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TMCNet:  DUBLI, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[August 26, 2014]

DUBLI, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD LOOKING STATEMENTS Introductory Note Caution Concerning Forward-Looking Statements The discussion contained in this Form 10-K, contains forward-looking statements that involve risks and uncertainties. The registrant's actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "the Company believes," "management believes" and similar language, including those set forth in the discussions under "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis or Plan of Operation" as well as those discussed elsewhere in this Form 10-K. The forward-looking statements reflect our current view about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The following important factors could prevent us from achieving our goals and cause the assumptions underlying the forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements: ? our inability to establish and maintain a large growing base of Business Associates; ? our failure to adapt to technological change; ? increased competition; ? increased operating costs; ? changes in legislation applicable to our business; ? our failure to improve our internal controls; ? our inability to generate sufficient cash flows from operations or to secure capital and funds, including through Mr. Hansen, in order to maintain our current operations or support our intended growth and ? our failure to maintain registration of shares of our Common Stock under the Exchange Act.


However, other factors besides those referenced could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us herein speak as of the date of this Form10-K. We do not undertake to update any forward-looking statement, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

INTRODUCTION The following discussion and analysis summarizes the significant factors affecting: (i) our consolidated results of operations for the year ended September 30, 2012 compared to the year ended September 30, 2011; and (ii) our financial liquidity and capital resources. This discussion and analysis should be read in conjunction with our consolidated financial statements and notes included elsewhere in this Form 10-K. As discussed in Note 2 to the consolidated financial statements, our results of operations were restated for 2011.

Overview DubLi, Inc. has created a framework for attracting and maintaining consumers through a web based shopping and entertainment community. The foundation of DubLi is based on innovative technology, a global platform and an expertise in understanding and capitalizing on global economic trends and changing consumer behaviors. The central hub of the DubLi community is DubLi.com; from which all other components of the business model are derived.

DubLi.com is a global shopping and entertainment web portal that features two reverse auctions, Xpress and Unique from which the Company's own currency, DubLi Credits, are banked, sold and spent. The Company supports four different auction websites in the US, Europe, Australia and a global portal in which people from all other countries can participate. In addition, DubLi.com features an online shopping mall which supplements the DubLi auction sites. From this mall, consumers shop at national, brand name merchants and earn cash back rebates on these purchases. The Company has developed our own search feature designed to return only relevant results to the user. Supporting the growth of DubLi.com is the Company's sales and marketing engine, DubLi Network, a network marketing association of independent Business Associates who are engaged in direct marketing of the Company's products and services.

25 How We Generated Revenue for the year ended September 30, 2012: Components of revenue for the year ended September 30, 2012 are summarized as follows: AUCTIONS Bidding credits used in auctions $ 42,266,959 Bidding credits broken in auctions 4,816,581 Gross revenue from auctions 47,083,540 Sale of goods and handling fees 5,357,571 Auctioned value of gift cards 2,094,635,761 Less: Cost of gift cards auctioned (2,134,656,173 ) Net auctioned value of gift cards (34,662,841 ) Net revenue from auctions 12,420,699 NETWORK Network fees 1,628,419 Subscriptions 1,317,482 Advertising and sales events 2,229,752 5,175,653 SHOPPING MALL Commissions, rebates and others 313,881 Total revenue $ 17,910,233 Auctions The Company conducted reverse auctions of our electronic gift cards that are redeemable for cash. In reverse auctions the price of the gift card goes down with each successive bid. As a result, all such sales are made at a loss for the amount of the discount created by the bidders plus any added discount contributed by the Company. The Company records the bidding discount against the sale of the bidding credits and handling fees, which is recognized as revenue.

During fiscal year 2012, we sold $2.1 billion in electronic gift cards from approximately 8.9 million auction transactions recording a net revenue from DubLi Credits, sales of goods and handling fees of $12.4 million. The net revenue recognized from the auctions approximated 69.4% of our revenue for the fiscal year 2012. We charged $0.80 retail and an average of $0.57 wholesale for each DubLi Credit that was used to bid down the price of our products on both the Xpress and Unique auctions. The revenue earned from the usage of the Credits and the breakage from unused expired Credits permitted us to sell products and electronic gift cards at discounted prices. All remaining unused Credits are categorized as a liability until they are used or expired. We also earn a $0.50 handling fee for each auction transaction that resulted in a closed sale of an electronic gift card and those fees generated revenue of $5.3 million.

During fiscal 2012, the auctions program generated an increasing number of transactions during the first three quarters and then grew significantly in the fourth quarter. The fourth quarter growth is attributable to significant discount bonus feature added to each auction by the Company, a promotional device designed to build web site traffic and increased sales of goods and other products. The quarterly results for the auctions program are summarized asfollows: Quarter 1 Quarter 2 Quarter 3 Quarter 4 TotalSales of goods and handling fees, and auctioned value of gift cards $ 16,899,283 $ 25,772,193 $ 143,796,470 $ 1,913,525,386 $ 2,099,993,332 Auction transactions 87,274 117,110 574,235 8,125,222 8,903,841 See also section below Trends in Our Business for discussion regarding the discontinuance of the auctions program.

Business Associates affiliated with our network marketing company purchased 96.0% of all DubLi Credits sold in fiscal year 2012. The Business Associates purchased the DubLi Credits at an average discounted price of $0.57 which enabled them to earn an average of $0.23 per unit profit upon resale to their customers. The remaining 4.0% were sold directly from the DubLi.com web site at the full retail value of $0.80. Use of DubLi Credits and auction activity ceased in March 2013.

Network In fiscal year 2012, revenue from network fees (annual subscriptions) paid by our Business Associates made up 9.1% of our revenue. We also sold training and advertising packages and generated revenue from conferences and events attended by our Business Associates, which made up 12.4% of our revenue during fiscal year 2012.

During fiscal year 2012, we introduced two new subscription services that offered streaming music and entertainment and rebate programs for a monthly subscription price of varying rates. In conjunction with these new service offerings, we introduced our new corporate mascot, the "Dubot," an online assistant that demonstrated our service offerings. Sales of the subscription packages, namely Premium Package and the V.I.P. Member Package, produced 7.4% of our revenue in the fiscal year 2012.

26 Shopping Mall We also earned commission income from the online shops and stores affiliated with our online shopping mall arising from the purchase transactions our customers generated. We split those affiliate commissions with our customers and Business Associates in the form of cash back and commissions. We generated a nominal amount from these commissions equivalent to 1.8% of our revenue in fiscal year 2012. New versions of our online shopping malls, previously available in the US, Germany, Denmark, Spain and Australia, were introduced in fiscal year 2012. The new shopping malls are search engines and online communities for shoppers. In fiscal years 2013 and 2014, we launched the new online shopping malls in seven additional markets: Russia, United Kingdom, Switzerland, Austria, Italy, Canada and India.

We believe the factors that influence the success of our programs include the following: ? the appeal of the products and services we market and auction; ? the number of visits to our sites and customer retention; ? the number of merchants affiliated with our online shopping mall; ? the continued expansion of our network marketing organization; ? the success of our Business Associates and our contribution to their success; ? the amounts we pay our Business Associates; ? the development of new products and services; ? the development of new advertising and marketing programs; and ? the development of Partner Programs.

Trends in Our Business Although the addition of a random bonus discount that varied from 50% to 90% per auction increased transaction volume significantly which resulted in an increase in gross revenue recorded during the fourth quarter of fiscal year 2012, the profit margin on a majority of the transactions were negatively impacted and less than the expectation as desired by the Company. Consequently, after conducting an evaluation of the auctions program, we decided to discontinue this part of our business model during 2013 and to focus our resources on potentially more profitable programs for our e-commerce platform.

Shopping transactions continue to shift from traditional to online retailers as the digital economy evolves. This shift has contributed to the growth of our business since inception, resulting in increased revenue. Although we expect our business to continue to grow, our revenue growth rate may not be sustainable over time, due to a number of factors, including increasing competition, the difficulty of maintaining growth rates if our revenue increase to higher levels, and increasing maturity of the online shopping market. We plan to continue to invest in our core areas of strategic focus, but cannot provide any assurance that such investment will result in increased revenue or net profit.

We have taken steps to improve and increase the products offered on our web site via direct signing of dedicated private-label merchants providing cash back shopping programs, entertainment and an expanded global online shopping mall that provides a true worldwide shopping experience.

Seasonal fluctuations in Internet usage and traditional retail seasonality have affected our business, and are likely to continue to do so. Internet usage generally slows during the summer months, and shopping typically increases significantly in the fourth quarter of each calendar year. These seasonal trends have caused, and will likely continue to cause, fluctuations in our quarterly results.

We also continue to invest in our systems, data centers, corporate facilities, information technology infrastructure, and human resources. We expect the following to be important components in our business strategy: (i) acquisitions of compatible businesses; and (ii) Partner Programs strategy as we seek out partners with large retail customer bases who are interested in earning incremental revenue by co-branding our shopping and entertainment web site. We also expect that the cost of revenue will increase in dollars and may increase as a percentage of revenue in future periods, primarily because of forecasted increases in traffic acquisition costs, data center costs, credit card and other transaction fees, content acquisition costs and other costs.

As we expand our shopping programs and other products to international markets, we continue to increase our exposure to fluctuations in foreign currency toUS dollar exchange rates.

27 Recent Developments After we discontinued the auctions program in fiscal 2013, we modified our business model to focus on the following: ? selling Premium and V.I.P. Member Package subscriptions to online customers; ? growing the volume of merchandise and travel services purchased by customers through our DubLi.com site to increase the net rebate income (i.e. after "cash-back" payments to customers and commission payments to Business Associates) we generate from retailers and travel providers; selling merchandise and services on the DubLi online mall; and ? expanding the number of our Business Associates and Partner Program participants.

Organization of Information This section provides a narrative on our financial performance and condition, which should be read in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this report and includes: ? use of estimates and critical accounting policies; ? results of operations; ? liquidity and capital resources; and ? contractual obligations.

Operating results are not necessarily indicative of results that may occur in future periods.

Use of Estimates and Critical Accounting Policies Management's use of estimates and assumptions: The preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires us to make estimates, judgments and assumptions that affect the reported amounts of the assets and liabilities, disclosure of contingent assets and liabilities, deferred income, accruals for incentive awards and unearned auction Credits at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Examples, though not all-inclusive, of such items include estimates and assumptions for loss contingencies, depreciation or amortization of the economic useful life of an asset, stock-based compensation forfeiture rates, fair values, impairments of investment and other assets, potential outcomes of future tax consequences of events that have been recognized in our consolidated financial statements or tax return and incentive awards and unearned auction Credits. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates. The following items in our consolidated financial statements require significant estimates and judgments: Revenue recognition: Product Sales and Services - The Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition ("ASC 605-10"). ASC 605-10 requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the selling price is fixed and determinable; and (iv), collectability is reasonably assured. Determination of criteria (iii) and (iv) are based on Management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue that is subject to refund, and, for which the product has not been delivered or the service has not been rendered net of an estimated allowance for breakage. The Company's revenue recognition policies for each of our products and services are as follows: Recent Accounting Pronouncements In April 2014, the Financial Accounting Standards Board ("FASB") issued Update No. 2014-08 - Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"). This update revised the guidance to be applied in determining when the discontinuation or disposal of operating activities and entities should be presented as discontinued operations in the financial statements. Under the previous guidelines, the reporting of discontinued operations was based upon two factors, relating to the elimination of operations and continued cash flows, and the continued involvement in the operations of the disposed component of an entity.

Under the new guidance provided by ASU 2014-08, the reporting of discontinued operations will be based upon whether the disposal or discontinuation represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results.

Under the new guidance, the termination of the Company's auction program and DubLi Credits in March 2013 could be considered to be a strategic shift and therefore would be reported as a discontinued operation. The reporting of discontinued operations affects the presentation of the assets, liabilities and results of operations of the discontinued component or group of components, and does not affect comprehensive income or loss. ASU 2014-08 is effective for annual and interim reporting periods beginning on or after December 15, 2014.

Early adoption is permitted if discontinued operations have not already been reported in financial statements previously issued or available for issuance.

The Company is currently evaluating the impact that the new guidance may have on the consolidated financial statements.

In May 2014, the FASB issued Update No. 2014-09 Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). The new guidance provided by ASU 2014-09 is intended to remove inconsistencies and weaknesses in the existing revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability, provide more useful information and simplify the preparation of financial statements. ASU 2014-09 is effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact that the new guidance may have on the consolidated financial statements.

The Company does not believe that any recently issued pronouncements which were not yet effective will have a material effect on the consolidated financial statements when adopted.

28 Business Associates Program DubLi is a global network marketing organization with Business Associate representatives in dozens of countries throughout the world. Business Associates can offer a wide variety of products and services to their customers, many of whom are also recruited to become Business Associates themselves. Business Associates earn commissions on sales of products and services that they sell directly, and earn commissions on "downstream" sales of products and services made by Business Associates that they recruit into the marketing network.

? Network Subscription Fees - Business Associates pay an annual subscription fee for the marketing and training services provided by DubLi Network. The fees are recorded as revenue ratably over the subscription period.

? Co-operative Advertising - Co-operative advertising programs are a service that we provide to Business Associates whereby they can pool their marketing funds in order to participate in television and telemarketing advertising campaign managed by the Company. Each advertising campaign runs for a specific period and all customers acquired during the campaign are allocable and commissionable to Business Associates pro-rata based upon their percentage contribution to the program. The revenue is recognized ratably over the campaign period as the funds are spent. The Company retains a 25% service charge for producing and managing the program for the Business Associates.

Auctions DubLi Credits - To participate in the Company's auction programs (Xpress, Unique Bid), consumers are required to purchase DubLi Credits either directly on DubLi.com or from DubLi's independent Business Associates who are members of the DubLi Marketing Network. Most DubLi Credits are sold through the DubLi Marketing Network. All proceeds from the sales of DubLi Credits are recorded as deferred revenue until used by the consumer at auction, or upon their expiration when the related revenue is recognized as breakage. Purchases of DubLi Credits are non-refundable after three days. Unused Credits remaining in closed and inactive Business Associate accounts are recorded as breakage revenue 30 days after the account is closed.

? Xpress Auctions - Prior to June 2011, the Company's Xpress Auction program primarily offered name brand products, services and gift cards which the Company purchased for resale from retailers, wholesalers and manufacturers. In June 2011, the Company changed the format to exclusively offer its own proprietary electronic gift cards which could be used to buy additional products or services, or could be redeemed for cash.

Xpress Auctions use the "reverse auction" format, wherein each time a person makes a bid (which costs one DubLi Credit), the price is decremented by a fixed amount. The reduced price becomes visible to the person making the bid, and at that point the bidder can choose to purchase the item at the reduced price shown or opt to wait in the expectation that others will make additional bids and drive down the price even more. Upon successfully acquiring an electronic gift card products at auction, winning bidders have the option of (a) transferring the face amount of the card onto their DubLi branded MasterCard or receiving the product, (b) being paid the face value of the card via bank transfer or (c) accumulating the funds in their electronic "Cash Organizer," to be used later to purchase additional DubLi Credits, participate in other Xpress Auctions, or acquire other DubLi products and services.

Net costs are incurred from Xpress Auctions, because the amount of the winning bid is less than the face amount of the electronic gift card purchased. The net cost of Xpress Auctions is presented in the statement of operations as a component of the cost of sales of DubLi Credits.

? Unique Bid Auctions - Unique Bid Auctions function in a manner similar to Xpress Auctions, but the auctioned items consist of retail products, services and gift cards from retailers, wholesalers and manufacturers. In a Unique Bid Auction, consumers bid what they think the lowest bid price will be. The winning bid must be both the lowest price and different in amount from all other competing bids.

In October 2012, the Company suspended Xpress and Unique Bids Auction. In December 2012, the Company notified its Business Associates and retail consumers that all auction activities would cease, effective March 28, 2013. Unused DubLi Credits for Business Associates were converted to customer membership vouchers, which could be used for new customers recruited. DubLi Credits that were unused by retail consumers after the Company's notice period expired in accordance with Company policy were recognized as income at that time.

Online Experience ? Consumer Memberships - DubLi customers who purchase membership packages pay a monthly subscription fee for services and the ability to earn cash rewards. The fees are recorded as revenue ratably over the period of their membership service.

? Shopping Mall Program - Online shopping mall revenue is earned principally from revenue rebates (commissions) earned from merchants participating in our online shopping malls. The Company receives varying percentages in rebates from participating merchants on all transactions processed through our online mall platform and recognizes rebate revenue upon receipt of payment from the merchant. A percentage of the rebate is paid to the member sixty days after the initial purchase transaction in the form of a "Cash Back" which is recorded as cost of revenue.

Direct cost of revenue: Direct cost of revenue includes the loss from Xpress and Unique Bids Auctions, costs of goods sold, commissions and incentive bonuses earned by Business Associates on the sales of DubLi Credits, and other incremental direct costs including credit card processing fees and certain marketing costs associated with DubLi Network. Commissions are based upon each Business Associate's volume of sales and any "Down-line" sales by other Business Associates under the sponsoring Business Associate. Commissions are paid to Business Associates at the time of sale and are recognized as a deferred expense (prepaid customer acquisitions costs) until the related revenue is recognized.

Monthly or quarterly incentive bonuses are recognized when the Business Associate meets the target sales goal.

29 Stock-based compensation: The Company accounts for stock-based compensation in accordance with ASC 718, Share-Based Compensation, which requires the use of the fair value method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (warrants and options). The fair value of each option award is estimated on the date of the stock option grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatility is based on weighted average of the historical volatility of the Company's Common Stock and selected peer group comparable volatilities and other factors estimated over the expected term of the options. The expected term of stock options granted is derived using the "simplified method" which computes expected term as the average of the sum of the vesting term plus the contract term. The risk-free rate is based on the U.S.

Treasury yield curve in effect at the time of grant for the period of the expected term.

Income Taxes: The Company accounts for income taxes in accordance with ASC 740, Income Taxes ("ASC 740") under which deferred tax assets and liabilities are determined based on temporary differences between accounting and tax bases of assets and liabilities and net operating loss and credit carry forwards, using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. A provision for income tax expense is recognized for income taxes payable for the current period, plus the net changes in deferred tax amounts.

In accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes, the Company adopted a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

In the event of a distribution of the earnings of certain international subsidiaries, the Company would be subject to withholding taxes payable on those distributions to the relevant foreign taxing authorities. Since the Company currently intends to reinvest undistributed earnings of these international subsidiaries indefinitely, the Company has made no provision for income taxes that might be payable upon the remittance of these earnings. The Company has also not determined the amount of tax liability associated with an unplanned distribution of these permanently reinvested earnings. In the event that in the future the Company considers that there is a reasonable likelihood of the distribution of the earnings of these international subsidiaries (for example, if the Company intends to use those distributions to meet our liquidity needs), the Company will be required to make a provision for the estimated resulting tax liability, which will be subject to the evaluations and judgments of uncertainties described above.

The Company conducts business globally and, as a result, one or more of our subsidiaries file income tax returns in U.S. federal, state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in the countries in which the Company operates. The Company is currently under ongoing tax examinations in several countries. While such examinations are subject to inherent uncertainties, the Company does not currently anticipate that any such examination would have a material adverse impact on our consolidated financial statements.

Property and Equipment: Property and equipment are recorded at cost. The cost of maintenance and repairs of equipment is expensed when incurred. Depreciation and amortization is determined based upon the assets' estimated useful lives, and is calculated on a straight-line basis beginning when the asset is placed into service. When the Company sells, disposes or retires equipment, the related gains or losses are included in operating results.

Impairment of Long-Lived Assets: In accordance with Accounting Standards Codification ("ASC") 360-10-35, Property, Plant and Equipment - Subsequent Measurement, the Company reviews the carrying value of our long-lived assets, which includes property and equipment and restricted cash annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition.

The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, growth rates and other factors. Estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to the business model or changes in operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, an impairment loss will be recognized, measured as the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined using available market data, comparable asset quotes and/or discounted cash flowmodels.

30 Results of Operations The following table sets forth certain of our results of operations as a percentage of revenue for the periods indicated: Year ended September 30 2012 2011 $'000 % $'000 % Revenue 17,910 100.0 15,610 100.0 Direct cost of revenue 29,359 163.9 7,614 48.8 Gross profit (loss) (11,449 ) (63.9 ) 7,996 51.2 Selling, general and administrative expense 13,872 77.5 11,767 75.4 Net loss 27,432 153.2 4,157 26.6 The following table sets forth the major components of revenue for the periods indicated: Year ended September 30 2012 2011 Increase/(decrease) Components of revenue: Net revenue from auctions $ 12,420,699 $ 12,998,188 $ (577,498 ) (4.4 )% Network fees 1,628,419 1,903,323 (274,904 ) (14.4 ) Subscriptions 1,317,482 387,467 930,015 240.0 Advertising and sales events 2,229,752 - 2,229,752 - Others 313,881 321,958 (8,077 ) (2.5 ) Total $ 17,910,233 $ 15,610,936 $ 2,299,297 14.7 % During fiscal year 2012, we recorded revenue of $17.9 million, an increase of $2.3 million or 14.7% over the prior fiscal year. The increase was principally due to income from advertising and sales events amounting to $2.2 million which were introduced during the fiscal year 2012. The other existing revenue generating business recorded a nominal increase of $70,000.

Despite marketing efforts in fiscal year 2012 for auctions which resulted in increased transaction counts, the net revenue decreased by about $0.6 million or 4.4%, from $13.0 million in fiscal year 2011 mainly due to additional bonus discounts offered and applied to each auction transaction. Subsequently during fiscal 2013, because of poor returns on each auction transaction, the Company discontinued the auctions program to concentrate on the other revenue generating streams.

Network fees revenue was $1.6 million in fiscal year 2012 as compared to $1.9 million in fiscal 2011, which was a decline of 14.4% or $0.3 million over the period. This decline was due to reduced marketing efforts in the early part of the year while we restructured our business model to expand our multi-level marketing activities to reduce turnover of Business Associates. During the first quarter of 2011 and again in the first quarter of 2012, we rolled out an improved website to enhance our customers' shopping experience with improved integration of the web shopping mall experience with our auction and music sites. In addition, we introduced several new subscription packages. Revenue earned from the V.I.P. and Premium Packages was $1.3 million and $0.4 million for the years ended September 30, 2012 and 2011, representing an increase of $0.9 million or 240% from these new product offerings.

Direct Costs of Revenue Direct costs consist of commissions earned by our Business Associates and costs of products used for auctions and gift cards that are redeemed by our shopping mall customers. We incurred direct costs of $29.3 million in fiscal 2012 as compared to $7.6 million during fiscal year 2011, which resulted in an increase of $21.7 million or 285% as discussed below: 31 Our cost of inventory sold on our online auctions was $0.5 million in fiscal year 2012 as compared to $1.8 million in fiscal 2011, which resulted in a decrease of $1.3 million or 75%. This decrease is due to the change in format of the Xpress auction from products to electronic gift cards.

Commission expense to Business Associates was $23.6 million in fiscal year 2012, compared to $5.6 million in fiscal year 2011. The increase of $18.0 million or 319% in commission expense is a direct result of more marketing efforts to promote the auctions program, thus overall business activity expanded within DubLi Network and auction transactions increased on DubLi.com.

During fiscal year 2012, the Company introduced additional bonus incentive for the auctions program which did not provide the desired results. Even though it resulted in increased transaction counts, lower revenue was recorded due to the additional bonus incentive. As a result of losses sustained from the auction activities, the Company subsequently terminated our auctions program during the second quarter of fiscal 2013. Deferred cost of $3.5 million associated with the termination was impaired and was recorded as of September 30, 2012.

Part of the increase is also attributed to direct cost associated with advertising and sales events which were introduced during fiscal year 2012.

Selling, General and Administrative Expense Selling, general and administrative ("SG&A") expense consists primarily of the following: payroll and related expenses for executive and administrative personnel; fees for professional services; costs related to leasing, maintaining and operating our facilities; credit card fees; recruiting fees; travel costs for executive and administrative personnel; insurance, expenses and fees associated with the reporting and other obligations of a public company; bad debts; and other general and administrative services. Fees for professional services include amounts due to lawyers, auditors, tax advisers, and other professionals in connection with operating our business, and evaluating and pursuing new opportunities.

SG&A increased by $2.1 million from $11.8 million in fiscal year 2011 to $13.9 million in fiscal year 2012, a 17.9% increase. The significant changes to the components of SG&A expense for the fiscal year 2012 versus fiscal year 2011 were as follows: (i) $1.2 million increase in payroll and related expenses due to increase in the Company's activities; (ii) $0.4 million increase in stock compensation expense due to new stock option grants to our interim Chief Operating Officer, other employees and contractors; (iii) $0.8 million increase in legal and other services; and (iv) $0.7 million increase in advertising and marketing costs to promote our improved web sites and new product offerings and other costs. These were offset by a decrease of $1.0 million in depreciation and amortization expense due to an increase in fully depreciated assets in capitalized computer equipment and software and software cost written off in fiscal year 2011.

Deferred revenue and prepaid customer acquisition costs Deferred (unearned) revenue is recorded for all sales of products and services for which we have been paid in advance. We earn the revenue from those sales when we provide the product or service. Deferred revenue consists primarily of unused DubLi credits and the unearned portion of monthly and annual subscription packages such as V.I.P. and Premium packages and Ebiz kits. During the third quarter of fiscal year 2012, we also began selling advertising packages to our Business Associates. Revenue is recognized from DubLi Credits when they are used for bidding on the Unique or Xpress auctions, or when they expire in closed Business Associate accounts. Subscriptions packages collected in advance are recognized as revenue ratably over the subscription coverage period.

The components of deferred revenue include the following: As of September 30 2012 2011 Unused DubLi Credits $ 13,121,844 $ 13,155,511 Subscription fees 1,926,047 565,551 Co-operative advertising programs 8,080,234 - Other - 109,327 $ 23,128,125 $ 13,830,389 In July 2014, the Company announced a new vouchers program offering to the Business Associates in exchange for their unused DubLi Credits and their outstanding amounts under the Co-operative advertising programs. Our business could be adversely affected if the Business Associates do not agree to accept the new vouchers from us.

32 Deferred revenue from Co-operative advertising programs represented a pool of funds that we collected in advance of a planned television and telemarketing advertising campaign program that we sold to the Business Associates. The first campaign ran from April 2012 to December 2012 and all customers acquired during the campaign were allocated and commissioned to Business Associates pro-rata based upon their percentage contribution to the program. The revenue was recognized ratably as the funds were spent over the campaign period. A second program ran from September to December 2012, however, due to a lack of response from customers, the rest of the campaign was discontinued.

Prepaid customer acquisition costs consist primarily of commissions paid to Business Associates and other incremental direct marketing and web site costs incurred to support the Business Associate Network. These costs are recognized as expense in direct proportion to the related revenue recognition as it relates to unused DubLi Credits.

These accounts have a significant effect on the Company because we have been paid in advance of the service that we have sold and because we pay commissions and other costs in advance of the recognition of sales revenue. Our cash flow precedes our net earnings from such activities. The following table shows the significance of the asset and liability accounts related to DubLi Credits and their potential future impact on our earnings results.

Deferred revenue Prepaid customer Periods - Dubli Credits acquisition costs March 31, 2011 $ 19,686,982 $ 10,448,041 June 30, 2011 14,372,024 7,620,225 September 30, 2011 13,155,511 6,958,894 December 31, 2011 12,519,746 6,710,127 March 30, 2012 11,949,603 6,628,110 June 30, 2012 10,267,909 6,356,409 September 30, 2012 13,121,844 1,974,341 Income Taxes For the year ended September 30, 2012, we recorded a tax provision of $44,033 which represented principally foreign taxes due and for the year ended September 30, 2011, there was no tax due. As the Company is still incurring losses, and due to the uncertainty that the Company will generate sufficient profit to recognize any tax benefit, the Company has consequently recorded a valuation allowance to offset all of the deferred tax assets associated with our netoperating losses.

Net Loss We recorded a net loss of $27.4 million for the year ended September 30, 2012, an increase of $23.3 million over the prior year, which was mainly due to transactional losses sustained in the auctions program, impairment of prepaid customer acquisition costs and land impairment charge on the Cayman Islands land parcel. The land impairment charge was arrived at based upon a subsequent evaluation performed by Management to reflect a change in the estimated fair value of the Cayman Islands land parcel as of September 30, 2012.

Effects of Foreign Currency Translation Net revenue and related expenses generated from international locations are denominated in the functional currencies of the local countries, primarily in Euros. The results of operations and certain of our intercompany balances associated with our international locations are exposed to foreign exchange rate fluctuations. The consolidated statements of operations of our international subsidiaries are translated into US dollars at the average exchange rates in each applicable period. To the extent the US dollar weakens against foreign currencies, this translation methodology results in these local foreign currency transactions increasing the consolidated net revenue, operating expenses, and net income (loss). Similarly, our consolidated net revenue, operating expenses, and net income (loss) will decrease when the US dollar strengthens against foreign currencies.

During fiscal year 2012, the US Dollar strengthened slightly against the Euro.

The closing exchange rates in effect were $1.2881 to 1.00€ at September 30, 2012 and $1.3596 to 1.00€ at September 30, 2011 representing an increase of 5.3%. The average rate of the US dollar to the Euro strengthened approximately 6.95% from $1.3943 for fiscal year 2011 to $1.2973 for fiscal year 2012. If the average exchange rates for fiscal year 2011 of $1.3943 to 1.00€ were used in the consolidated financial statements for translation of the revenue and net loss for the year ended September 30, 2012, the effects would have been an increase of approximately $1.3 million and $1.4 million, respectively.

33 Liquidity and Capital Resources As of September 30, 2012, the Company had cash and cash equivalents of $8.6 million. This represents a $7.1 million or 471.3% increase from $1.5 million recorded at September 30, 2011. Restricted cash included in current assets was $5.7 million at September 30, 2012 compared to $0.4 million at September 30, 2011, an increase of $5.3 million or 1,167.3% resulting from an increase in sales transactions. The restricted cash is withheld based on a six month rolling reserve for charge backs by credit card processors and averages 5% of credit card sales processed.

Operating Activities Net cash provided by operating activities totaled $5.7 million during the year ended September 30, 2012. The main components impacting cash flow from operations were (i) increase in commission payables; (ii) increase in restricted cash held back by processors and (iii) a decrease in prepaid customer acquisition costs.

Investing Activities Net cash used in investing activities was approximately $1.1 million during the year ended September 30, 2012 mainly for equipment and software purchase of $0.7 million and progress payments on land purchase for $0.4 million. For the year ended September 30, 2011, net cash of $0.4 million was used for purchase of equipment and software of $ 0.1 million, progress payments on land purchase of $0.5 million and reduced by cash that was released from restricted cash of$0.2 million.

The Company acquired two mixed-use parcels of vacant land in Dubai, United Arab Emirates in a non-cash transaction through the issue of 41.6 million shares of the Company's Common Stock which was initially valued at S5.8 million. Based upon subsequent appraisal obtained, Management determined that the initial valuation did not properly reflect the fair value due to certain factors that were overlooked. As a result, Management concluded that the fair value as of the acquisition date was $3.5 million.

Financing Activities For the year ended September 30, 2012, net cash provided by financing activities was $2.7 million. These were derived principally from stock subscription proceeds of $2.8 million and offset against a repayment of note payable of $0.2 million. For the comparative year ended September 30, 2011, proceeds from stock subscriptions and note payable was $4.8 million and $1.0 million respectively.

This was offset by a repayment of note payable of $1.9 million resulting in net cash provided by financing activities of $3.9 million.

Liquidity The Company is required to maintain a portion of our cash ("restricted cash") with two credit card processing companies to mitigate their financial risk arising from processing the Company's sales transactions. We use one credit card processing company for US based transactions and the other for foreign based transactions. The reserve requirement is for a rolling term of six months based on processed amounts calculated on a range of percentages. The Company has classified these accounts as a current asset because the funds turnover is not held for more than 12 months.

During the first quarter of 2010, the Company became aware that one of our credit card processing companies was improperly retaining $2.1 million of the cash from completed transactions that was due the Company. In October 2010, the Company instituted legal action against the credit card processing company which in-turn terminated the agreement with the Company. On February 24, 2012, the Court ruled that the Company was entitled to the immediate return of $2.1 million, which was the balance of the reserves after deduction of certain fees not challenged by the Company. The funds were returned and received by the Company on April 12, 2012.

The Company is making changes to our product offerings, which will place additional demands on future cash flows and decrease liquidity as we improve our systems. Our future liquidity and capital requirements will depend on numerous factors including market acceptance of our revised operations and revenue generated from such operations, competitive pressures, and acquisitions of complementary products, technologies or businesses. We intend to increase our marketing efforts in order to grow our network of Business Associates which will place additional demands on our cash flows and liquidity. We cannot offer any assurance that we will be successful in generating revenue from operations; adequately deal with competitive pressures; acquire complementary products, technologies or business; or increase our marketing efforts.

Because of potential constraints to sources of capital and increased liquidity, we have continued to borrow from Michael Hansen, our President and CEO. We also may seek additional capital through the issuance of debt or equity to fund working capital, expansion of our business and/or acquisitions, or to capitalize on market conditions. The sale of additional equity securities could result in additional dilution to existing stockholders. There can be no assurance that Mr.

Hansen will provide funding to us to support our operations.

34 The Company issued promissory notes or entered into loan agreements or stock purchase agreements with the following individuals: ? In March 2011, we entered into a $5 million line of credit agreement with an interest rate of 6% per annum with Michael Hansen, the President and CEO of the Company, which was repaid in full and canceled on September 30, 2011; ? During fiscal year 2012 and 2011, we completed several private placements totaling $2.8 million and $4.8 million, respectively, in Europe using a Regulation S exemption from registration; ? In March 2013, we completed a private placement of 6.4 million shares of the Company's Common Stock totaling $1.0 million, in Europe using a Regulation S exemption from registration; ? On April 23, 2013, the Company entered into a loan agreement for $1 million with Mr. Hansen. Under the terms of the loan agreement, funds may be drawn down as needed by the Company at an interest rate of 3% per annum beginning May 1, 2013, and all principal and accrued interest became due and payable in full on September 30, 2013. However, interest continues to accrue and the loan is still outstanding; ? On June 20, 2013, the Company entered into separate stock purchase agreements with several executives of the Company namely Michael Hansen, President and CEO; Eric Nelson, CFO; Andreas Kusche, General Counsel; Rick Daglio, Chief Technology Officer; and Thomas Sikora, Chief Product Officer with respect to the sale of 30,408,453 shares of Common Stock at a price of $0.10 per share. On the date that the Board of Directors of the Company approved the transaction, the Company's Common Stock had a closing price of $0.115; ? On November 15, 2013, the Company entered into an amendment to the stock purchase agreement with Mr. Hansen for an additional 751,000 shares of Common Stock at a price of $0.10 per share. The consideration of $75,100 was paid partly by cash of $25,000 and the balance of $50,100 through conversion of debt owed to Mr. Hansen; ? Effective June 30, 2013, the Company and Messrs. Hansen, Nelson, Kusche, and Sikora mutually agreed to cancel the stock purchase agreements entered into on June 20, 2013. All the cash paid in or conversion of debt initially agreed upon will now be evidenced through new separate unsecured convertible promissory notes dated June 1, 2013 signed with the respective individuals. Under the terms of the promissory notes, interest will be calculated on a compounded basis at 10% per annum and repayment of principal and interest will be made on the earlier of (i) the date on which the respective staff's agreement, as the case may be, with Company ends for whatever reason, or (ii) the last day of any calendar month prior to March 15, 2015 which may specify at least 10 days in advance of such date in writing by the Company, or (iii) March 15, 2015; ? Effective November 30, 2013, the Company and Mr. Hansen mutually agreed to cancel the amended stock purchase agreement entered into on November 15, 2013; and ? On May 6, 2014, the Company entered into an unsecured loan agreement with a private lender to provide $500,000 for business development purposes at an interest rate of 10% per annum. Principal and accumulated interest shall be fully repaid on January 1, 2015, failing which there will be a late charge of $1,000 per day until full repayment.

? On August 11, 2014, the Company issued a promissory note to Mr. Hansen for a revolving loan commitment to fund the Company up to $3 million through December 31, 2015. Interest is calculated at 6% per annum commencing January 1, 2015, and all principal and accrued interest are to be paid on December 31, 2015. The Company recently drew down $1.5 million under the revolving loan.

As a result of the Company incurring substantial losses for fiscal year 2012 and to meet the cash requirements for working capital and capital expenditures as described above, we will require additional financing. We can provide no assurance that such additional financing will be available in an amount or on terms acceptable to us, if at all. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we will be unable to execute upon our business plan and pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations.

Cash in Foreign Subsidiaries The Company has significant operations outside the US. As a result, cash generated by and used in the Company's foreign operations is used only in amounts sufficient to pay general and administrative expenses in the US, or to fund certain US operational costs. As of September 30, 2012, the Company held $8.1 million of unrestricted and $5.7 million of restricted cash in foreign subsidiaries.

Should foreign cash be repatriated, the Company will be subject to US tax at the applicable US federal statutory rate on the amount treated as a dividend for US income tax purposes. Dividend treatment will largely be the result of the collective financial position of the foreign subsidiaries at the time of repatriation. Any US income tax attributable to repatriated earnings may be offset by foreign income taxes paid on such earnings. Due to the significance of our foreign operations, the Company does not foresee the need to repatriate foreign cash in excess of our US funding needs.

35 Subsequent Events Restatement of Revenue On December 12, 2012, the audit and finance committee of the Board of DubLi in consultation with the Company's auditors, Cherry Bekaert LLP, determined that the Company's Consolidated Statements of Operations for the year ended September 30, 2011, and for each of the three quarters ended December 31, 2011, March 31, 2012 and June 30, 2012 (collectively, "Financial Statements") should not be relied upon because the Company needed to revise our presentation of revenue from a gross to a net presentation for the sales of our proprietary electronic gift cards. A restatement of the Financial Statements was necessary to correct accounting errors in revenue recognition because the sales of the proprietary electronic gift cards were not considered revenue generating activities under GAAP.

The Company has restated the Consolidated Statement of Operations for the year ended September 30, 2011 as previously reported in our 2011 Annual Report on Form 10-K in this 2012 Form 10-K and also amended our quarterly reports on Form 10-Q for the periods ended December 31, 2011, March 31, 2012 and June 30, 2012 in filings made on Form 10-Q /A on June 19, 2013 in order to restate revenue from the sales of our electronic gift cards sold and the DubLi credits used on our auctions program to be net of the related cost of the gift cards.

Historically, the Company has reported the gross amount of the gift card sold plus the Dubli credits used in the auction as revenue and the face value of the gift card delivered to the customer was reported as a direct cost of revenue.

However, Management subsequently determined that, because the Company's proprietary gift cards provide the purchaser with a right to receive cash in the amount of the gift card, the transactions were an exchange of one type of cash equivalent for another. As such, the value of the gift card should properly be set off against the proceeds the Company received, with only the net amount categorized as revenue. The sales of the proprietary electronic gift cards were not considered revenue generating activities.

In addition to the adjustment described above, the Company discovered a second error in the calculation of deferred costs presented in our Form 10-Q report for the period ended June 30, 2012. The overstatement of deferred costs was the result of a computation error. The deferred costs were direct and incremental costs associated with the deferred revenue from sales of DubLi Credits and include primarily commissions on those sales. In each period we measure the amount of period costs of selling DubLi Credits as a percentage of period revenue derived from sales of DubLi Credits before making any deferrals. We then record an adjustment to defer the unearned portion of the revenue and the pro rata share of the related expense based upon the current period ratio of cost to sales in order to achieve a proper matching in the statement of operation and on the balance sheet. The error occurred because of the way in which the worksheet formula treated Business Associates resales resulting in deferred costs to be overstated and cost of revenue to be understated. The effect of this second error resulted in a reduction of the previously reported deferred cost asset and a corresponding increase in the direct cost of revenue and operating expenses, the net effect increased net loss by $1,151,597 and other comprehensive loss by $1,091,485. Net loss per share of ($0.01) remained unchanged for the three months ended June 30, 2012 but increased from ($0.02) to ($0.03) for the nine months ended June 30, 2012.

Changes to the Company's Business Model On March 28, 2013, DubLi discontinued our Unique Bid and Xpress auction business model to concentrate and enhance our global member based Shopping Mall and Entertainment services and to introduce a comprehensive Travel and Lifestyle, Finance and Insurance, and Telecom online service. This enabled the Company to eliminate our losses sustained in the auction business model and focus on the other potentially more profitable business opportunities.

Agreements with Agaani Music, JLT On December 31, 2012, DubLi and Agaani Music, JLT ("Agaani") entered into an Amended and Restated Agreement for the sale of assets, assumption of liabilities and obligations, and licensing of certain rights dated as of January 3, 2013 ("Transaction Agreement"). Pursuant to the Transaction Agreement, the Company caused two of our subsidiaries to sell certain assets, liabilities and obligations as well as license certain rights to Agaani.

On January 23, 2013, the Company and Agaani entered into a Rescission Agreement and Mutual Release, pursuant to which the Company and Agaani rescinded the Transaction Agreement and Agaani returned the assets, liabilities and obligations to the Company's subsidiaries in the state they were in immediately prior to the Transaction Agreement as if the Transaction Agreement never occurred.

Agreements with Officers On October 15, 2012, the Company and Mark Mroczkowski entered into an Amended and Restated Employment Agreement ("Amendment"), which became effective on October 1, 2012. Pursuant to the Amendment, Mr. Mroczkowski served as Chief Financial Officer ("CFO") of the Company through January 31, 2013 and as an officer of the Company, other than CFO, from and after February 1, 2013. The Amendment extended the term through to January 31, 2014. None of the other terms of the original employment agreement were modified in any material respect. On February 1, 2013, Mr. Mroczkowski resigned his position with the Company.

36 On February 26, 2013, DubLi appointed Eric Nelson as CFO of the Company. In connection with Mr. Nelson's appointment as CFO, he entered into an employment agreement with the Company, which has an initial term of five years, with successive one-year renewals, and provides for a minimum annual base salary of $225,000. In addition, DubLi may pay additional salary from time to time, and award bonuses in cash, stock or stock options or other property and services.

Mr. Nelson received options to purchase 7.5 million shares of the Company's Common Stock of which option for 1.5 million shares vest on February 26, 2013 and the remaining options for 6 million shares shall vest and become exercisable at the rate of 750,000 shares on March 31 and September 30 of each year, beginning on September 30, 2013, until all the options have vested for so long as his agreement remains in effect. The exercise price of the stock options was $0.12, which was the closing bid price of the Company's Common Stock on the grant date.

Mr. Nelson is also entitled to three months' severance pay during the first year of the agreement and six months' severance pay thereafter, plus any accrued base and incentive pay, in the event that he is terminated without cause. Mr. Nelson is restricted from competing with the Company during the course of his employment and for a period of one year after his employment has been terminated.

On February 27, 2013, DubLi entered into a new employment agreement and restricted stock award agreement with our President and CEO, Michael Hansen which superseded and replaced the previous employment agreement and non-qualified stock option agreement. In addition, Mr. Hansen and DubLi also entered into a cancellation agreement effective September 30, 2011 whereby Mr.

Hansen relinquished his rights to the remaining 23,041,767 unvested options under the non-qualified stock option agreement dated May 14, 2011.

Mr. Hansen's new employment agreement with the Company, has an initial term of five years, with successive one-year renewals, and provides for a minimum annual base salary of $420,000 and a stock grant of 25 million shares of the Company's Common Stock. 2.5 million shares will vest on September 30, 2013 and the remaining 22.5 million shares will vest at the rate of 2.5 million shares on March 31 and September 30 of each year, beginning on March 31, 2014, until all shares have vested for so long as his agreement remains in effect. In the event of a change in control (as defined in the Company's 2010 Omnibus Equity Compensation Plan), all previously unvested shares will immediately vest. If the Board determines that any negligence or intentional misconduct by Mr. Hansen results in a restatement of the Company's consolidated financial statements, then any shares that are not yet vested that were granted during the three month period prior to or the nine month period following the issuance of the consolidated financial statements shall be forfeited.

Mr. Hansen is entitled to three months' severance pay during the first year of the agreement and six months' severance pay thereafter, plus any accrued base and incentive pay, in the event that he is terminated without cause. Mr. Hansen is restricted from competing with the Company during the course of his employment and for a period of one year after his employment has been terminated.

On July 16, 2014, Mr. Hansen and the Company entered into a cancellation agreement whereby Mr. Hansen relinquished his rights to the stock award for 25 million shares provided under his employment agreement effective February 27, 2013.

On April 23, 2013, the Company entered into a loan agreement with Michael Hansen, the Company's CEO and controlling shareholder for an unsecured loan of up to $1 million which may be drawn as needed by the Company. Interest was accrued at 3% per annum beginning May 1, 2013, and all principal and accrued interest became due and payable in full on September 30, 2013. However interest continues to accrue and the loan is still outstanding.

On June 20, 2013, the Company entered into various stock purchase agreements with Michael Hansen (CEO), Eric Nelson (CFO), Andreas Kusche (General Counsel), Rick Daglio (Chief Technology Officer), and Thomas Sikora (Chief Product Officer) with respect to the sale of 30,408,452 shares of Common Stock at a price of $0.10 per share. On the date that the Board approved the transaction, the closing price of the shares of the Company's Common Stock was $0.115.

On November 15, 2013, the Company entered into an amendment to the stock purchase agreement with Mr. Hansen for an additional 751,000 shares of Common Stock at a price of $0.10 per share. The consideration of $75,100 was paid partly by cash of $25,000 and the balance of $50,100 through conversion ofdebt owed to Mr. Hansen.

Effective June 30, 2013, the Company and Messrs. Hansen, Nelson, Kusche and Sikora mutually agreed to cancel the stock purchase agreements entered into on June 20, 2013. All the cash paid in or conversion of debt initially agreed upon will now be evidenced through new separate unsecured convertible promissory notes dated June 1, 2013 signed with the respective individuals. Under the terms of the promissory notes, interest will be calculated at 10% per annum on a compounded basis and repayment of principal and interest will be made on the earlier of (i) the date on which the respective staff's employment agreement, as the case may be, with Company ends for whatever reason, or (ii) the last day of any calendar month prior to March 15, 2015 which may specify at least 10 days in advance of such date in writing by the Company, or (iii) March 15, 2015.

37 Effective November 30, 2013, the Company and Mr. Hansen mutually agreed to cancel the amended stock purchase agreement entered into on November 15, 2013.

On August 11, 2014, the Company executed a promissory note to Mr. Hansen for a revolving loan commitment to fund the Company up to $3 million through December 31, 2015. Interest is calculated at 6% per annum commencing January 1, 2015, and all principal and accrued interest are to be paid on December 31, 2015. The Company recently drew down $1.5 million under the revolving loan.

Changes to the Board On March 24, 2013, Niels Thuesen resigned from his position as Chairman and member of the Board due to other business commitments. Management is not aware of any disagreement between Mr. Thuesen and the Company relating to the Company's operations, policies or practices.

On March 27, 2013, the Company made the following appointments: (i) David W.

Sasnett to the Board and as Chairman of the Audit and Finance Committee of the Board; (ii) Blas Garcia Moros, a member of the Board since April 2011, as Chairman of the Board and Chairman of the Compensation Committee of the Board; and (iii) Lester Rosenkrantz, a member of the Board since April 2011, as Chairman of the Nominating and Corporate Governance Committee of the Board.Code of Business Conduct and Ethics On October 31, 2012, the Company's Board adopted and approved an Amended and Restated Code of Business Conduct and Ethics ("Code"), which replaced the Company's previous Code of Business Conduct and Ethics in its entirety. The overall purpose of amending and restating the Code is to conform to newly adopted Company policies, generally updating the Code and enhancing awareness and to adhere to the Code. The updated text and amendments include the following changes: (i) clarification and expansion of provisions relating to promotion of the Company's interests and conflicts of interests; (ii) references to the newly adopted policies relating to insider trading, anti-discrimination and harassment, use of company assets and resources, and anti-fraud; (iii) added provisions relating to accounting policies; and (iv) expanded the provisions relating to the reporting of illegal, fraudulent or unethical behavior.

Loan Agreement On May 6, 2014, the Company entered into an unsecured loan agreement with a private lender to provide $500,000 for business development purposes at an interest rate of 10% per annum. Principal and accumulated interest shall be fully repaid on January 1, 2015, failing which there will be a late charge of $1,000 per day until full repayment.

Private Placements On February 27, 2013, the Company entered into separate Securities Purchase Agreement ("SPA") with several investors in Europe ("CG investors") deemed to be Qualified Investors under Directive 2004/39/EC of the European Parliament and of the Council, for a private placement of up to 15 million shares of the Company's Common Stock, based upon the market price of the Company's Common Stock on the closing date. The qualification of being an investor is also conditioned upon them being a Business Associate of the Company. The private placement of shares is pursuant to Regulation S promulgated under the Securities Act of 1934 which is exempted from registration.

In consideration of the investors acquiring the shares, CG Holdings Ltd, a wholly owned subsidiary of the Company is required to establish a special bonus pool whereby each investor will be entitled to a quarterly bonus payment, based on their respective investments. To participate in the bonus pool, each investor has to remain a Business Associate in good standing as defined under the SPA.

On May 7, 2013, the Company completed the first tranche of the SPA of 6.4 million shares totaling $1 million. Subsequent to that date, the Company received funds amounting to $199,361 for additional subscriptions under the SPA for which the closing has not been completed.

On July 23, 2014, the Company and the CG investors agreed to cancel their remaining obligations under the SPA, with an effective date of March 30, 2013.

38 Lawsuits The Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business as described in more detail in Note 9 Commitments and Contingencies for the following: (i) on August 22, 2013 the Company and National Merchant Centers settled all remaining claims between them. A full description of the settlement is described under "Litigation" in Note 8 Commitments and Contingencies; and (ii) on December 31, 2013, we moved our office premises from Boca Raton, Florida before the expiration of our office lease agreement. As a result, on January 23, 2014, the landlord filed suit against the Company for breach of lease.

The Company continues to defend against the landlord's claims.

Off-Balance Sheet Arrangements At September 30, 2012 and 2011, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

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