Unassociated Document  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A-1
(Mark One)

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

For the quarterly period ended March 31, 2010

¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ______________to _______________.

Commission File Number 0-49801
 
MEDIANET GROUP TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)

Nevada
(State or other jurisdiction of incorporation or organization)
13-4067623
(I.R.S. Employer Identification No.)

5200 Town Center Circle, Suite 601
Boca Raton, FL 33486
(Address of principal executive offices)
 
561-417-1500
(Issuer’s telephone number)
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for the such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ¨    No ¨

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

Large accelerated filer
¨
Non-accelerated filer
¨
Accelerated filer
¨
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of shares of preferred stock outstanding as of May 24, 2010:  
  3,858,067
Number of shares common stock outstanding as of May 24, 2010:
28,621,680
 
 
 

 
 
EXPLANATORY NOTE
 
On December 16, 2010, the Board of Directors of the Company determined that the unaudited consolidated financial statements for the three and six months ended March 31, 2010, should be restated as a result of material misstatements.  The determination to restate the unaudited consolidated financial statements was made in connection with management’s assessment of accounting errors it discovered in connection with the preparation of the audited consolidated financial statements for the year ended September 30, 2010.
 
The Company has restated its balance sheet as of March 31, 2010 and its statements of operations, shareholders’ equity and cash flows for the three and six months then ended to correct errors in its accounting.  Certain reclassifications to conform to the presentations used in fiscal year 2010 have also been made to prior quarter's consolidated financial statements, none of which had any effect on previously reported net income or loss, or related per share amounts, of any period.
 
The descriptions of the error corrections and the effects of the restatements of the March 31, 2010 financial statements are as follows:
 
 
(1)
adjust cash for currency transaction losses not previously recorded;
 
(2)
reclassify deferred expenses previously netted to deferred revenue;
 
(3)
reclassify cash previously reported as a deposit;
 
(4)
adjust commissions payable for currency transaction losses not previously recorded;
 
(5)
record liability for unearned subscription revenue not previously recorded;
 
(6)
reclassify deferred expenses previously netted to deferred revenue;
 
(7)
intercompany transactions not previously eliminated;
 
(8)
adjust for costs erroneously recorded in 2010; and
 
(9)
correct 2010 tax provision.
 
As a result, on December 16, 2010, after discussion with the Company’s independent registered public accounting firm, the Company’s Board of Directors determined that the previously issued financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009 and in its Forms 10-Q for the periods ended December 31, 2009, March 31, 2010 and June 30, 2010 should not be relied upon.  The Company simultaneously herewith is filing amendments to its Quarterly Reports on Form 10-Q for the quarters ended December 31, 2009, March 31, 2010 and June 30, 2010 to reflect these restatements. The Company restated its financial statements for the year ended September 30, 2009 concurrently with the filing of its Annual Report for the year ended September 30, 2010.
 
For the convenience of the reader, this Form 10-Q/A sets forth the Company’s original Form 10-Q for the quarter ended March 31, 2010 (the “Original 10-Q") in its entirety, as amended by, and to reflect, the restatement.  No attempt has been made in this Form 10-Q/A to update other disclosures presented in the Original 10-Q, except as required to reflect the effects of the restatement.  This Form 10-Q/A does not reflect events occurring after the filing of the Original 10-Q or modify or update those disclosures, including the exhibits to the Original 10-Q affected by subsequent events.
 
The following sections of this Form 10-Q/A have been amended to reflect the restatement:
 
Part I – Item 1 – Financial Statements;
Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations; and
Part II – Item 1 – Legal Proceedings.
 
 
2

 
 
This Form 10-Q/A has been signed as of a current date and, as required by Rule 12b-15 of the Securities Exchange Act of 1934, all certifications of the Company’s Chief Executive Officer and our Chief Financial and Accounting Officer are given as of a current date.  Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original 10-Q, including any amendments to those filings.
 
USE OF NAMES
 
In this quarterly report, the terms “MediaNet,” “Company,” “we,” or “our,” unless the context otherwise requires, mean MediaNet Group Technologies, Inc. and its subsidiaries.
 
INDEX

PART I: FINANCIAL INFORMATION
4
Item 1.
 Financial Statements
4
§
Consolidated Balance Sheets as of March 31, 2010 and September 30, 2009
5
§
Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2010 and 2009
6
§
Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2010 and 2009
7
§
Condensed Notes to Consolidated Financial Statements
9
Item 2.
Management s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 4.
Controls and Procedures
39
     
PART II: OTHER INFORMATION
40
Item 1.
Legal Proceedings
40
Item 1A.
Risk Factors
41
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
57
Item 5.
Other Information
57
Item 6.
Exhibits
58
     
SIGNATURES 58
     
INDEX TO EXHIBITS 59
 
 
3

 
 
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
 
4

 
 
MediaNet Group Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets

         
September, 30
 
   
March 31, 2010
   
2009
 
   
(Unaudited)
   
(Audited Note 2)
 
 
 
(Restated)
   
(Restated)
 
 Assets            
Current Assets
           
Cash and cash equivalents
  $ 2,179,887     $ 2,533,649  
Restricted cash
    1,725,940       721,987  
Accounts receivable, net
    140,247       72,985  
Inventory
    607,702       401,113  
Prepaid customer acquisition costs
    4,120,425       2,577,168  
Prepaid expenses and other current assets
    592,526       127,165  
Deposits
    148,367       -  
Total current assets
    9,515,094       6,434,067  
Property and equipment, net
    2,195,859       94,109  
Other Assets
    17,848       32,212  
Total Assets
  $ 11,728,801     $ 6,560,388  
                 
Liabilities and Stockholders' Equity
               
Current Liabilities
               
Accounts payable
  $ 119,496     $ 121,451  
Accrued liabilities
    297,040       585,623  
Accrued incentives
    299,783       644,075  
Loyalty points payable
    264,268       209,025  
Commissions payable
    1,555,039       2,116,250  
Customer deposits
    81,579       18,342  
Deferred revenue
    9,000,087       5,560,762  
Accrued interest - related party
    6,659       -  
Note Payable-related party
    -       191,322  
Total current liabilities
    11,623,951       9,446,850  
                 
Stockholders' Equity (Deficit)
               
Preferred stock - $.01 par value, 5 million shares authorized, 5 million shares and 0 shares issued and outstanding as of March 31, 2010 and September 30, 2009, respectively
    50,000       -  
Common stock - $.001 par value, 50,000,000 shares authorized, 28,621,680 and  27,303,552 shares issued and outstanding as of March 31, 2010 and September 30, 2009, respectively (See Note 12)
    28,621       27,304  
Additional paid-in capital
    666,830       (768,528 )
Accumulated other comprehensive income (loss)
    (508,324 )     (96,014 )
Deficit in retained earnings
    (132,278 )     (2,049,224 )
Total stockholders' equity
    104,850       (2,886,462 )
Total liabilities and stockholders' equity
  $ 11,728,801     $ 6,560,388  
 
See accompanying notes to condensed consolidated financial statements
 
 
5

 
 
MediaNet Group Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations - (Unaudited)
 
   
For the three months
   
For the six months
 
   
ended March 31,
   
ended March 31,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Restated)
   
(Restated)
   
(Restated)
   
(Restated)
 
Revenues
  $ 6,332,129     $ 4,493,462     $ 10,616,064     $ 6,083,369  
Direct cost of revenues
    3,546,552       2,744,854       6,760,916       3,805,162  
Gross Profit
    2,785,577       1,748,608       3,855,148       2,278,207  
                                 
Operating Expenses
    1,529,680       1,506,539       2,137,420       1,899,673  
                                 
Income (loss) from operations
    1,255,897       242,070       1,717,728       378,533  
                                 
Interest income (expense) -net
    ( 5,512 )     (3,607 )     ( 7,138 )     ( 3,607 )
                                 
Income (loss) from continuing operations before income taxes
    1,250,386       238,463       1,710,591       374,926  
                                 
Provision for income taxes
    -       -       -       -  
                                 
Income (loss) from continuing operations
    1,250,386       238,463       1,710,591       374,926  
Discontinued operations
                               
Loss from discontinued segment
    -       (591,886 )     -       (1,232,257 )
Gain from sale of subsidiary
    -       74,990       -       74,990  
                                 
Net income (loss)
    1,250,386       (278,433 )     1,710,591       (782,340 )
                                 
Foreign currency translation adjustment
    (395,991 )     (32,655 )     (412,309 )     (47,725 )
                                 
Comprehensive Income (Loss)
  $ 854,394     $ (311,088 )   $ 1,298,282     $ (830,065 )
                                 
Earnings (loss) per share:
                               
Continuing operations
                               
Basic
  $ 0.04     $ 0.01     $ 0.06     $ 0.02  
Fully Diluted
  $ 0.00     $ 0.01     $ 0.01     $ 0.02  
Discontinued operations
                               
Basic
  $ 0.00     $ ( 0.03 )   $ 0.00     $ (0.06 )
Fully Diluted
  $ 0.00     $ (0.03 )   $ 0.00     $ (0.06 )
                                 
Weighted average number of shares outstanding during the period
                               
Basic
    28,484,206       20,674,802       28,484,206       20,674,802  
Fully Diluted
    339,037,717       20,674,802       277,167,462       20,674,802  
 
See accompanying notes to condensed consolidated financial statements.
 
 
6

 
 
MediaNet Group Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - (Unaudited)
   
For the six months
 
   
ended March 31,
 
   
2010
   
2009
 
   
(Restated)
   
(Restated)
 
Cash flows from operating activities
               
Net Income
  $ 1,715,720     $ 449,916  
Net loss from discontinued operations
    -       (1,232,257 )
Reconcile net income (loss) to net cash used in operating activities:
               
Prior period adjustment
    (278,560 )     -  
Currency gains (losses)
    (16,417 )     -  
Depreciation and amortization
    19,595       11,722  
Stock and Warrants issued for services
            97,709  
(Increase) decrease in assets:
               
Restricted cash
    (994,471 )     (824,392 )
Accounts receivable
    (66,367 )     (589,016 )
Inventory
    (205,043 )     26,859  
Prepaid customer acquisition costs
    (1,540,629 )     (1,121,708 )
Prepaid expenses
    (465,361 )     (5,368 )
Deposits
    (146,896 )     -  
Other current assets
    15,292       -  
Increase (decrease) in liabilities:
               
Accounts payable
    (2,258 )     287,169  
Accrued liabilities
    (285,127 )     11,353  
Accrued incentives
    (353,183 )     -  
Loyalty points payable
    55,243       23,670  
Commission payable
    (589,401 )     576,084  
Customer deposits
    62,863       (35,825 )
Deferred revenue
    3,388,314       2,171,766  
Accrued interest - related party
    6,692       -  
Note Payable-related party
    -       88,000  
Net cash provided (used) in operating activities
    320,005       (64,316 )
                 
Cash flows from investing activities:
               
Purchase of software license
    (400,000 )     -  
Purchase fixed assets
    (637,338 )     (67,388 )
Net cash provided (used) in investing activities
    (1,037,338 )     (67,388 )
                 
Cash flows from financing activities
               
Proceeds from common shares and warrants
    691,479       59,946  
Proceeds note payable – related party
    23,761       493,003  
Payments on note payable – related party
    (216,355 )     -  
Net cash provided (used) by financing activities
    498,885       552,949  
Foreign translation adjustment
    (135,315 )     25,374  
Net increase (decrease) in cash and equivalents
    (353,762 )     446,620  
Cash at beginning of period
    2,533,649       80,037  
Cash at end of period
  $ 2,179,887     $ 526,657  
 
See accompanying notes to condensed consolidated financial statements.
 
 
7

 
 
MediaNet Group Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
 
Supplemental disclosures of cash flow information:
           
Cash paid for interest
  $ 7,138     $ 3,607  
Cash paid for income taxes
    -       -  
Supplemental disclosures of non-cash transactions:
               
Foreign translation adjustment - comprehensive loss
  $ (412,310 )     (47,725 )
Stock issued for Software
  $ 1,337,673       -  
Recapitalization
  $ 6,874,886       -  
 
See accompanying notes to condensed consolidated financial statements.
 
 
8

 
 
MediaNet Group Technologies, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
 
Note 1 - Description of Business
 
MediaNet Group Technologies, Inc. (“MediaNet Group” or the “Company”), through its wholly owned subsidiaries, is a global marketing company that sells merchandise to consumers through Internet-based auctions conducted under the trade name “DubLi.com.”  As of March 31, 2010, our online auctions were conducted in Europe, North America, Australia and New Zealand and we had a network of independent business associates that sold “credits”, or the right to make a bid in one of our auctions (referred to herein as “Credit” or “DubLi Credits”).  These auctions are designed to offer consumers real savings on these goods.  The Company, through its subsidiary, BSP Rewards, Inc., also offers private branded loyalty and reward web malls where members receive rebates (rewards) on products and services from participating merchants.
 
The Company is organized in Nevada and has its principal executive offices in Boca Raton, Florida.  The Company’s wholly owned subsidiaries are domiciled in Delaware, Florida and Nevada in the United States and in the, British Virgin Islands, Cyprus and Berlin, Germany.

As of May 24, 2010, our President and Chief Executive Officer, through his beneficial ownership of the Company’s outstanding Series A Preferred Stock, has the indirect shared power to cast approximately 88% of the combined votes that can be cast by the holders of the Common Stock and the Series A Preferred Stock, which generally vote together as a single class on all matters submitted to the vote of shareholders. Accordingly, he, along with another person who is not an officer or director of the Company, has the power to influence or control the outcome of important corporate decisions or matters submitted to a vote of our shareholders, including, but not limited to, increasing the authorized capital stock of the Company, the dissolution, merger or sale of the Company’s assets and the size and membership of the Board of Directors and all other corporate actions.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not contain all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments which are necessary for the fair presentation of the condensed consolidated financial statements have been included and all such adjustments are of a normal and recurring nature. The operating results for the three months ended March 31, 2010 are not necessarily representative of the results of future quarterly or annual periods. The following information should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

The unaudited condensed consolidated financial statements include the accounts of MediaNet Group Technologies, Inc. and its subsidiaries which are wholly owned or otherwise under common control. All intercompany accounts and transactions have been eliminated in consolidation. The following subsidiaries are included in the consolidation at March 31, 2010 and 2009.

BSP Rewards, Inc.
Wholly owned
Actively engaged in business
CG Holdings, Ltd.
Wholly owned
Actively engaged in business
DUBLICOM Limited
Wholly owned
Actively engaged in business
DubLi Network Limited
Wholly owned
Actively engaged in business
Lenox Logistik und Service GmbH
Wholly owned
Actively engaged in business
Lenox Resources, LLC
Wholly owned
Actively engaged in business
DubLi Logistics LLC
Under Common Control*
Actively engaged in business
DubLi.com, LLC
Under Common Control
 Discontinued operations
DubLi.com GmbH
Under Common Control
 Discontinued operations
DubLi Network, LLC
Under Common Control
 Discontinued operations

* Acquired May 24, 2010
 
 
9

 
 
As is more fully described in Note 12 to the Financial Statements, DubLi Logistics was identified as one of the consolidated subsidiaries of the Company in Amendment No. 1 to the Company’s Form 8-K filed with the SEC on February 4, 2010 (the “Form 8-K”) and the Company’s Form 10-Q for the quarter ended December 31, 2009 (the “Form 10-Q”) based upon DubLi Logistics’ historical and current operation as an affiliated, profitless, product purchasing agent of DUBLICOM.  DubLi Logistics is operated exclusively by employees of Lenox Logistik.
 
The results of operations and assets and liabilities of DubLi.com, LLC’s subsidiaries were also included in the Company’s consolidated results of operations as reported in the Form 8-K and Form 10-Q based upon their common ownership and historical relationship to CG Holdings Limited (“CG”) and its other consolidated subsidiaries. DubLi.com, LLC, which is a holding company, has never directly operated a business and its subsidiaries were sold or their businesses were discontinued in the second quarter of 2009.
 
The condensed balance sheet as of September 30, 2009 has been derived from financial statements audited by Lake & Associates LLC, independent public accountants, as indicated in their report included in the Company’s 10-K for September 30, 2009.
 
The balance sheet as of March 31, 2010 have been corrected for an understatement of 500,000 outstanding shares, an error that existed from July 2007 until December 31, 2009 and the omission of existence of 5 million shares of authorized preferred stock for the periods from inception until December 31, 2009.  This Note also contains previously undisclosed information about each subsidiary company’s status as either wholly owned or controlled.
 
The Company has evaluated subsequent events and determined no adjustment or additional disclosure other than that already made to these financial statements , specifically in Note 12, is considered necessary based on this evaluation.
 
Accounting Principles
 
The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America.

Recent Authoritative Accounting Pronouncements
 
In September 2009, the Financial Accounting Standards Board (“FASB”) issued ASC 605-25, Revenue Recognition - Multiple-Deliverable Revenue Arrangements. This guidance addresses how to separate deliverables and how to measure and allocate consideration to one or more units of accounting. Specifically, the guidance requires that consideration be allocated among multiple deliverables based on relative selling prices. The guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence, (2) third-party evidence and (3) estimated selling price. This guidance is effective for annual periods beginning after December 15, 2009 but may be early adopted as of the beginning of an annual period. The Company is currently evaluating the effect that this guidance will have on its consolidated financial position and results of operations, if any.
 
Foreign Currency
 
Financial statements of foreign subsidiaries operating in other than highly inflationary economies are translated at year-end exchange rates for assets and liabilities and historical exchange rates during the year for income and expense accounts. The resulting translation adjustments are recorded within accumulated other comprehensive income or loss. Financial statements of subsidiaries operating in highly inflationary economies are translated using a combination of current and historical exchange rates and any translation adjustments are included in current earnings. Gains or losses resulting from foreign currency transactions are recorded in other expense.
 
 
10

 
 
Reclassifications
 
Certain amounts reported in previous periods have been reclassified to conform to the Company’s current period presentation.
 
Management’s Use of Estimates and Assumptions
 
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates, judgments and assumptions that affect the reported amounts of the assets and liabilities, disclosure of contingent assets and liabilities, deferred income, accruals for incentive awards and unearned auction Credits at the date of the consolidated financial statements, and the reported amounts of revenue and expense during the reporting periods. Examples, though not exclusive, include estimates and assumptions of: loss contingencies; depreciation or amortization of the economic useful life of an asset; stock-based compensation forfeiture rates; estimating the fair value and impairment of assets; potential outcome of future tax consequences of events that have been recognized in our financial statements or tax returns; estimates of incentive awards and unearned auction Credits and determining when investment impairments are other-than temporary. The Company bases its estimates on historical experience and on various assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions and conditions.
 
Cash, Cash Equivalents and Financial Instruments
 
The Company considers all highly liquid instruments with original maturities of three months or less at the date of purchase to be cash equivalents. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short term investments.
 
Concentrations
 
The Company maintains its cash in a bank deposit account, which at times may exceed the federally insured limits. The Company has not experienced any losses in such account and believes it is not exposed to any significant credit risk on cash and cash equivalents.
 
Fair Value of Financial Instruments
 
The Company has adopted and follows ASC 820-10, “Fair Value Measurements and Disclosures” for measurement and disclosures about the fair value of its financial instruments. ASC 820-10 establishes a framework for measuring fair value in accordance with generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by ASC 820-10 are:
 
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
 
Level 2 — Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
 
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Valuation of instruments includes unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
 
 
11

 
 
As defined by ASC 820-10, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale, which was further clarified as the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in an orderly transaction between market participants at the measurement date. The carrying amounts of the Company’s financial assets and liabilities, such as cash and cash equivalents, prepaid and other current assets,  and other assets, accounts payable, accrued expenses, accrued interest, taxes payable, and other current liabilities, approximate their fair values because of the short maturity of these instruments. The Company’s notes payable to shareholders approximates the fair value of such instrument based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at March 31, 2010.
 
The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis and, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at March 31, 2010, nor any gains or losses reported in the statements of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date.
 
Inventory
 
The inventory represents merchandise purchased at cost. Inventories are stated at lower of cost or market. Cost is determined on the first-in, first-out basis. Shipping and handling costs are included in purchases for all periods presented.
 
Property, Software and Leasehold Improvements
 
Property is recorded at cost. The cost of maintenance and repairs of equipment is charged to operating expense when incurred. Depreciation and amortization is determined based upon the assets’ estimated useful lives, and is calculated on a straight-line basis when the asset is placed in service. When the Company sells, disposes or retires equipment or replaces a leasehold improvement, the related gains or losses are included in operating results. Property is depreciated over five or seven years and begins when it is placed in service.
 
Depreciation and amortization are provided for financial reporting primarily on the accelerated and the straight-line methods over the estimated five year useful lives of the assets. Leasehold improvements are recorded at cost and are amortized over the remaining lease term.

Impairment of Long-Lived Assets
 
In accordance with Statement of ASC 360-10-35, Property, Plant and Equipment – Subsequent Measurement, the Company reviews the carrying value of its long-lived assets, which includes property and equipment, and intangible assets (other than goodwill) annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, growth rates and other factors. Estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to the business model or changes in operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, an impairment loss will be recognized, measured as the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined using available market data, comparable asset quotes and/or discounted cash flow models.  Management conducted an evaluation of long-lived assets and determined no impairments currently exist.
 
 
12

 
 
Revenue Recognition
 
Product Sales and Services - The Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”).  ASC 605-10 requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the selling price is fixed and determinable; and (iv) collectability is reasonably assured.  Determination of criteria (iii) and (iv) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.  Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.  The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.

Sales of “DubLi Credits” - Consumers bid on the Company’s online auctions by purchasing “DubLi Credits” either directly on DubLi.com or from DubLi’s independent business associates who are members of the DubLi Marketing Network. All proceeds from the sales of “DubLi Credits” are recorded as deferred revenue until used by the consumer in the bidding process and the related revenue is earned.   Purchases of DubLi Credits are non-refundable after six months.  Unused Credits remaining in deferred revenue after 12 months are recorded as revenue as if earned.  Management makes this estimated adjustment to reduce the deferred revenue liability and to increase revenue recognized based upon historical statistical utilization rates.
 
BSP Rewards revenue is earned principally from revenue rebates (commissions) earned from merchants participating in its online shopping malls, gift card sales from each rewards mall program and, web design/maintenance/hosting fees it earns for building and hosting its private-branded online mall platform for outside organizations. The Company receives rebates from participating merchants on all transactions processed by BSP through its online mall platform. The percentage rebate paid by merchants varies between 1% and 30% and BSP normally shares 50% of the rebate with the member who made the purchase.
 
Direct Cost of Revenues
 
Included in Direct Cost of Revenues are the costs of goods sold and commissions and incentive bonuses earned by business associates on the sales of DubLi Credits.  Commissions are based upon each business associate’s volume of Credit sales and that of other business associates who are sponsored by the subject business associate. Commissions are paid to business associates at the time of the sale of the Credits and are recognized as a deferred expense until the Credits are used and then are charged to expense. Incentive bonuses are paid either monthly or quarterly and the related expense is recorded when the business associate meets the stated sales goal for each particular promotional event.

Advertising and Marketing Expenses
 
Advertising and marketing costs are expensed as incurred and include the costs associated with internally developed websites and other marketing programs and materials.

Selling, General and Administrative Expenses
 
Selling, general and administrative expenses include costs associated with distribution activities, research and development, information technology, and other administrative costs, including finance, legal and human resource functions. Research and development is performed by in-house staff and outside consultants and those costs are expensed as incurred.
 
 
13

 
 
Comprehensive Income

Comprehensive income consists of net earnings, unrealized gains or losses on investments, foreign currency translation adjustments and the effective portion of the unrealized gains or losses on derivatives. Comprehensive income is presented in the consolidated statements of shareholders’ equity and comprehensive income.
  
Income Taxes
 
The Company accounts for income taxes under ASC 740-10, Income Taxes. Deferred income tax assets and liabilities are recognized based on differences between the financial statement and tax basis of assets and liabilities using presently enacted tax rates. At each balance sheet date, the Company evaluates the available evidence about future taxable income and other possible sources of realization of deferred tax assets, and records a valuation allowance that reduces the deferred tax assets to an amount that represents management’s best estimate of the amount of such deferred tax assets that more likely than not will be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

Computation of Income and Loss per Share
 
The Company computes income and loss per share in accordance with ASC 260, previously SFAS No. 128, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the statements of operations. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential Common Stock outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. In periods in which a net loss has been incurred, all potentially dilutive shares of Common Stock are considered anti-dilutive and thus are excluded from the calculation. As of March 31, 2010, the Company had two classes of potentially dilutive derivatives of Common Stock as a result of warrants granted and convertible preferred stock issued.

Dividends
 
The Company’s policy is to retain earnings to provide funds for the operation and expansion of our business and not to pay dividends.

Share-Based Payments
 
The Company accounts for stock-based compensation in accordance with the provisions of ASC 718, Stock Compensation, which establishes the accounting for share-based awards and the inclusion of their fair value in net earnings in the respective periods the awards, were earned. Consistent with the provisions of ASC 718, the Company estimates the fair value of stock options and shares issued under its employee stock purchase plan using the Black-Scholes option-pricing model. Fair value is estimated on the date of grant and is then recognized (net of estimated forfeitures) as expense in the Consolidated Statements of Operations over the requisite service period (generally the vesting period).
 
ASC 718 requires companies to estimate the fair value of stock-based compensation on the date of grant using an option-pricing model. The Company uses the Black-Scholes model to value stock-based compensation. The Black-Scholes model determines the fair value of stock-based payment awards based on the stock price on the date of grant and is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Although the fair value of stock options granted by the Company is determined in accordance with ASC 718 and Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment, (“SAB 107”) as amended by SAB No. 110, using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
 
 
14

 
 
Subsequent Events
 
(Included in Accounting Standards Codification (“ASC”) 855 “Subsequent Events”, previously SFAS No. 165 “Subsequent Events”)

SFAS No. 165 established general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued (“subsequent events”). An entity is required to disclose the date through which subsequent events have been evaluated and the basis for that date. For public entities, this is the date the financial statements are issued. SFAS No. 165 does not apply to subsequent events or transactions that are within the scope of other GAAP and did not result in significant changes in the subsequent events reported by the Company. SFAS No. 165 became effective for interim or annual periods ending after June 15, 2009 and did not impact the Company’s financial statements. The Company evaluated for subsequent events through the issuance date of the Company’s financial statements. No recognized or non-recognized subsequent events were noted except as described below in Note 11.
 
Note 3 – Restricted Cash
 
The Company has agreements with organizations that process credit card transactions arising from purchases of products by customers of the Company. Credit card processors have financial risk associated with the products and services purchased because the processor generally forwards the cash related to the purchase to the Company soon after the purchase is completed. The organization that processes MasterCard/Visa transactions allows the credit card processor to create and maintain a reserve account that is funded by retaining cash that it otherwise would deliver to the Company (i.e., “restricted cash”). The current agreement requires a 20% reserve or holdback on each sale for a period of six months.

Note 4 – Foreign Currency

All of the Company’s foreign subsidiaries designate the Euro as their functional currency. As of March 31, 2010, the total amount of cash held by foreign subsidiaries was $3.5 million and, of that amount, $1.8 million was maintained or invested in Euros.

Note 5 – Inventory
Inventory consists of the following at the dates indicated:

 
   
March 31,
   
September 30,
 
   
2010
   
2009
 
Merchandise
  $ 433,840     $ 321,095  
Gift Cards
    173,862       80,046  
Total
  $ 607,702     $ 401,141  

Note 6 – Property and Equipment

Equipment at cost consists of office furniture, computer equipment and software. Depreciation expense for the three months and six months ended March 31, 2010 and September 30, 2009 was $7,576 and $19,595, respectively.

   
March 31,
   
September 30,
 
   
2010
   
2009
 
Cost
  $ 2,250,864     $ 140,514  
Accumulated Depreciation
    (54,825 )     (46,375 )
Net
  $ 2,195,859     $ 94,139  
 
 
15

 
 
See also Note 11 Subsequent Events for a description of the May 24, 2010 acquisition of DubLi Properties, LLC and its land purchase agreement.

Note 7 – Commitments and Contingencies
 
The Company has non-cancellable operating leases for office space in Berlin, Germany and Boca Raton, Florida that expire in 2014 and 2020, respectively. Under the lease agreement in Berlin, the Company leases 589.9 square meters of office space and is obligated to pay property taxes, insurance and maintenance costs. The lease agreement in Boca Raton is for 10,476 square feet of office space and the Company is obligated to pay common area maintenance and sales tax.  Total rental expense for the three and six months ended March 31, 2010 was $119,955 and $165,697, respectively.
 
Future minimum rental commitments for non-cancellable operating leases at March 31, 2010, were as follows:

2010
  $ 330,839  
2011
    407,333  
2012
    418,587  
2013
    430,129  
Thereafter
    1,902,025  
Total
  $ 3,488,913  

Note 8 – Loans from Shareholders
 
During 2009, Michael Hansen, the President and Chief Executive Officer of the Company, loaned the Company $99,855.  That loan together with a $116,500 loan from the Company’s former CEO Martin Berns were repaid in the second quarter.

Note 9 – Income Taxes
 
The provision (benefit) for income taxes from continuing operations consisted of the following:

   
March 31,
2010
   
September 30, 2009
 
             
Current tax benefit:
           
Federal
  $ -     $ -  
State
    -       -  
      -       -  
Deferred tax benefit:
               
Federal
    -       -  
    $ -     $ -  
 
 
16

 
 
The tax effect of significant items comprising our net deferred tax assets as of March 31, 2010 and September 30 2009 are as follows:

   
March 31,
 2010
   
September 30, 2009
 
             
Deferred tax assets:
           
Stock options
  $ 248,009     $ 90,535  
Federal and state net operating loss
  carryforwards
    1,995,278       1,738,948  
Foreign net operating loss carryforwards
    371,326       109,157  
Other
    55,346       526  
Gross deferred tax assets
    2,669,959       1,939,166  
Less: valuation allowance
    (2,546,601 )     (1,939,166 )
Net deferred tax assets
    123,358       -  
Deferred tax liabilities
    (123,358 )     -  
Net deferred taxes
  $ -     $ -  

At March 31, 2010, the Company had $5,302,362 of net operating loss carryforwards for US federal income tax purposes that expire beginning in 2025.  Due to Internal Revenue Code Section 382 limitations related to the change in ownership of the Company, the utilization of pre-acquisition net operating losses is limited on an annual basis.  The Company had approximately $3,713,258 of foreign net operating loss carryforwards at March 31, 2010.

In assessing the ability to realize the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the period in which these temporary differences become deductible.  Management considers the projected future taxable income and prudent and feasible tax planning strategies in making this assessment.  As of March 31, 2010 and September 30, 2009, valuation allowances of $2,546,601 and $1,939,166 have been recorded, respectively.

A reconciliation of U.S. statutory federal income tax rate related to pretax income (loss) from continuing operations to the effective tax rate for the quarter ended March 31, 2010 and the year ended September 30 is as follows:

   
March 31,
 2010
   
September 30, 2009
 
             
Statutory rate
    35 %     -35 %
Permanent difference
    7 %     0 %
Effect of foreign earnings
    -72 %        
State income taxes, net of federal benefit
    1 %     0 %
Valuation allowance
    27 %     35 %
Other
    2 %        
      0 %     0 %

Under ASC 740, an entity may only recognize or continue to recognize tax positions that meet a more likely than not threshold.  In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions.  The Company assesses its income tax positions and records tax benefits for all years subject to examination based on management's evaluation of the facts, circumstances and information available at the reporting date.  For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company has recognized the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a  taxing authority that has full knowledge of all relevant information.  For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Company's financial statements.  Management believes that the Company has not taken any material tax positions that would be deemed to be uncertain, therefore the Company has not established a liability for uncertain tax positions for the years ended September 30, 2010 and 2009.
 
MediaNet Group Technologies Inc. and its subsidiaries file income tax returns in the U.S. federal jurisdiction and Germany. MediaNet Group Technologies Inc. and each of its subsidiaries file separate income tax returns.
 
 
17

 
 
Note 10 – Stock and Equity
 
Common Stock
 
The Company had authorized 50,000,000 shares of Common Stock, par value $.001 per share, at March 31, 2010 and September 30, 2009, respectively. At September 30, 2009, the Company had 27,843,552 shares of Common stock outstanding. At March 31, 2010 the Company had 28,621,680 shares of Common Stock outstanding. 

Preferred Stock
 
The Company had authorized 5,000,000 shares of Preferred Stock, par value $0.01 per share, at March 31, 2010 and September 30, 2009, respectively. As of September 30, 2009, there were 0 shares of Preferred Stock outstanding.  As of March 31, 2010, there were 5,000,000 shares of Preferred Stock outstanding, all of which were designated as “Series A Convertible Preferred Stock” (the “Series A Preferred Stock”).

On October 16, 2009, the Company filed a Certificate of Designation for the Series A Preferred Stock pursuant to which the Company, at the direction of its Board of Directors, designated the rights and preferences of all 5,000,000 authorized shares of Preferred Stock. The Certificate of Designation was subsequently amended on December 24, 2009 and May 24, 2010 to adjust the Conversion Ratio (defined below).

Under the Certificate of Designation in effect at March 31, 2010, the Series A Preferred Stock is automatically convertible into shares of the Common Stock at the conversion ratio of 54.7229736 shares of Common Stock for each share of the Series A Preferred Stock (the “Conversion Ratio”) in the event the shareholders approve an increase in the number of authorized shares of Common Stock to not less than five hundred million.  The holders of the Series A Preferred Stock are not entitled to any dividend preference but are entitled to participate pari passu in dividends declared with respect to the Common Stock as if the Series A Preferred Stock was converted in Common Stock at the Conversion Ratio.  Similarly, the holders of the Series A Preferred Stock are not entitled to any liquidation preference but, in the event of any liquidation, dissolution or winding up of the Company, the outstanding shares of Series A Preferred Stock shall be deemed converted into shares of Common Stock at the Conversion Ratio and shall participate pari passu in the distribution of liquidation proceeds.  Holders of the Series A Preferred Stock are entitled to vote on matters presented to the holders of Common Stock as if the Series A Preferred Stock was converted into the Common Stock at the Conversion Ratio.  Except as provided by Nevada law, holders of Series A Preferred Stock vote together with the holders of Common Stock as a single class. 

As more fully described in Note 12, Subsequent Events, on May 24, 2010, the Company amended the Certificate of Designation for the Series A Preferred Stock to increase the Conversion Ratio from 54.7229736 to 55.514574.

The Company does not have reserved and available out of its authorized but unissued shares of Common Stock the number of shares of common stock that shall be sufficient to effect the conversion of all outstanding shares of Series A Preferred Stock. The Company’s shareholders have not yet effectively approved an increase in the Company’s authorized shares of Common Stock to five hundred million (500,000,000) shares. These financial statements for the three and six month periods ended March 31, 2010 have been prepared using the Conversion Ratio in effect as of March 31, 2010 (54.7229736 shares of Common Stock for each share of Series A Preferred Stock).
 
Change in control
 
On October 19, 2009, there was a change in the effective control of the Company. On that date, pursuant to the Merger Agreement (the “Merger Agreement”), dated as of August 10, 2009, and subsequently amended on September 25, 2009, among the Company, the Company’s then subsidiary MediaNet Merger Sub, Inc., a Nevada corporation, and CG Holdings Limited, the Company acquired all of the issued and outstanding shares of CG for 5,000,000 shares of the Company’s Series A Preferred Stock (the “Merger”). Holders of the Series A Preferred Stock are entitled to vote on matters presented to the holders of Common Stock as if the Series A Preferred Stock was converted into the Common Stock at the Conversion Ratio.  In addition, the Series A Preferred Stock will automatically convert into shares of the Common Stock at the Conversion Ratio in the event the shareholders approve an increase in the number of authorized shares of Common Stock to not less than five hundred million.  Accordingly, Zen Holding Group Limited (“Zen”), the sole record holder of CG owns approximately 88% of the voting power of the Company.  Michael Hansen, the President and Chief Executive Officer of the Company, and Michel Saouma, who is neither a director nor executive officer of the Company, indirectly share the right to vote and make investment decisions with respect to the shares held by Zen.
 
 
18

 
 
In addition, as a condition to the Merger, the Company agreed to appoint:

 
·
Michael Hansen as a director and as President and Chief Executive Officer of the Company;
 
 
·
Kent Holmstoel as Chairman of the Board and Chief Operating Officer of the Company; and
 
 
·
Andreas Kusche as a director and as General Counsel of the Company.
 
In connection with the Merger, all of the persons serving as directors of the Company as of October 19, 2009, other than Mr. Martin Berns, resigned as of such date. On October 29, 2009, the Company appointed Mr. Hansen as President and Chief Executive Officer, Mr. Holmstoel as Chief Operating Officer and Mr. Kusche as General Counsel of the Company.  Also on such date, Steven Adelstein was appointed to the Board by Mr. Berns, who was then the sole remaining Board member. On February 23, 2010, Mr. Adelstein resigned and was replaced by Andreas Kusche. The appointment of Messrs. Hansen and Holmstoel is expected to be effective upon our compliance with Securities and Exchange Commission Rule 14f-1, which requires us to distribute certain information regarding the proposed directors.  We are seeking to circulate such information as part of a Schedule 14C previously filed with the Securities and Exchange Commission and in the process of being amended.
 
Note 11 – Warrants and Options
 
As of September 30, 2009 and March 31, 2010, the Company had outstanding warrants to purchase up to 3,058,000 and 2,219,750 shares of Common Stock, respectively. These securities give the holder the right to purchase shares of the Common Stock in accordance with the terms of the instrument.
 
   
Warrants
 
Balance, September 30, 2009
    3,098,000  
Exercised
    (878,250 )
Balance, March 31, 2010
    2,219,750  
 
The following table summarizes information with respect to the above referenced warrants outstanding at March 31, 2010 which have expiration dates ranging from June 2010 to February 2011:
 
   
Exercise Price
 
Number 
Outstanding
 
Weighted
Average
Exercise Price
 
Weighted
Average
Life Years
                     
Warrants
 
 
$0.25— $.55
 
2,219,750
 
$
0.43
 
1.0
 
Note 12 – Subsequent Events

Currency Translation Effects

Subsequent to the balance sheet date the exchange rate between the EURO and the US dollar decreased by approximately 11%.  These recent changes would increase the currency translation adjustment and decrease comprehensive income and current assets by approximately $190,000.
 
 
19

 
 
The Merger and Merger Related Transactions
 
Pursuant to the Merger Agreement, the Company acquired on October 19, 2009 all of the outstanding shares of CG in exchange for the issuance to CG’s shareholders of 5,000,000 shares of the Series A Preferred Stock.  The agreement provides that the Series A Preferred Stock will be automatically converted into Common Stock of at such time as the Company’s Articles of Incorporation are amended to increase the number of authorized shares of Common Stock to 500,000,000 shares.  Assuming all of the shares of Series A Preferred Stock were converted into Common Stock as of October 19, 2009, the former record holder of CG, Zen Holding Group Limited (“Zen”), would have become the record holder of approximately 88% of the then issued and outstanding Common Stock, on a fully diluted basis.

The Company and CG originally contemplated that Zen would receive Common Stock upon consummation of the Merger and the Merger would be completed in the first quarter of 2010 in order to:

-            provide the Company sufficient time to prepare a complex proxy statement and hold a shareholder meeting to consider approval of the Merger Agreement and an amendment to the Company’s articles of incorporation to increase the number of authorized shares of common stock from 50 million to 500 million shares; and

-           provide the beneficial owners of CG adequate time to contribute and/or transfer a number of entities or properties to CG.

For instance, upon completion of the merger the Company expected that CG would own directly or indirectly all of the following subsidiaries or assets:

-           DUBLICOM LIMITED (“DUBLICOM”), a Cyprus limited company, which runs DubLi’s auction websites;

-           Lenox Resources, LLC, a Delaware limited liability company, that holds DubLi’s intellectual property;

-           DUBLI NETWORK LIMITED (“DUBLI NETWORK”), a British Virgin Islands limited company, that operates DubLi’s global network with its business associates;

-           Lenox Logistik und Service GmbH (“Lenox Logistik”), a German corporation, serves as the product purchasing agent of DUBLICOM for products sold to customers outside of North America, Australia and New Zealand. Lenox Logistik also serves as an outsourced service provider that employs persons who are collectively responsible for DubLi’s administrative, accounting, marketing and purchasing activities.

-           DubLi Logistics, LLC, a Delaware limited liability company (“DubLi Logistics”), serves exclusively as the product purchasing agent of DUBLICOM for products sold to customers in North America (United States, Mexico, Puerto Rico, Canada), Australia and New Zealand;

-           certain rights to real estate in the Cayman Islands (the “Cayman Property Rights”) now held by DubLi Properties, LLC, a Delaware limited liability corporation.

In compliance with Generally Accepted Accounting Principles, the Company also expected to include in its consolidated financial statements DubLi.com, LLC, a Delaware limited liability company that was the holding company for two subsidiaries that have since discontinued operations: DubLi.com GmbH, a German corporation, and DubLi Network, LLC, a Delaware limited liability company.
 
 
20

 
 
In early September 2009, the Company and CG were advised by legal counsel that the merger could be effected sooner than previously anticipated if, in lieu of Common Stock, Zen received the Series A Preferred Stock, which was later converted into Common Stock and distributed to the beneficial holders of Zen. Accordingly, on October 19, 2009, the Merger was consummated and Zen was issued the Series A Preferred Stock.

Completed Post-Merger Adjustments

After completing the Merger, the Company determined that certain of its expectations with respect to the Merger had not been met.  In particular, upon completion of the Merger on or about the targeted completion date of March 31, 2010, the Company expected that: it would (i) directly or indirectly hold 100% of the equity interests of DubLi Logistics; (ii) directly or indirectly hold certain real estate rights now held by DubLi Properties LLC; and (iii) certain investors in DubLi.com, LLC would become shareholders in the Company.

As a result of the acceleration of the Merger closing and the substantial amount of work required to complete the Merger and the related SEC disclosure documents, Mr. Hansen’s oral pledge to, prior to the Merger, transfer his 100% ownership interest in DubLi Logistics to CG was not evidenced by definitive transfer documents until May 24, 2010. Similarly, Mr. Hansen’s oral pledge to contribute his 100% indirect ownership interest in the Cayman Property Rights (now owned by DubLi Properties, LLC) to the Company in support of DubLi’s marketing programs was not evidenced by definitive transfer documents until May 24, 2010.

As of May 24, 2010, the Company has acquired all of the equity interests in DubLi Logistics and DubLi Properties LLC that the Company expected it would own.

DubLi Logistics - Purchasing Agent of DUBLICOM

 
DubLi Logistics was identified as one of the consolidated subsidiaries of the Company in Amendment No. 1 to the Company’s Form 8-K filed with the SEC on February 4, 2010 (the “Form 8-K”) and the Company’s Form 10-Q for the quarter ended December 31, 2009 (the “Form 10-Q”) based upon DubLi Logistics’ historical and current operation as an affiliated, profitless, product purchasing agent of DUBLICOM.  DubLi Logistics is operated exclusively by employees of Lenox Logistik.

DubLi Properties - Property Orally Pledged to DubLi

DubLi Properties, LLC was contributed to the Company by Mr. Hansen on May 24, 2010 in satisfaction of Mr. Hansen’s oral pledge to contribute the Cayman Property Rights to the Company.  The Cayman Property Rights, which had a book value of $2,219,138 as of March 31, 2010, were acquired by DubLi Properties, LLC in December 2009 in exchange for 34 parcels of real property, $43,381 of cash and an agreement by DubLi Properties LLC to make an additional $824,244 of payments.  The primary purpose of the Cayman Property Rights, which consists of a purchase deed with respect to 15 lots in the Cayman Islands, is to reward DubLi business associates upon completion of certain performance objectives.

DubLi.com, LLC - Discontinued Businesses

The results of operations and assets and liabilities of DubLi.com, LLC’s subsidiaries were also included in the Company’s consolidated results of operations as reported in the Form 8-K and Form 10-Q based upon their common ownership and historical relationship to CG and its other consolidated subsidiaries. DubLi.com, LLC, which is a holding company, has never directly operated a business and its subsidiaries were sold or their businesses were discontinued in the second quarter of 2009.
 
 
21

 
 
The Company and Mr. Hansen had previously expected that the investors in DubLi.com, LLC (the “DubLi.com Investors”) would receive from Zen certain shares of Common Stock.  With the acceleration of the Merger closing and Merger restructuring, the DubLi.com Investors were expected to receive from Zen 62,679,116 shares of Common Stock upon the conversion of the Series A Preferred Stock to Common Stock.   Since Zen has not transferred and does not intend to transfer Common Stock to the DubLi.com Investors as previously anticipated, the Company and Zen entered into an agreement, dated May 24, 2010 (the “Post-Merger Agreement”), pursuant to which Zen has returned to the Company 1,129,057 shares of Preferred Stock, which were otherwise convertible into 62,679,116 shares of Common Stock.

Pursuant to the Post-Merger Agreement, Zen has also returned to the Company 12,876 shares of Series A Preferred Stock which were convertible into 714,817 shares of Common Stock (the “Lenox Shares”).  Since Zen had not distributed the Lenox Shares to various employees of Lenox, Zen returned the shares to the Company for future use in the Company’s employee benefit plans.

Accordingly, as of May 24, 2010, the Company had 3,858,067 and 28,621,680 issued and outstanding shares of Series A Preferred Stock and Common Stock, respectively.

The following table sets forth the beneficial ownership of the Common Stock and the Preferred Stock as of May 24, 2010 for each of the Company’s greater than 5% shareholders, directors, named executive officers and by all of the Company’s directors and executive officers as a group.  For purposes of this table, beneficial ownership is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, which rule focuses on the power to vote shares or make investment decisions with respect to such shares, potentially irrespective of any pecuniary interest in such shares.  The information as to the securities beneficially owned by Zen, Mr. Hansen and Mr. Saouma are based upon a Schedule 13D filed on June 24, 2010.

Title of Class
 
Name of Beneficial Owner
 
Amount and 
Nature of 
Beneficial
Ownership (1)
   
Percentage
 Of Class
 Owned (2)
 
Series A Convertible Preferred Stock
 
Zen Holding Group Limited
(3)   3,858,067   (4)   100 %
   
Michael B. Hansen
(5)   3,858,067   (4)   100 %
   
Michel Saouma
(6)   3,858,067   (4)   100 %
                     
Common Stock
 
Zen Holding Group Limited
    214,178,946   (4), (7)   88.2 %
   
Michael B. Hansen**
    214,178,946   (4), (7)   88.2 %
   
Michel Saouma
    214,178,946   (4), (7)   88.2 %
   
Joseph Saouma
(8)     (9)   *  
   
Martin A. Berns**
(10)   5,907,511   (11)   20.6 %
   
Kent L. Holmstoel**
(12)          
   
Andreas Kusche**
(13)          
   
Alfred Fernandez**
(14)   345,000   (15)   1.4 %
   
Directors and Executive Officers as a Group
    220,496,457       90.8 %
 
*           Indicates less than 1% of outstanding shares beneficially owned.
**         Serves as an executive officer or director of the Company as of May 24, 2010.
 
 
22

 
 
(1)           A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from May 24, 2010 upon exercise of options and warrants and upon conversion of convertible securities.  The Series A Preferred Stock is automatically convertible into shares of Common Stock upon our amendment of our Articles of Incorporation to increase the authorized number of shares of Common Stock to 500,000,000 (the “Articles Amendment”).  For purposes of this table, we have assumed that the Articles Amendment will be approved by our shareholders and filed with the Nevada Secretary of State within 60 days of May 24, 2010 and, accordingly, that the holders of the Series A Preferred Stock beneficially own the shares of Common Stock into which the shares of Series A Preferred Stock are convertible. Each beneficial owner's percentage ownership is determined by assuming that options, warrants and convertible securities that are held by such person (but not those held by any other person) and that are exercisable or convertible within 60 days from May 24, 2010 have been exercised or converted.

(2)           Applicable percentage ownership is based on 3,858,067 shares of Series A Preferred Stock and 28,621,680 shares of Common Stock outstanding as of May 24, 2010.

(3)           Zen Holding Group Limited’s (“Zen”) address is 197 Main Street, Road Town, Tortola, British Virgin Islands.

(4)           All of the outstanding shares of Preferred Stock are held of record by Zen.  Mr. Hansen and Mr. Saouma have the indirect shared right to vote and make investment decisions with respect to these shares held by Zen pursuant to an oral agreement.  Mr. Hansen and Mr. Souma have a 24% and 2% pecuniary interest, respectively, in Zen’s assets as of May 24, 2010 and, accordingly, claim a 21.6% and 1.8% pecuniary interest, respectively, in the outstanding shares of our Common Stock as of May 24, 2010 (assuming conversion of the Series A Preferred Stock).  Each of Mr. Hansen and Mr. Saouma disclaim a pecuniary interest in any other shares of Common Stock.  The figures provided do not include the 1,141,933 shares of Series A Preferred Stock returned by Zen to the Company and otherwise representing a 20.70 % beneficial interest in the Company.

(5)           Mr. Hansen’s address is The Palm Jumeirah, P.O. Box 283612, Dubai, U.A.E.

(6)           Mr. Michel Saouma’s address is Amine Gemayelstreet 226, Beirut, Achrafieh, Lebanon.

(7)           Includes 214,178,946 shares issuable upon the conversion of the Series A Preferred Stock at the conversion ratio of 55.514574 shares of Common Stock for each share of Series A Preferred Stock.

(8)           Mr. Joseph Saouma’s address is Amine Gemayelstreet 226, Beirut, Achrafieh, Lebanon.  Mr. Joseph Saouma is the father of Mr. Michel Saouma.

(9)           Although Mr. Joseph Saouma does not beneficially own any shares of Series A Preferred Stock or Common Stock of the Company, he has a 21.39% pecuniary interest in Zen’s assets as of May 24, 2010 and, accordingly, claims a 19.39% pecuniary interest in the outstanding shares of our Common Stock as of May 24, 2010 (assuming conversion of the Preferred Stock).  Mr. Joseph Saouma disclaims a pecuniary interest in any other shares of Common Stock.

(10)           Mr. Martin A. Bern’s address is 2936 Via Napoli, Deerfield Beach, FL 33442.

(11)           Assuming that the Series A Preferred Stock was converted to Common Stock as of May 24, 2010, Mr. Berns’ percentage beneficial ownership would decrease to 2.4%.

(12)           Mr. Kent L. Holmstoel’s address is Urbanización Haza del Algarrobo 32, Carretera de Mijas, 2,2 km, 29639 Mijas Costa, Malaga, Spain.
 
 
23

 

(13)           Mr. Kusche’s address is Wisbyer Stasse 10B, 10439 Berlin, Germany.

(14)           Mr. Alfred Fernandez’s address is 18775 SW 27th Ct., Miramar, Florida 33029

(15)           Assuming that the Series A Preferred Stock was converted to Common Stock as of May 24, 2010, Mr. Fernandez’s percentage beneficial ownership would decrease to less than one percent.

Outstanding Post-Merger Adjustments

Amendment of Certificate of Designation

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and a review of the transfer agent records, it came to the Company’s attention that the number of shares of the Company’s Common Stock outstanding prior to the Merger was understated by a total of 439,878 (the “Additional Common Stock”), comprised of 500,000 shares purchased by a shareholder in July 2007 (although the certificate was not issued until January 2010) offset by an accounting error in connection with the net exercise of warrants involving approximately 60,000 shares.  In light of this understatement, as of May 24, 2010 the Company amended the Certificate of Designation setting forth the terms of the Preferred Stock (the “Adjustment Amendment”).  In the Adjustment Amendment, the Conversion Ratio was increased from 54.7229736 to 55.514574 to permit the holders of the Preferred Stock to maintain their expected percentage ownership after taking into account the Additional Common Stock.

Proposed Two Step Transfer of Common Stock to DubLi.com Beneficiaries and Lenox Beneficiaries

In May 2010 Company announced that:

 
Zen Holding had returned to the Company 1,141,933 shares of Preferred Stock, which were convertible into 63,393,933 shares of Common Stock (the “Loyalty Shares”);
 
 
the Company intended to use 62,679,116 of the  Loyalty Shares to purchase, in a registered tender offer, various outstanding interests in DubLi.com, LLC from persons (the “DubLi.com Beneficiaries”) other than  Mr. Michael Hansen; and
 
 
the Company intended to transfer 714,817 of the Loyalty Shares to various employees (the “Lenox Beneficiaries” and together with the DubLi.com Beneficiaries, the “Beneficiaries”) of Lenox Resources, LLC.
 
The Company has since determined not to seek to acquire interests in DubLi.com, LLC. Nonetheless, the Company would still like to provide the Beneficiaries a significant ownership interest in the Company.
 
Accordingly, the Company anticipates transferring the Loyalty Shares to a trust (the “Trust”) on or about March 28, 2011, (the “Initial Transfer Date”) and, on March 28, 2012 (the “Final Transfer Date”), have the Trust transfer the Loyalty Shares to the Beneficiaries (the “Two Step Transfer”). The Loyalty Shares are expected to be freely transferrable after the Final Transfer Date.
 
The Company believes the Two Step Transfer process is preferable to conducting some form of registered offerings in the United States and numerous other countries due to, among other things, the projected expense and time required to complete registered offerings in numerous jurisdictions.
 
 
24

 
 
Establishment of the Trust and Issuance of the Loyalty Shares

The Two Step Transfer process is governed by the share transfer agreement, dated February 25, 2011 (“Share Transfer Agreement”), a copy of which is filed as Exhibit 10.14 hereto.  The Trust will be established on or before March 28, 2011, and is expected to be administered by Batista Guerra y Asociados, an independent offshore trust company (the “Trustee”), pursuant to the terms and conditions set forth in the trust agreement which has been signed on or before February 25, 2011 (the “Trust Agreement”), a draft of which is filed as Exhibit 10.15 hereto.  The following summary of the Share Transfer Agreement and the Trust Agreement is qualified in its entirety by the actual forms of agreement filed as exhibits hereto and which are hereby incorporated by reference herein.
 
The Company is not required to issue the Loyalty Shares to the Trust until prior satisfaction of the following, among other things: (1) the terms of the Share Transfer Agreement have been publicly disclosed by the Company at least 20 days prior to the issuance of the Loyalty Shares to the Trust; (2) on or prior to the Initial Transfer Date, the Company shall not have received any comments from the SEC or any other comparable foreign or U.S. State regulator with respect to the transactions contemplated by the Share Transfer Agreement (other than comments that are resolved to the satisfaction of the Company, in its sole and absolute discretion); and (3) on or prior to the Initial Transfer Date, the Company shall not have received notice of any demand, claim or a threatened claim with respect to the transactions contemplated by the Share Transfer Agreement (other than comments, demands, claims or threatened claims that are resolved to the satisfaction of the Company, in its sole and absolute discretion).
 
Terms and Conditions of the Trust
 
The Trustee is required to transfer the Loyalty Shares to the Beneficiaries without requiring any payment or other consideration from the Beneficiaries (other than any transfer taxes or tariffs that may be imposed in connection with the transfer).  In order to receive the Loyalty Shares, each Beneficiary will be required to complete execute and return to the Company a Beneficiary Representation Affidavit certifying that the Beneficiary, among other things: (1) has received an information memorandum relating to the transfer of the Loyalty Shares; (2) has had access to such financial information and other information concerning the Company and the Loyalty Shares; and (3) understands and agrees that the Beneficiary is receiving the Loyalty Shares pursuant to Regulation S, Regulation D or another applicable exemption from the registration requirements of the U.S. Securities Act of 1933 (the “Securities Act”).  No Beneficiary shall have any right, title or interest of any kind in the Loyalty Shares until such time, if ever, that the Trustee transfers Loyalty Shares to the subject Beneficiary in accordance with the terms of the Trust.
 
Until the Final Transfer Date, the Trustee has agreed not to, among other things: (1) vote the Loyalty Shares or enter into any form of voting agreement to vote other shares of common stock of the Company or to allow another person to vote the Loyalty Shares; (2) propose nominees to the Company’s board of directors or solicit proxies with respect to election of directors; (3) voluntarily pledge, encumber or in any other way subject the Loyalty Shares to any form of liens or security interests of any kind; (4) incur indebtedness of any kind (5) acquire any additional shares of the Company's common stock; (6) engage in any form of hedging transaction involving the Company's common stock; or (7) take any other action to control or influence the control of the Company.
 
The Company would like to provide the Beneficiaries a significant ownership interest in the Company since:  (i) virtually all of the DubLi.com Beneficiaries are former business associates of DubLi Network, LLC a wholly owned subsidiary of DubLi.com, LLC, and current business associates of DUBLI NETWORK LIMITED, a wholly owned subsidiary of the Company; (ii) virtually all of the Lenox Beneficiaries have been and are currently employees or consultants of the Company, (iii) notwithstanding the financial failure of DubLi.com, LLC, the Company believes that the DubLi Network, LLC business associates assisted the Company build brand awareness for the DubLi.com trade name; and (iv) consistent with many of their expectations, the Company likes the Beneficiaries to have a significant ownership interest in the entity which owns and is further developing the DubLi brand.
 
 
25

 
 
Litigation
 
The Company has historically relied upon two service providers to process credit card transactions arising from purchases of the Company’s services and products.  Disagreements have emerged between the Company and one such service provider, National Merchant Center (“NMC”), as to the permitted amount of reserves, if any, that NMC is eligible to maintain.  On September 22, 2010 certain of the Company’s subsidiaries instructed NMC to return to them all of the cash held in reserve with respect to the Company’s account.  In response to such demand, on November 1, 2010, NMC informed the Company that it was terminating the Company’s merchant account with NMC and holding all of the Company’s funds and deposits for a period of 180 days after the last chargeback (which have averaged less than 1.2% of sales or approximately $63,000 since the account was established in December 2009).
 
On October 27, 2010, DUBLICOM Limited and DubLi Network Limited, both of which are wholly owned subsidiaries of the Company, initiated legal action against NMC in the Circuit Court for the Eleventh Judicial Circuit in and for Miami-Dade County, Florida (Case No. 10-57829 CA 15) to seek recovery of approximately $2,162,000 of reserves held at the direction NMC plus various other awards, costs and expenses.  On December 21, 2010, NMC removed this case to the United States District Court (the “Court”) for the Southern District of Florida (Case No. 10-24563-Civ-Graham). DUBLICOM Limited and DubLi Network Limited (collectively, the “Subsidiaries”) allege that NMC committed civil theft and conversion by depriving the Subsidiaries of the use of the funds by appropriating the funds to NMC’s own use.  NMC’s legal counsel has since informed the Company that NMC is in bankruptcy, the subject funds are being held in escrow in California by a third party in a bank account and such funds are not involved in the NMC bankruptcy case.
 
On January 11, 2011, NMC filed a motion to dismiss the case for improper venue and failure to state any adequate claims.  In addition, NMC moved the court to transfer the case to the U.S. District Court in the Central District of California (the “California Court”) due to improper venue.  On March 14, 2011, the Court issued an order granting NMC’s request to transfer the case to the California Court, but denied NMC’s motion to dismiss the case for improper venue and the failure to state a claim.  In light of the Court’s decision, the Subsidiaries are currently reviewing their options, but they will continue to aggressively pursue legal action against NMC for the purpose of recovering the funds.
 
On February 9, 2011, NMC filed suit against the Company in the Superior Court of the State of California (Case Number: 30-2011-00449062-CU-BC-CJC) seeking to recover approximately $706,000.  NMC alleges that the Company breached the agreement between NMC and the Company by (i) failing to abide by the provision that requires that NMC be the exclusive credit card processing company for the Company between March 2010 and February 2013 and (ii) representing that the Company’s website is www.DubLi.com and that the Company does business as “DubLi.com.”  NMC claims to have terminated the agreement due to the Company’s alleged breach and that through the date of termination it had provided approximately $706,000 worth of services to the Company.

On January 28, 2011, the Company filed suit against Giant Equity, Inc. in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida (Case No. 11-01537 CA 21) seeking damages of $250,000 plus interest.  The Company’s claims arise from a $250,000 payment made by the Company to Giant Equity, Inc. in connection with a "Deal Memorandum" entered into by the parties on January 29, 2010.  The Company alleges fraudulent inducement, breach of contract, violation of Florida Statutes Chapter 501 et seq. (the Florida Deceptive and Unfair Trade Practices Act), civil theft and conversion.
 
 
26

 
 
Line of Credit

During 2010, Michael Hansen advanced the Company $399,356 for working capital purposes.  The loan is evidenced by an unsecured note dated August 22, 2010, payable by the Company to Mr. Hansen in the amount referenced above.  The note is interest free and payable upon demand of Michael Hansen made after August 21, 2011. During the fourth quarter of 2009, Mr. Hansen advanced an additional $441,528 to the Company without interest or repayment terms, which advance increased the total debt owed to Mr. Hansen to $840,884 at September 30, 2010. Subsequent to September 30, 2010, Mr. Hansen advanced the Company an additional $426,069 resulting in a total debt of $1,266,953 as of March 25, 2011, the date upon which the Company and Mr. Hansen entered into $5 million Promissory Grid Note (“Grid Note”). The amount of this Grid Note equals an existing outstanding balance of $1,266,953 now owed to Mr. Hansen plus any new borrowings under the Grid Note up to an aggregate of $5 million at any given time.  This Grid Note is issued in replacement of the Promissory Note dated August 23, 2010 in the principal amount of $399,356.  The Grid Note has a term of one year; bears interest at 6% per annum accruing from the date of the Grid Note and is guaranteed by DubLi Properties, LLC and secured by a pledge of the Cayman Property Rights, which consists of a purchase deed with respect to 15 lots in the Cayman Islands.

Note 13 – Discontinued Operations
 
In May 2009, the Company determined it was in the best long-term interest of the Company to discontinue the operations of Dubli.com GMBH., a wholly-owned subsidiary, and put the assets and business up for sale. The decision to sell this wholly owned subsidiary was primarily influenced by management’s decision to concentrate its efforts on its wholly owned subsidiary, Dubli Network.
 
The Company recognized a net loss of $1,980,285 during the year ended September 30, 2009 on the disposal of the subsidiary and reported in the Consolidated Statements of Operations and Cash Flows within the caption, “discontinued operations”.
 
Note 14 - Restatement of Previously Issued Financial Statements
 
On December 16, 2010, the Board of Directors of the Company determined that the unaudited consolidated financial statements for the three and six months ended March 31, 2010, should be restated as a result of material misstatements.  The determination to restate the unaudited consolidated financial statements was made in connection with management’s assessment of accounting errors it discovered in connection with the preparation of the audited consolidated financial statements for the year ended September 30, 2010.

The Company has restated its balance sheet as of March 31, 2010 and its statements of operations, shareholders’ equity and cash flows for the three and six months then ended to correct errors in its accounting.  Certain reclassifications to conform to the presentations used in fiscal 2010 have also been made to prior quarter's consolidated financial statements, none of which had any effect on previously reported net income or loss, or related per share amounts, of any period.
 
The descriptions of the error corrections and the effects of the restatements of the March 31, 2010 financial statements are as follows:

 
(1)
adjust cash for currency transaction losses not previously recorded;
 
(2)
reclassify deferred expenses previously netted to deferred revenue;
 
 
27

 
 
 
(3)
reclassify cash previously reported as a deposit;
 
(4)
adjust commissions payable for currency transaction losses not previously recorded;
 
(5)
record liability for unearned subscription revenue not previously recorded;
 
(6)
eliminate intercompany transactions not previously eliminated;
 
(7)
adjust for costs erroneously recorded in 2010; and
 
(8)
correct 2010 tax provision.

As a result, on December 16, 2010, after discussion with the Company’s independent registered public accounting firm, the Company’s Board of Directors determined that the previously issued financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009 and in its Forms 10-Q for the periods ended December 31, 2009, March 31, 2010 and June 30, 2010 should not be relied upon.  The Company simultaneously herewith is filing amendments to its Quarterly Reports on Form 10-Q for the quarters ended December 31, 2009, March 31, 2010 and June 30, 2010 to reflect these restatements. The Company restated its financial statements for the year ended September 30, 2009 concurrently with the filing of its Annual Report for the year ended September 30, 2010.

The effects of the restatement adjustments on the consolidated financial statements are as follows:

Balance Sheet
 
March 31, 2010
   
Adjust
   
Restated
 
Assets
                 
Current Assets
                 
Cash and cash equivalents
  $ 2,162,100     $ 17,787     $ 2,179,887  
Restricted cash
    1,463,491       262,449       1,725,940  
Accounts receivable, net
    465,978       (325,731 )     140,247  
Inventory
    608,393       (691 )     607,702  
Prepaid Customer Acquisition costs
            4,120,425       4,120,425  
Prepaid expenses and other
    592,570       (44 )     592,526  
Deposits
    255,000       (106,633 )     148,367  
Total current assets
    5,547,532       3,967,562       9,515,094  
                         
Property and equipment, net
    2,196,348       (489 )     2,195,859  
Other Assets
    19,147       (1,299 )     17,848  
Total Assets
  $ 7,763,027     $ 3,965,774     $ 11,728,801  
                         
Liabilities and Stockholders’ Deficit
                       
Current Liabilities
                       
Accounts payable
  $ 118,363     $ 1,133     $ 119,496  
Accrued liabilities
    298,276       (1,236 )     297,040  
Accrued incentives
    300,000       (217 )     299,783  
Loyalty points payable
    264,268       -       264,268  
Commissions payable
    1,320,348       234,691       1,555,039  
Income taxes payable
    1,110,755       (1,110,755 )     -  
Customer deposits
    81,892       (313 )     81,579  
Deferred revenue Credits
    3,708,029       4,464,519       8,172,548  
Deferred revenue Fees
    -       827,539       827,539  
Accrued interest - related party
    6,692       -       6,692  
Note Payable-related party
    -       (32 )     (32 )
Total current liabilities
    7,208,623       4,415,329       11,623,952  
                         
Stockholders’ deficit
                       
Preferred Stock - $.01 par value 5,000,000 shares authorized, issued and outstanding
    50,000               50,000  
Common stock - $.001 par value 50,000,000 shares authorized, 28,621,380 outstanding
    28,621       -       28,621  
Additional paid-in capital
    666,967       (137 )     666,830  
Accumulated other comprehensive (loss)
    (101,480 )     (406,844 )     (508,324 )
Accumulated deficit
    (89,704 )     (42,574 )     (132,278 )
Total stockholders’ equity (deficit)
    554,404       (449,554 )     104,850  
Total liabilities and stockholders’ equity
  $ 7,763,027     $ 3,965,774     $ 11,728,801  
 
 
28

 
 
Statements 
of
Operations
 
Three Months
   
Six Months
 
   
March 31,
 2010
   
Adjust
   
Restated
   
March 31, 
2010
   
Adjust
   
Restated
 
Revenues
  $ 7,030,213     $ (698,084 )   $ 6,332,129     $ 14,520,401       (3,904,337 )   $ 10,616,064  
Direct Cost of revenues
    4,364,647       (818,095 )     3,546,552       9,422,196       (2,661,280 )     6,760,916  
Gross Profit
    2,665,566       120,011       2,785,577       5,098,205       (1,243,057 )     3,855,148  
Operating expenses
    1,392,484       137,196       1,529,680       2,857,758       (720,338 )     2,137,420  
Income (loss) from operations
    1,273,082       (17,185 )     1,255,897       2,240,447       (522,719 )     1,717,728  
Interest income (expense) net
    (5,506 )     (6 )     (5,512 )     (7,001 )     (137 )     (7,138 )
Income (loss) before income taxes
    1,267,576       (17,191 )     1,250,385       2,233,446       (522,856 )     1,710,590  
Provision for income taxes
    430,976       (430,976 )     -       939,976       (939,976 )     -  
Net income (loss) from operations
    836,600       413,785       1,250,385       1,293,470       417,120       1,710,590  
Foreign currency translation loss
    (40,426 )     (355,565 )     (395,991 )     (87,303 )     (325,006 )     (412,309 )
Comprehensive income
  $ 796,174     $ 58,220     $ 854,394     $ 1,206,167     $ 92,114     $ 1,298,281  
Earnings (loss) per share:
            -                       -          
Basic
  $ 0.03     $ 0.01     $ 0.04     $ 0.05     $ 0.01     $ 0.06  
Fully Diluted
  $ 0.00     $ 0.00     $ 0.00     $ 0.00     $ 0.01     $ 0.01  
Weighted average number of shares outstanding :
                                               
Basic
    28,484,206       -       28,484,206       28,484,206       -       28,484,206  
Fully Diluted
    339,037,717       -       339,037,717       277,167,462       -       277,167,462  
 
 
29

 
 
   
Three Months
   
Six Months
 
   
March 31, 
2009
   
Adjust
   
Restated
   
March 31,
 2009
   
Adjust
   
Restated
 
Revenues
  $ 4,999,126     $ (505,664 )   $ 4,493,462     $ 8,187,410     $ (2,104,041 )   $ 6,083,369  
Direct Cost of revenues
    3,040,577       (295,723 )     2,744,854       5,257,094       (1,451,932 )     3,805,162  
Gross Profit
    1,958,549       (209,941 )     1,748,608       2,930,316       (652,109 )     2,278,207  
Operating Expenses
    1,353,720       152,819       1,506,539       2,439,583       (539,910 )     1,899,673  
Income (loss) from operations
    604,829       (362,760 )     242,069       490,733       (112,199 )     378,534  
Interest income (expense) net
    (3,437 )     (170 )     (3,607 )     (3,437 )     (170 )     (3,607 )
Income (loss) from continuing operations before income taxes
    601,392       (362,930 )     238,462       487,296       (112,369 )     374,927  
Provision for income taxes
    -       -       -       -       -       -  
Income (loss) from continuing operations
    601,392       (362,930 )     238,462       487,296       (112,369 )     374,927  
Loss from operations of discontinued segment
    -       (591,886 )     (591,886 )     -       (1,232,257 )     (1,232,257 )
Gain from sale of subsidiary
    74,990       -       74,990       74,990       -       74,990  
Net income (loss) from operations
    676,382       (954,816 )     (278,434 )     562,286       (1,344,626 )     (782,340 )
Foreign currency translation (gain) loss
    -       (32,655 )     (32,655 )     -       (47,725 )     (47,725 )
Comprehensive income (loss)
    676,382       (987,471 )     (311,089 )     562,286       (1,392,351 )     (830,065 )
                                                 
Earnings (loss) per share:
                                               
Continuing operations- basic and diluted
  $ 0.03     $ (0.02 )   $ 0.01     $ 0.02     $ (0.01 )   $ 0.02  
Discontinued operations- basic and diluted
  $ 0.03     $ (0.06 )   $ (0.03 )   $ 0.03     $ (0.09 )   $ (0.06 )
Weighted average number of shares outstanding during the period - basic and diluted
    20,674,802       -       20,674,802       20,674,802       -       20,674,802  
 
 
30

 
 
   
Six Months
             
Statements  of Cash Flows
 
March 31,2010
   
Adjust
   
Restated
 
Cash flows from operating activities
                 
Net Income (loss) from operations
  $ 1,293,470     $ 422,250     $ 1,715,720  
Prior period adjustment
            (278,560 )     (278,560 )
Currency
            (16,417 )     (16,417 )
Adjustments :
                       
Depreciation and amortization
    19,595       -       19,595  
(Increase) decrease in assets:
                       
Restricted cash
    (741,261 )     (253,210 )     (994,471 )
Accounts receivable
    (392,980 )     326,613       (66,367 )
Inventory
    (207,252 )     2,209       (205,043 )
Prepaid Customer Acquisition costs
    -       (1,540,629 )     (1,540,629 )
Prepaid expenses
    (465,361 )     -       (465,361 )
Deposits
    (160,930 )     14,034       (146,896 )
Other current assets
    13,075       2,217       15,292  
Increase (decrease) in liabilities:
                       
Accounts payable
    (3,099 )     841       (2,258 )
Accrued liabilities
    (280,747 )     (4,380 )     (285,127 )
Accrued incentives
    (344,292 )     (8,891 )     (353,183 )
Loyalty points payable
    55,243       -       55,243  
Commission payable
    (556,257 )     (33,144 )     (589,401 )
Income tax payable
    822,917       (822,917 )     -  
Customer deposits
    63,544       (681 )     62,863  
Deferred revenue
    1,081,194       2,307,120       3,388,314  
Accrued interest - related party
    6,692       -       6,692  
Note Payable-related party
    (191,355 )     191,355       -  
Net cash provided (used) in operating activities
    12,196       307,810       320,006  
                         
Cash flows from investing activities:
                       
Deposits
                       
Option Agreement
                       
Purchase of software license
    (400,000 )     -       (400,000 )
Purchase of license
    -       -       -  
Purchase fixed assets
    (640,812 )     3,474       (637,338 )
Net cash provided (used) in investing activities
    (1,040,812 )     3,474       (1,037,338 )
                         
Cash flows from financing activities
                       
Proceeds from common shares and warrants
    113,185       -       113,185  
Proceeds note payable-related party
    -       23,761       23,761  
Payments note payable-related party
    -       (216,355 )     (216,355 )
Proceeds from common shares
    578,294       -       578,294  
Net cash provided (used) by financing activities
    691,479       (192,594 )     498,885  
Effect of exchange rate changes on cash
            (135,315 )     (135,315 )
Net increase (decrease) in cash
    (337,137 )     (16,625 )     (353,762 )
Cash at beginning of period
    2,499,237       34,412       2,533,649  
Cash at end of period
  $ 2,162,100     $ 17,787     $ 2,179,887  
                         
Cash paid for interest
  $ 3,671     $ 3,467     $ 7,138  
Cash paid for income taxes
    -       -       -  
Supplemental disclosures of non-cash transactions:
                       
Foreign translation adjustment - comprehensive loss
  $ (87,303 )   $ (325,007 )   $ (412,310 )
Stock issued for Software
    1,337,673       -       1,337,673  
Recapitalization
    6,874,886       -       6,874,886  
 
 
31

 

 

   
Six Months
             
Statements of Cash Flows
 
March 31,2009
   
Adjust
   
Restated
 
Net Income (loss) from continuing operations
  $ 261,314     $ 188,602     $ 449,916  
Net Loss from discontinued operations
    -       (1,232,257 )     (1,232,257 )
Cash flows from operating activities
    261,314       (1,043,655 )     (782,341 )
Adjustments :
                       
Depreciation and amortization
    11,722       -       11,722  
Stock & warrants issued for services
    90,749       6,960       97,709  
(Increase) decrease in assets:
                       
Restricted cash
    1,079,761       (1,904,153 )     (824,392 )
Accounts receivable
    (326,764 )     (262,252 )     (589,016 )
Inventory
    (34,412 )     61,271       26,859  
Prepaid customer acquisition costs
    -       (1,121,708 )     (1,121,708 )
Prepaid expenses
    (13,553 )     8,186       (5,367 )
Increase (decrease) in liabilities:
                       
Accounts payable
    220,104       67,065       287,169  
Accrued liabilities
    101,890       (90,537 )     11,353  
Loyalty points payable
    -       23,670       23,670  
Commission payable
    -       576,084       576,084  
Customer deposits
    1,367       (37,192 )     (35,825 )
Deferred revenue
    16,174       2,155,592       2,171,766  
Accrued interest - related party
    1,519       (1,519 )     -  
Note Payable-related party
    169,500       (81,500 )     88,000  
Net cash provided (used) in operating activities
    1,579,371       (1,643,688 )     (64,317 )
                         
Cash flows from investing activities:
                       
Other current assets
    (837,162 )     837,162       -  
Purchase fixed assets
    (1,058 )     (66,330 )     (67,388 )
Net cash provided (used) in investing activities
    (838,220 )     (770,832 )     (67,388 )
                         
Cash flows from financing activities
                       
Proceeds from warrants
    29,247       (29,247 )     -  
Proceeds note payable-related party
    -       493,003       493,003  
Payments note payable-related party
    -       -       -  
Proceeds from common shares
    165,738       (105,792 )     59,946  
Net cash provided (used) by financing activities
    194,985       357,964       552,949  
Effect of exchange rate changes on cash
            25,374       25,374  
Net increase (decrease) in cash
    936,136       (489,518 )     446,618  
Cash at beginning of period
    1,480,199       (1,400,162 )     80,037  
Cash at end of period
  $ 2,416,335     $ (1,889,680 )   $ 526,655  
                         
Supplemental disclosures of cash flow information:
                       
Cash paid for interest
    1,989       1,618       3,607  
Cash paid for income taxes
    -       -       -  
                         
Supplemental disclosures of non-cash transactions:
                       
Foreign translation adjustment - comprehensive loss
    -       (47,725 )     (47,725 )
 
 
32

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

FORWARD LOOKING STATEMENTS