Business context and reporting period
LiveDeal, Inc. filed this Form 10-K for the fiscal year ended September 30, 2013. It provides online marketing services to small and midsize businesses. The company was shifting from legacy directory-listing subscriptions toward Velocity Local online-presence services and promotional deals. It launched LiveDeal.com, a restaurant deal platform, in San Diego in September 2013; Los Angeles followed in December 2013. New business lines had not yet generated significant revenue, and the company continued servicing legacy customers but was no longer accepting new ones.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $2.35 million | $3.07 million |
| Gross profit | $1.44 million; 61.0% margin | $2.36 million; 76.7% margin |
| Operating loss | $2.74 million | $0.95 million |
| Net loss | $5.75 million; $1.84 per share | $1.58 million; $0.76 per share |
| Operating cash flow | -$1.81 million | $29,000 |
| Cash at year-end | $761,458 | $1.31 million |
| Working capital | $179,968 | $370,780 |
| Total liabilities | $823,517 | $1.43 million |
| Total stockholders’ equity | $3.17 million | $2.83 million |
Revenue fell 23%, primarily because the loss of legacy local-exchange-carrier billing reduced revenue by about $1.2 million, partly offset by approximately $500,000 of increased online-marketing revenue. Cost of services rose 28%, partly reflecting higher allowances associated with the end of LEC billing. General and administrative expense rose 25% to $4.11 million, including higher staffing costs. Other expense was $3.01 million, largely due to $3.29 million of interest expense, including $3.29 million of noncash charges related to convertible notes with ICG, an entity owned by the CEO.
Investing cash outflow was $141,478; financing provided $1.40 million, including $1.25 million of convertible-note proceeds and $152,160 from stock issuance. At September 30, 2013, the balance sheet showed no separate notes payable, as the ICG notes issued during the year were converted into shares and warrants. The company had $2.85 million of net intangible assets. Its allowance for doubtful accounts was $1.06 million against $1.28 million of gross receivables.
Material changes and unusual items
- Revenue declined from $3.1 million in FY2011 to $2.4 million in FY2013 as legacy sales wound down and LEC billing channels ceased; new offerings had not yet replaced that revenue.
- Net loss widened by $4.17 million year over year. The significant noncash beneficial-conversion-feature and warrant charges on related-party convertible notes materially increased reported interest expense.
- During FY2013, ICG converted $1.25 million of notes into 846,363 common shares and warrants for an equal number of shares. Total warrants outstanding were 955,502 at year-end; potentially dilutive securities were excluded from loss per share as antidilutive.
- The company issued 200,000 shares valued at $994,000 for CRM software assets and 44,233 shares for $152,160 cash. Common shares outstanding rose to 3,778,558 at September 30, 2013 from 2,620,486 a year earlier.
- The auditor’s report is unqualified, but highlights substantial doubt about the company’s ability to continue as a going concern, citing the FY2013 net loss and $27.33 million accumulated deficit.
Outlook, risks and contingencies
Management said existing cash alone was insufficient to sustain current operations, while expressing the view that operating cash generation and potential debt or equity financing could fund the next 12 months. The filing provides no formal revenue, earnings, or cash-flow guidance and no assurance that new products will become profitable or that financing will be available on acceptable terms.
After year-end, the company entered into an agreement providing for up to $5 million of unsecured convertible notes, subject to NASDAQ approval for borrowings. The notes carry 8% interest, are issued at a 5% discount, and have conversion terms that may create substantial dilution, including warrants and anti-dilution provisions. The company also authorized an at-the-market offering of up to 660,000 shares; on January 9, 2014, 12,200 shares were sold for about $109,000 gross and $106,000 net. These subsequent financing arrangements do not establish that the full amounts will be raised. The board also adopted a plan reserving 600,000 shares for equity awards, subject to stockholder approval.
Key risks include continued operating losses and liquidity needs; uncertain customer adoption and monetization of the new platform; competition from larger deal and internet-marketing companies; customer attrition and dependence on payment processors and publishing partners; collectability of legacy receivables; dilution from financing and equity awards; and regulatory, technology, security, and NASDAQ-listing risks. The company accrued $52,261 for a lease-related judgment expected to be paid in FY2014. A separate class-action settlement was completed. Management said pending routine litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Cash runway, near-term cash burn, and whether the company drew funds under the post-year-end convertible-note facility; confirm the NASDAQ approval condition and any resulting conversion or warrant issuance.
- LiveDeal.com and Velocity Local merchant/customer adoption, monetization, and revenue contribution relative to continuing decline in legacy subscriptions and billing channels.
- Whether reported receivables and reserves are collectible, including the concentration in three counterparties and the high allowance against gross receivables.
- Potential dilution from the ICG warrants, the Kingston note terms, the ATM offering, and the 600,000-share incentive plan; compare these with shares outstanding.
- Quarterly performance and cost trends: FY2013 Q4 revenue was $617,382, gross profit $99,521, and net loss $960,319; verify the causes of the sharp quarterly gross-margin decline.
- Going-concern disclosures, financing availability, and progress toward sustained positive operating cash flow.