stock at an exercise price of $0.05 per share pursuant to the terms of
the Subscription Agreement. These issuances were in exchange for financings
under the Subscription Agreement in the aggregate amount of $323,730. A
compensation charge of $4,717,677 was recorded for the fiscal year ended March
31, 2010. This amount is calculated as the difference between the market price
of our common stock at the end of each quarter in which shares were issued and
the subscription price of the common shares ($0.02) multiplied by the number of
shares issued, plus the Black-Scholes valuation of the warrants issued as
calculated at the end of each quarter.




For the
nine months ended December 31, 2010, TGR was issued 101,088,150 shares of common
stock and fully vested warrants to purchase 50,544,075 shares of common stock at
an exercise price of $0.05 per share in exchange for funding of $2,021,763
provided during the nine months ended December 31, 2010 under the terms of a
Subscription Agreement. A compensation charge of $1,620,787 was recorded for the
nine months ended December 31, 2010 as an officer of the Company is also a
principal of TGR and the securities issued were below market value as of the
issue date. This amount is calculated as the difference between the market price
of our common stock at the end of each quarter in which shares were issued and
the subscription price of the common shares ($0.02) multiplied by the number of
shares issued, plus the Black-Scholes valuation of the warrants issued as
calculated at the end of each quarter. The Subscription Agreement was fully
subscribed at December 31, 2010.


51





On
December 10, 2010, Openfilm entered into a loan agreement with Enerfund LLC (a
company controlled by Mike Zoi) in the principal amount of $1,667,020. The
annual interest rate is 5% payable annually on December 31st. The
loan matures on December 10, 2012 with accrued interest due at that time.





On December 31, 2010, we
entered into a Subscription Agreement with Enerfund, LLC (a company controlled
by Mike Zoi) (the “Enerfund Subscription Agreement”) pursuant to which we
received an aggregate of $2,000,000 in exchange for 200,000,000 shares of our
common stock and warrants to purchase 100,000,000 shares of our common stock at
an exercise price of $0.05 per share for a period of five years from date of
issuance. However, we did not have sufficient authorized shares of common stock
to fully issue these securities to Enerfund at December 31, 2010. Accordingly,
this transaction has been accounted for asa purchase by Enerfund as of
December 31, 2010 of 112,000,000 shares of our common stock and fully vested
warrants to purchase 56,000,000 shares of our common stock for $0.05 per share
in exchange for $1,120,000. A compensation charge of $560,000 was recorded for
the nine months ended December 31, 2010 as one of our officers is also a
principal of Enerfund. This amount is calculated as the Black-Scholes valuation
of the warrants issued as of December 31, 2010. The balance of the proceeds of
$880,000 has been accounted for as an advance until we can issue the
balance of the shares (88,000,000) and warrants to purchase shares (44,000,000),
which is expected on or about March 1, 2011, and appears on our balance sheets
as a stock subscription liability.




NOTE 12.
DISCONTINUED OPERATIONS





Effective
March 31, 2010, we entered into a Joint Venture Dissolution Agreement, which
dissolved the TOT-SIBBNS joint venture. We received the 3,000,000 shares of
common stock issued in 2008 in connection with the establishment of the joint
venture and the assets of the joint venture were returned to the noncontrolling
interest holder (JV Partner). The following summarizes results from discontinued
operations:





Nine months ended
                      
                      
                      Twelve
                        months endedDecember 31, 2010
                      
                      
                      March 31, 2010Revenues
                      
                      $
                      -
                      
                      
                      $
                      -Cost
      of Sales
                      
                      
                      -
                      
                      
                      
                      -Operating
      Expenses
                      
                      
                      -
                      
                      
                      
                      942,044Other
      (Income) Expenses
                      
                      
                      -
                      
                      
                      
                      (80,688
                      )Impairment
      on assets held for disposal
                      
                      
                      -
                      
                      
                      
                      -Net
      loss from discontinued operations
                      
                      $
                      -
                      
                      
                      $
                      (646,017
                      )





NOTE 13. SUBSEQUENT EVENTS





During
February 2011, Enerfund agreed to transfer 1,000,000 of our common shares held
by Enerfund to a consultant in consideration for services performed on our
behalf. We will record a compensation charge in the amount of the value of the
services ($10,000) during the quarter ending March 31, 2011.





On
February 1, 2011, our Board of Directors adopted a resolution recommending an
amendment to the Certificate of Incorporation to increase the number of
authorized shares of the Company’s capital stock to an aggregate of
2,600,000,000 shares with 2,500,000,000 shares designated common stock, $.001
par value, and 100,000,000 shares designated preferred stock, $.001 par value.
Our majority stockholders have approved the proposed amendment to our
Certificate of Incorporation through action taken by consent and without a
meeting, as authorized by Section 228 of the Delaware General Corporation Law.
The actions recommended by the Board of Directors and approved by the Company’s
majority stockholder will become effective no earlier than 20 calendar days
after an Information Statement is sent or given to all persons who were holders
of record of our common stock on February 1, 2011. The purpose of such increase
is to place the Company in a position where it will continue to have a
sufficient number of shares of authorized and unissued common stock which can be
issued for or in connection with such corporate purposes as may, from time to
time, be considered advisable by the Board of Directors. The Articles of
Amendment will become effective upon the filing of a certificate of amendment
relating thereto with the Secretary of State of the State of Delaware, which is
expected to occur on or about March 1, 2011.


52





Motorsport.com
acquisition





On
February 1, 2011, we entered into a purchase agreement (the “Motorsport Purchase
Agreement”) with Enerfund, LLC, an entity controlled by Mike Zoi, to purchase
all of the issued and outstanding interests of Motorsport, LLC, a Florida
limited liability company that held 80% of the outstanding common stock of
Motorsport.com, Inc., a Florida corporation engaged in the operation of a news
and information website relating to the international motorsport industry.
Motorsport, LLC purchased the interest of Motorsport.com, Inc. on December 17,
2010. The remaining 20% of the outstanding common stock of Motorsport.com, Inc.
is held by the original stockholders (4 persons) of Motorsport.com, Inc. We paid
Enerfund an aggregate of $130,000 (exclusive of a $20,000 contingent payment
relating to the purchase of certain domain names) and agreed to take over
responsibility for the obligations contained in the purchase agreement of
December 17, 2010, which includes, among other things, the aggregate payment to
the original stockholders of Motorsport.com, Inc. of an additional $450,000
payable in four quarterly installments, without interest, commencing on December
1, 2013. In the event the domain names and related registrations are purchased
by June 16, 2011, then the contingent amount ($20,000) will be paid. The
original sellers have a security interest in the domains of Motorsport.com, Inc.
as collateral for payment of the additional purchase price. Failure by us to pay
the additional purchase installments when due may result in forfeiture of the
shares in Motorsport.com, Inc. held by us.





In
addition, we have an option to purchase the remaining interests of
Motorsport.com, Inc. currently held by the original stockholders. The purchase
option expires on December 16, 2018. We may exercise this option at any time
upon thirty days prior written notice and the payment, in cash or preferred
stock of Motorsport.com, Inc., as follows:





(ix)
            until
      December 16, 2015: $0.1075 per
share;


(x)
            from
      December 17, 2015 through December 16, 2016: $0.1185 per
      share;


(xi)
            from
      December 17, 2016 through December 16, 2017: $0.1305 per share;
      and


(xii)
            from
      December 17, 2017 through December 16, 2018: $0.1435 per
      share.





We may
redeem the preferred stock issued at any time upon the payment in full of the
value of the preferred stock as of the date of issuance.




On
January 31, 2011, Motorsport entered into a loan agreement with Enerfund LLC (a
company controlled by Mike Zoi) in the principal amount of $184,592. The annual
interest rate is 5% payable annually on December 31st. The
loan matures on the third anniversary of each funding under the loan agreement,
which fundings occurred from October 2010 through January 2011, with accrued
interest due at that time.





Music1





In
furtherance of our strategy to become an online media company, on February 1,
2011, we acquired Music1, LLC, a Florida limited liability company, from
Enerfund (an investment company controlled by Mike Zoi), for an aggregate
purchase price of $15,000. Music1, LLC owns 97% of the membership interests of
A&R Music Live, LLC, a Georgia limited liability company that owns and
operates two websites that provide an online social community and marketplace
for musicians, songwriters, producers and record companies and an opportunity to
showcase artist talents. Music1, LLC purchased its interest in A&R Music
Live, LLC on November 8, 2010. The remaining 3% of the membership interests of
A&R Music Live, LLC is owned by Stephen Strother, the Founder and President
of Music1. We are required to invest at least $500,000 in Music1 by December 31,
2012 (which amount may include salaries and other expenses of Music1). In the
event such amount is not invested in Music1 by December 31, 2012 or the
employment agreement of Mr. Strother is terminated other than for cause or good
reason on or before May 7, 2012, then Mr. Strother will have the right to
repurchase Music1 for $1.00. Additionally, Mr. Strother has granted a royalty
free license to Music1 to use certain technology owned by him for the term of
his employment agreement.




On
January 31, 2011, Music1 entered into a loan agreement with Enerfund LLC (a
company controlled by Mike Zoi) in the principal amount of $128,890. The annual
interest rate is 5% payable annually on December 31st. The
loan matures on the third anniversary of each funding under the loan agreement,
which fundings occurred from October 2010 through January 2011, with accrued
interest due at that time.




53


Item
9.   Changes and Disagreements With Accountants on Accounting and
Financial Disclosure.





None.




Item
9A.  Controls and Procedures.





Our
disclosure controls and procedures are designed to provide reasonable assurance
that information required to be disclosed in our reports filed or submitted
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC’s 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 . In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.





As of
December 31, 2010, our disclosure controls and procedures are currently not
effective because there are a limited number of personnel employed and we cannot
have an adequate segregation of duties, and due to material weaknesses in
internal control over financial reporting as discussed below. Accordingly,
management cannot provide reasonable assurance of achieving the desired control
objectives. Management works to mitigate these risks by being personally
involved in all substantive transactions and attempts to obtain verification of
transactions and accounting policies and treatments involving our overseas
operations. We are in the process of reviewing and, where necessary, modifying
controls and procedures throughout the Company, particularly in light of our
recent acquisitions and the continued integration of these businesses. We expect
this process to continue through 2011.




Management’s
Report on Internal Control Over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) under the Securities Exchange
Act of 1934, as amended. Internal control over financial reporting is designed
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 in the United States of America
(“GAAP”). We recognize that because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies and procedures may
deteriorate.





Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2010. Our management’s evaluation of our
internal control was based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the “COSO Framework”). Based on this evaluation under the COSO
Framework, our management concluded that our internal control over financial
reporting was not effective as of December 31, 2010.





Management
is aware of the following material weaknesses (a material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected and corrected on a timely basis) in our internal control over
financial reporting:




54




Control
Environment





·
            Inadequate
      Written Policies and Procedures: Based on our management’s review of key
      accounting policies and procedures, our management determined that such
      policies and procedures were inadequate as of December 31, 2010.
      Management identified certain policies and procedures as inadequate and
      others as lacking in appropriate documentation. Management is in the
      process of enhancing existing policies and procedures and preparing formal
      written documentation as appropriate. In addition, there is a lack of
      consistent review procedures performed by management and also a lack of a
      formal control design structure for the review of external financial
      data.





·
            Segregation of Duties: We did not
      maintain adequate segregation of duties related to job responsibilities
      for initiating, authorizing, and recording of certain transactions as of
      December 31, 2010. Although we believe that we have established
      appropriate transaction approval criteria, we do not have sufficient
      personnel to provide an independent review of journal entries, account
      analyses, monitoring or adequate risk assessment functions. Due to this
      material weakness, there is a reasonable possibility that a material
      misstatement in the financial statements would not be prevented or
      detected on a timely basis. We have attempted to mitigate certain of these
      risks by enhancing management’s oversight of various procedures for
      initiating, authorizing, and recording of various transactions and
      establishing more formal and rigorous written guidelines, policies and
      procedures. We have also added additional senior and junior finance
      personnel. However, additional measures and personnel are
      required.





·
            Board of Directors and Audit
      Committee: We did not have a functioning audit committee as of December
      31, 2010 due to the lack of a sufficient number of independent members on
      our board of directors and that no member qualifies as a “financial
      expert” as defined by regulations of the SEC. Our entire board of
      directors acted in place of an audit committee. However, since we do not
      have a financial expert on our board, the oversight and monitoring of
      internal controls and procedures are not
  effective.




Control
Activities





·
            Testing of Internal Controls: We
      have identified deficiencies in our testing of internal controls within
      our key business processes, particularly with respect to our overseas
      operations, which were acquired effective December 14, 2010, and consist
      mainly of a research and development facility and personnel in Ukraine.
      This was primarily due to insufficient financial and personnel resources.
      Management believes there are control procedures that are effective in
      design and implementation within our key business processes. However,
      certain of these processes were not formally tested or adequately
      documented. Additionally, our overseas managers, while competent in local
      accounting requirements, may not have the requisite expertise in matters
      of U.S. GAAP.





Information
and Communication





·
            Timeliness and Adequacy of
      Financial Reporting Disclosures: Our Chief Executive Officer and our Chief
      Financial Officer concluded that our controls were not effective as of
      December 31, 2010 due to inherent weaknesses present in the preparation of
      financial statements and related disclosures as a result of the limited
      financial personnel, information technology infrastructure and other
      resources. However, management believes that given the size and scope of
      our business that all material information was communicated to management
      within a time-frame that was adequate for management to make informed
      business and reporting decisions. We also hired a controller and Chief
      Technology Officer during 2010 in order to address some of these
      concerns.





Monitoring





·
            Internal Control Monitoring: As a
      result of the lack of financial and personnel resources, management’s
      ability to monitor the design and operating effectiveness of internal
      controls is limited. Accordingly, management’s ability to timely detect,
      prevent and remediate deficiencies and potential fraud risks is
      inadequate.


55





These
material weaknesses and other deficiencies impede the ability of management to
implement remedial measures and oversee internal controls over financial
reporting on a consistent basis. Management intends to focus its remediation
efforts in the near term on developing additional formal policies and procedures
surrounding transaction processing, period-end account analyses and providing
for additional review and monitoring procedures and periodically assess the need
for additional accounting resources as the business develops and resources
permit. Management also intends to formally evaluate and test the effectiveness
of our disclosure controls and procedures and our internal control over
financial reporting on an ongoing basis and is committed to taking further
action and implementing enhancements or improvements as resources permit.
Additionally, we intend to appoint a financial expert and additional independent
members to the board of directors as soon as such persons can be identified and
incentivized to join our board. We recognize that due to the size and stage of
development of our business, implementation of these measures may take
considerable time.




Notwithstanding
the material weaknesses discussed above, our management has concluded that the
financial statements included in this Annual Report on Form 10-K fairly present
in all material respects our financial condition, results of operations and cash
flows for the periods presented in conformity with generally accepted accounting
principles.





Attestation
Report of the Independent Registered Public Accounting Firm





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management's report in this annual
report.





Other
than as described above, there were no changes in internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.




Item
9B.    Other Information





On February 1, 2011, our Board of
Directors adopted a resolution recommending the amendment of our Certificate of
Incorporation to increase the number of authorized shares of our capital stock
to an aggregate of 2,600,000,000 shares with 2,500,000,000 shares designated
common stock, $.001 par value, and 100,000,000 shares designated preferred
stock, $.001 par value. Our majority stockholders have approved the proposed
amendment to our Certificate of Incorporation through action taken by consent
and without a meeting, as authorized by Section 228 of the Delaware General
Corporation Law. The actions recommended by the Board of Directors and approved
by our majority stockholders will become effective no earlier than 20 calendar
days after an Information Statement is sent or given to all persons who were
holders of record of our common stock on February 1, 2011. The purpose of such
increase is to place us in a position where we will continue to have a
sufficient number of shares of authorized and unissued common stock which can be
issued for or in connection with such corporate purposes as may, from time to
time, be considered advisable by the Board of Directors. Such corporate purposes
could include, without limitation: (a) issuance in connection with any desirable
acquisitions which may be presented, (b) the payment of stock dividends or
issuance pursuant to stock splits, (c) the issuance of common stock upon
exercise of options granted under a stock option plan or in connection with
other employee benefit plans, (d) the issuance of common stock upon the
conversion of any preferred stock or the exercise of warrants or the conversion
of other securities convertible into common stock which may be outstanding from
time to time, and (e) issuance in connection with an offering to raise capital
for us, including pursuant to the Enerfund Subscription
Agreement.




The
Articles of Amendment will become effective upon the filing of a certificate of
amendment relating thereto with the Secretary of State of the State of Delaware,
which is expected to occur on or about March 1, 2011.


56





PART
III





Item
10.    Directors, Executive Officers and Corporate
Governance.





Directors and Executive Officers





The
names, ages and offices held of all of the Company’s directors, director
nominees and executive officers are set forth in the table below:


Name
                        
                        Age
                        
                        Position
                        
                        Year
                          AppointedMike
      Zoi
                        
                        44
                        
                        CEO,
      Director
                        
                        2007Curtis
      Wolfe
                        
                        47
                        
                        Secretary,
      Director
                        
                        2007James
      Caan
                        
                        70
                        
                        Director
                        
                        2011Dmitry
      Kozko
                        
                        27
                        
                        CEO,
      Openfilm
                        
                        2009Jonathan
      New
                        
                        50
                        
                        Chief
      Financial Officer
                        
                        2008Ivan
      Onuchin
                        
                        34
                        
                        Chief
      Technology Officer
                        
                        2010




Each of
our directors will hold office until our next annual meeting of stockholders at
which directors are elected or until his successor is duly elected and
qualified.




Mr. Zoi
has been the CEO and a Director of the Company since 2007. Mr. Zoi has also been
a director and president of Ener1 Group since 2001, a privately held investment
firm he co-founded in 2001. Mr. Zoi indirectly holds a minority interest in
Ener1 Group. Ener1 Group owns approximately 52% of Ener1, Inc. (NASDAQ: HEV), a
public company with manufacturing facilities in the United States engaged
primarily in the business of designing and developing high-performance,
rechargeable, lithium-ion batteries and battery systems for hybrid and electric
vehicles.  Mr. Zoi served as a Director of Ener1, Inc. from February
2002 to August 2008 and a vice president from February 2007 to August 2008.
Since 2007, Mr. Zoi has been the managing member of TGR Energy LLC, a Florida
investment company, which owns approximately 89% of the Company. Mr. Zoi also
founded and owns 100% of Enerfund, LLC, a Florida investment company with
interests in a variety of high growth businesses, including 8 Motor, LLC, a
Florida company engaged in the electric vehicle business.  Enerfund
has also provided financing to Openfilm, LLC in the past. Mr. Zoi is responsible
for strategy and directly manages all senior executives of the Company. Mr. Zoi
also directs all merger and acquisition activities of the Company. His expertise
includes strategic development, branding and corporate alliances. Earlier in his
career, Mr. Zoi worked in various capacities relating to international finance
and business development. Mike Zoi’s niece is married to Dmitry
Kozko.





Mr. Wolfe has been a director of the Company since
2004 except for the period beginning August 31, 2007 and ending December 18,
2007. Mr. Wolfe served as Chief Operating Officer, Executive Vice President and
General Counsel of Ener1 Group, Inc., the largest shareholder of alternative
energy company Ener1, Inc., from 2004 to 2007. Prior to his involvement with
Ener1 Group, he was a partner in an international law firm based in Miami where
he focused on mergers and acquisitions, start-up company financing, franchising
and intellectual property. His experience also includes equity and debt
offerings and compliance with reporting requirements for publicly traded
companies. Since 2007, Mr. Wolfe has been the president of a private business
consulting company, Lobos Advisors, assisting start-up businesses in defining
their business objectives, strategic goals, and expanding business
opportunities. Mr. Wolfe is the founder of WCIS Media, LLC, a company that
launched www.whocanisue.com, an online legal portal where he served as an
executive officer from 2007 until 2009. Mr. Wolfe continues to serve as a
director of WCIS Media. Mr. Wolfe served 11 years in the United States Air Force
from 1981 to 1992. Mr. Wolfe has a BIS in English, Mathematics and Latin
American Studies from Weber State University and a JD from the University of
Iowa College of Law, where he graduated with distinction. He is also a
screenwriter and author.





Mr. James
Caan is currently the Chairman of Advisory Board of Openfilm and a director
nominee of the Company. Mr. Caan exchanged his ownership interest in Openfilm
for shares of common stock of the Company in connection with the acquisition of
Openfilm by the Company on December 14, 2010. Mr. Caan has been appointed to
fill the vacancy created by the departure of Stuart Murdoch earlier in 2010,
which appointment will take effect as of January 1, 2011 and he will serve until
the next annual meeting of stockholders at which directors are elected. Pursuant
to Mr. Caan’s advisory agreement with Openfilm, Mr. Zoi and Mr. Kozko are
obligated to vote their shares in favor of Mr. Caan as a director of the Company
for the next three years. Mr. Caan is an actor and director working in the film
and TV industries for over 40 years and one of the industry’s most renowned
talents, having starred in over 80 films. As Chairman of the Openfilm Advisory
Board, Mr. Caan will oversee the other advisory board members, help recruit
additional celebrity talent when needed, offer his wisdom to the Openfilm
community as he evaluates submissions, serve as a judge for the online
competitions and interact with emerging talent and other Openfilm
members.


57





Dmitry
Kozko co-founded Openfilm in 2007 and has been the CEO of Openfilm since 2009.
Prior to 2009, Mr. Kozko was Chief Marketing Officer of Openfilm. With an
extensive technical background, he is responsible for the operations of Openfilm
and until Openfilm’s acquisition by the Company, was responsible to oversee the
software development team. Prior to founding Openfilm, Mr. Kozko was a
consultant responsible for developing the business infrastructure and Web
presence for companies and clients in the online entertainment, real estate and
consumer goods space. Since 2006, Mr. Kozko has provided consulting services to
Enerfund and TGR (investment companies controlled by Mike Zoi) and assisted in
evaluating technology-based companies. From March 2006 through February 2007,
Mr. Kozko was a principal of Caribbean Soda, LLC, a beverage distribution
company in Southern Florida, responsible for expansion of the soft drinks of
Hitond, Inc., a New York company, into the Florida market. From March 2004 to
March 2006, Mr. Kozko worked as an independent contractor for Re/Max SouthShore
Realty in New York, primarily responsible for technological solutions
development, market research automation, business development and sales
assistant. A native of St. Petersburg, Russia, Mr. Kozko emigrated to the U.S.
in 1995. During his tenure with Openfilm, Mr. Kozko was responsible for
marketing and sales initiatives, business development, overseeing technological
development and capital raising. Dmitry Kozko is married to Mike Zoi’s
niece.





On March
10, 2008, Jonathan New joined the Company as Chief Financial
Officer.  Mr. New served as Chief Operating Officer of Ener1, Inc.
from 2001 to 2003. From 2004 until it was sold in 2006, Mr. New owned and
operated Wholesale Salon Furniture Corp.com, which imported and distributed
salon equipment.  Thereafter, until joining the Company, Mr. New
provided counsel to public companies on a variety of corporate accounting,
reporting and audit related issues. Prior to joining Ener1 in 2001, Mr. New held
controller and chief financial officer positions with companies including
Haagen-Dazs, Virtacon (a web development company), RAI Credit Corporation and
Prudential of Florida. Mr. New obtained his BS in Accounting from Florida State
University and began his career with Accenture. He is a member of the Florida
Institute of Certified Public Accountants and the American Institute of
Certified Public Accountants.




Mr. Ivan
Onuchin joined the Company on November 1, 2010 and was appointed Chief
Technology Officer of the Company and its subsidiaries on December 14, 2010.
From December 2008 though October 2010, Mr. Onuchin was employed with EdgeTech,
Inc., an underwater imaging company, as a software engineer responsible for the
creation of architecture and software development for a new generation of
products for managing advanced underwater sonar imaging systems. From September
2005 until December 2008, Mr. Onuchin was working as the Chief Technology
Officer of Helpful Technologies, Inc. and its subsidiaries, a Florida-based
software development company providing products that simplify access and
navigation to the Internet. Mr. Onuchin’s responsibilities included development
of break-through technologies allowing users to navigate on the Internet without
launching a browser. From February 2004 through June 2005, Mr. Onuchin was the
Chief Technology Officer of Splinex, Inc., a predecessor of the Company which
was involved in the development of advanced technologies in the
three-dimensional computer graphics industry. Throughout his career, Mr. Onuchin
was responsible for the creation of proprietary intellectual property portfolios
and managed local and outsourced teams of software developers. Mr. Onuchin has a
post-graduate degree from the Russian Academy of Science, where he has also
taught classes in advanced mathematics. Mr. Onuchin has also taught at Ural
State Technical University and Ural State University.





Board
composition





Currently,
our board of directors consists of three members. Mr. Caan was appointed to fill
the vacancy created by Stuart Murdoch’s resignation earlier in 2010, which
appointment took effect as of January 1, 2011. The number of directors may
change from time to time, as determined by resolution adopted by a majority of
the board of directors. Our by-laws require a minimum of one director and allow
a maximum of nine directors.





Currently,
there is no one serving on the board who is a “financial expert” or
“independent” under the Commission’s standards (Rule 10A-3 of the Exchange Act)
as the Company’s limited financial resources are not adequate to attract and
retain qualified candidates.


58





Committees
of the board of directors





In
December 2004, our board of directors established a Nominating and Compensation
Committee and an Audit Committee. Currently, there are no members of these
committees, which did not meet during fiscal 2010.





Audit
Committee





Our audit
committee’s main function is to oversee our accounting and financial reporting
processes, internal systems of control, independent auditor relationships and
the audits of our financial statements. This committee’s responsibilities
include:





·
            Selecting and hiring our
      independent auditors.


·
            Evaluating the qualifications,
      independence and performance of our independent
      auditors.


·
            Approving the audit and non-audit
      services to be performed by our independent
    auditors.


·
            Reviewing the design,
      implementation, adequacy and effectiveness of our internal controls and
      our critical accounting
policies.


·
            Overseeing and monitoring the
      integrity of our financial statements and our compliance with legal and
      regulatory requirements as they relate to financial statements or
      accounting matters.


·
            Reviewing with management and our
      auditors any earnings announcements and other public announcements
      regarding our results of
operations.


·
            Preparing the audit committee
      report we are required to include in filings with the
      Commission.




Currently,
the entire board of directors is serving as the audit committee.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors, executive officers and holders of more than 10% of our outstanding
common stock to file with the Securities and Exchange Commission reports
regarding their ownership and changes in ownership of the common stock. Based
solely upon a review of copies of forms furnished to our Company, the following
officers and directors and holders of more than 10% of our common stock did not
timely file the statement of changes in beneficial ownership on Form 4 or the
statement of beneficial ownership on Form 3 pursuant to Section 16(a) during
fiscal 2010 as follows:





NONE.




Code
of Ethics





We have a
Code of Ethics that applies to our officers and directors. The code provides
written standards that are reasonably designed to deter wrongdoing and promote:
(1) honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interests between personal and professional relationships;
(2) full, fair, accurate, timely and understandable disclosure in reports and
documents that we file with or submit to the SEC or in other public
communications we make; (3) compliance with applicable laws, rules and
regulations; (4) prompt reporting of internal violations of the code; and (5)
accountability for the adherence to the code. Our Code of Ethics can be found on
our Company website at http://netelement.com/about-us/way/code-of-ethics/.
We will provide a copy of our Code of Ethics to any person without charge, upon
written request to the Company.





Openfilm
Advisory Board





Our
Advisory Board consists of world class actors, producers, writers and directors,
who are willing to mentor Openfilm’s member filmmakers and offer advice on their
projects. Each of our Advisory Board members is widely recognized for their
quality work and passion for all aspects of film-making. Each Advisory Board
member has committed their time to participate in a minimum of two annual webcam
chat appearances with Openfilm’s premium members. Advisory Board members also
provide valuable insight and advice to management on strategy and business
development and serve as judges for Openfilm’s semi-annual contests. Openfilm
provided each Advisory Board member with an ownership interest in Openfilm
(which was exchanged for shares of common stock of the Company in connection
with the acquisition) and reimburses Advisory Board members for certain travel
related expenses. Our Advisory Board members are as follows:





59





James
Caan – Chairman of Advisory Board




Actor
      and director, James Caan, is the Chairman of Openfilm’s Advisory Board.
      Mr. Caan joined Openfilm with the belief that succeeding in the film
      business requires talent, an unshakeable belief in yourself and being in
      the “right place at the right time.” He feels Openfilm will create that
      “right place” for inspiring filmmakers, harnessing the power of the
      Internet to provide a forum for films to be seen by industry insiders. As
      an Advisory Board Member, Mr. Caan will mentor the next generation of
      talent who will continue his passion to entertain and
    inspire.





Mr. Caan
studied acting in New York and soon began to work in numerous TV roles, making
his big screen debut with the starring role in Lady in a Cage (1964) with
Olivia de Havilland. He quickly garnered the attention of audiences and critics
with his work in Red Line
7000 (1965), El
Dorado (1966), Journey
to Shiloh (1968) and The
Rain People (1969). In one of his most acclaimed roles, Mr. Caan was cast
as the hot-tempered gangster Santino "Sonny" Corleone in Francis Ford Coppola’s
The Godfather (1972).
The film earned Caan a Best Supporting Actor Oscar nomination. That same year,
he received a Best Actor Emmy nomination for the award-winning Brian’s Song . He later
reprised the role of Sonny Corleone in The Godfather: Part II
(1974).





Mr. Caan
moved on to act in a diverse number of films, including a cop-buddy crime
partnership with Alan Arkin in Freebie and the Bean (1974), a
man playing for his life in the critically acclaimed The Gambler (1974) and pairing
with Barbara Streisand in Funny
Lady (1975). Two further strong starring roles came in the 1975 films
Rollerball and The Killer Elite. He starred
in fellow Advisory Board Member Mark Rydell’s films Cinderella Liberty (1973),
Harry and Walter Go to New
York (1976) and For the
Boys (1991).





Mr. Caan
acted in a variety of films throughout the 1980’s and 1990’s, including the
critically acclaimed heist movie Thief (1981), the supernatural
romantic comedy Kiss Me
Goodbye (1982), Francis Ford Coppola’s Gardens of Stone (1987), and
the sci-fi hit Alien
Nation (1988). He surprised audiences with his portrayal of a meek
romance novelist held captive after a car accident by a deranged fan in Misery (1990). Other films
include Honeymoon in
Vegas (1992), The
Program (1993) and Flesh
and Bone (1993). Mr. Caan made his directorial debut in 1981 with the
film Hide in Plain Sight
(1981), which won him accolades from every known film critic.





Over
recent years, Mr. Caan has influenced a new generation of fans. He has
consistently created intriguing characters in such films as The Yards (2000), The Way of the Gun (2000) and
City of Ghosts (2002).
In 2003, Mr. Caan starred alongside Nicole Kidman in Lars von Trier’s
provocative tale Dogville and later caught the
attention of both child and adult audiences starring alongside Will Ferrell in
the now holiday classic, Elf. For many years, Mr. Caan
was also seen as the casino security chief in the television series Las Vegas.





In some
of his latest projects, Mr. Caan lent his voice for the animated film Cloudy with a Chance of
Meatballs and starred in features New York, I Love You and Mercy, written by and
costarring his son Scott. He will be seen in the upcoming film Middle Men and is currently
starring alongside Keanu Reeves in Henry’s Crime.





As one of
the industry’s most renowned actor’s, Mr. Caan is also a veteran, having starred
in well over 80 films. He is widely known and celebrated in the entertainment
community by industry workers of all ages and professions. As Chairman of the
Openfilm Advisory Board, Mr. Caan will oversee and collaborate with other
Advisory Board members, help recruit additional celebrity talent when needed,
offer his wisdom to the Openfilm community as he evaluates submissions, serve as
a judge for online competitions and interact with emerging talent and Openfilm
members.





60


Robert
Duvall – Advisory Board Member




Renowned
      actor, director and producer Robert Duvall joined Openfilm as a member of
      the Advisory Board. Mr. Duvall will evaluate film submissions, serve as a
      judge for Openfilm’s online contests and interact with emerging talent and
      Openfilm members.





Mr.
Duvall is a celebrated force in the film industry, having won an Academy Award,
two Emmy Awards and four Golden Globe Awards among many others for his
performances throughout his career. He began acting in theater and in small and
supporting television roles before garnering recognition in the TV series MASH (1970) and George Lucas’
film THX 1138 (1971).
Shortly after, Mr. Duvall starred in The Rain People (1969), The Godfather (1972), and
The Godfather Part II
(1974) all with Openfilm Advisory Board Chairman James Caan, as well as Network (1976), The Great Santini (1979) and
True Confessions
(1981).





In the
1979 film Apocalypse Now
(1979), Mr. Duvall received accolades for his performance as “Lt. Col. Kingore”.
He earned his second Academy Award nomination for the role and was named by the
Guinness Book of World
Records as the most versatile actor in the world. In 1983, Mr. Duvall won
an Oscar for his role in Tender
Mercies. Mr.
Duvall has appeared in many productions over the past several decades including
The Natural (1984),
Colors (1988), Lonesome Dove (1989), Stalin (1992), The Man Who Captured Eichmann
(1996), The Apostle
(1997), A Civil Action
(1998), Gods and
Generals (2003) and Broken Trail (2006). Mr.
Duvall has directed several pictures, such as the documentary We're Not the Jet Set (1977),
Angelo My Love (1983)
and Assassination Tango
(2002). He received his third Best Actor nomination and fifth Oscar nomination
for his role in The
Apostle (1997), which he wrote, directed and produced.





Most
recently, Mr. Duvall has been seen in many films such as Lucky You (2007), We Own the Night (2007), Four Christmases (2008), The Road (2009) and Crazy Heart (2009), which he
also produced.





Mark Rydell – Advisory Board
Member




Director,
      producer and actor Mark Rydell has joined Openfilm as a member of the
      Advisory Board. Mr. Rydell will evaluate film submissions, serve as a
      judge for Openfilm’s online contests and interact with Openfilm members.
      With over 40 years of experience in the entertainment industry, Mr. Rydell
      has seen filmmaking progress through technology advances and believes
      Openfilm will help new emerging talent get recognized, discovered and
      financed in ways never before
possible.





Mr.
Rydell began his career as an actor and became known for his roles in television
shows including The Edge of
Night and As the World
Turns. He later received critical acclaim for his role as the violent
Jewish mob kingpin, Marty Augustine, in The Long Goodbye
(1973).





Mr.
Rydell has directed numerous actors who received coveted nominations and awards
in many of his films. His directing credits include The Reivers (1969), The Cowboys (1972), Cinderella Liberty (1973),
The Rose (1979), On Golden Pond (1981), for
which he received an Oscar nomination for Best Director, The River (1984), For the Boys (1991) and Intersection (1994). Most
recently, he directed the 2006 film Even Money. Mr. Rydell also
directed the TV bio-pic James
Dean (2001), in which he played head of Warner Studios Jack
Warner.





In
addition to his work with Openfilm, Mr. Rydell is dedicated to educating
aspiring artists. He has worked for many decades at The Actors Studio, a
non-profit theatre workshop for professional actors, directors and writers, and
currently serves as the Artistic Director and Executive Director in West
Hollywood. In 2009, Mr. Rydell, actor Martin Landau and screenwriter/playwright
Lyle Kessler teamed up to produce a unique two-day event covering the
disciplines of acting, directing and writing called “The Total Picture Seminar".
With his help, we will be able to assemble similar seminars and classes
online.





61


Scott
Caan – Advisory Board Member




Actor,
      writer and director Scott Caan serves as a member of the Advisory Board of
      Openfilm. The son of actor and director James Caan, he grew up around
      actors and other industry professionals and benefited from having an
      insider’s look at what it takes to be successful in the film world. He is
      committed to sharing his knowledge with a new crop of talent. In this
      role, Mr. Caan will evaluate film submissions, provide insight and work
      with the rest of the Advisory Board members to help jump-start the careers
      of aspiring filmmakers.





Mr. Caan
began acting in the 1990s and has appeared in numerous independent and studio
films. After studying acting at the Playhouse West in Los Angeles, Mr. Caan
quickly gained recognition for his roles in such films as Enemy of the State (1998) and
Varsity Blues (1999).
Mr. Caan subsequently appeared in the films Ready To Rumble (2000), American Outlaws (2001) and
Into the Blue (2005), as
well as the box office successes Ocean's Eleven, Ocean's Twelve, and Ocean's Thirteen
..





Mr. Caan
began creating his own material, making his screenwriting and directorial debut
in 2003 with the film Dallas
362, which won the Critics Award at the 2003 CineVegas International Film
Festival. He also wrote and directed the 2006 comedy The Dog Problem, in which he
plays one of the supporting characters.





Most
recently, Mr. Caan has been seen as a Hollywood talent manager on the HBO series
Entourage and starred in
the film Mercy, which he
wrote and produced. His book of photography, Scott Caan Photography Vol.1,
was published in 2009.




Item
11. Executive Compensation.





The
following table sets forth all compensation awarded, earned or paid by us for
services rendered in all capacities to us for the fiscal years ended December
31, 2010 and March 31, 2010 to our Chief Executive Officer and President and our
other executive officers who earn more than $100,000 annually in salary and
bonus or are otherwise considered significant employees. We refer to these
individuals as the “named executive officers.”




Summary
Compensation Table




Name and Principal Position
                                
                                Year
                                
                                Salary ($)
                                
                                
                                Bonus ($)
                                
                                
                                Stock Awards
                                  ($)
                                
                                
                                Option
                                  Awards ($)
                                
                                
                                All Other
                                  Compen-
                                  sation ($)
                                
                                
                                Total ($)Mike
      Zoi (1)
                                
                                2010
                                
                                $
                                927,348
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                927,348Chief
      Executive Officer
                                
                                2009
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -Jonathan
      New,
                                
                                2010
                                
                                $
                                68,256
                                
                                
                                $
                                4,874
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                73,130Chief Financial
      Officer
                                
                                2009
                                
                                $
                                91,000
                                
                                
                                $
                                19,500
                                
                                
                                $
                                60,000
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                170,500Dmitry
      Kozko (2)Chief Executive Officer
                                
                                2010
                                
                                $
                                7,500
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                2,330
                                
                                
                                $
                                9,830Ivan
      Onuchin (3)
                                  Chief Technology
      Officer
                                
                                2010
                                
                                $
                                15,000
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                15,000





(1)
            During
      fiscal 2010, Mr. Zoi received $927,348, a portion of which reflects
      deferred salary from prior fiscal years ($354,848 for fiscal 2009 and
      $310,000 for fiscal 2008). Salary for fiscal 2010 (nine months) amounted
      to $262,500. Mr. Zoi also receives health and life insurance benefits
      available to employees generally.





(2)
            Dmitry
      Kozko is the Chief Executive Officer of Openfilm, which was acquired by
      the Company on December 14, 2010. Mr. Kozko receives an annual salary of
      $120,000 ($60,000 from Openfilm and $60,000 from Net Element), health and
      life insurance benefits available to employees generally, and a car
      allowance of $1,165 per month. Mr. Kozko also receives consulting fees
      from Enerfund unrelated to services provided to Openfilm or Net
      Element.  The table reflects amounts paid by the Company from
      December 14, 2010 (the date of acquisition of Openfilm) through December
      31, 2010.




62


(3)
            Appointed
      an officer of the Company on December 14, 2010. Mr. Onuchin receives an
      annual salary of $120,000 and health and life insurance benefits available
      to employees generally.




Mike Zoi
became Chief Executive Officer on December 17, 2007 effective with his purchase
of member interests in Splinex, LLC. Mr. Zoi is entitled to receive an
annual salary of $350,000.





Jonathan
New joined us on March 10, 2008.  Up until May 15, 2009, Mr. New’s
base salary was $140,000 with a $30,000 bonus payable quarterly for meeting
agreed upon objectives.  On May 15, 2009, Mr. New’s base salary was reduced
from $140,000 to 91,000 and his bonus was reduced from $30,000 to $19,500
annually. To partially offset the reduction in salary, the Company provided Mr.
New with 25,000 shares of fully vested common stock in lieu of his March 31,
2009 cash bonus and 200,000 shares of common stock which vest monthly from April
1, 2009 to September 30, 2009.  Additionally, Mr. New was granted 250,000
shares of fully vested common stock at March 31, 2010.  A compensation
charge of $60,000 was recorded during fiscal 2009 for the 475,000 shares granted
during the fiscal year reflecting the then current market value per share on the
first trading day after the dates of grant as detailed below:




Date
                  
                  Number of
                    Shares
                  
                  
                  Compensation
                    Expense
                  
                  
                  Market Value
                    Per Share06/03/09
                  
                  
                  25,000
                  
                  
                  $
                  2,500
                  
                  
                  $
                  0.1009/30/09
                  
                  
                  200,000
                  
                  
                  $
                  20,000
                  
                  
                  $
                  0.1003/31/10
                  
                  
                  250,000
                  
                  
                  $
                  37,500
                  
                  
                  $
                  0.15





Mr. New
also participates in the Company’s equity incentive compensation
plan.





Curtis
Wolfe serves as Secretary and a Director of the Company.  Mr.
Wolfe served as Executive Vice President and General Counsel of the
Company from December 17, 2007 to September 30, 2008. For fiscal 2009, Mr.
Wolfe received an aggregate of $2,500 for legal services provided to us and
this amount was expensed to legal fees in the consolidated statement of
operations. On December 14, 2010, we issued 1,000,000 shares of common
stock to Mr. Wolfe in exchange for legal services provided on our behalf during
fiscal 2010. Mr.
Wolfe also participates in the Company’s equity incentive compensation
plan.




OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END 2010




Name
                        
                        Number of
                          Securities
                          Underlying
                          Unexercised
                          Options (#)
                          Exercisable
                        
                        
                        Number of
                          Securities
                          Underlying
                          Unexercised
                          Options (#)
                          Unexercisable
                        
                        
                        Equity Incentive
                          Plan Awards:
                          Number of
                          Securities
                          Underlying
                          Unexercised
                          Unearned
                          Options (#)
                        
                        
                        Option
                          Exercise
                          Price ($)
                        
                        Option Expiration
                          DateStuart
      Murdoch
                        
                        
                        100,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        0.25
                        
                        February
      7, 2013Curtis
      Wolfe
                        
                        
                        100,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        0.25
                        
                        July
      8, 2015Jonathan
      New
                        
                        
                        805,556
                        
                        
                        
                        194,444
                        
                        
                        
                        194,444
                        
                        
                        $
                        0.25
                        
                        July
      8,
2015




On August
13, 2008, the Board of Directors approved (i) the issuance of fully vested
options to purchase 100,000 shares of common stock to Curtis Wolfe for his
services as a board member and (ii) the issuance of options to purchase
1,000,000 shares of common stock to Jonathan New for his services as Chief
Financial Officer. Mr. New’s stock options will vest ratably over three years.
Both sets of options will have a term of 7 years from date of grant and a strike
price of $0.25 per share.


63




Equity Compensation Plan InformationNumber of
                          securities to be
                          issued upon
                          exercise of
                          outstanding
                          options, warrants
                          and rights
                        
                        
                        Weighted-
                          average exercise
                          price of
                          outstanding
                          options, warrants
                          and rights
                        
                        
                        Number of
                          securities
                          remaining available
                          for future issuance
                          under equity
                          compensation
                          plans (excluding
                          securities reflected
                          in column (a))Plan category
                        
                        (a)
                        
                        
                        (b)
                        
                        
                        (c)Equity
      compensation plans approved by security holders
                        
                        
                        1,200,000
                        
                        
                        $
                        0.25
                        
                        
                        
                        3,975,000




2010
DIRECTOR COMPENSATION





No
compensation was granted to board members of Net Element during fiscal 2010 for
their services as members of the board of directors.





Employment/Consulting
Agreements





Employment
Agreements





Music1
entered into a two-year employment agreement with Stephen Strother commencing on
November 1, 2010 appointing Mr. Strother as President of Music1. The agreement
is automatically renewable for successive one-year terms unless notice of
termination is given at least 30 days prior to the end of a term. Mr. Strother
may be terminated prior to the end of a term for “cause” as defined in the
employment agreement. Pursuant to the agreement, Mr. Strother will receive an
annual salary of $200,000 and a bonus of up to 50% of the annual salary provided
specified performance targets are met. Mr. Strother will be entitled to receive
distributions of dividends, if any, declared by Music1’s board of directors
equal to his equity ownership in Music1 of three percent. Mr. Strother is also
required to be appointed to the board of directors of Musci1. The agreement
contains customary non-compete and non-solicitation provisions. In addition, we
are obligated to invest at least $500,000 in Music1 by December 31, 2012 (which
amount may include salaries and other expenses of Music1). In the event such
amount is not invested in Music1 by December 31, 2012 or the employment
agreement of Mr. Strother is terminated other than for cause or good reason on
or before May 7, 2012, then Mr. Strother will have the right to repurchase
Music1 for $1.00.





Consulting
Agreements





Motorsport.com,
Inc. entered into three-year consulting agreements with three of its four
principals, Jack Durbin, Eric Gilbert and Nancy Schilke. The consulting
agreements set forth the responsibilities of each consultant as follows: Jack
Durbin – North American News Manager; Eric Gilbert – Art Director; Nancy Schilke
– Editor-in-Chief/News Manager.  Each consultant receives a monthly
fee that is subject to adjustment when Motorsport revenues exceed $500,000. Each
consultant is eligible for a bonus of up to 50% of annual compensation if
certain specified milestones have been met. Upon Motorsport achieving profitable
operations, each of the consultants shall be eligible for an increase in annual
fees to be mutually agreed upon, but no less than an increase of 25% of the then
current fee. Motorsport may terminate the consulting arrangements upon 30 days
written notice at any time after payment of the remainder of the purchase price
for Motorsport and exercise of the option to purchase the remaining interests in
Motorsport.com, Inc. held by each of the four minority owners of Motorsport.com,
Inc. as set forth in the Motorsport Purchase Agreement (for more information,
see “Item 1. Business – Recent Acquisitions – Motorsport.com”).




64


Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.





The table
below contains information as of January 31, 2011 (the most recent practicable
date for which information could be obtained) about stockholders whom we believe
are the beneficial owners of more than five percent (5%) of our outstanding
common stock, as well as information regarding stock ownership by our directors
and director nominees and our Chief Executive Officer, our named executive
officers, and our directors, director nominees and named executive officers as a
group. Except as described below, we know of no person that beneficially owns
more than 5% of our outstanding common stock. As of January 31, 2011 there were
642,119,111 shares of common stock outstanding.  We believe, based on
information supplied by the following persons that, except as noted, the persons
named in this table have sole voting and investment power with respect to all
shares of common stock which they beneficially own. The amount and percentage of
common stock beneficially owned are reported on the basis of regulations of the
SEC governing the determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a “beneficial owner” of a security if
that person has or shares “voting power,” which includes the power to vote or to
direct the voting of such security, or “investment power,” which includes the
power to dispose of or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities of which that person has
a right to acquire beneficial ownership within 60 days. The address of each
person or entity named in the following table is c/o Net Element, Inc., 1450 S.
Miami Avenue. Miami, Florida 33130.




Name and Address of Beneficial Owner
                  
                  Amount and Nature of
                    Beneficial owner (number of
                    Common shares)
                  
                  
                  Percent of
                    ClassMike
      Zoi (1)
                  
                  
                  876,269,503
                  
                  
                  
                  94.2Dmitry
      Kozko (2)
                  
                  
                  24,950,000
                  
                  
                  
                  3.9James
      Caan (3)
                  
                  
                  5,568,421
                  
                  
                  
                  *Curtis
      Wolfe (4)
                  
                  
                  1,100,000
                  
                  
                  
                  *Jonathan
      New (5)
                  
                  
                  1,365,741
                  
                  
                  
                  *Ivan
      Onuchin
                  
                  
                  -
                  
                  
                  
                  -Directors
      and named executive officers as a group (1)(2)(3)(4)(5)
                  
                  
                  909,253,665
                  
                  
                  
                  97.6


* Less
than one percent (1%)




(1)
            Includes 5,754 shares of common
      stock held by Mr. Zoi, 401,263,749 shares of common stock and warrants to
      purchase 100,000,000 shares of common stock that are held by TGR over
      which Mr. Zoi has dispositive and voting power, 75,000,000 shares of
      common stock received in exchange for his ownership interest in Openfilm
      that is held by MZ Capital, LLC (Delaware) (45,937,500 shares) and MZ
      Capital, LLC (Florida) (29,062,500 shares), limited liability companies
      over which Mr. Zoi has dispositive and voting power and whose members
      include Mr. Zoi, Mr. Kozko and Mr. Kozko's wife and minor children (Mr.
      Kozko and his wife and minor children have no voting or dispositive
      control over the shares of the Company held by MZ Capital and therefore
      disclaim beneficial ownership thereof), and 200,000,000 shares of common
      stock (of which 88,000,000 shares are to be issued upon an increase in the
      authorized number of shares of the Company expected by March 2011) and
      warrants to purchase 100,000,000 shares of common stock (of which warrants
      to purchase 44,000,000 shares are to be issued upon an increase in the
      authorized number of shares of the Company expected by March 2011) that
      are held by Enerfund over which Mr. Zoi has dispositive and voting
      power.





(2)
            CEO of Openfilm. Reflects shares
      of common stock received in exchange for his ownership interest in
      Openfilm.





(3)
            Appointed to Board of Directors
      effective January 1, 2011. Reflects shares of common stock received in
      exchange for his ownership interest in
  Openfilm.





(4)
            Includes 100,000 shares
      underlying the grant of stock options expiring on August 12, 2013 and a
      strike price of $0.25 per share, and the grant on December 14, 2010 of
      1,000,000 shares of restricted stock of the Company in lieu of payment for
      legal services provided to the
Company.





(5)
            Reflects 890,741 shares
      underlying stock options that are currently exercisable with respect to
      stock options to purchase 1,000,000 shares of common stock that were
      granted on August 13, 2008 and vest ratably over 36 months from the date
      of grant.  These options expire on August 13, 2013 and have a strike
      price of $0.25.  Also includes restricted stock grants totaling
      475,000 shares.




65


Item
13. Certain Relationships and Related Transactions, and Director
Independence.





Certain
Relationships and Related Transactions





On
December 17, 2007, (1) certain holders, who had received shares in the Company
as distributions from Splinex LLC, transferred their ownership of 35,162,334
shares of common stock of the Company to Splinex LLC for nominal consideration,
and (2) Bzinfin, S.A., a British Virgin Islands limited corporation that is
indirectly owned by an affiliate of Ener1 Group, Inc., a Florida company of
which Mike Zoi is a shareholder and director and which is the majority
shareholder of Ener1, Inc., co-founded by our President, Mike Zoi, a
company that designs, develops and manufactures high-performance,
rechargeable, lithium-ion batteries and battery systems in the transportation
and energy markets, and Ener1 Group assigned debt obligations of the
Company to Splinex LLC in the amount of $2,805,207 and $845,864, respectively.
Under a Purchase Agreement dated December 17, 2007, TGR Capital, LLC (which
changed its name to Enerfund, LLC in September 2008), a Florida limited
liability company (“Enerfund”), which is wholly-owned by Mike Zoi, acquired all
of the membership interests in Splinex LLC, thereby giving Enerfund control of
Splinex LLC.





Under an
Exchange Agreement dated December 18, 2007, we agreed to issue 113,500,000 newly
issued shares to Splinex LLC of which 8,500,000 shares were issued to Bzinfin
and 2,125,000 were issued to a former affiliate of Splinex, LLC. Splinex LLC
owned 98,157,334 shares as of December 17, 2007 and an aggregate of 201,032,334
shares after the completion of the Exchange Agreement on December 18, 2007. We
had 100,757,769 shares outstanding at December 17, 2007 and 214,257,769 shares
outstanding after the completion of the Exchange Agreement. In June 2008,
Splinex, LLC changed its name to TGR Energy, LLC (“TGR”).




On August
7, 2008, the Company and TGR, which held 94% of our outstanding common stock,
entered into the Subscription Agreement described above pursuant to which TGR
has agreed to provide funding of up to $2,000,000 (the “Investment Amount”) in
exchange for up to 100,000,000 shares of our common stock and warrants to
purchase up to 50,000,000 shares of the our common stock at an exercise price of
$0.05 per share. Pursuant to the Subscription Agreement, TGR will fund the
Investment Amount as required in our operational budget. TGR’s obligation to
fund the Investment Amount will be reduced by any future third party funding or
investments on terms no less favorable than those contained in the Subscription
Agreement. On January 12, 2010, TGR agreed to increase the Investment Amount
from $2,000,000 to $4,000,000 in exchange for up to an additional 100,000,000
shares of our common stock and warrants to purchase up to 50,000,000 shares of
our common stock at an exercise price of $0.05 per share for a period of five
years from date of issuance. TGR has funded the full amount required under the
Subscription Agreement.





For the
fiscal year ended March 31, 2010, TGR was issued an aggregate of 16,186,515
shares of our common and fully vested warrants to purchase 8,093,757 shares of
our common stock at an exercise price of $0.05 per share pursuant to the terms
of the Subscription Agreement.  These issuances were in exchange for
financings under the Subscription Agreement in the aggregate amount of
$323,730.




For the
nine months ended December 31, 2010, TGR was issued 101,088,150 shares of our
common stock and fully vested warrants to purchase 50,544,075 shares of our
common stock for $0.05 per share in exchange for funding of $2,021,763 provided
under the terms of the Subscription Agreement.  The Subscription
Agreement was fully subscribed at December 31, 2010.




66




As part of our
strategy to develop an online media company, on December 14, 2010, we entered
into a purchase agreement with the members of Openfilm.  Mike Zoi, our
President, through his control of Enerfund, LLC and MZ Capital, LLC, both
Florida limited liability companies, held approximately 70% of Openfilm’s
outstanding membership interests prior to the acquisition by us. Pursuant to the
Openfilm Purchase Agreement, we acquired all of the outstanding membership
interests in Openfilm by exchanging for such interests an aggregate of
107,238,421 shares of our common stock to the security holders of Openfilm, of
which 45,937,500 shares were issued to Enerfund (a company controlled by Mike
Zoi), 29,062,500 shares were issued to MZ Capital, LLC (a company controlled by
Mike Zoi), 24,950,000 shares were issued to Dmitry Kozko, CEO of Openfilm, and
an aggregate of 7,288,421 shares were issued to the remaining seven
non-controlling security holders of Openfilm. Upon completion of the acquisition
transaction on December 14, 2010, Openfilm became a wholly-owned subsidiary. Up
until the date of acquisition, Openfilm operations were funded primarily by
entities controlled by our President, Mike Zoi.





On
December 10, 2010, Openfilm entered into a loan agreement with Enerfund LLC (a
company controlled by Mike Zoi) in the principal amount of $1,667,020. The
annual interest rate is 5% payable annually on December 31st.  The
loan matures on December 10, 2012 with accrued interest due at that
time.





On
December 31, 2010, we entered into a Subscription Agreement with Enerfund, LLC
(a company controlled by Mike Zoi) (the “Enerfund Subscription Agreement”)
pursuant to which we received an aggregate of $2,000,000 in exchange for
200,000,000 shares of our common stock and warrants to purchase 100,000,000
shares of our common stock at an exercise price of $0.05 per share for a period
of five years from date of issuance. However, we did not have sufficient
authorized shares of common stock to fully issue these securities to Enerfund as
of December 31, 2010. Accordingly, this transaction has been accounted for as a
purchase by Enerfund as of December 31, 2010 of 112,000,000 shares of our common
stock and fully vested warrants to purchase 56,000,000 shares of our common
stock for $0.05 per share in exchange for $1,120,000. A compensation charge
of $560,000 was recorded for the nine months ended December 31, 2010 as one of
our officers is also a principal of Enerfund.   This amount is
calculated as the Black-Scholes valuation of the warrants issued as of December
31, 2010.  The balance of the proceeds of $880,000 has been accounted
for as an advance until we can issue the balance of the shares and warrants,
which is expected on or about March 1, 2011, and appears on our balance sheets
as stock subscription liability. The proceeds of the Enerfund Subscription
Agreement will be used to fund our operations. However, we will need to raise
additional capital to fund operations during the latter half of
2011.





On
February 1, 2011, we entered into a purchase agreement (the “Motorsport Purchase
Agreement”) with Enerfund, LLC, an entity controlled by Mike Zoi, to purchase
all of the issued and outstanding interests of Motorsport, LLC, a Florida
limited liability company that held 80% of the outstanding common stock of
Motorsport.com, Inc., a Florida corporation engaged in the operation of a news
and information website relating to the international motorsport
industry.  Motorsport, LLC purchased the interest of Motorsport.com,
Inc. on December 17, 2010. The remaining 20% of the outstanding common stock of
Motorsport.com, Inc. is held by the original stockholders (4 persons) of
Motorsport.com, Inc.  We paid Enerfund an aggregate of $130,000
(exclusive of a $20,000 contingent payment relating to the purchase of certain
domain names) and agreed to take over responsibility for the obligations
contained in the purchase agreement of December 17, 2010, which includes, among
other things, the aggregate payment to the original stockholders of
Motorsport.com, Inc. of an additional $450,000 payable in four quarterly
installments, without interest, commencing on December 1, 2013. In the event the
domain names and related registrations are purchased by June 16, 2011, then the
contingent amount ($20,000) will be paid. The original sellers have a security
interest in the domains of Motorsport.com, Inc. as collateral for payment of the
additional purchase price. Failure by us to pay the additional purchase
installments when due may result in forfeiture of the shares in Motorsport.com,
Inc. held by us.





In
addition, we have an option to purchase the remaining interests of
Motorsport.com, Inc. currently held by the original stockholders. The purchase
option expires on December 16, 2018.  We may exercise this option at
any time upon thirty days prior written notice and the payment, in cash or
preferred stock of Motorsport.com, Inc., as follows:





(xiii)
            until
      December 16, 2015:  $0.1075 per
share;


(xiv)
            from
      December 17, 2015 through December 16, 2016: $0.1185 per
      share;


(xv)
            from
      December 17, 2016 through December 16, 2017: $0.1305 per share;
      and


(xvi)
            from
      December 17, 2017 through December 16, 2018: $0.1435 per
      share.





We may
redeem the preferred stock issued at any time upon the payment in full of the
value of the preferred stock as of the date of issuance.




67




On January 31,
2011, Motorsport entered into a loan agreement with Enerfund LLC (a company
controlled by Mike Zoi) in the principal amount of $184,592. The annual interest
rate is 5% payable annually on December 31st.  The
loan matures on the third anniversary of each funding under the loan agreement,
which fundings occurred from October 2010 through January 2011, with accrued
interest due at that time.


On
February 1, 2011, we acquired Music1, LLC from Enerfund for an aggregate
purchase price of $15,000. We are required to invest at least $500,000 in Music1
by December 31, 2012 (which amount may include salaries and other expenses of
Music1). In the event such amount is not invested in Music1 by December 31, 2012
or the employment agreement of Mr. Strother is terminated other than for cause
or good reason on or before May 7, 2012, then Mr. Strother will have the right
to repurchase Music1 for $1.00.




On
January 31, 2011, Music1 entered into a loan agreement with Enerfund LLC (a
company controlled by Mike Zoi) in the principal amount of $128,890. The annual
interest rate is 5% payable annually on December 31st.  The
loan matures on the third anniversary of each funding under the loan agreement,
which fundings occurred from October 2010 through January 2011, with accrued
interest due at that time.




Director Independence





Currently,
there is no one serving on the board or any committee thereof who is a
“financial expert” or “independent” under the Commission’s standards (Rule 10A-3
of the Exchange Act) as our limited financial resources are not adequate to
attract and retain qualified candidates. For more information regarding the
Board and committees thereof, see “Item 10. Directors, Executive Officers and
Corporate Governance.”





Board
meetings and committees; annual meeting attendance





During
fiscal 2010, the board held seven meetings by telephonic conference or unanimous
written consent in lieu of a meeting. During fiscal 2010, Stuart Murdoch
attended less then 75% of the telephonic board meetings and resigned from the
Board in September 2010.





We do not
have a formal policy regarding attendance by directors at annual meetings of
security holders. However, if any board members do attend the annual meeting of
security holders, their expenses will be reimbursed.





Item
14.  Principal Accounting Fees and Services.





Audit
Fees.    The aggregate fees, including expenses, billed by our current
principal accountants in connection with the audit of our annual financial
statements and review of regulatory filings including the financial statements
included in our Annual and Quarterly Reports on Forms 10-K and 10-Q during
fiscal 2010 and fiscal 2009 were $45,296 and $51,500, respectively.





Audit
Related Fees.  The aggregate fees, including expenses, billed by our
current principal accountants for services reasonably related to the performance
of the audit or review of financial statements not reported under “Audit Fees”
above for fiscal 2010 and fiscal 2009 were $16,037 and $13,750,
respectively.





Tax
Fees.  The aggregate fees, including expenses, billed by our former and
current principal accountants for services rendered for tax compliance, tax
advice, and tax planning during fiscal 2010 and fiscal 2009 were
$0.





All Other
Fees.  The aggregate fees, including expenses, billed for all other
services rendered to us by our current principal accountants during fiscal 2010
and fiscal 2009 were $0.




68




Audit
Committee Pre-Approval Policy
  Our Audit
Committee (which, in our case, is the full Board of Directors) is responsible
for selecting and hiring our independent auditors and approving the audit and
non-audit services to be performed by our independent auditors. The Audit
Committee’s policy is that all audit and non-audit services provided by our
independent auditor shall be approved before the independent auditor is engaged
for the particular services. These services may include audit services and
permissible audit-related services, tax services and other services. The Audit
Committee may in the future establish pre-approval procedures pursuant to which
our independent auditor may provide certain audit and non-audit services to us
without first obtaining the Audit Committee's approval. All fees paid to the
independent auditors in fiscal 2010 and 2009 were pre-approved by the Audit
Committee   (which in our case is the full Board of Directors), and
therefore no services were approved after the services were
rendered.




PART IV





Item
15. Exhibits, Financial Statement Schedules.





Financial
Statements and Exhibits





(a)
            Financial
      Statements.





The
following financial statements of Net Element, Inc. are included in “Item 8.
Financial Statements and Supplementary Data”:





Audited
Consolidated Balance Sheets as of December 31, 2010 and as of March
31, 2010.





Audited
Consolidated Statements of Operations for the nine months ended December 31,
2010 and the twelve months ended March 31, 2010.





Audited
Consolidated Statements of Changes in Stockholders’ Deficiency in Assets for the
nine months ended December 31, 2010 and the twelve months ended March 31,
2010.





Audited
Consolidated Statements of Cash Flows for the nine months ended December 31,
2010 and the twelve months ended March 31, 2010.




69





The
following financial statements of Motorsport.com, Inc. are included as an
appendix to this Annual Report:




Audited
Balance Sheets as of December 31, 2010 and 2009




Audited
Statements of Operations – for the twelve months ended December 31, 2010 and
2009




Audited
Statements of Stockholders’ Equity – for the years ended December 31, 2010 and
2009




Audited
Statements of Cash Flows – for the twelve months ended December 31, 2010 and
2009




(b)    Exhibits.





Exhibit
                  Number
                
                Description2.1
                
                Agreement
      and Plan of Merger among Ener1 Acquisition Corp., Registrant and Ener1,
      Inc., dated as of June 9, 2004, incorporated herein by reference to
      Exhibit 2.1 to Splinex’s Registration Statement on Form S-1 filed with the
      Commission on June 24, 2004 (Registration No.
  333-116817)2.2
                
                First
      Amendment to Agreement and Plan of Merger among Ener1 Acquisition Corp.,
      Registrant and Ener1, Inc., dated as of October 13, 2004,
      incorporated herein by reference to Exhibit 2.2 to Amendment No, 1 to
      Splinex’s Registration Statement on Form S-1 filed with the Commission on
      October 15, 2004 (Registration No. 333-116817)2.3
                
                Second
      Amendment to Agreement and Plan of Merger among Ener1 Acquisition Corp.,
      Splinex and Ener1, Inc., dated as of December 23, 2004, incorporated
      herein by reference to Exhibit 2.3 to Amendment No. 3 to Splinex’s
      Registration Statement on Form S-1 filed with the Commission on December
      27, 2004 (Registration No. 333-116817)3.1
                
                Certificate
      of Incorporation of Splinex, incorporated herein by reference to Exhibit
      3.1 to Splinex’s Registration Statement on Form S-1 filed with the
      Commission on June 24, 2004 (Registration No.
  333-116817)3.2
                
                Certificate
      of Merger of Splinex, incorporated herein by reference to Exhibit 3.2 to
      Amendment No. 3 to Splinex’s Registration Statement on Form S-1 filed with
      the Commission on December 27, 2004 (Registration No.
      333-116817)3.3
                
                Bylaws
      of Splinex, incorporated herein by reference to Exhibit 3.3 to Splinex’s
      Registration Statement on Form S-1 filed with the Commission on June 24,
      2004 (Registration No. 333-116817)3.4
                
                Certificate
      of Amendment of Articles of Incorporation, incorporated herein by
      reference to Appendix A to Schedule 14C filed with the Commission on
      February 11, 2009.10.1
                
                Bridge
      Loan Agreement between Registrant and Ener1 Group, Inc. dated November 2,
      2004 incorporated herein by reference to Exhibit 10.13 to Amendment No. 2
      to Splinex’s Registration Statement on Form S-1 filed with the Commission
      on December 3, 2004 (Registration No.
  333-116817)





70





10.2
              
              Amendment
      to Bridge Loan Agreement between Registrant and Ener1 Group, Inc. dated
      November 17, 2004 incorporated herein by reference to Exhibit 10.14 to
      Amendment No. 2 to Splinex’s Registration Statement on Form S-1 filed with
      the Commission on December 3, 2004 (Registration No.
      333-116817)10.3
              
              Employment
      Agreement between Christian Schormann and Splinex dated January 12, 2005,
      incorporated herein by reference to Exhibit 10.15 of the Current Report on
      Form 8-K filed with the Commission on January 25, 2005.10.4
              
              Revolving
      Debt Funding Commitment Agreement between Bzinfin, S.A. and Registrant,
      dated as of June 9, 2004, incorporated herein by reference to Exhibit
      10.1 to Splinex’s Registration Statement on Form S-1 filed with the
      Commission on June 24, 2004 (Registration No.
  333-116817)10.5
              
              2004
      Stock Option Plan of Registrant, incorporated herein by reference to
      Exhibit 10.2 to Splinex’s Registration Statement on Form S-1 filed with
      the Commission on June 24, 2004 (Registration No.
    333-116817)10.6
              
              Form of
      Stock Option Agreement of Registrant, incorporated herein by reference to
      Exhibit 10.3 to Splinex’s Registration Statement on Form S-1 filed with
      the Commission on June 24, 2004 (Registration No.
    333-116817)10.7
              
              Sublease
      Agreement between Ener1 Group, Inc. and Splinex, LLC, dated as of
      November 1, 2003, assigned to Registrant as of April 1, 2004,
      incorporated herein by reference to Exhibit 10.4 to Splinex’s Registration
      Statement on Form S-1 filed with the Commission on June 24, 2004
      (Registration No. 333-116817)10.8
              
              Contribution
      Agreement between Splinex, LLC and Registrant, dated as of April 1,
      2004, incorporated herein by reference to Exhibit 10.5 to Splinex’s
      Registration Statement on Form S-1 filed with the Commission on June 24,
      2004 (Registration No. 333-116817)10.9
              
              Assignment
      and Assumption of Employment Agreements between Splinex, LLC and
      Registrant, dated as of April 1, 2004, incorporated herein by
      reference to Exhibit 10.6 to Splinex’s Registration Statement on Form S-1
      filed with the Commission on June 24, 2004 (Registration No.
      333-116817)10.10
              
              Global
      Bill of Sale and Assignment and Assumption Agreement between Splinex, LLC
      and Registrant, dated as of April 1, 2004, incorporated herein by
      reference to Exhibit 10.7 to Splinex’s Registration Statement on Form S-1
      filed with the Commission on June 24, 2004 (Registration No.
      333-116817)10.11
              
              Employment
      letter between Gerard Herlihy and Registrant, dated May 20, 2004,
      incorporated herein by reference to Exhibit 10.8 to Splinex’s Registration
      Statement on Form S-1 filed with the Commission on June 24, 2004
      (Registration No. 333-116817)10.12
              
              Consulting
      Agreement between Dr. Peter Novak and Registrant, dated
      January 1, 2004, incorporated herein by reference to Exhibit 10.9 to
      Splinex’s Registration Statement on Form S-1 filed with the Commission on
      June 24, 2004 (Registration No. 333-116817)10.13
              
              Form
      of Employee Innovations and Proprietary Rights Assignment Agreement,
      incorporated herein by reference to Exhibit 10.10 to Splinex’s
      Registration Statement on Form S-1 filed with the Commission on June 24,
      2004 (Registration No.
333-116817)


71





10.14
              
              Form
      of Indemnification Agreement, incorporated herein by reference to Exhibit
      10.11 to Amendment No. 3 to Splinex’s Registration Statement on Form S-1
      filed with the Commission on December 27, 2004 (Registration No.
      333-116817)10.15
              
              Employment
      Agreement between Michael Stojda and Registrant, dated September 1,
      2004, incorporated herein by reference to Exhibit 10.12 to Amendment No. 1
      to Splinex’s Registration Statement on Form S-1 filed with the Commission
      on October 15, 2004 (Registration No. 333-116817)10.16
              
              Reseller
      Agreement between Waterloo Maple Inc. and the Company dated May 27, 2005.,
      incorporated herein by reference to Exhibit 10.1 to Splinex’s Current
      Report on Form 8-K, filed with the Commission on June 3,
    200510.17
              
              Severance
      Agreement dated November 21, 2005 by and between Splinex and Michael
      Stojda, incorporated by reference to Exhibit 10.1 to Splinex’s Current
      Report on Form 8-K, filed with the Commission on November 21,
      200510.18
              
              Termination
      Agreement dated October 17, 2005 by and between Splinex and Christian
      Schormann, incorporated by reference to Exhibit 10.2 to Splinex’s Current
      Report on Form 8-K, filed with the Commission on November 21,
      200510.19
              
              First
      Amendment to Splinex Technology, Inc. 2004 Stock Option Plan, incorporated
      by reference to Exhibit 10.19 to the Annual Report on Form 10-K for the
      year ended March 31, 2009, filed with the Commission on June 30,
      200910.20
              
              Joint
      Venture Agreement dated July 16, 2008 by and between the Company and
      Evgeni Bogarad, incorporated by reference to Exhibit 10.1 to the Current
      Report on Form 8-K, filed with the Commission on July 23,
    200810.21
              
              Notarial
      Deed dated July 17, 2008 by and between the Company and Korlea Invest
      Holding AG, incorporated by reference to Exhibit 10.20 to the Quarterly
      Report on Form 10-Q, filed with the Commission on November 18,
      200810.22
              
              Subscription
      Agreement dated August 7, 2008 by and between the Company and TGR Energy,
      LLC, incorporated by reference to Exhibit 10.20 to the Quarterly Report on
      Form 10-Q, filed with the Commission on November 18,
  200810.23
              
              Amendment
      to the Subscription Agreement between TGR Energy, LLC and the Company
      dated January 12, 2010, incorporated by reference to Exhibit 10.20 to the
      Quarterly Report on Form 10-Q filed with the Commission on February 16,
      201010.24
              
              Assignment
      between TGR Energy, LLC and the Company dated January 12, 2010,
      incorporated by reference to Exhibit 10.21 to the Quarterly Report on Form
      10-Q filed with the Commission on February 16, 2010, incorporated by
      reference to Exhibit 10.24 to the Annual Report on Form 10-K, filed with
      the Commission on July 13, 2010.10.25
              
              Joint
      Venture Dissolution Agreement dated March 31, 2010 between the Company and
      Sibburnefteservis, LTD., TOT-SIBBNS, LTD and Evgeni Bogorad, incorporated
      by reference to Exhibit 10.25 to the Annual Report on Form 10-K, filed
      with the Commission on July 13,
2010.





72





10.26
              
              Stock
      Repurchase Agreement dated April 28, 2010 between the Company, TGR Energy,
      LLC and Dune Capital Group LLC, incorporated by reference to Exhibit 10.26
      to the Annual Report on Form 10-K, filed with the Commission on July 13,
      2010.10.27
              
              Membership
      Interest Purchase Agreement dated December 14, 2010 by and among the
      Company, Openfilm, LLC and the members of Openfilm, incorporated by
      reference to Exhibit 10.27 to the Periodic Report on Form 8-K, filed with
      the Commission on December 15, 2010.10.28
              
              Technology
      Transfer and License Agreement dated December 14, 2010 between NetLab
      Systems, LLC and Opernfilm, LLC, incorporated by reference to Exhibit
      10.28 to the Periodic Report on Form 8-K, filed with the Commission on
      December 15, 2010.10.29*
              
              Membership
      Interest Purchase Agreement (Motorsport) Between Enerfund, LLC and Net
      Element, Inc. dated as of February 1, 2011.10.30*
              
              Membership
      Interest Purchase Agreement (Music1) Between Enerfund, LLC and Net
      Element, Inc. Dated as of February 1, 2011.10.31*
              
              Employment
      Agreement dated as of November 1, 2010 between Music1, LLC and Stephen
      Strother.10.32*
              
              License
      Agreement dated February 1, 2011 between Music1, LLC and Stephen
      Strother.10.33*
              
              Loan
      Agreement dated as of December 10, 2010 between Enerfund, LLC and
      Openfilm, LLC.10.34*
              
              Subscription
      Agreement dated as of December 31, 2010 between the Company and Enerfund,
      LLC.10.35*
              
              Loan
      Agreement dated as of January 31, 2011 between Enerfund, LLC and Music1,
      LLC.10.36*
              
              Loan
      Agreement dated as of January 31, 2011 between Enerfund, LLC and
      Motorsport, LLC.14
              
              Code
      of Ethics, incorporated by reference to Exhibit 10.2 to Splinex’s Annual
      Report on Form 10-K for the year ended March 31, 2005, filed with the
      Commission on June 30, 200521.1*
              
              List
      of Subsidiaries31.1*
              
              Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2*
              
              Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1*
              
              Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002





* Filed
herewith.


73


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this amended report to be signed on its
behalf by the undersigned, thereunto duly authorized.





Net
      Element, Inc.February
      3, 2011
              by: /S/ Mike ZoiMike
      ZoiPresident
      and Chief Executive OfficerPursuant
      to the requirements of the Securities Exchange Act of 1934, this amended
      report has been signed below by the following persons on behalf of the
      registrant and in the capacities and on the dates
    indicated.February
      3, 2011
              /S/ Mike ZoiMike
      ZoiPresident,
      Chief Executive Officer and Director(Principal
      Executive Officer)February
      3, 2011
              /S/ Jonathan NewJonathan
      NewChief
      Financial Officer(Principal
      Financial Officer and Principal Accounting Officer)February
      3, 2011
              /S/ James CaanJames
      CaanDirectorFebruary
      3, 2011
              /S/ Curtis WolfeCurtis
      WolfeDirector




74




FINANCIAL STATEMENT INDEX


MOTORSPORT.COM, INC.





Page
                  No.Report
      of Independent Registered Public Accounting Firm
                F-1Financial
      Statements:Balance
      Sheets
                F-2Statements
      of Operations
                F-3Statements
      of Shareholders’ Equity
                F-4Statements
      of Cash Flows
                F-5Notes
      to Financial Statements
                F-6
      - 9
  75


Report of Independent
Registered Public Accounting Firm
 
 To the
Shareholders
 Motorsport.com,
Inc.
 Miami,
Florida
 
 We have
audited the accompanying balance sheets of Motorsport.com, Inc. as of December
31, 2010 and 2009, and the related statement of operations, shareholders’ equity
and cash flows for the years then ended.  These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audit
provides a reasonable basis for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Motorsport.com, Inc., as December
31, 2010 and 2009, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
 
 /s/
Daszkal Bolton LLP
 
 Fort
Lauderdale, Florida
 February
2, 2011
  
  MOTORSPORT.COM,
      INC.BALANCE
      SHEETSDECEMBER
      31, 2010 AND 2009ASSETS2010
                                                          
                                                          
                                                          2009Current
      assets:Cash
      and cash equivalents
                                                          
                                                          $
                                                          1,309
                                                          
                                                          
                                                          $
                                                          5,053Accounts
      receivable
                                                          
                                                          
                                                          6,470
                                                          
                                                          
                                                          
                                                          2,675Total
      current assets
                                                          
                                                          
                                                          7,779
                                                          
                                                          
                                                          
                                                          7,728Property
      and equipment, net
                                                          
                                                          
                                                          2,398
                                                          
                                                          
                                                          
                                                          4,262Total
      assets
                                                          
                                                          $
                                                          10,177
                                                          
                                                          
                                                          $
                                                          11,990LIABILITIES AND SHAREHOLDERS'
      EQUITYCurrent
      liabilities:Accrued
      expenses
                                                          
                                                          $
                                                          4,900
                                                          
                                                          
                                                          $
                                                          -Loans
      payable to shareholders
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          26,350Total
      current liabilities
                                                          
                                                          
                                                          4,900
                                                          
                                                          
                                                          
                                                          26,350Commitments
      and ContingenciesShareholders'
      equity:Common
      stock (no par value, 20,000,000 sharesauthorized,
      19,479,380 shares issued and outstanding)
                                                          
                                                          
                                                          1,420
                                                          
                                                          
                                                          
                                                          1,420Treasury
      stock, 859,380 shares
                                                          
                                                          
                                                          (500
                                                          )
                                                          
                                                          
                                                          -Paid-in
      capital
                                                          
                                                          
                                                          23,500
                                                          
                                                          
                                                          
                                                          17,500Accumulated
      deficit
                                                          
                                                          
                                                          (19,143
                                                          )
                                                          
                                                          
                                                          (33,280
                                                          )Total
      shareholders' equity
                                                          
                                                          
                                                          5,277
                                                          
                                                          
                                                          
                                                          (14,360
                                                          )Total
      liabilities and shareholders' equity
                                                          
                                                          $
                                                          10,177
                                                          
                                                          
                                                          $
                                                          11,990
  See
accompanying notes to financial statements.
  F-2
  MOTORSPORT.COM,
      INC.STATEMENTS
      OF OPERATIONSYEARS
      ENDED DECEMPBER 31, 2010 AND 20092010
                                              
                                              
                                              2009Revenue
                                              
                                              $
                                              80,766
                                              
                                              
                                              $
                                              32,917Operating
      expenses:Professional
      fees
                                              
                                              
                                              35,305
                                              
                                              
                                              
                                              25,138Website
      content
                                              
                                              
                                              9,805
                                              
                                              
                                              
                                              10,304Internet
      connectivity
                                              
                                              
                                              9,453
                                              
                                              
                                              
                                              6,928Travel
      and entertainment
                                              
                                              
                                              6,926
                                              
                                              
                                              
                                              6,425General
      and administrative
                                              
                                              
                                              5,140
                                              
                                              
                                              
                                              5,046Total
      operating expenses
                                              
                                              
                                              66,629
                                              
                                              
                                              
                                              53,841Net
      income (loss) before income taxes
                                              
                                              
                                              14,137
                                              
                                              
                                              
                                              (20,924
                                              )Income
      taxes
                                              
                                              —
                                              
                                              
                                              —Net
      income (loss)
                                              
                                              $
                                              14,137
                                              
                                              
                                              $
                                              (20,924
                                              )
 
 See
accompanying notes to financial statements.
 F-3
  MOTORSPORT.COM,
      INC.STATEMENTS
      OF SHAREHOLDERS' EQUITYYEARS
      ENDED DECEMPBER 31, 2010 AND 2009Common
Stock
              
              
              Treasury
    Stock
              
              
              
              
              
              
              
              
              TotalPaid
      in
              
              
              Accumulated
              
              
              Shareholders'Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              EquityBalance, January 1,
      2009
              
              
              19,479,380
              
              
              $
              1,420
              
              
              
              -
              
              
              $
              -
              
              
              $
              4,000
              
              
              $
              (12,356
              )
              
              $
              (6,936
              )Contribution-in-kind
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              13,500
              
              
              
              -
              
              
              
              13,500Net Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (20,924
              )
              
              
              (20,924
              )Balance, December 31,
      2009
              
              
              19,479,380
              
              
              
              1,420
              
              
              
              -
              
              
              
              -
              
              
              
              17,500
              
              
              
              (33,280
              )
              
              
              (14,360
              )Purchase of Common
      Stock
              
              
              
              
              
              
              -
              
              
              
              (859,380
              )
              
              
              (500
              )
              
              
              -
              
              
              
              -
              
              
              
              (500
              )Contribution-in-kind
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,000
              
              
              
              -
              
              
              
              6,000Net Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              14,137
              
              
              
              14,137Balance, December 31,
      2010
              
              
              19,479,380
              
              
              $
              1,420
              
              
              
              (859,380
              )
              
              $
              (500
              )
              
              $
              23,500
              
              
              $
              (19,143
              )
              
              $
              5,277
  See
accompanying notes to financial statements.
  F-4
  MOTORSPORT.COM,
      INC.STATEMENTS
      OF CASH FLOWSYEARS
      ENDED DECEMBER 31, 2010 AND 20092010
                                          
                                          
                                          2009Cash
      flows from operating activities:Net
      income (loss)
                                          
                                          $
                                          14,137
                                          
                                          
                                          $
                                          (20,924
                                          )Adjustments
      to reconcile net income (loss) to net cashused
      in operating activities:Depreciation
                                          
                                          
                                          1,864
                                          
                                          
                                          
                                          3,373Contribution-in-kind
      services
                                          
                                          
                                          6,000
                                          
                                          
                                          
                                          13,500Change
      in operating assets and liabilities:Accounts
      receivable
                                          
                                          
                                          (3,795
                                          )
                                          
                                          
                                          689Accrued
      expenses
                                          
                                          
                                          4,900
                                          
                                          
                                          
                                          -Total
      adjustments
                                          
                                          
                                          8,969
                                          
                                          
                                          
                                          17,562Net
      cash provided (used) in operating activities
                                          
                                          
                                          23,106
                                          
                                          
                                          
                                          (3,362
                                          )Cash
      flows from financing activities:Repurchase
      of common stock
                                          
                                          
                                          (500
                                          )
                                          
                                          
                                          -Payment
      to loans payable to shareholders
                                          
                                          
                                          (26,350
                                          )
                                          
                                          
                                          -Net
      cash used by financing activities
                                          
                                          
                                          (26,850
                                          )
                                          
                                          
                                          -Net
      decrease in cash
                                          
                                          
                                          (3,744
                                          )
                                          
                                          
                                          (3,362
                                          )Cash
      and cash equivalents, beginning of period
                                          
                                          
                                          5,053
                                          
                                          
                                          
                                          8,415Cash
      and cash equivalents, end of period
                                          
                                          $
                                          1,309
                                          
                                          
                                          $
                                          5,053
 
 See
accompanying notes to financial statements.
 F-5
  Motorsport.com,
Inc.
 Notes
to Financial Statements
 
 Note 1 – Nature of
Operations
 
 Nature of
Operations
 Motorsport.com,
Inc. (“Motorsport” or “the Company”) was formed as a Florida corporation on
April 9, 1999.  The Company operates the website (www.Motorsport.com),
a global online media company that distributes content related to the motor
sports industry to racing enthusiasts. Motorsport.com derives revenues primarily
from display advertising
 
 Note 2 – Summary of
Significant Accounting Policies
 
 Use of
Estimates
 The
preparation of financial statements in conformity with GAAP requires management
to make estimates, judgments, and assumptions that affect the reported amounts
of assets, liabilities, revenues, and expenses and the related disclosure of
contingent assets and liabilities.  On an on-going basis, the Company
evaluates its estimates including those related to the collectability of
accounts receivable, useful lives of property and equipment and
contingencies.  Actual results may differ from these
estimates.
 
 Basis of
Presentation
 The
accompanying financial statements include the accounts of the Company, prepared
on the basis of Generally Accepted Accounting Principles in the United States
(“GAAP”).
 
 During
November 2010, the Board of Directors voted to amend the Company’s Articles of
Incorporation to increase the number of authorized shares from 10,000,000 to
20,000,000 and facilitated a 14.323:1 stock split.  This change in
capitalization has been given retroactive effect in the financial
statements.
 
 Fair Value of Financial
Instruments
 The
Company’s financial instruments are cash, accounts receivable and accrued
expenses, and are carried at historical cost which approximates fair value
because of the short-term nature of these instruments.
 
 Cash and Cash
Equivalents
 The
Company considers all highly liquid investments with an original maturity of
three months or less as cash equivalents.  There were no cash
equivalents at each balance sheet date presented.
 
 Accounts Receivable and
Allowance for Uncollectible Amounts
 Accounts
receivable represents amounts billed to customers but
uncollected.  Accounts receivable are recorded at the invoiced amounts
and are non-interest bearing.  Based on its experience with its
customers, management expects to collect all its receivables, and as a result a
provision for doubtful accounts has not been recorded.
 
 Property and
Equipment
 Property
and equipment are stated at cost less accumulated
depreciation.  Depreciation is provided for on a straight-line basis
over the estimated useful lives of the assets per the following
table.  The Company periodically reviews property and equipment to
determine that the carrying values are not impaired.
  Furniture
      and fixtures
              7
      yearsOffice
      and computer equipment
              5
      yearsSoftware
              5
      years
 
 Intangible
Property
 Costs
incurred for internally developed website development and purchased content are
expensed as incurred.
  F-6
  Motorsport.com,
Inc.
 Notes
to Financial Statements
 
 Note 2 – Summary of
Significant Accounting Policies, continued
 
 Revenue
 The
Company recognizes revenue when the persuasive evidence of an arrangement
exists, no significant company obligations remain, collection of the related
receivable is reasonably assured, and the fees are fixed or
determinable.  The Company’s revenues are derived primarily from
display advertising placement on the website.
 
 Advertising
revenue is generated by performance-based Internet advertising, such as
cost-per-click, or CPC, in which an advertiser pays only when a user clicks on
its advertising that is displayed on our owned and operated websites; fees
generated by users viewing third-party website banners and text-link
advertisements; fees generated by enabling customer leads or registrations for
partners; and fees from referring users to, or from users making purchases on,
sponsors’ websites.  In determining whether an arrangement exists, we
ensure that a binding arrangement is in place, such as standard insertion order
or a fully executed customer-specific agreement.  Obligations pursuant
to our advertising revenue arrangements typically include a minimum number of
impressions or the satisfaction of the other performance
criteria.  Revenue from performance-based arrangements, including
referral revenues, is recognized as the related performance criteria
met.
 
 Income
Taxes
 The
Company accounts for income taxes under the provisions of Accounting for Income
Taxes (ASC 740-10).  This standard requires, among other things,
recognition of future tax consequences, measured by enacted tax rates
attributable to taxable and deductible temporary differences between financial
statement and income tax bases of assets and liabilities.  Valuation
allowances are established, when necessary, to reduce the deferred tax assets to
amount expected to be realized.  Income tax expense is the tax payable
for the period and the change during the period in the deferred tax asset and
liability.
 
 Subsequent
Events
 Management
has evaluated subsequent events through February 2, 2011, the date on which the
financial statements were available to be issued.
 
 Note 3 – Property and
Equipment
 
 Property
and equipment consisted of the following at December 31, 2010 and
2009:
 
 2010
                
                
                2009Computers
                
                $
                32,788
                
                
                $
                32,788Furniture
      and fixtures
                
                
                845
                
                
                
                845Total
      property and equipment
                
                
                33,633
                
                
                
                33,633Less:
      accumulated depreciation
                
                
                (31,235
                )
                
                
                (29,371
                )Property
      and equipment, net
                
                $
                2,398
                
                
                $
                4,262
  Depreciation
expense for the years ended December 31, 2010 and 2009 was $1,864 and $3,373,
respectively.
  F-7
  Motorsport.com,
Inc.
 Notes
to Financial Statements
 
 Note 4 – Concentration of
Credit Risk
 
 The
Company maintains cash balances at a financial institution in
Florida.  The balance, at any given time, may exceed Federal Deposit
Insurance Corporation (“FDIC”) insurance limits of $250,000 per
institution.  The Company’s cash balances at December 31, 2010 and
2009 were within FDIC insured limits.
 
 Note 5 – Shareholder Loans
Payable
 
 The Company had a non-interest bearing
obligation due to directors of the Company, which was repaid during
2010
 
 Note 6 – Commitments and
Contingencies
 
 Litigation
 From time
to time, the Company may become subject to legal proceedings, claims and
litigation arising in the ordinary course of business.  The Company is
not currently a party to any material legal proceedings, nor is the Company
aware of any other pending or threatened litigation that would have a material
adverse effect on the Company’s business, operating results, cash flows or
financial condition should such litigation be resolved unfavorably.
 
 Note 7 – Shareholders’
Equity
 
 The Company is authorized to
issue 20,000,000 shares of
common stock, without par value. Each holder of common stock is entitled to one
vote for each share held.
 
 On November 1, 2010 the Board of
Directors voted to amend the Company’s Articles of Incorporation to increase
the number of authorized
shares to 20,000,000 from 10,000,000.  The Company facilitated a
14.323:1 stock split, resulting in an increase in shares from 1,360,000 to
19,479,380.  This increase has been given retroactive
effect.
 
 On October 17, 2010 the Company
purchasedfrom a
shareholder 60,000 shares of common stock (859,380 shares post-split) for
$500.
 
 During the years ended December 31, 2010
and 2009, certain Shareholder’s performed services for the Company
withoutremuneration. The
value of those services were charged to Professional fees and credited to
Paid-in capital. For the year 2010 and 2009 the value of those services was
$6,000 and $13,500, respectively
 
 On December 17, 2010 the shareholders of
the Companyentered into a
Stock Purchase Agreement (“SPA”) with Enerfund Motorsport, LLC (a
Florida limited liability company) for the sale of 80% of the outstanding shares
of Motorsport.com, Inc. The SPA also grants Enerfund Motorsport, LLC an
option to purchase theremaining interests within eight years
after the date of closing.
 
 Note 8 – Income
Taxes
 
 The
(provision) benefit for income taxes consists of the following:
  2010
              
              
              2009Current
              
              $
              3,064
              
              
              $
              -Deferred
              
              
              (3,064
              )
              
              
              -$
              -
              
              
              $
              -
  F-8
  Motorsport.com,
Inc.
 Notes
to Financial Statements
 
 Note 8 – Income Taxes,
continued
 
 Deferred
tax assets for December 31, 2010 and 2009 consist of the following:
  2010
              
              
              2009Deferred
      tax asset:Net
      operating loss carry forward
              
              $
              -
              
              
              $
              3,064Less:  valuation
      allowance
              
              
              -
              
              
              
              (3,064
              )Deferred
      tax asset
              
              $
              -
              
              
              $
              -
  A
reconciliation of income tax at the statutory rate to the Company’s effective
tax rates for the periods ended December 31, 2010 and 2009 is as
follows:
  2010
                
                
                2009Federal
      income tax at statutory rate of 15%
                
                $
                2,120
                
                
                $
                (3,028
                )State
      tax, net of federal benefit
                
                
                661
                
                
                
                (945
                )Other
                
                
                283
                
                
                
                909Valuation
      allowance
                
                
                (3,064
                )
                
                
                3,064$
                -
                
                
                $
                -
  2010
              
              
              2009Deferred
      tax assets:Net
      operating loss carry forward
              
              $
              -
              
              
              $
              3,064Total
      deferred tax assets
              
              
              -
              
              
              
              3,064Valuation
      allowance:Beginning
      of year
              
              
              (3,064
              )
              
              
              -Decrease
      (increase) during the year
              
              
              3,064
              
              
              
              (3,064
              )Ending
      balance
              
              
              -
              
              
              
              (3,064
              )Net
      deferred taxes
              
              $
              -
              
              
              $
              -
  Note 9 – Subsequent
Events
 
 On
February 1, 2011, Net Element, Inc. (a Delaware corporation) entered into a
purchase agreement with Enerfund, LLC (a Florida limited liability company) to
purchase all of the issued and outstanding interest of Enerfund Motorsport, LLC
which holds 80% of the outstanding common stock of the Company.  The
remaining 20% of the outstanding stock of the Company is held by the original
shareholders of the Company.
  F-9