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DUBLI, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[September 29, 2014]

DUBLI, INC. - 10-Q - 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 Quarterly Report on Form 10-Q ("Report") under the Securities Exchange Act of 1934 ("Exchange Act"), 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 Condensed Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed elsewhere in this Report. 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.



Forward-looking statements include, but are not limited to, statements about: ? 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.

For information concerning these factors and related matters, see Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in this Report, and the following sections of our Annual Report on Form 10-K for the year ended September 30, 2012: (a) Item 1A "Risk Factors", and (b) Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations". 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 Report. 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 condensed consolidated results of operations for the three months ended December 31, 2012 compared to the three months ended December 31, 2011; and (ii) financial liquidity and capital resources. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes included in this Report.

Due to the timing of the filing this report, this discussion and analysis includes a description of our business operations for three months ended December 31, 2012 as well as our current business operations. During the three months ended December 31, 2012, our business operations consisted of (i) online auctions, (ii) an online shopping portal that allowed customers to search for products offered by various online stores and (iii) an online entertainment portal that enabled customers to search and stream audio files from public sources. During fiscal year 2013, we ceased our online auction program and have since focused our operations on (i) our shopping and entertainment portals and (ii) newly introduced online travel and lifestyle, finance and insurance, and telecom services.

16 Programs for the Quarter Ended December 31, 2012 Overview DubLi, through our Operating Subsidiaries, is a global network marketing company that sells merchandise, predominantly our proprietary electronic gift cards and, to a lesser extent consumer electronics, jewelry, and other luxury goods to consumers through Internet-based auctions conducted under the trade name "DubLi.com." Our online auctions are conducted in Europe ("EU"), North America ("US") (United States, Mexico, Puerto Rico and Canada), Australia and New Zealand ("AU"), and Worldwide ("Global"). We have a large network of independent Business Associates that sell "credits," or the right to make a bid in one of our auctions (referred to herein as "Credits" or "DubLi Credits"). These auctions are designed to offer consumers real savings on these goods.

Our revenue during quarter ended December 31, 2012 were generated primarily from the following items which were: (1) reported under discontinued operations: (a) the sale of electronic gift cards and goods through auctions; (b) the sale of Credits directly to consumers and through Business Associates; (c) handling fees for each auction transaction that resulted in the sale of an electronic gift card; and (2) reported under continuing operations: (a) annual license fees paid by Business Associates; (b) annual subscription, training, advertising, and conference event fees paid, and (c) commissions from the online shops and stores affiliated with our online shopping mall arising from the purchase transactions our customers generated.

How We Generated Revenue for the Quarter ended December 31, 2012: Components of revenue for the quarter ended December 31, 2012 are summarized as follows: Auctions (discontinued operations) Bidding Credits used in auctions $ 20,716,838 Bidding Credits broken in auctions 730,954 Gross revenue from auctions 21,447,792 Sale of goods and handling fees 1,553,606 Auctioned value of gift cards 667,845,779 Less: Cost of gift cards auctioned (683,372,086 ) Net auctioned value of gift cards (13,972,701 ) Net revenue from auctions 7,475,091 E-Commerce and Memberships 926,216 Total revenue $ 8,401,307 Auctions (Discontinued Operations) In October 2012, the Company suspended the Xpress price reveal ("Xpress") and the Unique Bid ("Unique") auctions. In December 2012, the Company notified our Business Associates and retail consumers that all auction activities would be discontinued, effective March 28, 2013. As a result, the operating results pertaining to the auction program was reclassified as discontinued operations.

17 The Company conducted reverse auctions in two formats; the Xpress auctions designed to sell our proprietary electronic gift cards (each a "Gift Card") that are redeemable for cash at a discount and the Unique bid auctions designed to enable consumers to purchase goods, such as computers, cameras, smart-phones, and jewelry at discounts to retail prices through the shopping portal. The Unique auction offers only certain inventory (brand new, newest model, full warranty) from the world's leading manufacturers. Both types of auctions operate on four separate platforms, one each for EU, US, AU and Global.

In order to participate in and make bids in any DubLi.com online auctions, consumers were required to purchase DubLi Credits. We sold each Credit for either United States Dollar (US$) 0.80, Australian Dollar (AU$) 0.90 or Euros (€) 0.60 depending on portal location that entitled the consumer to one bid in either Unique or Xpress auctions. Discounts were available on the purchase of a substantial volume of Credits at one time. We also included Credits in various retail subscription packages such as the Premium and the V.I.P. Member Packages.

Credits could be purchased directly from us or from one of our Business Associates. Accordingly, we generated revenue from the auctions both on the sale of Credits and on the sale of products to the ultimate auction winners. DubLi Credits had no monetary value, no stored value, they were not refundable after three days of purchase and they could not be redeemed for products or services.

DubLi Credits could only be used to place bids at auctions. With each bid, the price of the goods on the Xpress auction was reduced by $/€ 0.20. We recorded the price reduction against the sale of the Credits and handling fees, which were recognized as revenue.

The Unique auction was scheduled with a definitive start and end time. At any time prior to the scheduled auction end time, anyone could make bids at the price at which they would purchase the product. Bids were required to be made in 0.20 increments in US$, AU$ or €. The individual who had placed the lowest unique bid (i.e. no other person had bid the same 0.20 incremental amount) was entitled to purchase the product at that bid price.

In an Xpress auction, the Gift Card up for auction was displayed with a starting price, which was the actual face value of the Gift Card ('Starting Price"). Each time a person made a bid, the price was decreased by either US$0.20, AU$0.20 or 0.20€ and the reduced price became visible to the person making a bid and to no other person. The bidder could choose to purchase the Gift Card at the reduced price so shown or could opt to wait in the hopes that others would make further bids and drive the price down. The final purchase price was always less than the Starting Price and often represented a substantial discount to the Starting Price.

During the quarter ended December 31, 2012, we sold $668 million in Gift Cards from approximately 2.9 million auction transactions recording net revenue from DubLi Credits, sales of goods and handling fees and cost of gift cards auctioned of approximately $7.5 million. The net revenue recognized from the auctions approximated 89% of our revenue for the quarter ended December 31, 2012. We charged $0.80 retail and an average of $0.42 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 were categorized as a liability until they were used or expired. We also earned 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 $1.6 million.

Credits were sold to consumers directly by us or through our network of Business Associates. During the quarter ended December 31, 2012, substantially all our Credit sales were made through our network of Business Associates. Business Associates affiliated with our network marketing company purchased 80% of all DubLi Credits sold in the quarter ended December 31, 2012. The Business Associates purchased the DubLi Credits at an average discounted price of $0.42 which enabled them to earn an average of $0.38 per unit profit upon resale to their customers. The remaining 20% were sold directly from our web site at the full retail value of $0.80. The use of DubLi Credits and our auction activities ceased in March 2013. See the following section Trends in Our Businessfor discussion regarding the discontinuance of the auction program.

18 E-Commerce and Memberships 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. We also earned commission income from the online shops and stores affiliated with our online shopping mall arising from the purchase transactions generated by our customers. We split those commissions with our customers and Business Associates in the form of cash back and commissions. Revenue generated from the shopping mall is recognized upon receipt of payment from the merchant. A percentage of the affiliate commission is paid to the member sixty days after the initial purchase transaction in the form of "cash back" which is recorded as cost of revenue.

Our network marketing organization of Business Associates is represented in dozens of countries throughout the world. Our Business Associates offers 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 ("Down-line Associates"). Business Associates earn commissions on: (1) the sale of our Premium and V.I.P. Member subscriptions packages; and (2) a share in the commissions earned by the Company from customers who shop in our online shopping mall described above.

Business Associates also earn profits on the re-sale of Credits purchased by the subject Business Associate from us at a discount directly to retail consumers ("Affiliated Consumers") who are signed up by such Business Associate. The amount of the profit earned by a Business Associate varies based on the total Credits purchased by the Business Associate over a consecutive twelve-month period.

Revenue generated from our E-Commerce and Memberships accounted for approximately 11% of our revenue in the quarter ended December 31, 2012 Trends in Our Business Although the addition of a random bonus discount that varied from 50% to 90% per auction increased transaction volume significantly and resulted in an increase in gross revenue recorded during the fourth quarter of fiscal year 2012, the profit margins on a majority of the transactions were less than desired by the Company. Consequently, after conducting an evaluation of the auction 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.

19 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.

New Programs subsequent to the Quarter Ended December 31, 2012 Overview In December 2012, Management conducted an evaluation of our Unique Bid and Xpress auction program and determined that DubLi would derive a greater financial return by focusing on the enhancement of its e-commerce platform and that the operations of the auctions would be incompatible with the enhanced platform. As a result, during the second quarter ended March 30, 2013, DubLi terminated our auctions program in order to enhance its global member based Shopping Mall and Entertainment services and to introduce a comprehensive Travel and Lifestyle, Finance and Insurance, and Telecom online service. DubLi's vision is to capitalize on both the growing international travel sector as well as the continuously expanding trends in consumer online purchasing, both domestically and in global growth markets in Asia and South America. We cannot provide any assurance that we will be successful in capitalizing on the international travel sector or trends in consumer online purchasing domestically or internationally.

Subsequent to December 31, 2012, DubLi has focused exclusively on becoming a global e-commerce and network marketing organization that brokers products and services to consumers through Internet-based searches conducted under the trade name DubLi.com. Neither the Company nor our Business Associates maintain physical inventory or deliver physical products. DubLi provides services in EU, US, AU and Global, and plans to expand its service offerings to India, Asia and South America. We cannot provide any assurance that we will be successful in expanding our services to India, Asia and South America. Our network of independent Business Associates is the primary sales driver for the organization. In fiscal years 2013 and 2014, the Business Associates have sold marketing packages and co-branded Partner Program marketing opportunities to drive traffic to our Dubli.com site.

Recognizing that e-commerce continues to attract market share from the traditional retail market, our Management decided to completely re-design our web offerings into a consumer-based e-commerce platform more consistent with DubLi's core consumer-driven values. The consumer purchasing experience is based on a global entertainment and shopping mall platform that features a travel and lifestyle portal. The redesign is being implemented in multiple phases and has built-in flexibility to adjust to real time market and consumer behavioral data.

The website will focus on merchant-based product and services searches.

Since December 2012, DubLi's revenue has been derived from a combination of: ? Sales of DubLi.com Premium and V.I.P. membership subscriptions; ? Affiliate commissions earned from DubLi.com online shopping mall retailers, net of "cash-back" payments to customers and commission payments to Business Associates; ? Affiliate commissions earned from DubLi.com online travel providers, net of "cash-back" payments to customers and commission payments to Business Associates; ? Online sales of software, games, music and videos from DubLi online entertainment;? DubLi Network revenue from sales training materials, and conferences sold to Business Associates and Partner Program participants; ? Sales of marketing packages to Business Associates and Partner Program participants; and ? Sales of monthly business licenses to Business Associates and Partner Program participants.

20 Our Management continues to utilize the existing structure of our network of Business Associates to drive sales and marketing efforts for DubLi.com in various countries. As the Business Associates invest in the development of their own organizations through continued education and media purchase, they are assigned qualified customers who are registered users to the DubLi.com site.

Both the consumer and the Business Associates will receive a percentage of the affiliate commission attributed to each purchase while DubLi retains the remaining commission. We expect that the Business Associates will continue to build our organization, reaching new DubLi.com consumers directly, through marketing programs and through co-branded Partner Programs. The new marketing programs were initiated in the US during this current quarter ended December 31, 2012, and were launched worldwide in the third quarter of fiscal 2013.

The subscription membership packages includes access to the DubLi Shopping Mall and a wide range of entertainment, travel and other product offerings, advanced user experience features and greater "cash back" earnings. A major portion of the cash back incentives received by DubLi from retailers will be passed through to the consumers to strengthen website loyalty and to the Business Associates to reinforce sales-marketing efforts resulting in increased activity to the site.

In fiscal year 2013, DubLi revised its Partner Program offered to companies, associations, affinity groups and non-profit organizations to reflect the changes in its service offerings. Using the Partner Program gives participating organizations a professional web presence, access to products offered on the various malls through DubLi, and the use of DubLi back office to complete all customer purchase processes. DubLi provides a variety of ready-made templates that can be customized to the individual requirements of any organization, including the use of the organization's URL.

Pricing for this service includes partner registration fees and monthly administration fees. The Partner Program is intended to drive consumer traffic to the website while earning the Business Associates commissions on applicable sales. In fiscal year 2013, the DubLi Network Business Associate training program was revised to certify DubLi Network Business Associates in our Partner Program sales strategy.

A summary of the revised service offerings for periods subsequent to December 31, 2012 is as follows: Travel and Lifestyle - The DubLi Global Travel & Lifestyle portal includes white label services provided by international supplier affiliates. Global data retrieval from affiliates provides DubLi users a comprehensive listing of travel search results combined with cash back incentives and travel and entertainment value-added services. DubLi's objective is to provide the most reliable brands, the highest cash back in the industry, and exclusive travel deals.

DubLi's travel portal strategy is to: launch DubLi Travel & Lifestyle with both domestic and international supplier affiliates; offer negotiated deals for our V.I.P. members & Business Associates; and, develop an exclusive range of value added services. The longer term strategy includes: enhancing the user search experience; adding regionally popular brands and content; launching DubLi's TLC (Tender Loving Care) exclusive card; and, developing a DubLi exclusive product-line featuring offers and monthly specials. DubLi Travel will offer special deals every month providing cash back in partnership with hotels, airlines and holiday resorts in the main countries in which DubLi has customers and associates. The TLC card will be a membership club that offers multiple benefits such as credit on international airlines, hotel chains, car rentals and free DubLi dream holidays.

The existing DubLi Shopping Mall is also being changed to provide greater access to additional elements in Lifestyle, Finance and Insurance, and Telecoms. A blog webpage was launched during the second quarter of fiscal year 2013 and will become the basis of communication for events and items of interest occurring within the DubLi community.

DubLi implemented a toolbar changing "search" focus to support internet searches in chrome and safari. Configurable pools of merchants that are displayed randomly per visitor improves the customer experience by displaying fresh content on every visit and allows DubLi to promote specific merchants. Coupon and promotional strategies will be employed to improve customer retention. The platform will encompass behavioral tracking, dynamic content displays and registration process simplification.

21 Results of Operations For the Three Months Ended Increase (Decrease) Percent of December 31, Amount Percent revenue 2012 2011 2012 2011 Revenue $ 926,216 $ 337,255 $ 588,961 175 % 100 % 100 %Direct cost of revenue 186,906 420,611 (233,705 ) (56 ) 20 125 Gross income (loss) 739,310 (83,356 ) 822,666 987 80 (25 ) Selling, general and administrative expense 3,601,976 3,407,908 194,068 6 389 1,011 Loss from operations (2,862,666 ) (3,491,264 ) (628,598 ) (18 ) (309 ) (1,035 ) Interest expense 1,125 1,253 (128 ) (10 ) - - Loss before income taxes (2,863,791 ) (3,492,517 ) (628,726 ) (18 ) (309 ) (1,036 ) Provision for income taxes - - - - - - Loss from continuing operations (2,863,791 ) (3,492,517 ) (628,726 ) (18 ) (309 ) (1,036 ) Income from discontinued operations 2,354,712 492,257 1,862,455 378 254 146 Net loss (509,079 ) (3,000,260 ) (2,491,181 ) (83 ) (55 ) (890 ) Foreign currencytranslation adjustment (714,128 ) 76,549 (790,677 ) (1033 ) (77 ) 23 Comprehensive loss $ (1,223,207 ) $ (2,923,711 ) $ (1,700,504 ) (58 )% (132) % (867 )% Revenue We recorded operating revenue of approximately $926,000 for the three months ended December 31, 2012 ("2013 Qtr1"), an increase of approximately $589,000, or 175%, as compared to approximately $337,000 in the same period ended December 31, 2011 ("2012 Qtr1"). The increase in revenue is mainly attributed to an improved website that enhanced our customers' shopping experience with improved integration of the web shopping mall experience with our music sites, increased revenue from the new subscription packages, the V.I.P. and Premium Packages, as well as, revenue generated from advertising packages.

Direct Cost of Revenue During 2013 Qtr1, we had direct cost of revenue of approximately $187,000, or 20% of revenue, versus approximately $421,000 or 125% of revenue in 2012 Qtr1 which represented a decrease of approximately $234,000 or 56%. The Company held a convention during 2012 Qtr1 and marketed the event to Business Associates.

During 2013 Qtr1, the Company did not hold any similar event, resulting in the decrease in cost of revenue.

Gross income We had gross income of approximately $739,000 and a gross loss of approximately $(83,000) for 2013 Qtr1 and 2012 Qtr1, respectively. Gross margin increased by $823,000 or 987% primarily due to the increase in operating revenue and the decrease in direct cost of revenue as stated above.

Selling, general and administrative expense Selling, general, and administrative expense ("SGA") comprise primarily of salaries and benefits, merchant service fees, outside services and stock compensation expense. SGA for 2013 Qtr1 was $3.6 million compared to $3.4 million for 2012 Qtr1 resulting in an increase of $194,000 or 6% which was mainly due to increased outside service provider expenses.

22 Loss from continuing operations Loss from continuing operations during 2013 Qtr1 was approximately $2.9 million as compared to approximately $3.5 million in 2012 Qtr1, a decrease of $0.6 million, or 18%. The decrease was primarily due to increased revenue from subscriptions, the introduction of advertising and sales events, and increased commissions and rebates from our shopping mall. Direct cost of revenue as a ratio of revenue was lower in 2013 Qtr1 as compared to 2012 Qtr1 due to reduced costs of advertising and sales events.

Income from discontinued operations In October 2012, the Company suspended the Xpress and Unique Bids Auctions. In December 2012, the Company notified our Business Associates and retail consumers that all auction activities would be discontinued, effective March 28, 2013. As a result, the operating results for the auction program have been reclassified as income from discontinued operations.

Income from discontinued operations during 2013 Qtr1 increased to approximately $2.4 million from approximately $0.5 million in 2012 Qtr1, an increase of $1.9 million or 378%. The increase was primarily due to increased auction transaction counts that required usage of Dubli Credits for each bid which led to increased sales of DubLi Credits recognized as revenue. Direct cost of revenue as a ratio of net revenue was lower in 2013 Qtr1 as compared to 2012 Qtr1 due to reduced commission payout to Business Associates. The lower commission payout was as a result of the mix of packages sold for the DubLi Credits that paid a loweraverage commission rate.

Net loss We recorded a net loss of $0.5 million for 2013 Qtr1, a decrease of $2.5 million over 2012 Qtr1, which was mainly due to increased revenue as reported in our continuing operations and discontinued operations.

Foreign currency translation adjustment 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.

The foreign currency translation loss was approximately $714,000 for 2013 Qtr1 as compared to a gain of approximately $77,000 for 2012 Qtr1, an increase of approximately $813,000.

Comprehensive Loss We had a comprehensive loss of $1.2 million for 2013 Qtr1 compared to $2.9 million in 2012 Qtr1, a decrease of $1.7 million, or 58%. Our comprehensive loss was a function of revenue, direct cost of revenue, SGA, discontinued operations, and foreign currency translation adjustment. Revenue, direct cost of revenue, SGA, and discontinued operations as described above, resulted in a net loss of approximately $0.5 million in 2013 Qtr1 as compared to a net loss of approximately $3.0 million in 2012 Qtr1, an improvement in the operating results, quarter over quarter of $2.5 million or 83%.

23 Liquidity and Capital Resources General As of December 31, 2012, the Company had cash and cash equivalents of approximately $0.7 million. This represented a $7.9 million or 92% decrease from approximately $8.6 million recorded at September 30, 2012. The decrease was primarily due to cash receipts that were already received as of September 30, 2012 when the DubLi Credits were sold, even though these DubLi Credits were used in our auction program reported as discontinued operations in the current period 2013 Qtr1.

Restricted cash included in current assets was approximately $2.8 million at December 31, 2012 compared to approximately $5.7 million at September 30, 2012, a decrease of $2.9 million or 50% resulting primarily due to the release of cash withheld. The restricted cash is withheld based on a six month rolling reserve for charge backs by credit card processors and averaged 5% of credit card sales processed.

Operating Activities Net cash used in operating activities totaled approximately $6.9 million during 2013 Qtr1. The main components impacting cash flow from operations in 2013 Qtr1 were (i) receipt of $2.9 million from restricted cash held back by processors, and (ii) increased payments to Business Associates which resulted in $9.5 million reduction in Business Associates payable. Net cash used in operating activities totaled approximately $0.2 million during 2012 Qtr1. The main components impacting cash flow from operations in 2012 Qtr1 were increase in restricted cash withheld of $533,000 offset by an increase in customer deposits of $991,000.

Investing Activities Net cash used in investing activities was approximately $0.3 million during 2013 Qtr1 for purchase of equipment and software. Net cash used in investing activities was approximately $0.5 million during 2012 Qtr1 primarily for acquisition of land, and purchase of equipment and software.

Financing Activities For the 2013 Qtr1, net cash provided by financing activities was approximately $70,000 from preferred stock subscription proceeds. There was no net cash provided by financing activities in 2012 Qtr1.

Liquidity 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 that 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.

As a result of the Company incurring substantial losses and to meet the cash requirements for working capital and capital expenditures, 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 conditionand results of operations.

Operations subsequent to December 31, 2012 have been financed (i) through borrowings from the Company's President and Chief Executive Officer, Mr. Michael Hansen amounting to $1.9 million for 2013 fiscal year and $1.5 million during fiscal 2014 to date; and (ii) from the sale of land in Dubai in March 2014 which resulted in net proceeds of $0.8 million. In August 2014, Mr. Hansen executed a revolving loan commitment to fund the Company up to $5 million through December 31, 2015. Currently, the Company still has negative working capital and recently drew down $1.5 million under the $5 million revolving loan facility from Mr.

Hansen.

24 Until such time as cash flows provided by operations increase to the amounts necessary to cover the Company's operating costs, capital expenditure and other cash outflows, we will remain dependent upon borrowings from Mr. Hansen to obtain the funds necessary to continue operations. However, there can be no assurance that Mr. Hansen will provide any further funding to the Company in excess of that provided under the previously discussed $5 million amended and restated promissory note.

Cash in Foreign Subsidiaries The Company has significant operations outside the United States ("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 December 31, 2012, the Company held $0.6 million of unrestricted and $2.8 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.

Subsequent events ? 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 agreement for the sale of assets, assumption of liabilities and obligations, and licensing of certain rights dated as of January 3, 2013 ("Transaction Agreement"). 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. ? 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 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 award of 25 million shares of the Company's Common Stock. 2.5 million of shares vested 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.

25 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 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 that 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 a majority of the CG investors agreed to cancel their remaining obligations under the SPA, with an effective date of March 30, 2013.

? 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.

? 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.

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

? 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.

26 ? On August 11, 2014, the Company issued a promissory note ("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.

On August 27, 2014, the Company entered into an amendment and restatement of the revolving loan agreement ("Amended Note") with Mr. Hansen whereby the maximum amount available under the loan agreement was increased by $2 million, for an aggregate amount of up to $5 million. All the other existing terms of the Note remained unchanged in the Amended Note. The Company recently drew down $1.5 million under the revolving loan and has $3.5 million in available funds for the cash flow needs of the Company.

Off-Balance Sheet Arrangements At December 31, 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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