10. Commitments and Contingencies

Litigation

During December 2013, the Company vacated its former office premises. On January 23, 2014, the landlord filed suit against the Company for breach of lease. The complaint did not specify the amount of claimed damages, but instead generally sought all amounts allegedly due and owing under the terms of the lease as well as the landlord’s costs, expenses and reasonable attorney fees. In the Company’s answer to the complaint, the Company contended that, among other things, the landlord breached the lease by failing to maintain and repair the office building and premises, the landlord had re-taken the office premises for their own benefit, and, in the event that any damages are owed to the landlord, such damages are limited by the early termination provision in the lease.

In October 2014, the landlord informed the Company that its former office premises has been rented out to another tenant and provided a claim for the remaining amount due on the lease of $1.7 million. The Company is presently attempting to negotiate a settlement with the landlord and is presently unable to determine the amount that will ultimately be paid to settle this litigation.

Employment Agreement with Michael Hansen

On February 27, 2013, Mr. Hansen executed a new employment agreement with the Company for an initial term of five years, renewable for each successive one year period. Under the new employment agreement, Mr. Hansen is paid a base annual salary of $420,000 and is due a severance payment of six months of base salary.

11. Stockholders’ Equity

During the three months ended June 30, 2013, the Company entered into certain transactions which required the issuance of approximately 5.5 million shares of its Common Stock. As of June 30, 2013, these shares were committed for issuance and reflected as issued on the books of the Company, but stock certificates were not issued due to certain administrative and documentation requirements. The shares of Common Stock were in respect of the following: (a) the receipt of cash proceeds from investors totaling approximately $838,000, or approximately $0.25 per share, (b) the receipt of cash proceeds totaling approximately $294,000 for the exercise of stock options at a price of $0.15 per share, and (c) as payment for services received by the Company in the amount of $50,000, or approximately $0.25 per share. Certificates representing approximately 3.3 million shares of Common Stock committed for issuance were issued during the quarter ended September 30, 2013. Certificates for the remaining 2.2 million shares committed for issuance are expected to be issued during fiscal year 2015. The aforementioned 5.5 million shares were included in the Company’s basic and diluted weighted average shares computation for the three and nine months ended June 30, 2013.

12. Stock Based Compensation

The Company’s 2010 Omnibus Equity Compensation Plan (the “Plan”) was approved on September 30, 2010 by Mr. Hansen, who was the Company’s majority stockholder at the time. A proxy statement or an information statement has not yet been submitted to all of the Company’s stockholders for approval. The Plan’s potential participants include board members, executives, employees, and certain consultants and advisers of the Company and has been implemented in order to attract, incentivize and retain highly qualified individuals and keep the Company competitive with other companies with respect to executive compensation. Awards under the Plan may be made to participants in the form of (i) incentive stock options; (ii) non-qualified stock options; (iii) stock appreciation rights; (iv) restricted stock; (v) deferred stock; (vi) stock awards; (vii) performance shares; (viii) other stock-based awards; and (ix) other forms of equity-based compensation as may be provided and are permissible under the Plan and the law. A total of 50 million shares of Common Stock have been reserved for issuance under the Plan.

The stock based compensation expense for the three months ended June 30, 2013 and 2012 amounted to $103,992 and $480,565, respectively, and for the nine months ended June 30, 2013 and 2012, was $590,690 and $2,456,202, respectively. Unamortized stock option compensation expense at June 30, 2013 was $1,012,123 and is expected to be recognized over a period of 3.9 years.

13. Segment Information

The Company divides its product and service lines into two segments: (1) E-Commerce and Memberships which includes partner program with retailers, affinity groups and other organizations, subscription fees, advertising and marketing programs, and business license fees; and (2) Auctions (now reported as discontinued operations).

The total revenue recorded in our four geographic regions is summarized as follows:

14. Subsequent Events

Loan Agreements with Chief Executive Officer

In August 2014, the Company issued an amended and restated promissory note to Mr. Hansen for a revolving loan commitment to fund the Company up to $5 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. Between August 15 and August 20, 2014, the Company 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.

Loan Agreement with a Third Party

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. The outstanding principal and unpaid accrued interest are due and payable on January 1, 2015. The Company will incur a late fee of $1,000 per day for each day these amounts are outstanding beyond the due date.

On November 4, 2014, the Company fully repaid the outstanding principal and accrued interest to the private lender with cash generated from the Company’s current operations.

Private Placements

On May 7, 2013, the Company completed the first tranche of the private placements of 6.4 million shares of Common Stock amounting to approximately $1 million pursuant to a 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. The private placement of shares was exempted from registration pursuant to Regulation S promulgated under the Securities Act of 1933, as amended.

Subsequent to that date, the Company received funds totaling approximately $199,000 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. The Company is in the process of making refunds of the additional subscriptions to those investors who have mutually cancelled the SPA.

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. 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:

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 and nine months ended June 30, 2013 compared to the three months and nine months ended June 30, 2012; 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 filing this report, this discussion and analysis includes a description of our business operations for three months and nine months ended June 30, 2013 as well as our current business model. During the nine months ended June 30, 2013, 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 the quarter ended March 31, 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.

Programs for the Three Months and Nine Months Ended June 30, 2013

Overview

DubLi is a global network marketing company. Our online transactions are conducted through DubLi.com websites in Europe, North America, Australia and New Zealand and through a global portal serving the rest of the world. We have a large network of independent Business Associates that sell our various E-commerce products. Prior to March 28, 2013, DubLi’s principal business consisted of reverse auction program conducted online that were designed to (i) sell its proprietary electronic gift cards; and (ii) enable consumers to purchase merchandise through its shopping portals from online retailers at discount prices. Our Business Associates sold “credits” (referred to hereinafter as “Credit” or “DubLi Credits”), or the right to make a bid in one of our auctions, which were designed to offer consumers savings on their purchases of merchandise. Effective March 28, 2013, we discontinued our auction program. DubLi’s principal business now consists of facilitating the online sale of merchandise and services by third parties by providing cash back incentives to consumers for purchases from these third parties through the DubLi.com websites.

Our revenue during the three months ended June 30, 2013 which were reported under continuing operations were generated primarily from (a) annual license fees paid by Business Associates; (b) annual subscription, 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. For the nine months ended June 30, 2013, the revenue were generated primarily from the following items: (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, 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 Three Months and Nine Months Ended June 30, 2013:

Components of revenue for the three months and nine months ended June 30, 2013 are summarized as follows:

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 were reclassified as discontinued operations.

The Company conducted reverse auctions in two formats; the Xpress auctions designed to sell our proprietary electronic gift cards (each a "Gift Card") that were redeemable for cash at a discount and the Unique 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 the 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 nine months ended June 30, 2013, we sold $707 million in Gift Cards from approximately 3 million auction transactions recording net revenue from DubLi Credits, sales of goods and handling fees and cost of gift cards auctioned of approximately $10.7 million. The net revenue recognized from the auctions approximated 43% of our total revenue for the nine months ended June 30, 2013. 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 subsequently redeemed through replacement vouchers. 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 $1.7 million.

Credits were sold to consumers directly by us or through our network of Business Associates. During the nine months ended June 30, 2013, 97% of our Credit sales were made through our network of Business Associates. 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 3% 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 Business for discussion regarding the discontinuance of the auction program.

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 was recorded as cost of revenue.

The Company also introduced three advertising and marketing programs during fiscal year 2012. These advertising and marketing 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 campaign ran from September to December 2012, however, due to a lack of response from customers, the rest of the advertising program was discontinued.

Subsequently, in fiscal 2013, the Company through various shopping mall initiatives was able to generate sufficient customers needed for allocation to our Business Associates who purchased the advertising and marketing programs. As a result, the Company recognized the revenue in fiscal 2013 which was reported as unearned subscription fees and advertising as a liability in the consolidated financial statements in the previous periods.

Our network marketing organization of Business Associates is represented in several countries throughout the world. Our Business Associates offer the Company’s 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 as 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 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. Effective March 28, 2013, the Credits were no longer sold as we ceased our auction program.

Revenue generated from our E-Commerce and Memberships accounted for approximately 100% and 57% of our total revenue in the three months and nine months ended June 30, 2013, respectively.

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 quarter ended September 30, 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 March 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 increases 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 continued 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 to US dollar exchange rates.

New Programs subsequent to June 30, 2013

Overview

Following the termination of the auction program in March 2013, DubLi 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. 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.

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 June 2013, DubLi’s revenue has been derived from a combination of:

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 the quarter ended December 31, 2012, and were launched worldwide in the quarter ended June 30, 2013

The subscription membership packages include 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 June 30, 2013 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: (i) launch DubLi Travel & Lifestyle with both domestic and international supplier affiliates; (ii) offer negotiated deals for our V.I.P. members & Business Associates; and (iii) develop an exclusive range of value added services. The longer term strategy includes: (i) enhancing the user search experience; (ii) adding regionally popular brands and content; (iii) launching DubLi's TLC (Tender Loving Care) exclusive card; and (iv) 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 April 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 multiple browsers. 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.

Results of Operations

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Consolidated Results

Net income for the three months ended June 30, 2013 was approximately $7.3 million as compared to a net loss of approximately $3.4 million for the three months ended June 30, 2012, an increase of approximately $10.7 million. Approximately $9.5 million of the increase was due to a higher income recorded from continuing operations including the net income attributed to approximately $6.6 million of revenue recognized from the advertising and marketing programs, and approximately $1.2 million from reduction in loss from discontinued operations. Further discussions on the results of continuing operations and discontinued operations are detailed in the following paragraphs.

Continuing Operations

We recorded revenue of approximately $9.9 million for the three months ended June 30, 2013, an increase of approximately $8.4 million, as compared to approximately $1.5 million in the same period ended June 30, 2012. The increase was mainly due to approximately $6.6 million in revenue that was recognized from the deferred liability amounts. During the quarter ended June 30, 2013, the Company allocated customers to the Business Associates in satisfaction of the terms of the advertising and marketing programs that were sold in fiscal 2012 as discussed above. Our improved website also enhanced our customers’ shopping experience with better integration of the web shopping mall experience with our music sites which contributed in increased revenue of approximately $1.4 million from the new V.I.P. and Premium subscription packages.

Gross income was approximately $9.5 million for the three months ended June 30, 2013 or 95% of revenue, as compared to approximately $1.1 million or 73% of revenue, for the three months ended June 30, 2012, representing an increase of approximately $8.4 million. The increase was primarily due to the recognition of revenue from the deferred liability amounts in respect of the advertising and marketing packages, and the increased contribution from the V.I.P and Premium packages as described above.

Selling, general and administrative (“SGA”) expense was approximately $2.1 million and $3.3 million for the three months ended June 30, 2013 and 2012, respectively, a decrease of $1.2 million. The decrease was primarily due to (i) approximately $0.7 million reduction in stock compensation expense due to fewer grants in 2013 as compared to 2012; (ii) the Company held a conference event in 2012 for approximately $0.2 million but not in 2013 due to cutbacks in the budget; and (iii) lower travel expenses in 2013 than in 2012 of $0.2 million due to budget cutbacks.

Discontinued Operations

The auction program was discontinued effective March 28, 2013. As a result, there were no operating results for the auction program for the three months ended June 2013. For the three months ended June 30, 2012, the Company reported a loss of $1.2 million which have been reclassified as loss from discontinued operations. The loss was mainly due to additional random bonus discounts given on the auction transactions.

Foreign Currency Translation Adjustment

Our 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 for the quarter ended June 30, 2013 was a loss of approximately $369,000 as compared to a gain of approximately $181,000 for the quarter ended June 30, 2012, an increase in the loss of approximately $550,000.

Nine Months Ended June 30, 2013 Compared to Nine Months Ended June 30, 2012

Consolidated Results

Net income for the nine months ended June 30, 2013 was approximately $7.2 million as compared to a net loss of approximately $9.3 million for the nine months ended June 30, 2012, representing an increase in income of approximately $16.5 million. Approximately $11.5 million of the increase was due to a higher income recorded from continuing operations including the net income attributed to approximately $8.1 million of revenue recognized from the advertising and marketing programs, and approximately $5.0 million increase in income from discontinued operations. Further discussions on the results of continuing operations and discontinued operations are detailed in the following paragraphs.

Continuing Operations

For the nine months ended June 30, 2013, we recorded revenue of approximately $14.0 million, an increase of approximately $11.1 million, as compared to approximately $2.9 million for the nine months ended June 30, 2012. The increase was mainly due to approximately $8.1 million in revenue that was recognized from the deferred liability amounts. For the nine months ended June 30, 2013, the Company allocated customers to the Business Associates in satisfaction of the terms of the advertising and marketing programs that were sold in fiscal 2012 as discussed above. Our improved website also enhanced our customers’ shopping experience with better integration of the web shopping mall experience with our music sites which contributed in increased revenue of approximately $2.1 million from the new V.I.P. and Premium subscription packages.

We had gross income of approximately $13.0 million or 93% of revenue for the nine months ended June 30, 2013, as compared to $2.0 million or 69% of revenue for the nine months ended June 30, 2012, an increase of approximately $11.0 million. The increase was primarily due to the recognition of revenue from the deferred liability amounts in respect of the advertising and marketing packages, and the increased contribution from the V.I.P and Premium packages as described above.

SGA expense for the nine months ended June 30, 2013 was approximately $8.9 million as compared to approximately $9.8 million recorded for the nine months ended June 30, 2012, representing a decrease of approximately $0.9 million. The decrease was mainly attributed to reduction in stock compensation expense due to fewer grants in 2013 which amounted to approximately $2.0 million. This decrease was set off by an increase of approximately $0.8 million that was procured for outside information technology support services.

During the nine months ended June 30, 2013, we recorded a software impairment charge of approximately $355,000 due to obsolescence of certain components of our shopping mall operating system.

Discontinued Operations

Income from discontinued operations for the nine months ended June 30, 2013 increased to approximately $3.5 million from a loss of approximately $1.5 million for the nine months ended June 30, 2012, an increase of $5.0 million. The increase was primarily due to increased auction transaction counts that required usage of DubLi Credits for each bid that led to increased sales of DubLi Credits being recognized as revenue.

Direct cost of revenue as a ratio of net revenue was lower in the 2013 period as compared to the 2012 period because of reduced commission payout to Business Associates. The lower commission payout was a result of the mix of packages sold for the DubLi Credits that paid a lower average commission rate. In addition, a higher average margin per transaction was recorded in 2013 as a result of fewer and lower random bonus discounts given on those transactions.

Foreign Currency Translation Adjustment

The foreign currency translation for the nine months ended June 30, 2013 and 2012 was a loss of approximately $374,000 as compared to a gain of approximately $195,000, respectively, an increase of approximately $569,000.

Liquidity and Capital Resources

Liquidity

As a result of the Company incurring substantial losses in fiscal 2012 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 condition and results of operations.

The Company is making changes to its 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 we expect will improve sales of our E-commerce products. The marketing efforts 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.

Operations subsequent to June 30, 2013 have been financed (i) through borrowings from the Company’s President and Chief Executive Officer, Michael Hansen, amounting to $1.5 million for the balance of fiscal 2013 and $1.5 million during fiscal 2014 (as described under Mr. Hansen revolving loan below); (ii) from the sale of land in Dubai in March 2014 which resulted in net proceeds of $0.8 million; and (iii) in May 2014 through unsecured loan from an unrelated party of $0.5 million which was subsequently repaid on November 4, 2014.

In August 2014, Mr. Hansen executed a revolving loan commitment to fund the Company up to $5 million through December 31, 2015. Between August 15 and August 20, 2014, the Company drew down $1.5 million under the revolving loan facility. On October 17, 2014, the Company fully repaid Mr. Hansen for the $1 million loaned to the Company from April through September 2013 with cash generated from current operations.

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 June 30, 2013, the Company held $0.2 million of unrestricted and $0.5 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

Off-Balance Sheet Arrangements

At June 30, 2013 and 2012, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information to be reported under this item is not required of smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our Management, including our principal executive officer and our principal financial and accounting officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15 (e) under the Exchange Act) as of the end of the period covered by this Report. Based on the foregoing, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms, and (ii) accumulated and communicated to Management, including the principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

As previously reported in our Form 10-K for the year ended September 30, 2012, as a result of our principal executive officer’s and principal financial and accounting officer’s assessment of the effectiveness of our internal control over financial reporting as of September 30, 2012, we identified the material weaknesses in internal control over financial reporting as of September 30, 2012. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Remediation Plans

To address the identified material weakness discussed above, we have:

Under the steps as detailed in the “Remediation Plans”, we are in the process of enhancing our internal control processes as follows:

If the remedial measures described above are insufficient to address any of the identified material weaknesses or are not implemented effectively, or additional deficiencies arise in the future, material misstatements in our interim or annual consolidated financial statements may occur in the future and we may continue to be delinquent in our filings. We are currently working to improve and simplify our internal processes and implement enhanced controls, as discussed above, to address the material weaknesses in our internal control over financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures. A key element of our remediation effort is the ability to recruit and retain qualified individuals to support our remediation efforts. While our Board has been supportive of our efforts in the hiring of various individuals in our finance department, as well as, funding efforts to improve our financial reporting system, improvement in internal control will be hampered if we cannot recruit and retain more qualified professionals. Among other things, any un-remediated material weaknesses could result in material post-closing adjustments in future financial statements. If we are unable to obtain the necessary funds, we may not be able to implement our remedial measures.

PART II: OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

On December 31, 2013, the Company vacated its former Boca Raton office premises prematurely before the lease agreement expiration date of January 31, 2020. Subsequently on January 23, 2014, the landlord filed suit against the Company for breach of lease. The complaint did not specify the amount of claimed damages, but instead generally sought all amounts allegedly due and owing under the terms of the lease agreement as well as the landlord’s costs, expenses and reasonable attorney fees. In the Company’s answer to the complaint, the Company contended that, among other things, the landlord breached the lease agreement by failing to maintain and repair the office building and premises and had re-taken the office premises for its own benefit.

In October 2014, the landlord informed the Company that its former office premises has been rented to another tenant and provided a claim for the remaining amount due on the lease of $1.7 million. The Company is presently attempting to negotiate a settlement with the landlord but is presently unable to determine what amount will ultimately be paid to settle this litigation.

In the ordinary course of business, the Company and its subsidiaries including its directors and officers may be defendants in or parties to pending or threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants.

 ITEM 1A.  RISK FACTORS

There has been no material change to the risk factors relating to our business as disclosed in our Form 10-K for the year ended September 30, 2012 as filed with the SEC on August 26, 2014.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

SIGNATURES

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

28