LiveDeal, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2013. The filing was signed May 14, 2013. LiveDeal provides online customer-acquisition and marketing services to small and medium-sized local businesses; results include one operating segment.
Financial performance
| Metric | Three months ended March 31, 2013 | Six months ended March 31, 2013 |
|---|---|---|
| Revenue | $555,084, down 32% year over year | $1,127,619, down 33% |
| Gross profit / margin | $438,171 / 78.9%; prior-year margin 72.4% | $908,070 / 80.5%; prior-year margin 72.4% |
| Operating loss | $800,526; prior-year loss $226,860 | $1,112,444; prior-year loss $378,134 |
| Net loss | $3,215,017; $1.15 per share | $4,275,526; $1.57 per share |
| Net interest and other expense | $2,414,941 | $3,165,495 |
| Operating cash flow | Cash used: $1,112,603 for the six months, versus $5,684 provided a year earlier |
Cash and cash equivalents were $1,297,275 at March 31, compared with $1,305,785 at September 30, 2012. Working capital was $743,695, up from $370,780. Current assets were $1,749,240 and current liabilities $1,005,546. Total liabilities were $1,005,546; the balance sheet reported no debt balance after the convertible notes were converted. Cash used in investing was $145,907; financing provided $1,250,000. The filing reports no income-tax provision or benefit.
Material changes and notable items
- Revenue declined mainly because legacy-product sales and customer counts continued to fall; the new LiveDeal promotional-marketing and Velocity Local online-presence businesses had not yet generated significant revenue.
- Cost of services fell 48% for the quarter and 53% for the six months, reflecting fewer customers and more in-house fulfillment. Gross margin improved, but gross profit dollars declined with revenue.
- General and administrative expense rose 50% for the quarter and 26% for the six months. Management cited call-center compensation, professional fees and other costs; cost reductions partly offset the increases.
- Interest expense included $3,291,466 of noncash expense associated with beneficial conversion features and warrants. The reported net loss therefore substantially exceeded the operating loss.
- Convertible notes totaling $1.5 million were issued to Isaac Capital Group, owned by CEO Jon Isaac, and converted during the period into common shares and warrants. The filing reports 846,363 warrants granted during the six months and 955,502 warrants outstanding at March 31. Common shares issued and outstanding rose from 2,620,486 at September 30 to 3,496,340 at March 31; 3,502,623 were reported outstanding May 6.
- The company acquired LiveOpenly assets in August 2012 for 75,000 shares and recorded $420,000 of intangible assets. It spent $117,500 on intangible assets in the six months.
Liquidity, outlook and risks
Management stated that existing cash was expected to fund operations for the next 12 months, but cautioned that profitability and positive operating cash flow were not assured and that results could remain volatile. The company was pursuing new business lines and anticipated that online-advertising and website demand could support revenue growth; no quantified guidance was provided.
A Form S-3 shelf registration, amended May 6, 2013, could permit offerings of up to $10 million in securities for general corporate purposes, but it had not been declared effective as of the filing. No securities could be sold under it before effectiveness and a prospectus supplement.
Key risks include continued losses and operating cash burn; declining legacy revenue and uncertain adoption of new offerings; receivable collectability and dependence on third-party billing companies; and dilution or related-party concerns from the CEO-owned lender’s note and warrant arrangements. Three entities represented 41%, 27% and 14% of gross receivables at March 31, while the allowance for doubtful accounts was $1,516,474.
The company accrued $160,000 for the Global Education Services class-action settlement, which received final court approval April 26, 2013; payments were expected in the fiscal third quarter. A separate lease dispute was settled for $112,500 plus retention of a $24,000 security deposit, and the payment had been made. Future operating lease payments totaled $460,050. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new marketing products can generate material revenue and offset continuing legacy-customer attrition.
- Cash burn, available financing, and the basis for management’s 12-month liquidity assessment.
- The full economic and dilution effects of the related-party convertible-note and warrant terms, including potential additional offerings under the shelf registration.
- Receivable quality, billing-company holdbacks, concentration exposure, and the adequacy of related allowances.
- Final settlement payments and any material developments in legal proceedings or other contingencies.