LiveDeal, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2011; filed August 15, 2011. The filing identifies the company as a provider of internet directory and marketing services for small businesses. Financial statements are unaudited. Amounts are in U.S. dollars.
Financial performance
| Metric | Three months ended June 30, 2011 | Prior-year quarter | Nine months ended June 30, 2011 | Prior-year nine months |
|---|---|---|---|---|
| Net revenue | $1.125 million | $0.992 million | $3.238 million | $3.202 million |
| Gross profit (loss) | $76,747 | $817,562 | $(217,826) | $2.746 million |
| Gross margin | 6.8% | 82.4% | (6.7)% | 85.8% |
| Operating loss | $(1.115) million | $(1.542) million | $(5.031) million | $(6.975) million |
| Net loss | $(1.143) million | $(1.340) million | $(5.188) million | $(5.639) million |
| Basic and diluted loss per share | $(1.68) | $(2.13) | $(7.87) | $(8.93) as shown in the statements |
Quarterly revenue rose 13%; nine-month revenue rose 1%. Management attributed the increases to growth in Velocity sales, partly offset by declining Legacy sales. Cost of services surged, leaving quarterly gross profit sharply lower and nine-month gross profit negative. Management cited higher commissions, fulfillment, lead-generation, and other Velocity costs. General and administrative expense fell 50% in both comparison periods, reflecting restructuring and lower compensation, professional fees, and other costs. Operating and net losses narrowed year over year, but operations remained substantially unprofitable.
Cash, debt, and liquidity
- Cash and cash equivalents were $598,379 at June 30, down from $3.227 million at September 30, 2010. Working capital was approximately negative $691,000, versus positive $3.201 million at September 30.
- Operating cash outflow was $3.980 million for the nine months, compared with $2.842 million in the prior-year period. Investing activities provided $97,413; financing activities provided $1.254 million.
- The company borrowed $1 million from Everest Group in May. The one-year loan bears 18% annual interest, is secured by specified assets including receivables, and requires $50,000 monthly principal payments beginning November 1, 2011, with the balance due at maturity. Certain additional borrowing and corporate actions are restricted; default can accelerate repayment and trigger a $20,000 fee.
- Receivables were $1.156 million net of a $1.801 million allowance against $2.956 million gross receivables. Three entities represented 77% of gross receivables. Capital lease obligations were $52,607 current; reported future operating lease and service-contract commitments totaled $813,687.
Material changes, outlook, and risks
- The company discontinued its Direct Sales business, closing it in May 2011. It reported $367,588 of noncash intangible-asset impairment and $7,083 of employee contract termination charges for the discontinuation. Direct Sales revenue was reclassified as discontinued operations.
- A reduction in force effective December 2010 eliminated 36 employees, about 60% of the workforce; the company reported 13 employees at June 30, 2011. Management said it had suspended new sales of Velocity products, continued the Legacy business, and was exploring strategic alternatives.
- Management said available cash and potential financing sources were expected to support operations for 12 months, but cautioned that it might not achieve profitability or positive operating cash flow, repay the loan, or obtain additional financing on acceptable terms. No specific revenue or earnings guidance was provided.
- Nasdaq had cited the company for failing to meet both the 500,000 publicly held share requirement and the $2.5 million minimum stockholders’ equity requirement. A 20-for-19 forward stock split took effect August 10, 2011, addressing the share-count issue, but the company remained below the equity requirement. It appealed a delisting determination; trading was to continue while the appeal was pending.
- Subsequent to quarter-end, a prospective investor delivered a nonbinding term sheet for a proposed $1.5 million investment at $2.50 per share, with potential board appointment rights. The proposal remained subject to due diligence, definitive agreements, and stockholder approval.
- The GES consumer-fraud dispute remained a contingency. In an August 1, 2011 arbitration, the settlement agreement was rescinded and fees and costs were awarded to plaintiffs; the company estimated the request for fees and costs at about $40,000. The company had not accrued amounts for its legal proceedings.
- In a separate equity arrangement, purchasers failed to pay a final $50,000 installment due in May; the company notified them of alleged breach and said it was preserving its rights.
Important facts for investors to verify
- Whether the company can control service-delivery costs and restore positive gross margins, particularly after suspending new Velocity sales.
- Cash burn, near-term liquidity, access to additional financing, and ability to meet the 18% secured loan’s payment schedule and maturity.
- Nasdaq appeal outcome and the company’s plan to meet the $2.5 million stockholders’ equity requirement.
- Collectability and concentration of receivables, including the large allowance for doubtful accounts and reliance on three entities.
- Status and financial impact of the GES fee award, the failed equity installment, and the proposed investment, which was nonbinding.