LiveDeal, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2014. The filing was signed May 20, 2014. LiveDeal provides online marketing and promotional services for small and medium-sized businesses, including its LiveDeal.com restaurant deal platform and Velocity Local online-presence services. It continued to earn a significant share of revenue from legacy customers, while no longer accepting new legacy-product customers.
Financial performance
| Metric | Three months ended March 31, 2014 | Prior-year quarter | Six months ended March 31, 2014 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $678,033 | $555,084 | $1,271,491 | $1,127,619 |
| Gross profit | $432,355 | $438,171 | $904,484 | $908,070 |
| Gross margin | 63.8% | 78.9% | 71.1% | 80.5% |
| Operating loss | $(970,955) | $(800,526) | $(1,396,598) | $(1,112,444) |
| Net loss | $(975,860) | $(3,215,017) | $(1,384,019) | $(4,275,526) |
| Basic and diluted loss per share | $(0.07) | $(0.38) | $(0.11) | $(0.52) |
Quarterly revenue increased 22% and six-month revenue increased 13%. Management attributed the increases mainly to growth in online-products revenue, partly offset by declining legacy revenue. Cost of services rose faster than revenue, primarily from online-product fulfillment costs, leaving gross profit roughly flat and reducing gross margin. Sales and marketing expense rose substantially as the company funded corporate marketing; operating losses widened. Net loss improved sharply versus 2013 largely because the prior-year period included substantial non-cash interest expense associated with convertible debt and warrants—not because operations had become profitable.
Cash, liquidity, debt, and capital
- Cash and cash equivalents were $9.57 million at March 31, 2014, versus $761,458 at September 30, 2013. Working capital was $9.28 million, versus $179,968.
- Operating cash outflow was $1.50 million for the six months, compared with $1.11 million in the prior-year period. Investing cash outflow was $208,330. Financing provided $10.52 million, including $9.70 million net proceeds from an at-the-market common-stock offering and $823,595 from convertible debt and warrants.
- Current liabilities were $1.30 million, including $297,714 of notes payable net of debt discount and a $174,286 derivative liability. The company had issued a $500,000 one-year note to related party Isaac Capital Group and a $323,595 one-year convertible note to an unaffiliated party. The filing reports no advances under the separate $5 million Kingston convertible-note facility as of March 31.
- The March-quarter ATM sale of 2,214,612 shares generated $10 million gross and $9.70 million net proceeds. Common shares outstanding rose from 11.34 million at September 30 to 13.58 million at March 31. A new shelf registration for up to $50 million of securities became effective April 10; a subsequent ATM agreement authorized sales of up to 10 million shares.
- Operating lease commitments totaled $794,581. The company reported no off-balance-sheet arrangements requiring disclosure.
Outlook, risks, and notable items
- Management said available cash should fund operations for the next 12 months, but the filing also states that recurring losses create substantial doubt about the company’s ability to continue as a going concern. Management said continued operations depend on revenue growth, profitability, positive operating cash flow, or additional financing; further equity or debt financing could dilute or otherwise impair existing shareholders.
- LiveDeal.com had launched in San Diego and Los Angeles and expanded to more than 30 other cities. Management described the platform as scalable and said it expected initial monetization through premium placement while exploring other options. No quantified revenue, earnings, or cash-flow guidance was provided.
- The company reported a March 7 agreement to acquire substantially all DA Stores assets for $200,000; the asset transfer was executed May 16. Two individuals also received $150,000 each in retention compensation, with additional conditional payments tied to revenue and profitability targets. Separately, on May 5 the company agreed to acquire DealTicker for CAN$246,000, subject to closing conditions.
- The February convertible note contains conversion-price reset and dilution provisions. Its embedded conversion feature was accounted for as a derivative liability; the company recorded $34,434 of fair-value expense during the six-month period. Kingston notes, if issued, carry 8% interest and conversion and warrant terms that may create dilution.
- A lease dispute resulted in a judgment of approximately $52,261, accrued at March 31; the company expected to pay it in the quarter ending June 30, 2014. Management said other pending matters were not expected to have a material adverse effect, while noting litigation outcomes remain uncertain.
- Three entities accounted for 38%, 22%, and 16% of gross receivables at March 31, underscoring collection and customer-concentration risk. The company also cited historical billing dilution, holdbacks, and dependence on third-party billing companies.
Important facts for investors to verify
- Whether LiveDeal.com and other newer offerings can grow revenue and improve margins enough to offset declining legacy revenue and ongoing operating costs.
- The company’s actual cash burn and financing needs relative to management’s 12-month liquidity expectation and the going-concern warning.
- Potential dilution and economic terms of outstanding convertible notes, warrants, the Kingston facility, and any future ATM or shelf offerings.
- Closing status, purchase accounting, integration costs, and performance of the DA Stores and DealTicker transactions, including contingent compensation or purchase-price provisions.
- Receivable collectability, billing-company holdbacks and concentration, and the resolution and payment of the J3 Harmon judgment.