LiveDeal, Inc. — Form 10-Q Summary
Business context and period: The filing covers the fiscal second quarter and six months ended March 31, 2012; the company’s fiscal year ends September 30. LiveDeal provides online marketing and directory services to small businesses through its InstantAgency product suite. The direct-sales business was discontinued in 2011, and new sales of the legacy directory offering had been paused since July 2011.
Financial results
| Metric | Three months ended March 31, 2012 | Six months ended March 31, 2012 |
|---|---|---|
| Revenue | $821,701 | $1,673,114 |
| Gross profit (margin) | $595,093 (72.4%) | $1,210,687 (72.3%) |
| Operating loss | $(226,860) | $(378,134) |
| Net loss | $(258,993) | $(450,631) |
| Basic and diluted loss per share | $(0.11) | $(0.27) |
- Year-over-year comparison: Quarterly and six-month revenue fell 27% and 21%, respectively. Gross profit improved from losses of $394,618 and $294,573 in the comparable 2011 periods, respectively, largely because fulfillment costs declined. Net losses narrowed from $2.315 million to $259,000 for the quarter and from $4.045 million to $451,000 for six months.
- Expenses: General and administrative expense declined 49% for the quarter and 56% for six months. Management cited lower compensation, professional fees, depreciation and other costs, following workforce and cost reductions. Sales and marketing expense was minimal.
- Cash flow: Operating cash flow was positive $5,684 for the six months, compared with cash used of $2.806 million a year earlier. Investing used $8,169; financing provided $1.868 million, mainly from $2.150 million of stock proceeds, partly offset by $250,000 of note repayments and capital-lease payments. Cash rose to $2.110 million from $244,470 at September 30, 2011.
- Liquidity and debt: Working capital was $869,000, versus a deficit of $1.050 million at September 30, 2011. Current liabilities were $1.840 million, including $750,000 of notes payable and $5,330 of current capital-lease obligations. Management said available cash was expected to fund operations for 12 months, while cautioning that profitability and positive operating cash flow were not assured.
- Balance sheet and equity: Total assets were $4.371 million and stockholders’ equity was $2.531 million at March 31, 2012. Common shares issued increased to 2,392,522 from 698,491 at September 30, 2011, primarily reflecting equity financing. The filing reports 2,395,729 common shares outstanding as of May 1, 2012.
Material changes, outlook and risks
- In December 2011, the company sold common stock for $2.0 million at $1.24 per share; certain investors received director-nomination rights while they held at least 5% of the company. In March 2012, it issued 45,180 shares for $150,000.
- After quarter-end, on April 3, 2012, the company issued an initial $250,000 unsecured subordinated convertible note to Isaac Capital Group, owned by CEO and director Jon Isaac. The agreement allows up to $2 million in notes, bears 8% interest and includes conversion and warrant provisions. Additional borrowing is subject to the agreement’s terms and covenants.
- Management expects demand for online advertising and websites to support revenue growth, but provided no quantified financial guidance. It also described significant uncertainty and volatility as it implements its business strategy.
- A material operating risk is the expected cessation of third-party LEC billing by major providers by December 28, 2012. LiveDeal planned to move affected customers to alternative billing methods, which could increase cancellations and refunds.
- The company is negotiating a settlement in the Global Education Services consumer-fraud class action concerning activator checks. No litigation accrual was recorded; management said other pending matters were not expected to materially affect financial condition, results, cash flows or liquidity.
- Former CEO Kevin A. Hall’s termination is disputed. The filing states that a potential $56,250 severance payment had not been made. CEO Jon Isaac agreed to a $1 annual salary, with possible discretionary bonuses. The CFO’s salary was reduced 50% to $110,000, and his options were scheduled to vest in May 2012.
- Management reported effective disclosure controls as of quarter-end and no material change in internal control over financial reporting. A receivables presentation change grossed up receivables and the doubtful-account allowance by approximately $350,000, with no effect on net receivables or prior periods.
Important facts for investors to verify
- Whether new sales resume and revenue stabilizes after the pause, and whether reported cost reductions translate into sustained operating improvement.
- How the transition from LEC billing affects customer retention, refunds and cash collections before the anticipated 2012 provider cutoff.
- Cash runway and financing needs, including the terms and potential dilution from the related-party convertible-note facility and associated warrants.
- Concentration and collectability of receivables: three entities represented 37%, 28% and 15% of gross receivables at March 31, 2012; the allowance for doubtful accounts totaled $1.653 million.
- Outcome and possible costs of the GES litigation and the dispute over former CEO severance.