UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2016

 

OR

 

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

 

For the transition period from _____________to ______________.

 

Commission File Number 0-49801

 

OMINTO, INC.

(Exact name of registrant as specified in its charter)

 

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

 

1515 S. Federal Highway, Suite 307

Boca Raton, FL 33432

(Address of principal executive offices)

 

561-362-2393

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company

(Do not check if a smaller company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐  No ☒

 

The number of shares outstanding of each of the issuer’s classes of stock, as of August 15, 2016 is as follows:

 

Number of shares of Common Stock outstanding: 12,233,472

 

 

 

 
 

 

TABLE OF CONTENTS

 

    Page
PART I: FINANCIAL INFORMATION  
Item 1 Financial Statements (unaudited) 3
  Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and September 30, 2015 3
  Condensed Consolidated Statements of Operations for the three (3), and nine (9) months ended June 30, 2016 and 2015 (unaudited) 4
  Condensed Consolidated Statements of Comprehensive Income (Loss) for the three (3), and nine (9) months ended June 30, 2016 and 2015 (unaudited) 5
  Condensed Consolidated Statements of Cash Flows for the nine (9) months ended June 30, 2016 and 2015 (unaudited) 6
  Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 3 Quantitative and Qualitative Disclosures about Market Risk 26
Item 4 Controls and Procedures 26
     
PART II: OTHER INFORMATION 27
Item 1 Legal Proceedings 27
Item 1A Risk Factors 27
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3 Defaults upon Senior Securities 27
Item 4 Mine Safety Disclosures 27
Item 5 Other Information 27
Item 6 Exhibits 27
     
SIGNATURES 28

 

 2 
 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS

 

Ominto, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   June 30,   September 30, 
   2016   2015 
   (Unaudited)     
ASSETS
CURRENT ASSETS:        
Cash   $1,286,406   $3,531,124 
Restricted cash    1,881,216    1,434,699 
Other receivables and prepaid expenses    1,334,429    480,268 
Deferred costs    2,977,574    4,061,592 
Total Current Assets    7,479,625    9,507,683 
           
Property and Equipment, net    2,121,768    1,550,390 
Other Assets    21,000    - 
TOTAL ASSETS   $9,622,393   $11,058,073 
           
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES:           
Accounts payable   $1,887,681   $1,166,684 
Business associates payable    2,066,952    1,973,216 
Customer deposits    2,578,845    1,948,030 
Other payables and accrued liabilities    3,206,880    2,335,217 
Warrant liability    -    715,575 
Note payable    -    3,301,224 
Deposit for Subscription    1,675,000    - 
Amounts due to related party    246,000    425,242 
Deferred revenue subscriptions    5,510,366    8,233,180 
Deferred advertising revenue    571,578    42,260 
Liability of discontinued operations    26,658    58,857 
Total current liabilities    17,769,960    20,199,485 
           
TOTAL LIABILITIES    17,769,960    20,199,485 
           
COMMITMENTS AND CONTINGENCIES           
           
STOCKHOLDERS' (DEFICIT):           
Preferred stock 25,000,000 shares authorized $.01 par value; 185,000 shares issued and outstanding    1,850    1,850 
Common stock $.001 par value; 14,000,000 shares authorized; 12.2 million and 11.0 million shares issued and outstanding, respectively.    12,235    11,008 
Additional paid-in capital    46,759,748    39,185,136 
Accumulated other comprehensive income (loss)    1,331,261    956,174 
Accumulated deficit    (56,252,661)   (49,295,580)
Total Stockholders' (Deficit)    (8,147,567)   (9,141,412)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT)   $9,622,393   $11,058,073 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

 3 
 

 

Ominto, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations
(Unaudited)

  

   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
Revenue                
Business license fees  $593,981   $1,218,352   $1,997,736   $3,305,784 
Membership subscription fees/commission income   3,267,448    3,495,656    10,989,397    9,074,147 
Advertising and marketing programs   8,577    51,012    28,846    949,884 
Other   119,714    9,776    402,633    21,668 
    3,989,720    4,774,796    13,418,612    13,351,483 
                     
Cost of Revenue   1,734,565    3,102,014    8,641,418    8,738,903 
                     
Gross Margin   2,255,155    1,672,782    4,777,194    4,612,580 
                     
Selling, general and administrative expense   4,201,199    2,989,706    12,016,982    9,265,426 
Loss from Operations   (1,946,044)   (1,316,924)   (7,239,788)   (4,652,846)
                     
Other Income (Expenses)                    
Change in FV of Warrant   -    -    549,656    - 
Interest expense   -    (19,624)   (298,828)   (79,820)
                     
Loss Before Income Taxes   (1,946,044)   (1,336,548)   (6,988,960)   (4,732,666)
                     
Income taxes   -    -    -    - 
                     
Loss from continuing operations   (1,946,044)   (1,336,548)   (6,988,960)   (4,732,666)
Income (loss) from discontinued operations   (30)   136,641    31,879    385,532 
                     
Net (loss)  $(1,946,074)  $(1,199,907)  $(6,957,081)  $(4,347,134)
                     
Loss per share                    
Basic and Diluted                    
- continuing operations  $(0.16)  $(0.15)  $(0.59)  $(0.54)
- discontinued operations  $(0.00)  $0.02   $0.00   $0.04 
                     
Weighted average common shares outstanding                    
Basic and Diluted   12,040,418    8,857,137    11,852,756    8,715,888 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

 4 
 

 

Ominto, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
Consolidated Statement of Comprehensive Loss  2016   2015   2016   2015 
                 
Net Loss   (1,946,074)   (1,199,907)   (6,957,081)   (4,347,134)
Foreign currency translation gain (loss)   516,540    (536,322)   375,087    1,149,329 
Comprehensive loss   (1,429,534)   (1,736,229)   (6,581,994)   (3,197,805)

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

 5 
 

 

Ominto, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(Unaudited)

 

   Nine Months Ended 
   June 30, 
   2016   2015 
CASH FLOW FROM OPERATING ACTIVITIES:        
Loss from continuing operations  $(6,988,960)  $(4,732,666)
Adjustments to reconcile net loss to net cash flows from operating activities:          
Depreciation and amortization   115,854    156,297 
Stock-based compensation   1,797,815    392,990 
Change in fair value of derivative liability   (549,656)   - 
Gain on sale of land   -    (17,321)
Changes in operating assets and liabilities:          
Restricted cash   (446,517)   (363,312)
Other receivables and prepaid expenses   (854,161)   (642,585)
Deferred costs   1,084,018    (2,666,258)
Other assets   (21,035)   45,045 
Accounts Payable   720,997    (1,131,063)
Amounts payable to Business Associates   93,736    257,388 
Customer Rebates   630,815    554,165 
Other payables and accrued liabilities   871,663    576,067 
Amounts due to related parties   (179,242)   (381,893)
Deferred subscription fee revenue   (2,722,813)   6,469,261 
Deferred advertising revenue   529,321    (982,618)
           
NET CASH FLOWS FROM CONTINUING OPERATIONS   (5,918,165)   (2,466,503)
           
Income (loss) from discontinued operations   31,879    385,532 
Net change in assets and liabilities of discontinued operations   (32,199)   (440,072)
Net cash flows from discontinued operations   (320)   (54,540)
NET CASH FLOWS FROM OPERATING ACTIVITIES   (5,918,485)   (2,521,043)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of equipment and software   (683,041)   (43,912)
Proceeds from sale of land   -    1,242,590 
NET CASH FLOWS FROM INVESTING ACTIVITIES:   (683,041)   1,198,678 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from subscription payable   1,675,000    - 
Repayment of note payable - related party   -    (1,000,000)
Repayment of note payable   -    (500,000)
Proceeds from common stock issuances   913,189    2,000,000 
Proceeds from exercise of warrant   250,000    - 
Proceeds from convertible loan   1,400,000    - 
NET CASH FLOWS FROM FINANCING ACTIVITIES   4,238,189    500,000 
           
Effect of exchange rate changes   118,619    1,144,027 
           
NET CHANGE IN CASH AND CASH EQUIVALENTS   (2,244,718)   321,662 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   3,531,124    2,111,812 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $1,286,406   $2,433,474 
           
Supplemental cash flow information:          
Cash paid for interest  $-   $60,196 
Cash paid for income taxes  $-   $- 
Non cash investing and financing activities:          
Conversion of convertible notes to common stock  $5,000,000   $- 
Reclass of derivative liability of warrants to stockholders' equity  $165,919   $- 
Stock issued in lieu of salaries  $227,527   $- 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

 6 
 

 

Ominto, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. The Company

 

On June 26, 2015, the Company changed its name to Ominto, Inc. (“Ominto,” the “Company,” “we,” “our,” or “us”) from DubLi, Inc. We are a global e-commerce company that owns and operates a global online Cash Back (“Cash Back”) shopping website. Our Cash Back shopping platform powers a variety of Cash Back loyalty websites, including the DubLi.com site which we operate for our DubLi Network subsidiary, and our Partner Programs, which are co-branded and white label Cash Back shopping and loyalty websites for third parties (“Partner Programs”). We market VIP membership subscriptions directly to consumers and through Partner Programs and our network marketing subsidiary. The Company is incorporated in the State of Nevada and our principal executive offices are located in Boca Raton, Florida. The Company’s wholly owned operating subsidiaries are:

 

  Dublicom Limited (“DUBLICOM”), a Cyprus limited company, which operates the DubLi.com Cash Back shopping website, and previously operated online auctions that were discontinued as of March 28, 2013;

 

  DubLi Network Limited (“DubLi Network”), a British Virgin Islands limited company, which operates our global network of Business Associates;

 

  DubLi Properties, LLC, a Delaware limited liability company, which holds certain rights to real estate in the Cayman Islands;

 

  DubLi India Private Limited, a Haryana, India company, which operates DubLi Network’s global network of Business Associates in India; and
     
  Ominto India, a New Dehli, India company, which operates Ominto’s Cash Back shopping websites in India.

 

Our e-commerce Cash Back transactions throughout the world are conducted primarily through DubLi.com’s shopping websites. In May 2016, we replaced our previous 13 DubLi.com country malls with our new Ominto.com platform which also offers Cash Back shopping through one global website available in eight languages. We have a large network of independent Business Associates (“BAs”) that sell our VIP membership for our e-commerce Cash Back website. Ominto and our DubLi Network subsidiary currently serve customers in more than 100 countries in local language and currency. Our global Cash Back website offers links to thousands of third party global, online merchants and travel booking sites as well as coupons, discounts and vouchers.

 

Mr. Michael Hansen, CEO and a director of the Company, has a direct ownership of approximately 2.8 million shares of our common stock, par value $0.001 per share (the “Common Stock”) and 185,000 shares of our super voting preferred stock, par value $0.01 per share (the “Super Voting Preferred Stock”) as of June 30, 2016. Each share of our Super Voting Preferred votes as 40 shares of common stock. As a result, Mr. Hansen had the power to cast approximately 56% of the votes that could be cast by our stockholders as of June 30, 2016. Accordingly, he has the power to influence or control the outcome of important corporate decisions or matters submitted to a vote of our stockholders, including, but not limited to, increasing the authorized capital stock of the Company, the dissolution or merger of the Company, sale of all of the Company’s assets or changing the size and composition of the board of directors.

 

Reverse Stock Split

 

On August 15, 2015, our board and a stockholder holding a majority of the stockholder votes approved a reverse stock split of Common Stock at a ratio of 1-for-20 to 1-for-100 with the board of directors having discretion to set the ratio. On November 1, 2015, the board of directors approved a reverse stock split of our common stock at a ratio of 1-for-50 (the “Reverse Split”). We effectuated the Reverse Split on November 4, 2015, and our shares of common stock began trading on a post-Reverse Split basis on November 6, 2015. The par value of our Common Stock and Super Voting Preferred Stock was not adjusted as a result of the Reverse Split. All issued and outstanding Common Stock, options for Common Stock, restricted stock awards, warrants, and convertible debt, and per share amounts have been retroactively adjusted to reflect this Reverse Split for all periods presented. The voting and conversion rights of the Super Voting Preferred have been retroactively adjusted to reflect the Reverse Split for all periods presented.

 

 7 
 

 

Liquidity

 

We have incurred substantial losses from inception through June 30, 2016. We experienced negative net cash flows from our operating activities of approximately $5.9 million and $2.5 million for the nine (9) months ended June 30, 2016 and 2015, respectively. We will require additional financing to meet our working capital and capital expenditures requirements. We can provide no assurance that such additional financing will be available in an amount or on terms acceptable to us. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable to us, we will be unable to execute our business plan and fund operations, which could have a material, adverse effect on our business, financial condition and results of operations.

 

Our financial statements for the fiscal year ended September 30, 2015 were prepared assuming that we will continue as a going concern. We have incurred losses since our inception. We do not have sufficient cash to fund normal operations for the next twelve months without deferring payment on certain current liabilities and raising additional funds. For the nine (9) months ended June 30, 2016 we incurred a loss from continuing operations of approximately $6.9 million and we had negative cash flows from continuing operations of $5.9 million. We had an accumulated deficit for the period from our inception through June 30, 2016 of approximately $56.3 million. As a result, we had a working capital deficit of approximately $10.3 million as of June 30, 2016. These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

The Company’s ability to continue as a going concern is dependent on our ability to raise capital to fund our future operations and working capital requirements and our ability to profitably execute our business plan. Our plans for the long-term return to and continuation as a going concern include financing our future operations through sale of our common stock and/or debt and the eventual profitable operation of our business. The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. If the going concern basis were not appropriate for these financial statements, adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used.

 

We continue to update our product offerings, which places additional demands on future cash flows and may decrease liquidity. Our future liquidity and capital requirements will depend on numerous factors including market acceptance of our future products, revenues generated from our operations, the impact of competitive product offerings, and whether we are successful in acquiring additional customers on a large scale basis through Partner Program clients. We also intend to increase our efforts to attract BAs which we expect will improve sales of our e-commerce product. These efforts will place additional demands on our cash flows and liquidity. We cannot offer any assurance that we will be successful in generating revenues from operations, adequately dealing with competitive pressures, acquiring complementary products, technologies, or businesses, or increasing our marketing efforts. 

 

Because of constraints on our sources of capital and our liquidity needs, we have continued to borrow from Michael Hansen, the Company’s founder, a director, and the Company’s current Chief Executive Officer, to fund our operations. As of June 30, 2016, we owe Mr. Hansen a total of approximately $246,000 in advances to us.

 

 8 
 

 

Beginning in January 2016, we implemented a series of changes to streamline our organization and reduce monthly operating expenses. Our efforts focused on reducing staffing costs, transferring certain functions to lower cost locations, consolidating our operations to fewer locations, and reducing our efforts on activities not related to our core operations. These changes were designed to conserve our resources and allow for continued investment in the completion and launch of our new Ominto.com and its related DubLi.com technology platform. The new platform launched in May 2016. As of the date of this filing it is still too early to tell if the platform will lead to the revenue growth the Company anticipates.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Consolidation

 

The accompanying interim condensed consolidated financial statements are unaudited. These condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) that, in the opinion of management, are necessary to fairly present the Company’s financial position, results of operations and cash flows as of and for the periods presented. The results of operations for these interim periods are not necessarily indicative of the operating results for future periods, including the fiscal year ending September 30, 2016.

 

These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) relating to interim financial statements and in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted in these condensed financial statements pursuant to SEC rules and regulations, although we believe that the disclosures made herein are adequate to make the information not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015.

 

The condensed consolidated financial statements include the accounts of Ominto, Inc. and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of these condensed consolidated financial statements, in conformity with US GAAP requires us to make estimates and assumptions that affected the reported amounts of assets and liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities, at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board, (“FASB”), issued Accounting Standards Update No. 2014-09 Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU 2014-09 is effective for annual periods beginning after December 15, 2017 and shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted as of the effective date. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15 Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASU 2014-15”). ASU 2014-15 requires that for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

 9 
 

 

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (“ASU-2015-03”). ASU 2015-03 requires companies to present debt issuance costs as a direct deduction from the carrying value of that debt liability. ASU 2015-03 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for financial statements that have not been previously issued. Entities would apply the new guidance retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted). The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that lessees recognize right-of-use assets and lease liabilities for any lease classified as either a finance or operating lease that is not considered short-term. The accounting applied by lessors is largely consistent from the existing lease standard. ASU 2016-02 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018. Lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. We have obligations under lease agreements for facilities, which are classified as operating leases under the existing lease standard. We are still evaluating the impact ASU 2016-02 will have on the consolidated results of operations, financial condition, and cash flows.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax consequences and classifications. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. Accordingly, the standard is effective for us on September 1, 2017 and we are currently evaluating the impact that the standard will have on our consolidated financial statements.

 

Foreign Currency

 

Financial statements of foreign subsidiaries operating in other than highly inflationary economies are translated at period-end exchange rates for assets and liabilities and historical exchange rates during the period 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 operating expense. We have no subsidiaries operating in highly inflationary economies.

 

In accordance with Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters, companies with foreign operations or foreign currency transactions are required to prepare the statement of cash flows using the exchange rates in effect at the time of the cash flows. We use an appropriately weighted average exchange rate for the period for translation if the result is substantially the same as if the rates at the dates of the cash flows were used. The condensed consolidated statement of cash flows reports the effect of exchange rate changes on cash balances held in foreign currencies as a separate part of the reconciliation of the change in cash and cash equivalents during the period.

 

Cash and Cash Equivalents

 

We consider all highly liquid instruments with original maturities of three (3) months or less at the date of transaction to be cash equivalents. We maintain our cash in bank deposit accounts in the United States, Cyprus, India, and United Arab Emirates, which at times may exceed the federally insured limits in those countries. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on cash and cash equivalents.

 

Restricted Cash

 

We have agreements with organizations that process our credit card transactions. The credit card processors have financial risk of chargebacks associated with the credit card transactions because the processor generally forwards us the cash proceeds soon after each transaction is completed but before the expiration of the time period in which the purchaser may request a refund. Our agreements with the credit card processors allow them to create and maintain a reserve account by retaining a certain portion of the cash generated from the credit card transactions that would otherwise be delivered to us, herein known as “Restricted Cash”. The reserve requirement with each card processor is set at their respective fixed percentage for all transactions to be held for their respective rolling term period from the date of the transaction.

 

Allowance for Doubtful Accounts

 

Receivables are uncollateralized obligations due under normal trade terms, typically requiring payment within 30 days from invoice date. Receivables are stated at the contractual amount billed, net of an allowance for doubtful accounts, if any. Accounts dated over 90 days old are considered past due. We estimate the allowance based on an analysis of specific accounts, taking into consideration the age of past due accounts and an assessment of the debtors’ ability to pay and payment history. Interest income is not recognized on past due accounts.

 

 10 
 

 

Property and Equipment

 

Property and equipment are recorded at cost. Computers and equipment, computer software, furniture and fixtures are depreciated over their estimated useful life of five (5) years. Leasehold improvements included in furniture and fixtures are amortized on a straight-line basis over the term of the lease. Land is not amortized. The cost of maintenance and repairs of equipment is charged to expense when incurred. When we sell, dispose or retire property and equipment, the related gains or losses are included in operating results.

 

Internal-use Software and Website Development

 

Costs incurred to develop software for internal use are capitalized and amortized over the estimated useful life of the software. Costs related to design or maintenance of internal-use software and website development are expensed as incurred.

 

Impairment of Long-Lived Assets

 

In accordance with ASC 360, Property, Plant and Equipment - Subsequent Measurement (“ASC 360”), we review the carrying value of our long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. We assess 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.

 

Fair Value of Financial Instruments

 

We adopted ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), for measurement and disclosures about the fair value of its financial instruments. ASC 820 establishes a framework for measuring fair value using a three level hierarchy which prioritizes the inputs to valuation techniques used to measure fair value.

 

The book value of our financial instruments consisting of cash, receivables, deferred costs, accounts payable and accrued liabilities approximate their respective fair values because of the short maturity of these instruments. The three levels of fair value hierarchy defined by ASC 820 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; and

 

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.

 

Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter.

 

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Revenue Recognition

 

We recognize revenues in accordance with ASC 605, Revenue Recognition, which requires that four basic criteria be met before revenues 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 judgment regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and cash back to customers, estimated returns and allowances, and other adjustments are recorded in the same period the related revenues are recorded. We defer any revenues that are subject to refund, and for which the product has not been delivered or the service has not been rendered.

 

DubLi Network, a wholly owned subsidiary of the Company, has a global network marketing organization with Business Associate (“BA”) representatives in many countries throughout the world. BAs are responsible for referring new customers and selling the VIP memberships to DubLi Network’s primary product, DubLi.com. Many of these same customers also become BAs themselves. BAs earn commissions on the sales of the products of the customers they have referred directly, and on sales “downline” made by BAs that they also bring into the DubLi Network. DubLi Network also offers various packages to purchase VIP memberships that BAs can use to refer customers and a Partner Program whereby BAs can refer to organizations and corporations who offer the Cash Back shopping website to their own consumer base. Our revenue recognition policies for each of our products and services are as follows: 

 

E-commerce and memberships

 

 

Business license fees – Business Associates pay an initial business license fee and Partner Program participants (excluding not-for-profit organizations) pay a setup fee for the marketing and training services provided by us which enables them to begin their sales of DubLi.com’s products and services. The business license fee or partner setup fee is recognized as revenue ratably over twelve (12) months based upon the historical average of the BA’s useful life.

 

Effective March 2014, our BAs were no longer required to pay a monthly fee to maintain their membership status; these monthly fees were recorded as revenue in the respective period for which they were paid. Partner Program participants continue to pay a monthly maintenance fee which is recorded as revenue in the respective period for which it was paid.

     
 

Membership subscription fees - (i) Effective April 2014, our BAs may purchase our membership subscription products for resale in the form of a qualifying VIP membership or VIP membership packages for BAs or membership packages for DubLi.com’s customers as described under item (ii) below. These membership subscription products have a shelf life of twelve (12) months. Revenue is recognized ratably over a twelve (12) month period when any membership subscription product is activated or immediately upon expiry; (ii) DubLi.com customers who purchase VIP membership package pay an annual subscription fee. The annual subscription fee is recognized ratably over the subscription period.

 

At the end of the fourth quarter of fiscal year 2015, we concluded that we had accumulated a sufficient level of historical data from a large pool of homogenous transactions to allow management to reasonably and objectively determine an estimated unused and expired VIP voucher rate and the pattern of VIP voucher redemptions. Under this method, revenue is recognized and the VIP voucher liability is relieved for unredeemed VIP vouchers in proportion to actual VIP voucher redemptions. We believe this method is appropriate for recognizing revenue on expiration or use, because it better reflects the VIP voucher earnings process.

 

In accordance with Accounting Standards Codification (ASC) Topic 250, “Accounting Changes and Error Corrections,” we concluded that this accounting change represented a change in accounting estimate effected by a change in accounting principle. Accordingly, we included a revision in expected redemptions based on VIP voucher redemption patterns and accounted for the change as a change in estimate utilizing the cumulative catch-up method.

 

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We believe it is appropriate to recognize revenues on this basis in order to more closely match revenue and related costs. We believe that the use of recent historical data is reasonable and appropriate because of the relative stability of the average actual number of VIP membership’s redeemed.

 

  Commission income – We receive varying percentages in commission income earned from merchants participating on our online shopping platform. These commissions are calculated based upon the agreed rates with the participating merchants on all customer’s transactions processed through our online shopping platform and are recognized on an accrual basis based upon data obtained from the merchant. A percentage of the commission income is payable, in the form of Cash Back, to the customer for all purchase transactions. This Cash Back amount due the customer is accrued as a deduction from commission income at the time the commission income is recognized. Commission income owed to the company from merchants is included in other receivables and prepaid expenses.
     
  Advertising and marketing - Revenues for the respective advertising and marketing programs are recognized at a fixed rate per customer allocated to BAs in accordance with the terms and obligations under the programs or upon expiration based upon the following criteria - (i) when the BA became inactive for twelve (12) months and redemption was deemed remote, (ii) when the BAs accepted an exchange under any replacement program, or (iii) when waivers and releases were obtained from the BA.
     
  Other Revenue – Revenues for the monthly service fees charges to the BA’s for managing the accounts of BA’s that have not maintained minimum activity requirements. Revenue is recognized monthly as the service is performed.

 

Deferred Revenues

 

Deferred subscription fee revenues relate to unearned revenues associated with VIP memberships. We sell memberships and payments are received in advance of customers using the memberships.

 

Auctions (Discontinued Operations)

 

Effective March 28, 2013, we discontinued our auctions program. Any remaining unused credits owned by BAs following the discontinuance had been reclassified as a liability of discontinued operations. Unused credits associated with inactive BAs are recognized as revenues on the earlier of twelve (12) months after termination of the auctions program or when waivers and releases are obtained from BAs who have opted to accept any replacement program.

 

Prior to March 28, 2013, revenues from the auctions program were recorded on a net basis of (i) bidding credits used and broken in auctions, (ii) sale of goods and handling fees, and (iii) net auctioned value of gift cards. Net auctioned value of gifts cards was arrived at based upon the auctioned face value of the gift card less its associated cost of the gift card.

 

Cost of Revenues

 

Cost of revenues are principally commissions based upon each BA’s volume of sales, any “downline” sales by other BAs under the referring BA, and purchase transactions through our online shopping platform made by customers under the referring BA. Commissions due to BAs at the time of such transaction are recorded as deferred costs until the corresponding revenues are recognized. Special incentive bonuses are recognized when the BAs meets the sales target goals or specific criteria, and are recorded as deferred costs which are then expensed ratably as the corresponding revenues are recognized.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses include costs associated with advertising expenses, stock compensation, staff payroll costs, outside services, bank transaction fees, and other general administrative costs.

 

Comprehensive Income (loss)

 

Comprehensive income (loss) is net earnings or loss after tax plus certain items that are recorded directly to stockholders’ equity. Other than foreign currency translation adjustments, we have no other comprehensive income (loss) components.

 

 13 
 

 

Income Taxes

 

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

 

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

 

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

 

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

 

Earnings (Loss) per Share

 

We compute basic earnings (loss) per share by dividing the income (loss) attributable to holders of Common Stock for the period by the weighted average number of shares of Common Stock outstanding during the period. The potential impact of all common stock equivalents was excluded from the number of shares outstanding used for purposes of computing net loss per share as the impact of such equivalents was anti-dilutive due to the loss from continuing operations. Potential dilutive securities, which consisted of outstanding stock options and other compensation arrangements not included in dilutive weighted average shares for the three (3) months ended June 30, 2016 and 2015 were approximately 1.8 million and 2,340 (117,000 shares adjusted for 1:50 reverse stock split), respectively, and for the nine (9) months ended June 30, 2016 and 2015, were approximately 1.8 million and 260 (13,000 shares adjusted for 1:50 reverse stock split), respectively.

 

Stock-Based Compensation

 

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

 

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Segment Policy

 

We derive our revenues from the (i) E-Commerce and Memberships segment which includes business license fees, membership subscription fees, commission income, and, advertising and marketing programs; and (ii) Auctions segment (reported as discontinued operations) as described in Note 13 - Segment Information.

 

3. Restricted Cash

 

Restricted cash represents charge back reserves held by the Company’s credit card processor. Amounts of restricted cash held, by type of currency were as follows:

  

   As of 
   June 30,   September 30, 
   2016   2015 
Euro  $128,842   $1,302,172 
Australian Dollar   6,824    123,360 
Indian Rupees   171,135    - 
United States Dollar   1,574,415    9,167 
Total  $1,881,216   $1,434,699 

 

4. Deferred Costs

 

Deferred costs represent paid or accrued commission costs which are directly related to: (i) unearned subscription fees which are expensed ratably over the subscription periods; and (ii) advertising and marketing programs which are expensed when all services and obligations are fulfilled. Deferred costs expensed are included in cost of revenues.

 

5. Property and Equipment

 

Property and equipment comprised the following:

  

   As of 
   June 30,   September 30, 
   2016   2015 
Land:        
Held for sales incentives  $3,562,500   $3,562,500 
Less: Valuation allowance   (2,687,752)   (2,687,752)
    874,748    874,748 
           
Computers and equipment   382,130    340,781 
Computer software   -    - 
Software development   1,193,386    551,694 
Furniture and fixtures   147,146    111,478 
    1,722,662    1,003,953 
           
Accumulated depreciation   (475,642)   (328,311)
    1,247,020    675,642 
           
Total  $2,121,768   $1,550,390 

 

Land Held for Sales Incentives

 

We acquired a land parcel consisting of 15 lots in the Cayman Islands in March 2010. As of June 30, 2016, the land value of approximately $0.9 million consisted of the contract price and land filled cost of approximately $3.6 million less a valuation allowance of approximately $2.7 million that was based on our evaluation of the estimated fair value.

 

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Depreciation

 

Depreciation expense was $115,854 and $156,297 for the nine months’ period ended June 30, 2016 and 2015, respectively, and $80,741 and $51,721 for the three (3) months periods ended June 30, 2016 and 2015, respectively.

 

6. Note Payable and Warrants

 

On September 15, 2015, we entered into a convertible note payable agreement with two unrelated parties of the Company for a total of $5.0 million to be used for general working capital. The convertible note agreement contained a mandatory conversion provision whereby the notes mandatorily convert to shares of the Company’s Common Stock five days after the Company files either an amendment to its articles of incorporation with the State of Nevada increasing its authorized shares and/or an amendment with the State of Nevada authorizing a reverse split of the Company’s issued and outstanding Common Stock. We filed both amendments on November 1, 2015 and the notes converted to 800,000 shares of Common Stock on November 7, 2015. We also issued the stock purchase warrant for 300,000 shares of Common Stock to the holders on the same date.

 

The notes bore interest at the three month LIBOR rate (London Interbank Offered Rate) on the date of issuance which was 2%. The convertible note agreement contained a mandatory conversion provision in which the principal balance and accrued interest converted to Common Stock of the Company or became due and payable September 15, 2017 if the conversion provision was not triggered.

 

We determined that the conversion feature attached to the convertible debt was not a derivative. On September 15, 2015 when the convertible note was issued, we did not have authorized shares available under our articles of incorporation for conversion and issuance. The total shares required upon conversion equaled 800,000 (post Reverse Split). If shares had been available, the trading market for our shares did not have sufficient trading volume for the holders to sell the shares. In accordance with ASC 815 to be considered a derivative, the holder has to have the ability to sell their position upon conversion on shares. Because this was not the case, we determined that the conversion feature was not a derivative.

 

The convertible note agreement also included provisions for detachable warrants for 300,000 shares of Common Stock. As of September 30, 2015, the $3.6 million of proceeds from the note was recognized net of a discount for the fair value of the warrants totaling $0.4 million. See Note 7 for further discussion of the warrant.

 

Interest expenses related to these notes, including amortization of the warrant discount, totaled $298,828 and $79,820 for the nine (9) months ended June 30, 2016 and 2015, respectively.

 

7. Derivative Liability

 

The Company analyzed the provision of the convertible note entered into on September 15, 2015, that provided a detachable warrant for 300,000 shares of Common Stock. We accounted for these warrants as a liability in the financial statements because the Company did not have enough authorized shares to satisfy the potential exercise of the common stock warrants.

 

The warrants were recorded at fair value using the Black-Scholes option pricing model. The fair value was re-measured at each financial reporting period with any changes in fair value being recognized as a component of other income (expense) in the accompanying statements of operations.

 

The fair value of the derivative liability as of September 30, 2015, which was the end of our fiscal year, was $715,575. On November 7, 2015, in connection with completion of the Reverse Split and increase in authorized shares, the notes converted to 800,000 shares of Common Stock. We completed the final re-measurement of the warrant liability which totaled $165,919 on the conversion date and recognized a gain on the change in the fair value of the derivative liability of $549,656. As a result of the increase in authorized shares, we reclassified the warrant liability to stockholders’ equity as the warrants met the definition of an equity instrument.

 

The fair value derivative liability of the warrants was determined using the Black-Scholes option pricing model using the following assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatility is based on weighted average of the historical volatility of the Company’s Common Stock and selected peer group comparable volatilities and other factors estimated over the expected term of the options. The expected term of stock options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.

 

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8. Amounts Due to Related Party

 

Amounts due to a related party are comprised of the following:

 

 

   As of 
   June 30,
2016
   September 30, 2015 
Amounts due for advances by Mr. Hansen   $246,000   $397,480 
Amounts due for services rendered    -    27,762 
           
   $246,000   $425,242 

 

As of June 30, 2016, we owe Mr. Hansen $246,000 of advances he extended to the Company.

 

Amounts due for services rendered are comprised of accrued compensation due to the officers of the Company. The amounts due for advances and services rendered are non-interest bearing and have no terms of repayment.

 

9. Discontinued Operations

 

The Company discontinued all auctions activities effective March 28, 2013. As a result, the operating results for the auctions program have been reclassified to income from discontinued operations in the condensed consolidated statements of operations.

 

During the nine (9) months ended June 30, 2016 and 2015 income from discontinued operations amounted to $31,879 and $385,532, respectively. All the costs associated with the credits have been fully expensed as of the effective date of the termination.

 

Included in liabilities of discontinued operations at June 30, 2016 and September 30, 2015 are unused credits of approximately $0.03 and $0.06 million, respectively.

 

10. Income Taxes

 

We conduct business globally and operate in a number of foreign jurisdictions in addition to the United States. For the nine (9) months ended June 30, 2016 and 2015, our reported income tax rate was lower than the US federal statutory rate primarily due to lower income tax rates in the foreign jurisdictions where we operate, and as a result of net income or losses for the periods, the utilization of net operating loss carry-forwards and the valuation allowance against deferred tax assets.

 

11. Common Stock

 

As of June 30, 2016, a total of approximately 295,239 shares were committed for issuance and reflected as issued on the books of the Company, but stock certificates were not issued due to certain administrative and documentation requirements. The shares of Common Stock were in respect of the following: (a) 110,531 shares of stock for services; and (b) 184,708 shares of vested restricted stock awards to management and other personnel. Certificates for these shares committed for issuance are expected to be issued during the fourth quarter of 2016.

 

During the quarter ended June 30, 2016, the Company received $1.67 million from certain investors in advance of Common Stock to be issued. As of June 30, 2016, the Company had not finalized the terms of the stock subscription agreements; therefore, any proceeds received in advance has been classified as a deposit for subscriptions (liability) on the accompanying consolidated balance sheet. The Company expects to convert this amount into Common Stock during calendar year 2016. There was no interest or repayment terms designated as a result of the expected short term nature of this liability.

 

12. Stock-Based Compensation

 

We use the straight-line attribution method to allocate the fair value of share-based compensation expense over the requisite service period of the related award. The value of restricted or unrestricted shares is determined using the fair value method, which is based on the number of shares granted and the quoted price of our Common Stock on the grant date. The value of options is determined using the Black-Scholes option pricing model with estimates of option lives, stock price volatility and interest rates, then expensed over the periods of service. Changes in the estimated inputs or using other option valuation methods could result in materially different option values and share-based compensation expense. During the three months ended June 30, 2016, the Company granted 256,533 shares at $3.42 (fair value) per share to three consultants in exchange for services.

 

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Restricted Stock Units

 

As of June 30, 2016, there were 184,520 unvested restricted stock units outstanding with a weighted-average grant date value of $6.00. The restricted stock units vest over the next 1.4 years.

 

Options Activity and Positions

 

Stock-based compensation expense for the three (3) months ended June 30, 2016 and 2015 was $1,103,327 and $355,748, respectively, and for the nine (9) months ended June 30, 2016 and 2015 was $1,797,815 and $392,990, respectively. Unamortized stock option compensation expense at June 30, 2016 was approximately $0.64 million and is expected to be recognized over a period of 1.8 years. 

 

13. Segment Information

 

We divide our product and service lines into two segments: (i) E-Commerce and Memberships segment which includes business license fees, membership subscription fees, commission income, and, advertising and marketing programs; and (ii) Auctions segment (reported as discontinued operations).

 

   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
E-Commerce and memberships                
Revenues  $3,989,720   $4,774,796   $13,418,612   $13,351,483 
Costs of revenues   1,734,565    3,102,014    8,641,418    8,738,903 
Gross margin from continuing operations  $2,255,155   $1,672,782   $4,777,194   $4,612,580 
                     
Discontinued operations                    
Revenue  $-   $136,641   $31,879   $385,532 
Cost of revenues   30    -    30    - 
Income from discontinued operations, net of taxes  $(30)  $136,641   $31,849   $385,532 

 

The total revenues recorded in our four (4) geographic regions are summarized as follows:

 

   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
Revenues:                
European Union  $594,531   $817,428   $2,004,334   $2,317,928 
North America   2,065,054    2,919,041    6,961,890    8,491,876 
Australia   121,289    202,785    408,900    598,903 
Global   1,208,846    972,183    4,075,367    2,328,308 
Total  $3,989,720   $4,911,437   $13,450,491   $13,737,015 
                     
Revenue represented from:                    
Continuing operations  $3,989,720   $4,774,796   $13,418,612   $13,351,483 
Discontinued operations   -    136,641    31,879    385,532 
Total  $3,989,720   $4,911,437   $13,450,491   $13,737,015 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introductory Note

Concerning Forward-Looking Statements

 

The discussion contained in this Quarterly Report on Form 10-Q (“Report”) under the Securities Exchange Act of 1934 as amended (“Exchange Act”), contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “believe,” and similar language, including those set forth in the discussions under “Notes to Condensed Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as those discussed elsewhere in this Report. The forward-looking statements reflect our current view about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. 

 

The following important factors could prevent us from achieving our goals and cause the assumptions underlying the forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements:

 

our inability to sell enough Cash Back products, generate enough customers or enough purchasing activity for our shopping platform;
   
our inability to maintain a growing base of Business Associates;
   
our inability to generate sufficient cash flows from operations or to secure sufficient capital to enable us to maintain our current operations or support our intended growth;
   
our failure to adapt to technological changes;
   
increased competition;
   
increased operating costs;
   
changes in legislation applicable to our business;
   
our failure to improve our internal controls; and
   
our failure to maintain registration of shares of our common stock under the Exchange Act.

 

For information concerning these factors and related matters, see Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Report, and the following sections of our Annual Report on Form 10-K for the fiscal year ended September 30, 2015: Item 1A “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. However, other factors besides those referenced could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us herein speak as of the date of this Report. We do not undertake to update any forward-looking statement, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

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Introduction

 

The following discussion and analysis summarizes the significant factors affecting: (i) our condensed consolidated results of operations for the three (3) and nine (9) months ended June 30, 2016 compared to the three (3) and nine (9) months ended June 30, 2015; and (ii) financial liquidity and capital resources. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes included in this Report. 

 

Overview

 

Ominto, Inc. is a global e-commerce company that owns and operates a global online Cash Back shopping website. The Ominto.com shopping platform powers a variety of Cash Back and loyalty websites for third parties, including our DubLi.com site which is operated for our DubLi Network subsidiary, and both white-label and co-branded Partner Programs. DubLi.com and its related Ominto.com technology platform, currently serve customers in more than 100 countries in local language and currency. The Cash Back website offers thousands of third party global, online merchants and travel booking sites as well as coupons, discounts and vouchers. The Company receives a commission from our affiliated merchants each time customers make purchases and a portion of those commissions are passed back to customers in the form of Cash Back. Cash Back amounts are usually expressed as a percentage of what is purchased and are clearly stated throughout the website. We build our merchant network by contracting with third parties, called Affiliate Networks, who have relationships with thousands of global, online merchants and travel booking sites. Depending on the geographical market, Ominto’s websites feature the world’s most popular brands including Walmart®, Nike®, Hotels.com®, Groupon™ and Expedia®. At Ominto owned and operated websites, consumers can shop at the same online stores they normally frequent and earn Cash Back with each purchase. We offer a free membership and a paid VIP membership that allow shoppers to earn varying amounts of Cash Back from the purchases they make through the Ominto platform. We have a large international network of independent Business Associates (“BAs”) that use and sell our paid VIP membership.

 

Ominto also offers co-branded and white label Cash Back shopping and loyalty websites for third parties that we call Partner Programs. These co-branded websites allow our Partner Program clients to offer their own customers the opportunity to shop and earn Cash Back. We share our merchant commissions with our Partner Program clients and pay them commissions on any VIP membership purchases they refer.

 

During the three (3) and nine (9) months ended June 30, 2016 and 2015, our revenues from continuing operations were generated primarily from (a) business license fees paid by BAs and Partner Program participants; (b) membership subscription fees; (c) commission income from participating online merchants affiliated with our online shopping platform arising from the purchase transactions our shoppers generated; and (d) advertising and marketing programs. Our revenues from discontinued operations during the three (3) and nine (9) months ended June 30, 2016 and 2015 were recognized from credits breakage associated with inactive BAs.

 

The components of revenues for the three (3) and nine (9) months ended June 30, 2016 are summarized as follows:

 

   June 30, 2016 
   Three months ended   Nine months ended 
E-Commerce and Memberships          
 Business license fees  $593,977   $1,997,736 
 Membership subscription fees and commission income   3,267,454    10,989,397 
 Advertising and marketing programs   8,576    28,846 
 Other   119,713    402,633 
    3,989,720    13,418,612 
Discontinued operations   -    31,879 
Total revenue  $3,989,720   $13,450,491 

 

Business license fees are paid by our BAs and our Partner Program participants. The fees from BAs enable them to sell our products. Fees paid by our partners allow them to receive either a white label solution or a co-branded program that their customers or donors can use to make Cash Back purchases through our online shopping platform. Our partners earn commissions derived from membership subscription fees from the shoppers they refer as well as a portion of the commission income received through our Affiliate Network partners. Generally, our for-profit Partner Program participants pay a monthly maintenance fee to continue their Partner Program.

 

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We offer a free membership and a paid VIP membership to shoppers that enable them to earn Cash Back from all the purchases that they make through our online shopping platform. The VIP membership allows our customers to earn a higher percentage of Cash Back on their purchases. We charge an annual subscription fee for the VIP membership. Our BAs are required to purchase membership subscription products in the form of membership packages for DubLi.com’s customers and qualifying vouchers or membership packages for other BAs in their personal network.

 

Commission income is the amounts we receive from Affiliate Networks for purchases made from merchants on our shopping platform. We share this commission income with our customers in the form of Cash Back.

 

Our network marketing organization of BAs is represented in approximately 100 countries throughout the world. Our BAs market our VIP membership for our Cash Back website to their customers, many of whom become BAs themselves. BAs earn commissions both on the paid VIP membership subscription that they sell directly, as well as on “downline” sales of VIP memberships made by BAs that they refer into the marketing network. BAs also earn commissions on purchases made on our shopping platform by shoppers they have referred, or that have been referred by their downline BAs. 

 

Trends in Our Business

 

We continue to focus our resources on potentially more profitable programs related to our e-commerce shopping platform. We believe that shopping transactions continue to shift from traditional brick-and-mortar to online retailers as the digital economy evolves. This shift has enabled us to provide a continued growth in revenue. However, our revenue growth rate to date may not be sustainable due to factors, including increasing competition, and increasing maturity of the online shopping platform market. We plan to continue to invest in our shopping platform and increase our customer base through Partner Programs and our growing global network of BAs, but cannot provide any assurance that such investments will result in increased revenues or net income.

 

In order to increase the sale of our Cash Back products, we are working to add dedicated white-label Cash Back shopping portals through Partner Programs that include both for-profit and non-profit organizations, which we believe will increase the number of shoppers purchasing VIP memberships through our shopping platform.

 

Traditional retail seasonality has affected our results of operations, and is likely to continue to do so. Online shopping generally slows during the summer months, and shopping (whether traditional brick-and- mortar or e-commerce) typically increases significantly during the holiday season in the fourth quarter of each calendar year. These seasonal trends have caused, and will likely continue to cause, fluctuations in our quarterly results.

 

Increasing our revenues involves investment in our information technology infrastructure and human resources. We expect our Partner Program and expanding our merchant base further in local markets and into new markets and countries to be an important component in our business strategy. We expect that the gross cost of revenues will increase and may also increase as a percentage of revenues in future periods, primarily due to forecasted increases in costs, including customer acquisition costs, data center costs, credit card and other transaction fees, and content acquisition costs.

 

As we expand our shopping platform and register new BAs and Partner Programs in additional international markets, we continue to increase our exposure to fluctuations in foreign currency to US dollar exchange rates.

 


Effective June 1, 2016, the board of directors appointed Michael Hansen to serve as Chief Executive Officer (“CEO”) and President of the Company until his successor is duly elected, qualified and seated or until his earlier resignation or removal. Mr. Hansen is a Founder of the Company and has served as a director of the Company since 2010. Since September 15, 2015, Mr. Hansen has served as Executive Vice President, Business Development of the Company. From May 2015 to September 2015, Mr. Hansen was the Company’s chief strategist and concept developer. Mr. Hansen served as President and Chief Executive Officer of the Company's predecessor entity beginning in 2003 and served as President and Chief Executive Officer of the Company from October 2009 until May 2015.

 

Mr. Hansen replaces Mitch Hill, who has been serving as the Company’s Interim CEO since January 26, 2016. Mr. Hill will continue as a Board member.

 


Effective June 13, 2016, the board of directors appointed Raoul Quijada to serve as an interim Chief Financial Officer (“CFO”) of the Company. Mr. Quijada is an employee of Resources Global Professionals, where he has served as a consultant since the beginning of 2016, and will join the Company on a contractual basis for up to twelve months from the effective date of his appointment. Mr. Quijada comes to the Company with over 20-year experience bringing with him a significant record of leadership in several Fortune 500 Companies.

 

As part of the plan to relocate its worldwide headquarters from Seattle, WA to Boca Raton FL, Ominto agreed to expand the premises; and extend the term of its lease. The premises which currently are deemed to contain Two Thousand Six Hundred Thirty (2,630) rentable square feet (the “Premises”) shall be increased by Two Thousand Nine Hundred Thirty Seven (2,937) rentable square feet known as suite 308 so that following said increase, the Premises shall be deemed to contain Five Thousand Five Hundred Sixty Seven (5,567) rentable square feet. Beginning October 15, 2015 the Base Rental to be paid by Tenant for the Premises shall remain as set forth in the original Lease currently payable in the amount of Eighteen and 50/100 Dollars ($18.50) per rentable square foot per annum.

 

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Results of Operations

 

THREE (3) MONTHS ENDED JUNE 30, 2016 COMPARED TO THREE (3) MONTHS ENDED JUNE 30, 2015

 

Consolidated Results

 

Net loss for the three (3) months ended June 30, 2016 and 2015 was approximately $1.9 million and $1.2 million, respectively. Loss from operations increased $0.7 million. Further discussions on the results from continuing operations and discontinued operations are provided in the following paragraphs.

 

Continuing Operations

 

Revenues were approximately $4.0 million and $4.7 million for the three (3) months ended June 30, 2016 and 2015, respectively. Selling, general and administrative (“SGA”) expenses were approximately $4.2 million and $3.0 million for the three (3) months ended June 30, 2016 and 2015, respectively. The increase was primarily due to an increase in travel costs by $0.3 million attributed to international road shows and other selling initiatives, coupled with higher payroll costs due to relocation of worldwide headquarters from Seattle, WA to Boca Raton, FL and severance obligations. In addition, we experienced significant foreign currency fluctuations during the quarter. Details of our SGA expenses are summarized as follows:
 

   For the three months ended
June 30,
 
(All amounts in $ thousands)  2016   2015   Change 
             
Advertising and marketing costs  $25   $24   $1 
Depreciation   81    51    30 
Outside service fees   959    867    92 
Payroll costs   2,085    1,881    204 
Rent and office expenses   152    207    (55)
Banking and processing fees   250    204    46 
Foreign exchange   262    (381)   643 
Travel expenses and others   387    136    251 
Total  $4,201   $2,989   $1,212 

 

Discontinued Operations

 

Income (loss) from discontinued operations was approximately ($30) for three (3) months ended June 30, 2016, compared to approximately $0.14 million for the three (3) months ended June 30, 2015. The decrease was due to more inactive BAs that met the criteria of recognition of revenue for breakage.

 

Foreign Currency Translation Adjustment

 

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

 

During the three (3) months ended June 30, 2016 we recognized a gain on translation of approximately $0.5 million as compared to $0.5 million loss for the three (3) months ended June 30, 2015.

 

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NINE (9) MONTHS ENDED JUNE 30, 2016 COMPARED TO NINE (9) MONTHS ENDED JUNE 30, 2015  

 

Consolidated Results

 

Net loss from continuing operations for the nine (9) months ended June 30, 2016 was approximately $7.0 million and net loss for the nine (9) months ended June 30, 2015 was approximately $4.3 million. The increase in net loss was primarily due to higher selling, general, and administrative expenses of approximately $2.8 million due to higher payroll and relocation related costs. Further discussions on the results from continuing operations and discontinued operations are provided in the following paragraphs.

 

Continuing Operations  

 

Revenues were approximately $13.4 million for the nine (9) months ended June 30, 2016.

 

Gross margin was approximately $4.8 million and $4.6 million for the nine (9) months ended June 30, 2016 and 2015, respectively. 

 

SGA expenses were approximately $12.0 million and $9.3 million for the nine (9) months ended June 30, 2016 and 2015, respectively. The increase was primarily due to: (i) approximately $2.0 million in payroll and severance costs, mainly for executive level employees, (ii) an increase in travel expenses of $0.9 million, and (iii) a $0.6 million increase in foreign exchange impacts from the significant fluctuation of the Euro versus the US Dollar during 2016. These increases were offset by (iii) $0.2 million reduction in outside service fees; (iv) $0.5 million reduction in banking and processing fees as a result of fewer transactions processed for the first part of fiscal year 2016 compared to the same period a year ago. Beginning in January 2016, we have implemented a series of changes to streamline our organization and reduce monthly operating expenses. Our efforts focused on reducing staffing costs, transferring certain functions to lower cost locations, consolidating our operations to fewer locations, and reducing our efforts on activities not related to our core operations. Details of our SGA expenses are summarized as follows:

 

  

For the nine months ended

June 30,

 
(All amounts in $ thousands)  2016   2015   Change 
             
Advertising and marketing costs  $71   $41   $30 
Depreciation   115    156    (41)
Outside service fees   2,522    2,769    (247)
Payroll costs   6,400    4,408    1,992 
Rent and office expenses   458    490    (32)
Banking and processing fees   687    1,161    (474)
Foreign exchange   279    (368)   647 
Travel expenses and others   1,485    608    877 
Total  $12,017   $9,265   $2,752 

 

Discontinued Operations

 

Income from discontinued operations was approximately $0.03 million and $0.4 million for the nine (9) months ended June 30, 2016 and 2015, respectively. The decrease was primarily due to lower revenues recognized for credits breakage associated with inactive Business Associates.

 

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Foreign Currency Translation Adjustment  

 

Our net revenues and related expenses generated from international locations are denominated in the functional currencies of the local countries, primarily in Euros. The results of operations and certain of our intercompany balances associated with our international locations are exposed to foreign exchange rate fluctuations. The consolidated statements of operations of our international subsidiaries are translated into US dollars at the average exchange rates in each applicable period. The US dollar average rate strengthened against the Euro during the nine (9) months ended June 30, 2016 as compared to the nine (9) months ended June 30, 2015 which resulted in these exchange rate fluctuations decreasing the consolidated net revenues, operating expenses, loss from continuing operations and income from discontinued operations, net of income taxes. At the beginning of fiscal year 2016, the Company had a deficit in net equity of approximately $3.2 million recorded in our foreign subsidiaries which used the Euro as its functional currency. As a result of the average translation rate of the Euro to US dollars the beginning of fiscal year 2016 being stronger than the closing rate as of June 30, 2016 used for translation of the assets and liabilities, the foreign currency translation adjustment for the nine (9) months ended June 30, 2016 represented a gain of approximately $0.4 million.

 

Liquidity and Capital Resources

 

Liquidity

 

We have incurred substantial losses through June 30, 2016. We experienced negative net cash flows from our operating activities of approximately $5.9 million and $2.5 million for the nine (9) months ended June 30, 2016 and 2015, respectively. We will require additional financing to meet our working capital and capital expenditures requirements. We can provide no assurance that such additional financing will be available in an amount or on terms acceptable to us. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable to us, we will be unable to execute upon our business plan and fund operations, which could have a material, adverse effect on our business, financial condition and results of operations. Our financial statements for the year ended September 30, 2015 were prepared assuming that we will continue as a going concern. 

 

We have incurred losses since our inception. We do not have sufficient cash to fund normal operations and meet debt obligations for the next twelve (12) months without deferring payment on certain current liabilities and raising additional funds. For the fiscal year ended September 30, 2015 we incurred a loss from continuing operations of $12.2 million and had negative cash flows from continuing operations of $5.2 million. We had an accumulated deficit for the period from our inception through June 30, 2016 of approximately $56.3 million. As a result, we had a working capital deficit of approximately $10.3 million as of June 30, 2016. These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

The Company’s ability to continue as a going concern is dependent on our ability to raise capital to fund our future operations and working capital requirements and our ability to profitably execute our business plan. Our plans for the long-term return to and continuation as a going concern include financing our future operations through sales of our common stock and/or debt and the eventual profitable operation of our business. We expect that we will need approximately $5 million to fund operations during the next twelve (12) months. The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. If the going concern basis were not appropriate for these financial statements, adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used.

 

We continue to update our product offerings, which places additional demands on future cash flows and may decrease liquidity. Our future liquidity and capital requirements will depend on numerous factors including market acceptance of our future products, revenues generated from our operations, the impact of competitive product offerings, and whether we are successful in acquiring additional customers on a large scale basis through partners. We also intend to increase our efforts to attract BAs which we expect will improve sales of memberships on our e-commerce website and Partner Programs. These efforts will place additional demands on our cash flows and liquidity. We cannot offer any assurance that we will be successful in generating revenues from operations, adequately dealing with competitive pressures, acquiring complementary products, technologies, or businesses, or increase our marketing efforts.

 

 24 
 

 

Because of constraints on our sources of capital and our liquidity needs, we have continued to borrow from Michael Hansen, the Company’s founder, a director, and the Company’s current CEO, to fund our operations. As of June 30, 2016, we owed Mr. Hansen a total of approximately $0.2 million in advances to us.

 

On January 15, 2016, we sold 26,533 shares of Common Stock at $8.00 per share for total cash consideration of $0.2 million to a private investor.

 

On February 19, 2016 and February 22, 2016, we sold a total of 43,335 shares of common stock at a weighted average sale price of $3.46 per share for total cash consideration of $0.15 million to three of our independent directors. 

 

As of June 30, 2016, we received $1.67 million from certain investors in advance of common stock to be issued. The Company has not finalized the terms of the stock subscription agreements. The amount owed is unsecured, bears no interest and may be converted to approximately 418,750 shares of common stock at an estimated price of $4.00 per share.

 

Beginning in January 2016, we implemented a series of changes to streamline our organization and reduce monthly operating expenses. Our efforts focused on reducing staffing costs, transferring certain functions to lower cost locations, consolidating our operations to fewer locations, and reducing our efforts on activities not related to our core operations. These changes were designed to conserve our resources and allow for continued investment in the completion and launch of our new Ominto.com and its related DubLi.com technology platform. The new platform launched in May 2016. As of the date of this filing it is still too early to tell if the platform will lead to the revenue growth the Company anticipates.

 

Cash in Foreign Subsidiaries

 

We have significant operations outside the United States. As a result, cash generated by and used in our foreign operations is used only in amounts sufficient to pay general and administrative expenses in the US, or to fund certain US operational costs. As of June 30, 2016, we held approximately $1.3 million of unrestricted and approximately $1.9 million of restricted cash in foreign subsidiaries.

 

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

 25 
 

 

Off-Balance Sheet Arrangements

 

At June 30, 2016 and 2015, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

  

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the nine (9) months ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, as previously reported in our annual report Form 10-K for the year ended September 30, 2015, filed on January 13, 2016, as amended, as a result of our principal executive officer’s and principal financial officer’s assessment of the effectiveness of our internal control over financial reporting as of September 30, 2015, we identified material weaknesses in internal control over financial reporting as of September 30, 2015. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. These material weaknesses had not been remediated as of June 30, 2016.

 

Remediation Plans

 

To address the identified material weakness discussed in our annual reports on Form 10-K for the fiscal years ended September 30, 2014 and reiterated in our September 30, 2015 Form 10-K, we have commenced a reorganization of our finance, accounting and other support staff to improve work flow and enhance internal controls. 

 

In addition, we have improved or are in the process of improving our internal controls as follows:

 

Control Environment

 

(a) We have implemented a whistle-blower program and are in the process of implementing other programs to identify and manage fraud risks;

 

(b) Formalized job descriptions have been developed for all finance and accounting personnel that specifically: (i) identify required financial reporting roles, responsibilities, and necessary competencies; and (ii) clarify responsibilities for maintaining our internal controls over financial information; and

 

(c) We have increased the utilization of the features and controls provided in our Enterprise Resource Planning (“ERP”) system and reduce the use of spreadsheets.

 

 26 
 

 

Monitoring of internal control over financial reporting, and period end financial closing

 

(a) We continue to review and update our policies and procedures with respect to the review, supervision and monitoring of our accounting operations;

 

(b) We are developing forecasts and plans by which our management can measure achievement against formalized benchmarks.

 

If the remedial measures described above are insufficient to address any of the identified material weaknesses or are not implemented effectively, or additional deficiencies arise in the future, material misstatements in our interim or annual consolidated financial statements may occur in the future and we may be delinquent in our filings. We are currently working to improve and simplify our internal processes and implement enhanced controls, as discussed above, to address the material weaknesses in our internal control over financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures. Key factors in the success of our remediation efforts are our ability to recruit and retain qualified individuals, and to make the investments required to enhance our financial reporting systems. Therefore, the success of our remediation efforts will also be dependent in part upon our ability to obtain sufficient funding. Among other things, any un-remediated material weaknesses could result in material post-closing adjustments in future financial statements.

 

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

There were no material legal proceedings during the nine (9) months ended June 30, 2016.

 

ITEM 1A. RISK FACTORS

 

There has been no material change to the risk factors relating to our business as disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2015 filed on January 13, 2016, as amended.

 

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

 

None.
 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

No.   Description
     
10.1   Office Lease Agreement by and between Company and 1515 Associates, Ltd. dated October 15, 2015.
     
10.2   First Amendment to the Office Lease by and between Company and 1515 Associates, Ltd. dated June 3, 2016.
     
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
     
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
     
32.1   Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

 27 
 

 

SIGNATURES

 

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

 

  Ominto, Inc.
     
Date: August 22, 2016 By: /s/ Michael Hansen
   

Michael Hansen 

Chief Executive Officer

 

 

28

 

Exhibit 10.1

 

SOUTH CITY PLAZA

 

1515 SOUTH FEDERAL HIGHWAY

 

OFFICE LEASE AGREEMENT

 

THIS OFFICE LEASE AGREEMENT (this Lease) made as of this 15th day of October, 2015, by and between 1515 ASSOCIATES, LTD., a Florida limited partnership (Landlord), and Ominto,

Inc., a Nevada corporation (Tenant).

 

W I T N E S S E T H:

 

Landlord hereby leases to Tenant and Tenant hereby leases from Landlord those premises known as Suite 307, depicted on Exhibit A attached hereto and made a part hereof (the Premises), being located on the third floor of a multi-story office building located at 1515 South Federal Highway, Boca Raton, Florida 33432 (the Building”) constructed on a parcel of land (the Property).

 

The parties hereto stipulate and agree that the Premises consists of Two Thousand Six Hundred Thirty (2,630) rentable square feet. Landlord and Tenant agree that the rentable square footage of the Premises provided shall be the final determination of the rentable square footage for all purposes and may not be challenged or altered for any reason whatsoever. Tenant, its customers, employees, contractors, servants, agents and invitees shall also have the right to use the common areas of the Building and the Property such as, but not limited to, elevators, stairwells and hallways maintained for the use of all of the tenants of the building in common with other tenants of the Building.

 

1. TERM AND POSSESSION.

 

a.The term of this Lease shall be for Thirty Nine (39) full calendar months (unless sooner terminated or extended, as the case may be, as hereinafter provided) (the Lease Term) beginning on the Commencement Date (as hereinafter defined), except that if the Commencement Date is other than the first day of a calendar month, the term of this Lease shall be extended such that it expires on the last day of a calendar month.

 

b.The Commencement Date shall mean and be defined as the earlier of (i) the date upon which the Premises is “Substantially Complete, or deemed Substantially Complete, as such term is defined in the Work Letter Agreement attached hereto and made a part hereof as Exhibit B, or (ii) the date on which Tenant takes possession of a portion of or all the Premises.

 

c.Landlord shall Substantially Complete the Leasehold Improvements in the Premises as provided in the Work Letter Agreement with reasonable diligence, subject to events and delays due to causes beyond its reasonable control, including Tenant Delays (as defined in the Work Letter Agreement).

 

d.If Substantial Completion of the Premises or possession thereof by Tenant is delayed because any tenant or other occupant thereof holds over, and Landlord is delayed, using good faith efforts in Landlord’s discretion, in acquiring possession of the Premises, Landlord shall not be deemed in default, nor in any way liable to Tenant because of such delay, and Tenant agrees to accept possession of the Premises at such time as Landlord is able to tender the same as Substantially Complete, which date shall thenceforth be deemed the Commencement Date notwithstanding any other provision herein to the contrary.

 

e.Promptly following the Commencement Date Tenant shall execute and deliver to Landlord a letter of acceptance of delivery of the Premises, such letter to be on Landlords standard form. The delivery of the acceptance letter by Tenant shall not constitute a condition of evidence of delivery and acceptance of the Premises by Tenant.

 

  f. For the purposes of this Lease, a Lease Year shall mean each twelve (12) month period beginning on the Commencement Date and each anniversary of the Commencement Date (or the first day of the succeeding calendar month following the month in which the Commencement Date occurs should such date be on any day after the first day of a calendar month), and extending until the last day of each twelve (12) full calendar month period thereafter.

 

2. RENTAL.

 

a.Tenant shall pay to Landlord throughout the Lease Term a base annual rental of Forty Eight Thousand Six Hundred Fifty Five and no/100 Dollars ($48,655.00) together with all sales, use, transaction, or comparable tax(es) applicable thereto. Said base annual rental (hereinafter referred to as the Base Rental) shall be subject to adjustment as hereinafter provided in this Lease. Base Rental, together with tax(es) payable thereon, shall be due and payable in equal monthly installments of Four Thousand Fifty Four and 58/100 ($4,054.58) in advance, without demand, deduction or setoff, on or before the first day of each calendar month during the Lease Term. However, upon a default by Tenant of any of its obligations hereunder, the Base Rental for the balance of the Lease Term shall be immediately due and payable. If this Lease commences on a day other than the first day of a calendar month, the monthly Base Rental for the fractional month shall be appropriately prorated.

 

 1 

 

 

b.Tenant recognizes that late payment of any Rent (as hereinafter defined) or other sum due hereunder from Tenant to Landlord will result in administrative expense to Landlord, the extent of which additional expense would be extremely difficult and economically impractical to ascertain. Tenant therefore agrees that if Rent or any other payment due hereunder from Tenant to Landlord remains unpaid five (5) days after the same is due, the amount of such unpaid Rent or other payment shall be increased by a late charge to be paid Landlord by Tenant in an amount equal to five percent (5%) per month of the amount of the delinquent Rent or other payment. The amount of the late charge to be paid to Landlord by Tenant for any particular month shall be computed on the aggregate amount of delinquent Rent and other payments, including all accrued late charges then outstanding. Tenant agrees that such amount is a reasonable estimate of the loss and expense to be suffered by Landlord as a result of such late payment by Tenant and may be charged by Landlord to defray such loss and expense. The terms of this Paragraph in no way relieve Tenant of the obligation to pay Rent or other payments on or before the date on which they are due, nor do the terms of this Paragraph in any way affect Landlords remedies pursuant to Paragraph 18 of this Lease in the event said Rent or other payment is unpaid after the date due.

 

c.Rental Commencement Date is the date specified in Paragraph 1(a) hereof for the Commencement Date and subject to the Rent Abatement set forth in Paragraph 2(g) below, is the date upon which the first rental payment hereunder becomes due.

 

d.Landlord will receive monthly from Tenant, in addition to Rent, the equivalent of six percent (6%) of all amounts paid as Rent hereunder, or such other amount as may, from time to time, be required by law, which sum is paid as sales tax to the State of Florida by Landlord under the Florida Sales Tax Statute. Landlord receives no monetary benefit from the collection and disbursement of sales tax. Should such tax rate change under the Florida Sales Tax Statute or Palm Beach County Ordinance, Landlord will receive monthly from Tenant the amount reflective of appropriate charges. Tenant shall pay Landlord in conjunction with all sums due hereunder, any and all applicable sales, use or other similar tax and any interest or penalties assessed therein (“Sales Tax) simultaneously with such payment.

 

e.The annual Base Rental payable hereunder for each Lease Year shall adjust on an automatic basis on the first day of the second Lease Year and the first day of each successive Lease Year thereafter, in the following manner:
   
  The Base Rental rate provided for in Paragraph 2(a) shall be increased by three percent (3%) over the Base Rental rate of the prior Lease Year on the first day of each succeeding Lease Year of the Lease Term. Escalations shall be prorated when necessary to reflect occupancy for less than one (1) year.

 

  f. In addition to the Base Rental, Tenant shall pay without demand, deduction, or setoff as Additional Rent all sums of money due from Tenant to Landlord hereunder, except Base Rental, including without limitation sales tax, (which amounts together with Base Rental may collectively be referred to as Renthereunder) Tenants Proportionate Share of the Operating Expenses of the Building shall be paid as Additional Rent hereunder. Tenants Proportionate Share” is the amount which is equivalent to the percentage determined by dividing the rentable square feet in the Premises by the total rentable square feet in the Building. Operating Expenses shall mean all expenses of every kind incurred by Landlord with respect to the ownership, management, operation, improvement, promotion and maintenance of the Building, the land under the Building, and the Property, including, without limitation, the parking lot, landscaping and appurtenances and any property taxes, insurance premiums, assessments, governmental charges, capital expenses, reserves for repair and replacement, cost of providing security services, costs of providing supervision of the parking facilities and owners’ dues of any kind and nature whatsoever. In the event that during any Lease Year, less than ninety- five (95%) of the Building shall have been occupied by tenants and fully used by them at any time, Operating Expenses shall, during such period in which occupancy was less than ninety-five (95%) percent, be increased to the amount that Operating Expenses would normally be expected to have been incurred had such occupancy attained a minimum of ninety-five (95%) percent and had full utilization been made during the applicable Lease Year. In addition, if Landlord is not furnishing any particular work or service (the cost of which, if performed by Landlord, would constitute an Operating Expense), to a tenant who has undertaken to perform such work or service in-lieu of the performance thereof by Landlord, Operating Expenses in the applicable Lease Year shall be adjusted to an amount equal to the Operating Expenses which would reasonably have been incurred during such period by Landlord if Landlord had furnished such work or service to such tenant.

 

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On or before the Commencement Date, and in each calendar year thereafter during the Lease Term on or before March 1 or as soon thereafter as is reasonably possible, Landlord shall deliver to Tenant a statement setting forth Landlords reasonable estimate of the Operating Expenses of the Building for the then current calendar year and Tenant shall pay monthly, as Additional Rent, an amount equal to one twelfth (1/12th) of Tenants Proportionate Share of the estimated Operating Expenses of the Building. In the event Landlord determines that the estimate of the Operating Expenses is incorrect or insufficient to pay for actual costs, Landlord shall give Tenant notice of such discrepancy and the adjustment to the Additional Rent for the balance of the calendar year and the Additional Rent shall be increased or reduced as necessary as of the next monthly payment of Base Rental. On or before March 1 of each calendar year during the Lease Term, or as soon thereafter as is reasonably possible, Landlord shall furnish to Tenant a statement (the Expense Statement) which shall set forth the actual Operating Expenses of the Building for the previous calendar year. Landlord agrees to keep true and accurate records in accordance with accepted accounting principles of the Operating Expenses of the Building. After delivery of the Expense Statement, there shall be an adjustment between Landlord and Tenant such that after said adjustment Tenant will have paid the actual Additional Rent amount due in accordance with this Paragraph. Payment pursuant to said adjustment to Landlord or Tenant, as the case may be, shall be made within thirty (30) days following delivery of the Expense Statement to Tenant. For any year less than a full calendar year, Tenants Operating Expenses shall be prorated based on applicable expenses for the calendar year. Tenants obligation for payment of Additional Rent shall survive expiration or termination of this Lease.

 

No payment by Tenant or receipt by Landlord of an amount less than the Base Rent or Additional Rent or any other sum due and payable under this Lease shall be deemed to be other than a payment on account of the Base Rent, Additional Rent or other such sum, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, nor preclude Landlords right to recover the balance of any amount payable or Landlords right to pursue any other remedy provided in this Lease or at law.

     
  g. Notwithstanding the foregoing, as consideration for Tenants performance of all of its obligations under the Lease, Landlord conditionally excuses Tenant from payment of the monthly Base Rent otherwise payable for the first three (3) months of the Lease Term (the Rent Abatement). However, upon the occurrence of any default by Tenant of any of its obligations hereunder arising during the Lease Term beyond all applicable notice and cure periods, the aggregate amount of the Rent Abatement that was conditionally excused shall be deemed Additional Rent due and payable by Tenant to Landlord within five (5) days of written notice from Landlord to Tenant.

 

3. OCCUPANCY AND USE.

 

a.Subject to the rights of other tenants in the Building under their leases, Tenant shall use and occupy the Premises for general office purposes and for no other purpose without the prior written consent of Landlord.

 

b.Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure or annoy them, nor use or allow the Premises to be used for any improper, immoral, unlawful, or objectionable purposes or for any business, use or purpose deemed to be disreputable or inconsistent with the operation of a first class office building nor shall Tenant cause or maintain or permit any nuisance in, on, or about the Premises. Tenant shall not commit or suffer the commission of any waste in, on, or about the Premises. In the event Tenant is not in compliance with this Paragraph at any time during the Lease Term, Landlord may, at its option, (i) correct to the best of its ability the noncompliance, in which case all expenses associated therewith shall be borne by Tenant, or (ii) pursue other remedies available to it under this Lease or at law.

 

4.COMPLIANCE WITH LAW. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance, or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall not do or permit anything to be done on or about the Premises or bring or keep anything therein which will in any way increase the rate of any insurance upon the Building in which the Premises are situated or any of its contents or cause a cancellation of said insurance or otherwise affect said insurance in any manner, and Tenant shall at its sole cost and expense promptly comply with all laws, statutes, ordinances, and governmental rules, regulations, or requirements now in force or which may hereafter be in force and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use, or occupancy of the Premises. In the event Tenants use of the Premises, directly or indirectly, results in the need to alter any common areas of the Building in order to comply with Americans with Disabilities Act requirements, or other governmental requirements, Tenant shall pay all costs associated therewith on demand by Landlord.

 

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5.ALTERATIONS. Subsequent to the completion of the Leasehold Improvements as set forth in Exhibit B, if any, Tenant shall not make or suffer to be made any alterations, additions, or improvements in, on or to the Premises, or any part thereof, without the prior written consent of Landlord; and any such alterations, additions, or improvements in, on or to said Premises, except for Tenants fixtures, movable furniture and equipment, shall immediately become Landlords property at the end of the Lease Term, to remain on the Premises without compensation to Tenant. In the event Landlord consents to the making of any such alterations, additions, or improvements by Tenant, the same shall be made at Tenants sole cost and expense, in accordance with plans and specifications approved by Landlord, and any contractor or person selected by Tenant to make the same, and all subcontractors, must first be approved in writing by Landlord, or, at Landlords option, the alteration, addition or improvement shall be made by Landlord for Tenants account and Tenant shall reimburse Landlord for the cost thereof upon demand. Upon the expiration or sooner termination of the term herein provided, Tenant shall upon demand by Landlord, at Tenants sole cost and expense forthwith and with all due diligence remove any or all alterations, additions, or improvements made by or for the account of Tenant, designated by Landlord to be removed, and Tenant shall forthwith and with all due diligence, at its sole cost and expense, repair and restore the Premises to its original condition.

 

6.REPAIR. By taking possession of the Premises, Tenant accepts the Premises as being in the condition in which Landlord is obligated to deliver the Premises and otherwise in good order, condition and repair. Tenant shall, at all times during the Lease Term at Tenants sole expense, keep the Premises and every part thereof in good order, condition and repair, excepting ordinary wear and tear, damage thereto by fire, earthquake, act of God or the elements. Tenant shall upon the expiration or sooner termination of the Lease Term, unless Landlord demands otherwise as herein provided, surrender to Landlord the Premises and all repairs, changes, alterations, additions and improvements thereto in the same condition as when received, or when first installed, ordinary wear and tear, damage by fire, earthquake, act of God, or the elements excepted. It is hereby understood and agreed that Landlord has no obligation to alter, remodel, improve, repair, decorate, or paint the Premises or any part thereof except as specified in Exhibit “Battached hereto and made a part hereof, and that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant, except as specifically herein set forth.

 

7.LIENS. Tenant shall keep the Premises free from any liens arising out of any work performed, material furnished, or obligations incurred by Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of any such lien, cause the same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other rights and remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by such means as Landlord shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection herewith shall be Additional Rent and shall be payable to it by Tenant on demand and with interest at the rate of eighteen percent (18%) per annum, provided, however, that if such rate exceeds the maximum rate permitted by law, the maximum rate shall apply; the interest rate so determined is hereinafter called the Agreed Interest Rate. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord, the Premises, the Building, and any other party having an interest therein from mechanics and materialmens liens, and Tenant shall give to Landlord at least five (5) business days prior written notice of commencement of any construction on or in the Premises. Landlord and Tenant hereby give notice and Landlord, at its option, may require Tenant to provide a written certification of same to be recorded in the Public Records of the County in which the Building is located, that no party providing labor services or materials for the improvement of the Premises for or at the direction of Tenant shall be entitled to a lien against Landlords interest in the Premises including Landlords fee simple title to the Property and the Building, but must look instead only to Tenant and the Tenants interest under this Lease to satisfy such claims.

 

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8. ASSIGNMENT AND SUBLETTING.

 

a.Tenant shall not sell, assign, encumber, hypothecate, pledge or otherwise transfer by operation of law or otherwise this Lease or any interest herein, sublet the Premises or any portion thereof or suffer any other person to occupy or use the Premises or any portion thereof, without the prior written consent of Landlord, nor shall Tenant permit any lien to be placed on Tenants interest voluntarily or by operation of law. Notwithstanding the foregoing, Landlord and Tenant agree that, prior to an assignment or sublease becoming effective, any such assignment or sublease must be approved in writing by the holder of any mortgage or other financing instrument encumbering the Property and/or the Building. Tenant shall, by written notice, advise Landlord of its desire from and after a stated date (which shall not be less than thirty (30) nor more than ninety (90) days after the date of Tenant’s notice) to sublet the Premises or any portion thereof for any part of the Lease Term or to assign the Tenant’s interest under this Lease. Tenant shall supply Landlord with such information, financial statements, verifications and related materials as Landlord may request in order to evaluate the written request to so sublet or assign. Landlord shall have the right, to be exercised in Landlords sole discretion and by giving written notice to Tenant within thirty (30) days after receipt of Tenants notice and all of the aforesaid materials, to either refuse to consent to the proposed subletting or assignment or to terminate this Lease as to the portion of the Premises described in Tenants notice, and such notice from Landlord shall, if given, terminate this Lease with respect to the portion of the Premises therein described as of the date stated in Tenants notice. Said notice by Tenant shall state the name, address and principal(s) of the proposed subtenant or assignee, and (if a proposed subtenant) Tenant shall deliver to Landlord a true and complete copy of the proposed sublease with said notice. If said notice shall specify all of the Premises and Landlord shall give a termination notice with respect thereto, this Lease shall terminate on the date stated in Tenants notice. If, however, this Lease shall terminate pursuant to the foregoing with respect to less than all of the Premises, the Rent, as defined and reserved hereinabove and as adjusted pursuant to Paragraph 2(e) and Paragraph 2(f) shall be adjusted by Landlord and this Lease, as so amended, shall continue thereafter in full force and effect. If Landlord, upon receiving said notice from Tenant with respect to the subletting or assignment of all or any portion of the Premises, shall not exercise its right to terminate, Tenant hereby agrees that Landlord shall be entitled to unconditionally withhold its consent to any such subletting or assignment if the proposed subtenant or assignee is a prospective tenant for other space within the Building or for space within any other buildings owned and/or managed by the Landlord or affiliated entities, or if the Building within which the Premises are located is not one hundred percent (100%) leased. Tenant hereby agrees that Landlord may condition its consent to any such sublease or assignment upon the following: (i) any such sublease or assignment must be on the same terms, conditions and use permitted as are contained in this Lease; and (ii) if the sublease or assignment is at a rental rate greater than the rental rate required in this Lease and such sublease or assignment is approved by Landlord, Tenant agrees to pay to Landlord one hundred percent (100%) of the amount of rent required in the sublease or assignment, which is in excess of the Rent required under this Lease. Tenant shall, at Tenants own cost and expense, discharge in full any commissions which may be due and owing from any party as a result of any proposed assignment or subletting, whether or not the Lease is terminated pursuant thereto and rented by Landlord to the proposed subtenant or any other tenant.

 

b.Any subletting or assignment hereunder by Tenant must be approved in writing by Landlord prior to being effective and shall not result in Tenant being released or discharged from any liability under this Lease. As a condition to Landlords prior written consent as provided for in this Paragraph, the assignee or subtenant shall agree in writing to comply with and be bound by all of the terms, covenants, conditions, provisions and agreements of this Lease, and Tenant shall deliver to Landlord promptly after execution, an executed copy of such sublease or assignment and an agreement of said compliances by each sublease or assignee.

 

c.Landlords consent to any sale, assignment, encumbrance, subletting, occupation, lien or other transfer shall not release Tenant from any obligations hereunder or be deemed to be a consent to any subsequent occurrence. Any sale, assignment, encumbrance, subletting, occupation, lien or other transfer of this Lease which does not comply with the provisions of this Paragraph shall be void.

 

9. PARKING AND COMMON AREAS.

 

a.Upon request by Tenant and subject to availability, during the Lease Term, Tenant may request reserved parking spaces in the covered parking area (Designated Space(s)). If such request is made by Tenant, Landlords sole obligation shall be to identify such spaces as designated for Tenants exclusive use, using such signage or methods of identification as Landlord shall deem appropriate. Landlord may, but shall have no obligation to, enforce such designation by towing violators or other enforcement actions. Tenant shall not have the right to tow vehicles parked in Tenants designated spaces. Landlord shall have the right, after reasonable notice to Tenant and in Landlords discretion, to change the location of Tenants designated parking spaces from time to time so long as they continue to be in the covered parking area. In addition to Base Rent and as additional rent hereunder, Tenant shall pay Landlord Seventy-Five and 00/100 Dollars ($75.00) per Designated Space per month (Parking Charge) commencing with the first payment of Base Rent following the delivery of a Designated Space to Tenant. The monthly Parking Charge shall increase at the same times and in the same proportions as each increase in Base Rent.

 

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b.In addition to the Premises, Tenant shall have the right to non-exclusive use, in common with Landlord, other tenants, and the guests, employees and invitees of common areas (Common Areas) (a) automobile parking areas, driveways and footways, and (b) such loading facilities, freight elevators and other facilities as may be designated from time to time by Landlord, subject to the terms and conditions of this Lease and to reasonable rules and regulations for the use thereof as prescribed from time to time by Landlord. The parking area shall be provided with adequate lighting and shall be maintained in good condition by Landlord; provided that Landlord shall have the right at any time and from time to time to change or modify the design and layout of the parking area(s). In no event shall Tenant use, at any time, more than three point eight (3.8) parking spaces per one thousand (1,000) usable square feet of space in the Premises. If, at any time, Landlord reasonably determines that Tenants use of the parking lot has exceeded the number of parking spaces allocated to Tenant, Landlord shall give Tenant written notice and Tenant shall, at Tenant’s expense, make arrangements for employee parking at a site located off the Property sufficient