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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD LOOKING STATEMENTS
Introductory Note
Caution Concerning Forward-Looking Statements
The discussion contained in this 10-Q under the Securities Exchange Act of 1934,
contains forward-looking statements that involve risks and uncertainties. The
issuer's actual results could differ significantly from those discussed
herein. These include statements about our expectations, beliefs, intentions or
strategies for the future, which we indicate by words or phrases such as
"anticipate," "expect," "intend," "plan," "will," "we believe," "the Company
believes," "management believes" and similar language, including those set forth
in the discussions under "Notes to Financial Statements" and "Management's
Discussion and Analysis or Plan of Operation" as well as those discussed
elsewhere in this Form 10-Q. The forward-looking statements reflect our current
view about future events and are subject to risks, uncertainties and
assumptions. We wish to caution readers that certain important factors may have
affected and could in the future affect our actual results and could cause
actual results to differ significantly from those expressed in any
forward-looking statement. The following important factors could prevent us from
achieving our goals and cause the assumptions underlying the forward-looking
statements and the actual results to differ materially from those expressed in
or implied by those forward-looking statements:
· our inability to establish a maintain a large growing base of business
associates;
· our inability to develop brand awareness for our online auctions;
· our failure to maintain the competitive bidding environment for our online
auctions;
· our failure to adapt to technological change;
· an assertion by a regulatory agency that one ore more of our auctions
constitute some form of "gaming" or a "lottery";
· increased competition;
· increased operating costs;
· changes in legislation applicable to our business;
· our failure to improve our internal controls.
See also the risks discussed in under the heading "Risk Factors" in Part II,
Item 1A and those discussed in other documents we file with the Securities and
Exchange Commission.
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 10-Q. We do not undertake to update
any forward-looking statement, except as required by law. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements.
INTRODUCTION
The following discussion and analysis summarizes the significant factors
affecting: (i) our consolidated results of operations for the Three Months and
Nine Months Ended June 30, 2010 compared to the Three months and Nine Months
Ended June 30, 2009; and (ii) our financial liquidity and capital resources.
This discussion and analysis should be read in conjunction with our consolidated
financial statements and notes included in this Form 10-Q.
25
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MediaNet Group Technologies, Inc. ("MediaNet Group" or the "Company") through
its wholly owned subsidiaries, is a global marketing company that sells high end
branded merchandise to consumers through Internet-based auctions conducted under
the trade name "DubLi.com." As of June 30, 2010, our online auctions were
conducted in Europe, North America, Australia and New Zealand and a global
auction portal serving the balance of the world.We have a large network of
independent business associates that sold "credits", or the right to make a bid
in one of our auctions (referred to herein as "Credit" or "DubLi
Credits"). These auctions are designed to offer consumers real savings on these
high end goods. The Company, through its BSP Rewards subsidiary, also offers
private branded loyalty and reward web malls where members receive rebates
(rewards) on products and services from participating merchants.
Online Auctions
The DubLi.com auctions are designed to provide consumers with the ability to
obtain high quality goods at discounts to retail prices through a fun and
convenient shopping portal. These auctions offer only high quality inventory
(brand new, newest model, full warranty) from the world's leading manufacturers.
In order to participate in and make bids in any the DubLi.com online auctions,
consumers must purchase Credits. Each Credit costs US$0.80 (EUR 0.50) and
entitles the consumer to one bid in one auction. Discounts are available on the
purchase of a substantial volume of Credits at one time. Credits can be
purchased directly from DubLi or from one of DubLi's business
associates. Accordingly, we generate revenue from the DubLi.com auctions both on
the sale of Credits and on the sale of products to the ultimate auction winners.
DubLi has two types of auctions which it operates on separate platforms for
Europe, North America (United States, Mexico, Puerto Rico, Canada), Australia
and New Zealand and a global portal serving the balance of world: Xpress and
Unique Bid.
In an Xpress auctions, the product up for auction is displayed with a starting
price, which is the lowest available retail price (the "Starting Price"). Each
time a person makes a bid (which costs him or her one Credit), the Starting
Price is decreased by US$0.25 (EUR 0.20) and the reduced price becomes visible
to the person making a bid and to no other person. The bidder can choose to
purchase the item at the reduced price so shown or can opt to wait in the hopes
that others will make bids and drive down the price. The actual purchase price
is always less than the Starting Price and is often a substantial discount to
the Starting Price.
In an Unique Bid auction, the auction is scheduled with a definitive start and
end time. At any time prior to the auction end time, persons can make bids (one
bid for one Credit) on the price at which it would purchase the product. Bids
must be made in US$0.20 increments. The person who has placed the lowest unique
bid (i.e. no other person has bid the same US$0.20 incremental amount) is
entitled to purchase the product at such bid price.
In both styles of auctions, there are generally a high number of bidders and
most bidders place more than one bid. Accordingly, between the sale of the
product and Credits, DubLi often realizes more than the price which it paid for
an item. Substantially all items sold by DubLi in the online auctions are
purchased by DubLi on the open market at market price without any discount,
although in the future DubLi may seek to work with wholesalers or retailers to
purchase items for less than they can be purchased by the average customer.
Credits are sold to consumers directly by DubLi, through our network of business
associates, or through the Partner Program (described below). As of June 30,
2010, approximately 94% of our Credit sales are made through our network of
business associates and, accordingly, we are dependent on our business
associates for a significant portion of our sales. As of June 30, 2010, we had
business associates located in over 126 countries. Business associates are
incentivized to locate and sponsor new business associates ("Downstream
Associates") and establish their own sales organization.
Business associates earn commissions on:
· the sale of Credits by the subject business associate directly to retail
consumers ("Affiliated Consumers") who are signed up by such business
associate ("Retail Commissions");
· the sale of Credits by Downstream Associates sponsored by the subject business
associate or such business associate's Downstream Associates ("Organizational
Commission").
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To earn Retail Commissions, a business associate must purchase Credits from
DubLi and resell such Credits to its Affiliated Consumers. Credits are sold to
business associates by DubLi at the same price offered to retail consumers. When
an Affiliated Consumer places an order for Credits, the Credits are
automatically deducted from the subject Business Associate's account and
transferred to the Affiliated Consumer's account, and the Business Associate is
eligible to earn Retail Commission. If a Business Associate does not have
sufficient Credits in his account to cover an order by an Affiliated Consumer,
DubLi will supply the balance of Credits to fill the order, but the business
associate will not be eligible to earn commissions on the Credits supplied by
DubLi. The amount of the Retail Commissions earned by a business associate
varies from 5-25% based on the total Credits purchased by the business associate
over a consecutive twelve-month period.
To become a business associate, an applicant must register with DubLi by filling
out an online Business Associate Application and Agreement and purchase an e-Biz
kit for US $175.00. The e-Biz kit is the only purchase required to become a
business associate.
DubLi also offers a partner package and program (the "Partner Program") to
companies, associations, affinity groups and non-profit organizations (which it
refers to as a "white label solution"). Using the Partner Program, these groups
can, through DubLi, open and utilize an auction portal open to their members.
Each partner earns a thirty percent (30%) commission on all Credits sold to such
Partner's members through their portal. Using the Partner Program gives
participating organizations a professional web presence, access to products
offered on the auction portal through DubLi, and the use of DubLi to complete
all customer purchase processes. DubLi provides a variety of ready-made
templates that can be customized to the individual requirements of any
organization, including the use of the organization's URL. The Company receives
the remaining 70% of the of the sales proceeds from which it pays all related
costs and expenses.
Demand for our products and services will be dependent on, among other things,
market acceptance of our products, traffic to our websites, growth in our
Business Associate Network, and general economic conditions. Inasmuch as a major
portion of our activities is the receipt of revenues from the sales of Credits
and continued demand at our auction portals.
Our success will be dependent upon implementing our plan of operations, which is
subject to various risks including those contained in our various public reports
filed with the Securities and Exchange Commission. We plan to strengthen our
position in existing and new markets by continuing to aggressively marketing our
products and services.
BSP Rewards
BSP Rewards provides private branded loyalty and rewards programs designed as a
shopping service through which members receive rebates (rewards points) on
purchases of products and services from participating merchants in our Internet
mall platform. These rewards act as a common currency that may be accumulated
and used to make purchases of gift cards or donations to a charity. The rewards
can additional be loaded onto a debit MasterCard and usedtowards additional
purchases from any participating merchant in the program. Additionally, once the
loyalty points are loaded on the MasterCard, the consumer can utilize this debit
card at any merchant where the debit MasterCard is accepted.
The BSP Rewards program is a web based retail mall concept. Retail sellers of
goods and services who join in the program as participating merchants agree to
pay rebates to us for our members who purchase goods and services through the
program at their individual web stores. We collect all rebates paid by
participating merchants and retain a portion as our fee for operating the
program. Another portion of the rebate (generally one-half), is designated as a
"reward" earned by the member who made the purchase. A portion of the Company's
rebate is paid to the organization or company which enrolled the member in the
program.
DubLi uses the BSP Shopping Mall in combination with its auction sites.
We are also developing a new platform of websites to better provide DubLi.com
shoppers with an enjoyable experience. The new platform is expected to provide
DubLi.com shoppers' website displays that, among other things:facilitate a
shoppers' monitoring and participation in Xpress Auctions and Unique Bid
Auctions simultaneously;provide shoppers with expanded merchandise search
capabilities; and provides shoppers with expanded capabilities to monitor
auctions.
27
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We are also contemporaneously seeking to expand our service offering to a wide
range of entertainment products and services via streaming content downloads
(i.e. music, movies, television and radio).
Working from the "Cinch" technology we acquired from MSC, Inc. doing business as
Lariat, in October 2009, we intend to offer users a fast and convenient method
of locating and enjoying entertainment content readily available on the
Internet, free of charge. We hope that Cinch will expand DubLi.com's
relationship with its shoppers and thereby assist us to better identify our
shopper's needs and shopping habits.
MediaNet is targeting to launch its new websites in the fourth quarter of
2010. See "Risk Factors."
Our Industry
The Company provides a variety of shopping alternatives for which the industry
is segmented and diverse. MediaNet Group's service offering emphasize bringing
pricing value to consumers in a format that is unusual within the current
ecommerce environment. While the industry consists of many companies and
organizations that provide shopping, loyalty and rewards in various means and
fashions, few offer a complete package. There are many other similar businesses;
however, most others do not include many of the features and benefits that
MediaNet Group does. It requires significant time and resources to develop a
mature, flexible, broad-based platform and to attract and market the program to
a wide variety of business segments. We believe our various businesses have and
will generally continue to benefit from the growing popularity ofonline shopping
versus traditional brick and mortar shopping.
Competition
MediaNet Group believes that there are a number of companies engaging in reverse
auctions. However, it does not believe that any of these companies present
significant competition to DubLi.The Company believes that its DubLi online
auction business has been able to distinguish itself from other competitors
based upon its advanced, customer friendly technology, multi-level marketing
strategy, local marketing knowledge through the DubLi Network sales force, and
its exclusive focus on high quality inventory (brand new, newest model, full
warranty) from the world's leading manufacturers.
The BSP Rewards services offer private branded web mall program for companies,
organizations and associations with features that include, but is not limited
to, their logo and corporate image, cross links between the mall and their own
corporate websites where the end user associates the mall with the host brand.
Our competition includes other established loyalty/rewards companies, service
providers that aggregate affiliate network merchants and existing web portals.
While some competitors offer a private branded rewards program, most do not
offer all of the features as BSP, including our redemption option through a
stored value MasterCard, cross marketing applications and customer
communications. BSP intends to compete on the basis of pricing and speed to
market, ease of use, our platform and the number of features available in our
proprietary BSP Rewards application.
Our customers
DubLi's customers are derived primarily from three sources, consumers from the
general public who are interested in the DubLi auction formats, consumers signed
up by business associates and consumers introduced to the DubLi auctions through
our Partner Program. Sometimes there is overlap among the three categories. Our
customers are based all over the world including Europe and North America. We
believe that our ability to attract potential buyers to our website is based
upon the quality of our merchandise and our focus on word-of-mouth advertising.
Our business strategy was designed based on the concept that by rewarding people
for their recommendation through referral based commissions, we could
potentially attract a large numbers of customers from around the world to our
auction portal.
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BSP's business to business model enables customers from each of its private
branded malls to participate in the rewards malls. These customer members are
either employees from the sponsor of the private branded mall, debit card
customers, representatives of network marketing programs and a variety of other
membership bases.
Results of Operations
The following table sets forth certain of our results of operations for the
periods indicated.
For the three months Percent For the nine months Percent
ended June 30, Change ended June 30, Change
2010 2009 2010 2009
Revenues $ 6,990,388 $ 4,801,895 46 % $ 21,510,789 $ 12,989,305 66 %
Direct cost of revenues 2,533,736 824,143 207 % 11,955,932 6,081,237 97 %
Gross Profit 4,456,652 3,977,752 12 % 9,554,857 6,908,069 38 %
Operating Expenses 4,046,641 3,374,866 20 % 6,904,399 5,814,450 19 %
Income (loss) from
operations 410,011 602,886 -32 % 2,650,458 1,093,619 142 %
Interest income
(expense) -net (271 ) - (7,273 ) (3,437 ) 112 %
Provision for income
taxes 389,976 - (550,000 ) -
Discontinued operations (568,380 ) (399,511 ) 42 % (568,380 ) (1,718,763 ) -67 %
Gain from sale of
subsidiary - 74,990 -100 % - 74,990 -100 %
Foreign currency
translation (417,970 ) (4,333 ) (505,273 ) -
Comprehensive Income $ (186,634 ) $ 274,032 -168 % $ 1,019,532 $ (553,591 ) -284 %
Revenues
We had revenues of $6,990,388 for the three months ended June 30, 2010, an
increase of $2,188,493, or 46%, as compared to $4,801,895 in the same period
ended June 30, 2009. In the nine months ended June 30, 2010, we had revenues of
$21,510,789, an increase of $8,521,484, or 66%, as compared to $12,989,305 the
same period ended June 30, 2009. Revenue decreased $39,825 from $7,030,213 in
the second quarter of this year due primarily to the seasonal nature of online
retailing partly offset by an increase in the utilization rate of the DubLi
credits used for bidding in the online auctions.
Revenue increases occurred in both the sales of products and sales of Credits.
The increase in Credits sold was due to our overall domestic and foreign
business expansion resulting from our addition of new business associates and
increased productivity from existing associates between June 30, 2009 and June
30, 2010 as well as certain new promotions.
Direct Cost of Revenues
Direct Cost of Revenues primarily includes the cost of acquiring products to
sell in our online auctions, website operation costs and business associate
commission expenses. During the three months ended June 30, 2010, we had direct
cost of revenues of $2,533,736, or 36% of revenues, versus direct cost of
revenues of $824,143, or 17% of revenues, in the same period in 2009. During the
nine months ended June 30, 2010, we had direct cost of revenues of $11,955,932,
or 56% of revenues, compared to direct cost of revenues of $6,081,237, or 47%,
of revenues in the same period in 2009. This 207% and 97% respective increase is
primarily attributable to our increase in revenues. In addition, increased
incentives earned by our business associates contributed to the increase in
direct cost of revenues. Variability in the direct costs as a percentage of
revenues is a function of the reverse auction bidding process wherein the mix of
products offered at auction directly affects the amount of bidding revenue
earned from the redemption of DubLi Credits.
29
--------------------------------------------------------------------------------Gross profit
We had gross profit of $4,456,652 and $3,977,752 for the three months ended June
30, 2010 and June 30, 2009, respectively. Gross profit margin was 64% and 83%
for the three months ended June 30, 2010 and June 30, 2009, respectively.
We had gross profit of $9,554,857 and $6,908,069 for the nine months ended June
30, 2010 and June 30, 2009, respectively. Gross profit margin was 44% and 53%
for the nine months ended June 30, 2010 and June 30, 2009, respectively.
Operating Expenses
Operating expenses for the three months ended June 30, 2010 were $4,046,641, or
58% of revenues, compared to operating expenses of $3,374,866, or 70% of
revenues, for the same period ended June 30, 2009. Operating expenses for the
nine months ended June 30, 2010 were $6,904,399, or 32% of revenues, compared to
operating expenses of $5,814,450, or 45% of revenues, for the same period ended
June 30, 2009. The increase in operating expenses during the three and nine
months ended June 30, 2010 was attributable to increases in our advertising and
marketing expenses and increases in administrative expenses resulting from
planned improvements to our operations including enhancements to our auction
websites and backend software. Operating expenses also increased during the
period for travel and marketing as we worked to expand our Business Associate
Network. We also incurred significant legal expenses in connection with our SEC
filings.
Provision for Income Taxes
The Company is subject to taxation in the U.S., Germany, and various other
jurisdictions. We provide a quarterly income tax estimate which results in a
provision that is approximately 35% of net income, or $(550,000) for the nine
months ended June 30, 2010 after making a $389,976 reduction in the estimate for
the three months ended June 30, 2010.
Discontinued Operations
In May 2009, the Company determined it was in the best long-term interest of the
Company to discontinue the operations of Dublicom GMBH., a wholly-owned
subsidiary. The Company recognized a net loss of $568,380 and $399,511 for the
three months ended June 30, 2010 and 2009, respectively, and $568,380 and
$1,718,763 for the nine months ended June 30, 2010 and 2009, respectively, on
the disposal of the subsidiary and reported in the Consolidated Statements of
Operations and Cash Flows within the caption, "discontinued operations". The
Company has completed the winding up of this business.
Foreign Currency Translation
We had a foreign currency translation adjustment of $(417,970) in the three
month period ended June 30, 2010 and a foreign currency translation adjustment
of $(4,333) in the three month period ended June 30, 2009. We had a foreign
currency translation adjustment of $(505,273) in the nine month period ended
June 30, 2010 and a $0 foreign currency translation adjustment in the nine month
period ended June 30, 2009. These non-cash adjustments are the result of
translating the European subsidiaries' financial statements from their
functional currency, the Euro into US Dollars for financial reporting
purposes. The amounts are reflected as other comprehensive income (loss) and do
not affect net income or earnings per share.
Comprehensive Income
We had a comprehensive income (loss) of $(186,634), or (3)% of revenues, for the
three month period ended June 30, 2010 compared to comprehensive income of $
274,032, or 6% of revenues, for the same period ended June 30, 2009. Our
comprehensive income is a function of revenues, cost of sales and other
expenses, loss from discontinued operations and foreign currency translation
adjustment as described above. Earnings per share in the three month period
ended June 30, 2010 were $(0.01) per basic and $0.00 per fully diluted share
based on basic weighted average number of shares outstanding during the period
of 28,621,680 and fully diluted weighted average number of shares of 337,450,905
compared to earnings per basic share of $0.01 and $0.01 per fully diluted share
in the three months ended June 30, 2009 on the basic and fully diluted weighted
average number of shares outstanding of 20,674,802.
We had a comprehensive income of $1,019,532, or 5% of revenues, for the nine
month period ended June 30, 2010 compared to a $(553,591), or (4)% of revenues,
for the same period ended June 30, 2009. Earnings per share for continuing
operations in the nine month period ended June 30, 2010 were $0.04 per basic and
$0.00 per diluted share based on the basic weighted average number of shares
outstanding during the period of 28,100,031 and fully diluted shares of
318,399,072 compared to earnings per basic share of $(0.03) and $(0.03) per
fully diluted shares in the nine months ended June 30, 2009 on the basic and
fully diluted weighted average number of shares outstanding of 20,674,802
30
--------------------------------------------------------------------------------Liquidity and Capital Resources
General
As of June 30, 2010 and September 30, 2009, we had working capital of
approximately $(1,692,792) and $(2,644,590), respectively. Our working capital
has decreased in the nine month period ended June 30, 2010 as we have utilized
some of our available capital to fund operations (including various discontinued
operations) and purchase non-current assets such as real estate and software.
As of June 30, 2010, we had cash and cash equivalents of $1,024,426. We also had
$1,860,447 of restricted cash. Restricted cash is a cash reserve maintained by
our credit card processors on sales processed by them. Our credit card
processors are currently maintaining a 20%reserve for six months on each sale
processed by them.
Our principal use of cash in our operating activities has historically been for
restricted cash, inventory and for selling and general and administrative
expenses.
Operating Activities
Cash flows provided by operating activities during the nine months ended June
30, 2010 were $(586,783), compared to cash flows provided by operating
activities of $234977 during the nine months ended June 30, 2009. Significant
items reducing cash flows from operations for the nine months ended June 30,
2010 include: an increase in restricted cash of $1,138,217; a decrease in
commissions payable of $1,125,415; a decrease of accrued incentives $644,292; a
decrease of accrued liabilities $566,534; an increase in inventory of $286,634.
Items increasing cash flows from operations include significant increases in
deferred revenue of $511,070 and increase in accounts payable of $127,421.
Investing and Financing Activities
Cash flows (used) in investing activities were $(1,229,214) and $(78,750) for
the nine months ended June 30, 2010 and 2009, respectively. Our primary uses of
cash for investing activities were the software license, deposits and options,
and real estate and office equipment.
Cash flows provided by financing activities were $133,185 and $608,744 for the
nine months ended June 30, 2010, and 2009, respectively, from proceeds of
warrant exercises and sales of common stock and proceeds of $824,297 net of
repayments of $654,021 from the Note Payable related party.
In the nine months ended June 30, 2010, we utilized approximately $600,000 of
cash from operations and $1.2 million of cash for investment activities. We
financed this $1.8 million use of cash with our pre-existing cash resources and
approximately $200,000 of net cash advances from our Chief Executive Officer,
Mr. Michael Hansen. For the quarter ending September 30, 2010, we anticipate
our capital needs for investing activities will be approximately $1
million. Unless we can generate significantly more capital from operations then
we currently project may be generated, in the quarter ending September 30, 2010
we will need to secure additional capital to meet our projected cash needs for
investment purposes and to otherwise continue to grow our business as planned.
Mr. Michael Hansen has provided us considerable financial support in the past,
and he has verbally committed to provide us the capital we currently project we
will need for investment purposes in the quarter ending September 30, 2010, if
and when needed. Mr. Hansen has not yet reduced his commitment to writing. On
August 19, 2010, Mr. Hansen lent the Company $190,431so that it could make the
scheduled payment on a real estate contract it acquired as an investment. If we
are unable to generate or secure capital as planned, we may not be able to
develop our business as planned and/or may be compelled to seek alternative
sources of capital in order to pursue our current business plan.
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