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LIVEDEAL INC 10-K 2009 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
___________
FORM
10-K
ANNUAL
REPORT
PURSUANT
TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark
one)
For the
fiscal year ended September 30, 2009
For the
Transition period from ________ to ____________
Commission
File Number: 0-24217
LiveDeal,
Inc.
(Exact
Name of Registrant as Specified in Its Charter)
Registrant’s
telephone number, including area code:(702) 939-0230
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 Par
Value
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web Site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer”, “
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of the registrant’s common stock held by non-affiliates
computed based on the closing price of such stock on March 31, 2009 was
approximately $11,743,548.
The
number of shares outstanding of the registrant’s common stock, as of December 7,
2009, was 6,095,040 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement relating to the Registrant’s 2010 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form
10-K.
FORM
10-K
For
the year ended September 30, 2009
TABLE
OF CONTENTS
(Edgar
service provider to update pages)
Forward-Looking
Statements
Part I of
this Annual Report on Form 10-K includes statements that constitute
“forward-looking statements.” These forward-looking statements are
often characterized by the terms “may,” “believes,” “projects,” “expects,” or
“anticipates,” and do not reflect historical facts. Specific forward-looking
statements contained in Part I of this Annual Report include, but are not
limited to, our company’s (i) belief that local exchange carrier, or LEC,
billing will continue to be a significant billing channel in the future; (ii)
expectation of increasing revenues through our national accounts programs,
fulfillment contracts, web hosting and other arrangements; (iii) expectation
that our Telesold Suite Services will continue to grow in revenues and represent
a substantial portion of our revenue in the upcoming fiscal year and going
forward; (iv) belief in the growth of Internet usage and the Internet
Yellow Page market as described in recent press releases by The Kelsey
Group; (v) belief in the growth of the local search and information
market as described in recent reports by Borrell Associates;(vi) belief that
existing cash on hand will be sufficient to meet our needs for the next 12
months; and (vii) belief that existing facilities are adequate for our current
and anticipated future needs and that our facilities and their contents are
adequately covered by insurance.
Forward-looking
statements involve risks, uncertainties and other factors, which may cause our
actual results, performance or achievements to be materially different from
those expressed or implied by such forward-looking statements. Factors and risks
that could affect our results and achievements and cause them to materially
differ from those contained in the forward-looking statements include those
identified in Item 1A. Risk
Factors, as well as other factors that we are currently unable to
identify or quantify, but may exist in the future.
In
addition, the foregoing factors may affect generally our business, results of
operations and financial position. Forward-looking statements speak
only as of the date the statement was made. We do not undertake and
specifically decline any obligation to update any forward-looking
statements.
Our
Company
LiveDeal,
Inc., a Nevada corporation (formerly known as YP Corp.) (the “Company,” “we,”
“us,” or “our”) is a provider of Internet directory, classified and audience
acquisition services to small businesses. Through our wholly-owned
subsidiary, Telco Billing, Inc. (“Telco”), located in Las Vegas, Nevada, we
publish a small business directory online at
www.yellowpages.livedeal.com Any information contained on such
website or any other websites referenced in this Annual Report are not a part of
this Annual Report.
Summary
Business Description
We have
two inter-related primary lines of business: (1) we deliver a suite of audience
acquisition services for small businesses, sold via telemarketing and supported
by our websites and software that we have developed to manage search and other
Internet services efficiently, and (2) we maintain an Internet Yellow Pages
service for every city and zip code across the U.S.
Our
websites, by combining the benefits of business listings, mobile services,
advertising/distribution networks and e-commerce into a single online solution,
offer businesses and consumers an affordable and effective solution for creating
a web presence and marketing their products and services locally.
Our
websites also support our audience acquisition services by providing locally and
vertically targeted Internet pages that are effective at producing website
traffic, form fills and phone calls and other valuable customer interactions on
behalf of our small business customers. Our Telesold audience
acquisition services are not limited to our own websites. Our suite currently
includes the following activities, but the range of activities we deliver is
designed to shift over time, based on the needs of our small business customers
and the ever-changing state of Internet technology:
Business
Directory
We use a
business model similar to print Yellow Pages publishers for our Yellow
Pages directory. We publish basic directory listings on the
Internet free of charge. Our basic listings contain the business
name, address and telephone number for almost 17 million U.S. businesses. We
strive to maintain a listing for almost every business in America in this
format.
We
generate revenues from advertisers that desire increased exposure for their
businesses. As described below, advertisers pay us monthly fees in
the same manner that advertisers pay additional fees to traditional print Yellow
Pages providers for enhanced advertisement font, location or
display. The users of our website are prospective customers for our
advertisers, as well as the other businesses for which we publish basic
listings. We also have arrangements with third parties to distribute
our advertisers’ information to other search engines, thereby enhancing our
advertisers’ presence on the Internet.
Benefits to
Advertisers. We provide added value to advertisers that have
purchased our Internet Advertising Package (“IAP”) through promotion and
branding of our website to bring customers to our advertisers. We believe that
the large number of IAPs, which include the Mini-WebPages described in more
detail below, provide users of our website with more information about our
advertisers and that this feature is more readily available on our website than
that of our competitors. We believe that we provide users of our website with
the information they are looking for, more quickly and more
efficiently. We believe our call center provides the highest level of
customer service and therefore provides IAP advertisers with the necessary
resources to fully utilize the benefits of the IAP. We also believe
the attraction of these users will, over the longterm, result in more sales for
our IAP advertisers.
Moreover,
we provide additional value through our relationships. We provide the
majority of our IAP advertisers additional exposure by circulating their
listings to other search engines. We provide a listing service that
also ensures that our business listing customers are listed on hundreds of sites
including Google, Yahoo, MSN and others through an agreement with InfoUSA.
We also have an agreement with Yahoo! Search Services to improve our IAP
advertisers’ appearance in search results at several high-profile
sites.
Benefits to Users of our
Website. We provide a national online Yellow Pages directory.
Users of our website can access information nationally rather than relying
exclusively on local listings such as those provided in print Yellow Pages
directories. In addition, our product offerings allow users to find
and take advantage of our advertisers’ current special offerings and discounts.
Users can access such information easily through their desktop or laptop
computers, cellular telephones or hand-held devices, such as personal digital
assistants. We believe our offering of a national online Yellow Pages service
meets the growing demand for immediate access and the increasing need and trend
of Internet users who are more frequently traveling to areas outside the areas
serviced by their local print directories.
Products
and Services
Internet Advertising Package.
Our primary revenue-producing directory product is our IAP. Under
this package, the advertiser pays for additional exposure by purchasing
enhancements to a basic listing, such as a Mini-WebPage. This
Mini-WebPage contains, among other useful information, a 40-word description of
the business, hours of operation, and detailed contact
information. The advertiser can easily access and modify its
Mini-WebPage. This product is easily searched by users of our website
on their personal computers, as well as cellular telephones and other hand-held
devices. In order to provide search traffic to an advertiser’s
Mini-WebPage, we elevate the advertiser to a preferred listing status at no
additional charge. As such, the preferred advertiser enjoys the benefit of
having its advertisement displayed in a primary position before all of the basic
listings in that particular category when users of our website perform searches
on our website. We also provide our IAP advertisers with enhanced
presentation and additional unique products, including:
Our IAP
advertisers generally pay between $27.50 and $39.95 per month. Our IAP accounted
for approximately 69% of our net revenues in fiscal 2009.
Directory Billing. Our
billing process allows us to deliver high levels of service to our customers
through convenient and timely billing and payment options. We
currently bill our advertisers through (i) their local exchange carrier (“LEC”),
(ii) Automated Clearing House (“ACH”) billing, (iii) their credit card or (iv)
direct bill invoices.
Similar
to the local Regional Bell Operating Companies, we are approved to bill our
products and services directly on some of our advertisers’ local telephone bill
through their LEC, commonly referred to as their local telephone
company. We believe that this is an efficient and cost-effective
billing method as compared to direct billing methods.
In order
to bill our advertisers through their LECs, we are required to use one or more
billing service aggregators. These aggregators have been approved by various
LECs to provide billing, collection, and related services through the LECs.
Under these agreements, our service aggregators bill and collect our charges to
our advertisers through LEC billing and remit to us the proceeds, net of fees,
bad debt reserves, customer returns, and unbillable accounts, typically within
90 days of submission.
We also
use billing service providers to process billings via recurring direct bank
account withdrawal options through ACH billings. These service
providers process direct bank withdrawals through an Automated Clearing House
and remit the proceeds, net of fees and refunds to advertisers that cancel their
service, typically within 15 days of settlement.
Under our
contractual agreements with our LEC billing service aggregators, these third
parties are entitled to withhold certain amounts from our net proceeds to serve
as a security deposit or “holdbacks” or “reserves.” Such amounts are
generally remitted to us over a 12-18 month period, depending on the terms of
the respective agreements. An ACH processor maintains a fixed
security deposit as a reserve.
Directory Pricing. We
generally price our IAP product between $27.50 and $39.95 per month, which
includes all of the service benefits previously described. We believe that these
prices are comparable to the prices of our competitors, and we believe that our
site provides superior value to our advertisers when considering the many
benefits that they receive, including the Mini-WebPage, mapping directions,
links to the advertiser websites, and the speed and ease of use of our
website.
Our
pricing advantage is significant when compared with printed Yellow
Pages. For a Yellow Pages listing with comparable information
content, an advertiser would typically pay over $200 per month. This
listing in the printed Yellow Pages would include a business description of
comparable size to our IAP offering but would lack our mapping directions, and
link to the advertiser’s website. Our online Yellow Pages provide
significant flexibility in terms of changing content and adding special
informational items at any time throughout the year. Advertisers in
printed Yellow Pages are also limited by the publishers’ infrequent
re-publication schedule if they desire to change their
advertisement.
Direct Sales, also known as
Telesold Suite
Services. Since February 2008, we have added a new line
of business that utilizes, but is not entirely dependent on, our directory
websites and billing services. This line of business is based on using telesales
and sophisticated Internet audience acquisition technologies to deliver a suite
of audience acquisition services to small businesses.
We
believe this approach represents an essential element in the local marketplace.
Small businesses turned to traditional Yellow Pages and Internet directories as
low-cost effective tools for identifying and delivering customers who are
geographically appropriate and ready to buy. These traditional approaches retain
value for small businesses, but that value is steadily waning as new waves of
Internet capabilities come into existence.
The most
significant of these is Internet search and the linking of Internet advertising
services to search. This development makes it possible, even likely, that
customers can find the businesses they need without ever going to a directory.
The small business whose website information or advertising message is
associated with a successful search becomes the likely recipient of that
business. So, utilizing Internet search and related advertising is fast becoming
a necessity for small businesses.
Another
key Internet development is the rise of locally oriented user review sites and
services, such as Yelp.com. At these sites, consumers let each other know about
their experiences with local businesses. They rate and comment on the
businesses. The sites also tend to provide some aspects of traditional
directories as well as new services, such as placing businesses on a local map,
providing driving directions, etc. At these sites, as with online search
engines, consumers can select businesses for their commerce without ever using a
traditional directory.
With the
emergence of these new Internet capabilities, and others that are fast emerging,
the role of directories, both paper and Internet, is steadily moving toward the
back end of a customer acquisition process, where search and review sites
dominate the front end, where the greatest value for both customer and business
resides.
We
believe that small businesses that can take advantage of the emerging Internet
capabilities will be able to acquire customers with efficiency
never-before-possible and that those that cannot will suffer in comparison. So,
it is becoming widely recognized among small business owners that mastering the
Internet arts is essential.
But there
is a gap. These new Internet services are inherently technological. They require
a deep dedication of time, technological skills, language and presentation
expertise and other masteries that few small businesspeople have, or have the
intention of acquiring. We recognize that, to succeed, a small businessperson
needs to remain intensely focused on the fundamentals of his/her business. Small
businesses therefore need a partner with the necessary expertise and
understanding to manage emerging Internet audience acquisition services on their
behalf. They need this partner to operate quickly, proactively and at the lowest
possible cost.
Our
Telesold Suite Services approach allows LiveDeal to become this small business
audience acquisition partner.
By using
sophisticated telesales, rather than the far more expensive and inflexible
Yellow Pages field sales model, we are able to reach and serve more businesses
at lower cost than competitors.
By using
that telesales channel to deliver a suite of services standing at the state of
the Internet market, but packaged for comprehensibility and affordability by
small businesses, we are bringing small businesses a product that may help them
succeed.
By
backing these products with the most supple and sophisticated Internet audience
acquisition and customer feedback systems, we can achieve stability in margins,
pricing and profit from small business Internet services that have been
difficult for competitors to attain and sustain.
Our
current Telesold Services Suite includes:
In the
aggregate, these services represented 31% of our net revenue in fiscal 2009.
However, these services grew from nominal levels to approximately $800,000
in monthly contractual amounts by the end of fiscal 2009 (which may not
correlate with revenue recognition due to timing of revenue recognition). We
expect growth in this line of business to continue through fiscal 2010 and to
continue to represent a substantial portion of our revenue in the upcoming
fiscal year and going forward.
The
Internet Yellow Pages Advertising Market
According
to The Kelsey Group and the Yellow Pages Integrated Media Association, or YPIMA,
while there are approximately 200 major U.S. Yellow Pages print publishers, an
increasingly mobile and computer-sophisticated population is accessing the
Yellow Pages by way of the Internet at a sharply increasing rate.
According
to a Borrell Associates forecast, local online advertising will grow 12% to
$14.2 billion in 2009. According to Borell Associates, online media buys
currently hold a 13.8 percent share of all local advertising, and Borell
believes it will peak at a 16 percent share by 2013.
We
believe Internet Yellow Pages provide the following advantages over print Yellow
Pages:
Internet
Yellow Pages and online classifieds also offer lower costs for a given level of
content and the ability to easily access and modify displays and advertisements,
which allows for opportunistic or targeted specials or discounts.
Internet
usage, in general, has increased dramatically in recent years. According to
Internet World Stats, 73.6% of the North American population uses the Internet,
a growth of 129.6% from 2000 to 2008. Search engines are a common
method by which these users navigate the Internet. We expect to
expand our distribution network to allow our advertisers to benefit from this
growth by seeking prominent placement for them in search engine
results.
In May
2009, we closed our classifieds website and concentrated our marketing resources
in developing our search engine marketing (SEM) services required by our
Telesold business. Earlier, we had discontinued our use of telemarketing to
acquire new IAP customers, and discontinued our overseas telemarketing facility.
We also sold our primary URL, www.yp.com, as well
as a portion of our customer list. Further, certain fulfillment
contracts were terminated during the fiscal year.
We
utilize various online marketing methods to drive users and advertisers to our
site. However, our primary marketing method is
telemarketing.
We
utilize our expertise and experience as an Internet company to identify other
marketing opportunities. Through our referral networks, we have
generated revenue from national accounts programs (whereby revenues are
generated on a “per click” basis), fulfillment contracts, web hosting and other
arrangements. We also have entered into various marketing
arrangements with other businesses whereby we pay commissions based on sales
leads and revenue generated from these businesses. To date, such
commissions have not been material. We evaluate such business opportunities on a
case-by-case basis and expect to expand future revenues from such marketing
efforts.
Technology
and Infrastructure
We have
developed technologies to support the timely delivery of information requested
by a user of our online businesses. A staff of senior engineers
experienced in large-scale distributed web 2.0 applications and computer
operation develops and maintains the technology. We believe we are
particularly adept at scalable databases, design, data modeling, operations and
content management for a large-scale network of high volume websites and
distributed Internet fulfillment locations. During the second half of
fiscal 2008 we began expanding our Internet product development, SEM and search
engine optimization (“SEO”) capabilities. SEM, SEO and platforms related to them
have begun to become a technical core competency of the Company during fiscal
2009.
Our
technology efforts in fiscal 2009 fell into three key areas: website development
and support; sales and call center development and support and internal systems
development and support.
Source Code. We
own source code that includes widely deployed, cost-efficient, stable technology
(J2EE, Struts, XML, Spring, Hybernate, JBoss, Apache, etc):
Database Management
Systems. At the core of our infrastructure are several
high-performance and proprietary database systems containing several giga-bytes
of data representing millions of records with hundreds of attributes each, such
as business name, telephone number, address, number of employees, description of
the business, classifieds listings and feed back
reviews. We maintain the data for internal operations on
high-performance servers and with large-scale storage systems in California and
at our Las Vegas, Nevada facility. To meet the demand for our
products and services and to provide the highest level of reliability, we employ
technologies and techniques providing data redundancy and
clustering. Clustering is the use of several computers deployed in a
manner that provides redundancy and additional computer processing
power.
High-Performance Database and Search
Engine. We believe we provide one of the most complete and
high-performing directory services in the market today. Our
proprietary database enables us to collect and merge data from multiple sources
to provide extensive and accurate content for our users. With our
technologies, we provide keyword search, synonym matching, automated content
delivery, and multiple source data merging in a simple to use
paradigm. We believe these technologies simplify the search process
and provide the most relevant content to suit our customers’ and users’
needs. Ultimately, we expect these technologies to increase recurrent
use of our system by users of our directory services.
Content Syndication, Distribution,
and Private Label Networks. We add value by increasing our IAP
advertisers’ visibility by providing automated conduits and content delivery to
numerous search engines besides our own. We can deliver content both
on the Internet and on mobile devices such as cell phones and personal digital
assistants. Our market position and volume allows us to provide
content to any of our strategic alliances, as discussed elsewhere in this Annual
Report, at a cost below what would be accomplished if one were to attempt to
duplicate our content and distribution network. We have further enhanced the
capabilities of this global distribution network with our AdWiz technology,
which provides high-volume automated record updates in real-time to our
distribution partners and private-label customers.
Strategic
Alliances
In order
to service users of our website more effectively and to extend our brand to
other Internet sources, we have entered into strategic relationships with
business partners that offer content, technology, and distribution capabilities.
The following are descriptions of our most significant strategic
relationships:
We are
members of the Yellow Pages Association (formerly known as Yellow Pages
Integrated Media Association) and the Association of Directory Publishers and
have been since 1998. These organizations are trade associations for
Yellow Pages publishers or others that promote the quality of published content
and advertising methods.
Competition
We
operate in the highly competitive and rapidly expanding and evolving
business-to-business Internet services market. Our largest competitors are LECs,
which are generally known as local telephone companies, and national search
engines such as Yahoo! and Google that have recently expanded their presence in
the local search market. We compete with other online Yellow Pages services,
website operators, advertising networks, and traditional offline media, such as
traditional Yellow Pages directory publishers, television, radio, and print
share advertising. Our services also compete with many directory
website production businesses and Internet information service
providers. Our audience acquisition services compete with advertising
agencies and other businesses providing somewhat similar services.
The
principal competitive factors of the markets in which we compete include
personalization of service, ease of use of directories, quality and
responsiveness of search results, availability of quality content, value-added
products and services, and access to end-users. We compete for
advertising listings with the suppliers of Internet navigational and
informational services, high-traffic websites, Internet access providers, and
other media. This competition could result in significantly lower
prices for advertising and reductions in advertising
revenues. Increased competition could have a material adverse effect
on our business.
Many of
our competitors have greater capital resources than we have. These
capital resources could allow our competitors to engage in advertising and other
promotional activities that will enhance their brand name recognition at levels
we cannot match. The LECs and national search engines also have
advantages in terms of brand name recognition.
We
believe that we are in a position to successfully compete in these markets due
to our experience at sourcing, selling and servicing large numbers of small
business accounts, the comprehensiveness of our database, and the effectiveness
of our marketing programs and our distribution network. We also
believe that our Internet Yellow Pages provides businesses and consumers a
simple and affordable way of creating a web presence and marketing their
products and services to local audiences. The addition of our Telesold Suite
line of business opens new revenue channels for us and expands our
differentiation in the marketplace. We further believe that we can compete
effectively by continuing to provide quality services at competitive prices and
by actively developing new products and services for customers.
We
believe that our telesales capabilities are a competitive
advantage. Through our calling center we can contact more businesses
at a lower cost than our competitors. This is true both for initial sales and
sales support, but for all aspects of customer support. It also
provides us with lead generation capabilities many of our competitors
lack.
Employees
As of
September 30, 2009, we had 117 full-time and no part-time employees in the
United States. None of our employees are covered by any collective
bargaining agreements.
An
investment in our common stock involves a substantial degree of
risk. Before making an investment decision, you should give careful
consideration to the following risk factors in addition to the other information
contained in this report. The following risk factors, however, may
not reflect all of the risks associated with our business or an investment in
our common stock. The trading price of our common stock could decline
significantly due to any of these risks and investors may lose all or part of
their investments. In assessing these risks, investors should also refer to the
other information contained or incorporated by reference in this Annual Report
on Form 10-K, including our September 30, 2009 consolidated financial statements
and related notes.
Risks
Related to Our Business
Our
new business strategy is unproven.
Our new
strategic focus is on delivering a suite of Internet-based, local
search-driven, customer acquisition services for small businesses, sold via
telemarketing and supported by our websites and internally developed
software. This strategy is unproven at this time and will require continued
expenditures to develop products and offerings and develop marketing and support
functions. These expenditures may not be offset by corresponding
increases in revenues, leading to adverse impacts on our financial condition and
results of operations.
The
demand and market acceptance for our services may be subject to a high level of
uncertainty. Advertisers and users may not adopt or continue to
use our Internet-base marketing services and other online services that we may
offer in the future. Advertisers may find our Internet-based
marketing services to be less effective for meeting their business needs than
other methods of advertising and marketing. Our business, prospects,
financial condition or results of operations will be materially and adversely
affected if we do not execute our strategy or our services are not adopted by a
sufficient number of advertisers.
We
will incur operating losses and significant volatility in operations while we
develop our new business segment.
During
the fiscal year ended September 30, 2009, we incurred substantial operating
losses as we transitioned our business toward our new strategic
focus. We will continue to incur operating losses as we develop our
new business segment which will be financed through existing cash on
hand. While we believe our existing cash on hand is sufficient to
finance our operations for the next twelve months, there can be no assurance
that we will achieve profitability or positive operating cash
flows. To the extent that we cannot achieve profitability or positive
operating cash flows, our business will be materially and adversely affected.
Further, this new business segment is likely to experience significant
volatility in its revenues, operating losses, personnel involved, products or
services for sale, and other business parameters, as management implements its
strategies and responds to operating results from this new business
segment.
We
have sold a significant portion of our assets and customer list associated with
our directory services business.
During
fiscal 2009, as part of our changing business strategy, we sold our primary URL,
www.yp.com, as
well as a portion of our customer list. Further, certain fulfillment
contracts were terminated during the fiscal year. These transactions will result
in a significant loss of future revenue which could adversely impact our
financial condition and results of operations.
As a
result of the cessation of billing of the accounts subject to these sales or
terminations of billing contracts during this fiscal year, the reserves held by
the LEC processors, and carried by us as accounts receivable, were no longer
increasing as a result of continued billing for services provided to customers.
Further, the LEC processors continue to deduct their expenses from these
reserves. We have made reasonable estimates of these potential expenses over the
expected period of collection of these reserve amounts held-back by the LEC
processors. However, it is possible that the actual expenses billed by the LEC
processors in the future could vary significantly from the estimates made by the
Company, thereby affecting the amounts collectible from the booked accounts
receivable.
The
discontinuance of our classifieds business could adversely impact our financial
condition.
We
recently made the strategic decision to discontinue our classifieds business and
product offerings which have historically generated a majority of our
revenues. This discontinuance not only will reduce our revenues that
were generated from this product line but could also cause erosion of our Yellow
Pages customer base, particularly with respect to those customers who sought an
integrated Yellow Pages and classifieds product. Further, we made
cash outlays to wind down our business including the termination of affected
employees and office closures. This loss of revenues combined with
the wind-down costs could have an adverse impact on our financial condition and
results of operations in the short-term.
The
closure of our Philippines-based call center operations could adversely impact
our financial condition.
During
fiscal 2009, we discontinued the operations of our Philippines-based call
center, which had historically provided telemarketing services to support
our directory services business. To the extent that we incur
additional closure costs or that the execution of our current or future business
strategies necessitates that we develop similar functions in the future to
support our directory services business, our business could be adversely
affected.
We
face intense competition, including from companies with greater resources, which
could adversely affect our growth and could lead to decreased
revenues.
Search
engine optimization and online marketing services are emerging fields with
a considerable amount of competitors in each field. Additionally,
major Internet companies, including Google, Microsoft, Verizon, and Yahoo!,
currently market Internet Yellow Pages, local search services and other
products that directly compete with our legacy business as well as our new
product offerings. We may not compete effectively with existing and
potential competitors for several reasons, including the following:
Increased
competitive pressure could lead to reduced market share, as well as lower prices
and reduced margins, for our services. If we experience reductions in
our revenue for any reason, our margins may continue to decline, which would
adversely affect our results of operations. We cannot assure you that
we will be able to compete successfully in the future.
Our
success depends upon our ability to establish and maintain relationships with
our advertisers.
Our
ability to generate revenue depends upon our ability to maintain relationships
with our existing advertisers, to attract new advertisers to sign up for
revenue-generating services, and to generate traffic to our advertisers’
websites. We primarily use telemarketing efforts to attract new
advertisers. These telemarketing efforts may not produce
satisfactory results in the future. We attempt to maintain
relationships with our advertisers through customer service and delivery of
traffic to their businesses. An inability to either attract
additional advertisers to use our service or to maintain relationships with our
advertisers could have a material adverse effect on our business, prospects,
financial condition, and results of operations.
If
we do not introduce new or enhanced offerings to our advertisers and users, we
may be unable to attract and retain those advertisers and users, which would
significantly impede our ability to generate revenue.
We will
need to introduce new or enhanced products and services in order to attract and
retain advertisers and users and to remain competitive. Our industry
has been characterized by rapid technological change, changes in advertiser and
user requirements and preferences, and frequent new product and service
introductions embodying new technologies. These changes could render
our technology, systems, and website obsolete. We may experience
difficulties that could delay or prevent us from introducing new products and
services. If we do not periodically enhance our existing products and
services, develop new technologies that address our advertisers’ and users’
needs and preferences, or respond to emerging technological advances and
industry standards and practices on a timely and cost-effective basis, our
products and services may not be attractive to advertisers and users, which
would significantly impede our revenue growth. In addition, our reputation and
our brand could be damaged if any new product or service introduction is not
favorably received.
Our
results of operations could fluctuate due to factors outside of our
control.
Our
operating results have historically fluctuated significantly, and we have
experienced recent declines in net revenues and operating profits. We
could continue to experience fluctuations or continued declining operating
results due to factors that may or may not be within our
control. Such factors include the following:
The
loss of our ability to bill IAP advertisers through our ACH billing channel
would adversely impact our results of operations.
We bill a
significant number of our Directory Services advertisers through our ACH billing
channel. ACH transactions are closely regulated by NACHA – The
Electronic Payments Association, which develops operating rules and business
practices for the ACH network and for electronic payments in the areas of
Internet commerce and other electronic payment means. Changes in
these rules and business practices could compromise our ability to bill a
significant number of our advertisers through ACH billing, and we would have to
transition these advertisers to other billing channels. Such changes
would be disruptive and result in lost revenue.
Our
performance depends substantially on the performance of our executive officers
and other key personnel. The success of our business in the future
will depend on our ability to attract, train, retain, and motivate high quality
personnel, especially highly qualified technical and managerial
personnel. The loss of services of any executive officers or key
personnel could have a material adverse effect on our business, results of
operations or financial condition.
Competition
for talented personnel is intense, and there is no assurance that we will be
able to continue to attract, train, retain or motivate other highly qualified
technical and managerial personnel in the future. In addition, market
conditions may require us to pay higher compensation to qualified management and
technical personnel than we currently anticipate. Any inability to
attract and retain qualified management and technical personnel in the future
could have a material adverse effect on our business, prospects, financial
condition, and results of operations.
We
depend upon third parties to provide certain services and software, and our
business may suffer if the relationships upon which we depend fail to produce
the expected benefits or are terminated.
We depend
upon third-party software to operate certain of our services. The
failure of this software to perform as expected would have a material adverse
effect on our business. Additionally, although we believe that
several alternative sources for this software are available, any failure to
obtain and maintain the rights to use such software would have a material
adverse effect on our business, prospects, financial condition, and results of
operations. We also depend upon third parties to provide services
that allow us to connect to the Internet with sufficient capacity and bandwidth
so that our business can function properly and our websites can handle current
and anticipated traffic. Any restrictions or interruption in our
connection to the Internet would have a material adverse effect on our business,
prospects, financial condition, and results of operations.
We
may not be able to secure additional capital to expand our
operations.
Although
we currently have no material long-term needs for capital expenditures, we will
likely be required to make increased capital expenditures to fund our
anticipated growth of operations, infrastructure, and personnel. We
currently anticipate that our cash on hand as of September 30, 2009, together
with cash flows from operations, will be sufficient to meet our anticipated
liquidity needs for working capital and capital expenditures over the next 12
months. In the future, however, we may seek additional capital
through the issuance of debt or equity depending upon our results of operations,
market conditions or unforeseen needs or opportunities. Our future
liquidity and capital requirements will depend on numerous factors, including
the following:
Our
forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties and actual results could vary materially as a result of
the factors described above. As we require additional capital
resources, we may seek to sell additional equity or debt
securities. Debt financing must be repaid at maturity, regardless of
whether or not we have sufficient cash resources available at that time to repay
the debt. The sale of additional equity or convertible debt
securities could result in additional dilution to existing stockholders. We
cannot provide assurance that any financing arrangements will be available in
amounts or on terms acceptable to us, if at all.
Existing
laws and regulations and any future regulation may have a material adverse
effect on our business. For example, we believe that our direct
marketing programs meet existing requirements of the United States Federal Trade
Commission (“FTC”). Any changes to FTC requirements or changes in our
direct or other marketing practices, however, could result in our marketing
practices failing to comply with FTC regulations.
On
December 14, 2006, we voluntarily entered into a settlement with thirty-four
states’ attorneys general to address their concerns regarding our promotional
activities, including the use of our check mailer for customer
acquisition.
There can
be no absolute assurance that the other states or other parties, which were not
part of the above-mentioned state consortium, would not attempt to file similar
claims against us in the future. However, we believe this risk is
somewhat mitigated by the fact that those states did not join the states in
filing complaints against us and the fact that we are discontinuing the use of
our check activators. Finally, our utilization of ACH billing has
exposed us to greater scrutiny by the National Automated Clearing House
Association, or NACHA. Future actions from these and other regulatory
agencies could expose us to substantial liability in the future, including fines
and criminal penalties, preclusion from offering certain products or services,
and the prevention or limitation of certain marketing practices.
We
may not be able to adequately protect our intellectual property
rights.
Our
success depends both on our internally developed technology and our third party
technology. We rely on a variety of trademarks, service marks, and designs to
promote our brand names and identity. We also rely on a combination
of contractual provisions, confidentiality procedures, and trademark, copyright,
trade secrecy, unfair competition, and other intellectual property laws to
protect the proprietary aspects of our products and services. Legal
standards relating to the validity, enforceability, and scope of the protection
of certain intellectual property rights in Internet-related industries are
uncertain and still evolving. The steps we take to protect our intellectual
property rights may not be adequate to protect our intellectual property and may
not prevent our competitors from gaining access to our intellectual property and
proprietary information. In addition, we cannot provide assurance
that courts will always uphold our intellectual property rights or enforce the
contractual arrangements that we have entered into to protect our proprietary
technology.
Third
parties may infringe or misappropriate our copyrights, trademarks, service
marks, trade dress, and other proprietary rights. Any such
infringement or misappropriation could have a material adverse effect on our
business, prospects, financial condition, and results of
operations. In addition, the relationship between regulations
governing domain names and laws protecting trademarks and similar proprietary
rights is unclear. We may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or otherwise decrease
the value of our trademarks and other proprietary rights, which may result in
the dilution of the brand identity of our services.
We may
decide to initiate litigation in order to enforce our intellectual property
rights, to protect our trade secrets, or to determine the validity and scope of
our proprietary rights. Any such litigation could result in
substantial expense, may reduce our profits, and may not adequately protect our
intellectual property rights. In addition, we may be exposed to
future litigation by third parties based on claims that our products or services
infringe their intellectual property rights. Any such claim or
litigation against us, whether or not successful, could result in substantial
costs and harm our reputation. In addition, such claims or litigation
could force us to do one or more of the following:
Even if
we were to prevail, such claims or litigation could be time-consuming and
expensive to prosecute or defend, and could result in the diversion of our
management’s time and attention. These expenses and diversion of
managerial resources could have a material adverse effect on our business,
prospects, financial condition, and results of operations.
Capacity
constraints may require us to expand our infrastructure and advertiser support
capabilities.
Our
ability to provide high-quality services largely depends upon the efficient and
uninterrupted operation of our computer and communications
systems. We may be required to expand our technology, infrastructure,
and customer support capabilities in order to accommodate any significant
growth in customers. We may not be able to project accurately
the rate or timing of increases, if any, in the use of our services or expand
and upgrade our systems and infrastructure to accommodate these increases in a
timely manner. Our inability to upgrade and expand our infrastructure
and customer support capabilities as required could impair the reputation of our
brand and our services and diminish the attractiveness of our service offerings
to our advertisers.
Any
expansion of our infrastructure may require us to make significant upfront
expenditures for servers, routers, computer equipment, and additional Internet
and intranet equipment, as well as to increase bandwidth for Internet
connectivity. Any such expansion or enhancement will need to be
completed and integrated without system disruptions. An inability to
expand our infrastructure or customer service capabilities either internally or
through third parties, if and when necessary, would materially and adversely
affect our business, prospects, financial condition, and results of
operations.
Current
economic conditions may adversely affect our industry, business and results of
operations.
The U.S.
and global economy is currently undergoing a recession and a period of
unprecedented volatility. It is unclear how prolonged this recession
will be and how it will affect our industry in particular. Many believe that the
general future economic environment may continue to be less favorable than that
of recent years. If the challenging economic conditions in the U.S.
and other key countries persist or worsen, our customers may delay or reduce
spending. This could result in reductions in sales of our products
and services, longer sales cycles and increased price
competition. Any of these events would likely harm our business,
results of operations and financial condition.
We
may have an adverse resolution of litigation that may harm our operating results
or financial condition.
At times,
we are a party to lawsuits in the normal course of our business.
Litigation can be expensive, lengthy, and disruptive to normal business
operations. Moreover, the results of complex legal proceedings are
difficult to predict. An unfavorable resolution of a particular lawsuit could
have a material adverse effect on our business, operating results, or financial
condition.
We
have made strategic acquisitions and divestitures in the past few years and may
complete similar transactions in the future and cannot assure you that any
future transactions will be successful.
We
regularly look for opportunities to support our new business strategy through
appropriate acquisitions, divestitures and/or strategic
alliances. There can be no assurance that we will be successful in
identifying appropriate transaction partners or integrating the results of any
such transactions in a way that ultimately supports our business
strategy. Any such transactions could also involve the dilutive
issuance of equity securities and/or the incurrence of debt. In
addition, future strategic transactions may involve numerous other risks,
including but not limited to:
Risks
Related to the Internet
We
may not be able to adapt as the Internet, Internet Yellow Pages services, and
IAP advertiser demands continue to evolve.
Our
failure to respond in a timely manner to changing market conditions or client
requirements could have a material adverse effect on our business, prospects,
financial condition, and results of operations. The Internet, e-commerce, and
the Internet Yellow Pages industry are characterized by:
In order
to compete successfully in the future, we must:
We
may be required to keep pace with rapid technological change in the Internet
industry.
In order
to remain competitive, we will be required continually to enhance and improve
the functionality and features of our existing services, which could require us
to invest significant capital. If our competitors introduce new
products and services embodying new technologies, or if new industry standards
and practices emerge, our existing services, technologies, and systems may
become obsolete. We may not have the funds or technical know-how to
upgrade our services, technology, and systems. If we face material
delays in introducing new services, products, and enhancements, our advertisers
and users may forego the use of our services and select those of our
competitors, in which event our business, prospects, financial condition, and
results of operations could be materially and adversely affected.
Regulation
of the Internet may adversely affect our business.
Due to
the increasing popularity and use of the Internet and online services such as
online Yellow Pages, federal, state, local, and foreign governments may
adopt laws and regulations, or amend existing laws and regulations, with respect
to the Internet and other online services. These laws and regulations
may affect issues such as user privacy, pricing, content, taxation, copyrights,
distribution, and quality of products and services. The laws
governing the Internet remain largely unsettled, even in areas where legislation
has been enacted. It may take years to determine whether and how
existing laws, such as those governing intellectual property, privacy, libel,
and taxation, apply to the Internet and Internet advertising and directory
services. In addition, the growth and development of the market for electronic
commerce may prompt calls for more stringent consumer protection laws, both in
the United States and abroad, that may impose additional burdens on companies
conducting business over the Internet. Any new legislation could
hinder the growth in use of the Internet generally or in our industry and could
impose additional burdens on companies conducting business online, which could,
in turn, decrease the demand for our services, increase our cost of doing
business, or otherwise have a material adverse effect on our business,
prospects, financial condition, and results of operations.
We
may not be able to obtain Internet domain names that we would like to
have.
We
believe that our existing Internet domain names are an extremely important part
of our business. We may desire, or it may be necessary in the future,
to use these or other domain names in the United States and
abroad. Various Internet regulatory bodies regulate the acquisition
and maintenance of domain names in the United States and other
countries. These regulations are subject to change. Governing bodies
may establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a
result, we may be unable to acquire or maintain relevant domain names in all
countries in which we plan to conduct business in the future.
The
extent to which laws protecting trademarks and similar proprietary rights will
be extended to protect domain names currently is not clear. We
therefore may be unable to prevent competitors from acquiring domain names that
are similar to, infringe upon or otherwise decrease the value of our domain
names, trademarks, trade names, and other proprietary rights. We
cannot provide assurance that potential users and advertisers will not confuse
our domain names, trademarks, and trade names with other similar names and
marks. If that confusion occurs, we may lose business to a competitor
and some advertisers and users may have negative experiences with other
companies that those advertisers and users erroneously associate with
us. The inability to acquire and maintain domain names that we desire
to use in our business, and the use of confusingly similar domain names by our
competitors, could have a material adverse affect on our business, prospects,
financial conditions, and results of operations in the future.
Our
business could be negatively impacted if the security of the Internet becomes
compromised.
To the
extent that our activities involve the storage and transmission of proprietary
information about our advertisers or users, security breaches could damage our
reputation and expose us to a risk of loss or litigation and possible
liability. We may be required to expend significant capital and other
resources to protect against security breaches or to minimize problems caused by
security breaches. Our security measures may not prevent security
breaches. Our failure to prevent these security breaches or a misappropriation
of proprietary information may have a material adverse effect on our business,
prospects, financial condition, and results of operations.
Our
technical systems could be vulnerable to online security risks, service
interruptions or damage to our systems.
Our
systems and operations may be vulnerable to damage or interruption from fire,
floods, power loss, telecommunications failures, break-ins, sabotage, computer
viruses, penetration of our network by unauthorized computer users or “hackers,”
natural disaster, and similar events. Preventing, alleviating, or
eliminating computer viruses and other service-related or security problems may
require interruptions, delays or cessation of service. We may need to
expend significant resources protecting against the threat of security breaches
or alleviating potential or actual service interruptions. The
occurrence of such unanticipated problems or security breaches could cause
material interruptions or delays in our business, loss of data, or
misappropriation of proprietary or IAP advertiser-related information or could
render us unable to provide services to our IAP advertisers for an indeterminate
length of time. The occurrence of any or all of these events could
materially and adversely affect our business, prospects, financial condition,
and results of operations.
If
we are sued for content distributed through, or linked to by, our website or
those of our advertisers, we may be required to spend substantial resources to
defend ourselves and could be required to pay monetary damages.
We
aggregate and distribute third-party data and other content over the
Internet. In addition, third-party websites are accessible through
our website or those of our advertisers. As a result, we could be subject to
legal claims for defamation, negligence, intellectual property infringement, and
product or service liability. Other claims may be based on errors or
false or misleading information provided on or through our website or websites
of our directory licensees. Other claims may be based on links to
sexually explicit websites and sexually explicit advertisements. We
may need to expend substantial resources to investigate and defend these claims,
regardless of whether we successfully defend against them. While we
carry general business insurance, the amount of coverage we maintain may not be
adequate. In addition, implementing measures to reduce our exposure
to this liability may require us to spend substantial resources and limit the
attractiveness of our content to users.
Risks
Related to Our Securities
Stock
prices of technology companies have declined precipitously at times in the past
and the trading price of our common stock is likely to be volatile, which could
result in substantial losses to investors.
The
trading price of our common stock has been volatile over the past few years and
investors could experience losses in response to factors including the
following, many of which are beyond our control:
Domestic
and international stock markets often experience significant price and volume
fluctuations that are unrelated to the operating performance of companies with
securities trading in those markets. These fluctuations, as well as
political events, terrorist attacks, threatened or actual war, and general
economic conditions unrelated to our performance, may adversely affect the price
of our common stock. In the past, securities holders of other
companies often have initiated securities class action litigation against those
companies following periods of volatility in the market price of those
companies’ securities. If the market price of our stock fluctuates
and our stockholders initiate this type of litigation, we could incur
substantial costs and experience a diversion of our management’s attention and
resources, regardless of the outcome. This could materially and
adversely affect our business, prospects, financial condition, and results of
operations.
We are
subject to the Nevada anti-takeover laws regulating corporate takeovers. These
anti-takeover laws prevent Nevada corporations from engaging in a merger,
consolidation, sales of its stock or assets, and certain other transactions with
any stockholder, including all affiliates and associates of the stockholder, who
owns 10% or more of the corporation’s outstanding voting stock, for three years
following the date that the stockholder acquired 10% or more of the
corporation’s voting stock except in certain situations. In addition,
our amended and restated articles of incorporation and bylaws include a number
of provisions that may deter or impede hostile takeovers or changes of control
or management. These provisions include the following:
These
provisions of Nevada law and our articles and bylaws could prohibit or delay
mergers or other takeover or change of control of our company and may discourage
attempts by other companies to acquire us, even if such a transaction would be
beneficial to our stockholders.
Our
common stock may be subject to the “penny stock” rules as promulgated under the
Exchange Act.
In the
event that no exclusion from the definition of “penny stock” under the Exchange
Act is available, then any broker engaging in a transaction in our common stock
will be required to provide its customers with a risk disclosure document,
disclosure of market quotations, if any, disclosure of the compensation of the
broker-dealer and its sales person in the transaction, and monthly account
statements showing the market values of our securities held in the customer’s
accounts. The bid and offer quotation and compensation information
must be provided prior to effecting the transaction and must be contained on the
customer’s confirmation of sale. Certain brokers are less willing to
engage in transactions involving “penny stocks” as a result of the additional
disclosure requirements described above, which may make it more difficult for
holders of our common stock to dispose of their shares.
Our
stock price may result in our failure to maintain compliance with NASDAQ
Marketplace Rules related to minimum stock price requirements, which could
result in NASDAQ delisting our common stock.
NASDAQ
Listing Rules require us to maintain a closing bid price of $1.00 per share for
our common stock. In the event that our common stock closing bid
price falls below $1.00 per share for 30 consecutive business days, we would
likely receive notice from NASDAQ that we are not in compliance with Listing
Rules, which could ultimately lead to the delisting of our common stock from
NASDAQ if we were unable to maintain the requisite minimum stock price during
the subsequent probationary period. In the event that we were
delisted from NASDAQ, our common stock would become significantly less liquid,
which would adversely affect its value. Although our common stock
would likely be traded over-the-counter or on pink sheets, these types of
listings involve more risk and trade less frequently and in smaller volumes than
securities traded on NASDAQ.
Not
applicable. We
entered into a long-term lease, which began in November 2007, for a 12,635
square foot facility in Las Vegas, Nevada that functions as the operating
facility for LiveDeal, Inc. and our subsidiary, Telco Billing,
Inc. We pay rent of approximately $315,000 annually under the lease
which expires on December 31, 2012.
We also
have a long-term lease for a 16,772 square foot facility in Mesa, Arizona that
was formerly used to house our corporate headquarters. We pay rent of
approximately $120,000 annually under this lease, which expires in June
2011. Although we are no longer utilizing this space for our operations,
we are responsible for the remaining lease payments.
We have a
short-term lease on a residential facility in Las Vegas that is used to house
personnel who travel to Las Vegas on Company business. We have a minimum
commitment of approximately $15,000 in rent during the remaining term of
the lease, which expires on January 31, 2010.
We
believe that these facilities are adequate for our current and anticipated
future needs and that all of these facilities and their contents are adequately
covered by insurance.
Except as
described below, as of September 30, 2009, we were not a party to any
pending material legal proceedings other than claims that arise in the
normal conduct of our business. While we currently believe that the
ultimate outcome of these proceedings will not have a material adverse
effect on our consolidated financial condition or results of operations,
litigation is subject to inherent uncertainties. If an unfavorable ruling
were to occur, there exists the possibility of a material adverse impact on
our net income in the period in which a ruling occurs. Our estimate of the
potential impact of the following legal proceedings on our financial
position and our results of operation could change in the
future.
Joe
Cunningham v. LiveDeal, Inc. et al.
On July
16, 2008, Joseph Cunningham, who was at the time a member of LiveDeal's Board of
Directors, filed a complaint with the U.S. Department of Labor's Occupational
Safety and Health Administration ("OSHA") alleging that the Company and certain
members of its Board of Directors had engaged in discriminatory employment
practices in violation of the Sarbanes-Oxley Act of 2002's statutory protections
for corporate whistleblowers when the Board of Directors removed him as Chairman
on May 22, 2008. In his complaint, Mr. Cunningham asked OSHA to order his
appointment as Chief Executive Officer of the Company or, in the alternative, to
order his reinstatement as Chairman of the Board. Mr. Cunningham also sought
back pay, special damages and litigation costs. The Company has not received any
correspondence from OSHA, and there have been no other developments in the
matter, since December 2008.
State
of Washington v. LiveDeal, Inc. et al.
On
December 16, 2006, the State of Washington Attorney General’s office entered
into a Consent Decree with LiveDeal, Inc. (known at the time as YP Corp.) and
its subsidiary, Telco Billing, Inc. Pursuant to the Consent Decree,
the Company agreed to provide certain confidential, trade secret information to
the Attorney General’s office as part of the settlement of a regulatory dispute
between the State of Washington and the Company.
On July
14, 2009, the Attorney General’s office contacted the Company to request certain
confidential, trade secret information to which it was entitled under the
Consent Decree. The Company acknowledged its obligation to provide
the requested information but asked the Attorney General’s office to verify that
it would not provide such information to third parties. When the
Company was informed by opposing legal counsel in a private litigation matter
that the Attorney General’s office intended to provide its confidential, trade
secret information to such counsel’s client and other third parties immediately
upon receipt, the Company began taking certain steps to protect the sensitive
information while complying with its obligations under the Consent
Decree.
Following
unsuccessful settlement discussions in which the Attorney General’s office
refused to enter into any agreement not to share the confidential information
with third parties (including the Company’s opponents in pending private
litigation), the Company sought a protective order in the State of Washington’s
King County Superior Court (Case No. 06-2-39213-2 SEA) on September 8, 2009,
which was denied on November 16, 2009. The Company is appealing that
decision with in State of Washington’s Court of Appeals (Division I, Case No.
64539-1) and has filed a motion to stay the effect of the November 16, 2009
ruling. The appeal is pending.
Global
Education Services, Inc. v. LiveDeal, Inc.
On June
6, 2008, Global Education Services, Inc. ("GES") filed a consumer fraud class
action lawsuit against the Company in King County (Washington) Superior Court.
GES has alleged in its complaint that the Company's use of activator checks
violated the Washington Consumer Protection Act. GES is seeking injunctive
relief against our use of the checks, as well as a judgment in an amount equal
to three times the alleged damages sustained by GES and the members of the
class. LiveDeal has denied the allegations. The parties have filed
dispositive motions and anticipate a ruling on such motions in early
2010. Complaint
filed by Illinois Attorney General against LiveDeal, Inc.
On
November 12,2008, the Illinois Attorney General filed a complaint against us
requesting money damages and injunctive relief for claims that we employed
deceptive and unfair acts and practices in violation of the Illinois Consumer
Fraud and Deceptive Business Act in a telemarketing campaign that in part
promoted premium Internet Yellow Page listings to Illinois consumers. Based on a
preliminary investigation into the sales scripts and automated verification
system utilized in the telemarketing campaign, we denied the allegations raised
in the complaint and are vigorously defending the claim.
LiveDeal,
Inc. v. On-Call Superior Management (“OSM”) and SMeVentures, Inc.
(“SMe”)
On April
6, 2009, LiveDeal filed a declaratory judgment to a termination of contract
claim and a complaint on May 29, 2009 against OSM and SMEVentures, Philippines
call center managers with which the Company had entered into contracts in
November of 2007 and earlier, to provide inbound and outbound telemarketing
services, respectively, alleging breach of contract. OSM and SMe have
counterclaimed, alleging breach of contract. Recent settlement
discussions have not resolved the matter and legal proceedings (including
discovery) are ongoing.
As of
September 30, 2009, we have not recorded any accruals pertaining to these legal
proceedings because they do not meet the criteria for accrual under Statement of
Financial Accounting Standards No. 5, “Accounting for
Contingencies”.
None.
Our
Common Stock
On
February 1, 2008, we began trading on the NASDAQ Capital
Market. Concurrent with this change, our ticker symbol was
changed from LVDL.OB to LIVE.
The
following table sets forth the quarterly high and low sale prices per share of
our common stock during the last two fiscal years.
Holders
of Record
On
December 1, 2009, there were approximately 319 holders of record of our
common stock according to our transfer agent. The Company has no record of the
number of stockholders who hold their stock in “street name” with various
brokers.
Dividend
Policy
We have
one class of authorized preferred stock (Series E Preferred Stock), of which
there are currently 127,840 shares issued and outstanding. Each share
of Series E Preferred Stock is entitled to and receives a dividend of $0.015 per
year. At September 30, 2009, we had accrued but unpaid dividends
totaling approximately $8,200.
Presently,
we do not pay dividends on our common stock. The timing and amount of
future dividend payments by our Company, if any, will be determined by our Board
of Directors based upon our earnings, capital requirements and financial
position, general economic conditions, alternative uses of capital, and other
pertinent factors. Issuer
Purchases of Equity Securities
On May
25, 2007, the Company’s Board of Directors terminated its existing stock
repurchase plan and replaced it with a new plan authorizing repurchases of up to
$1,000,000 of common stock from time to time on the open market. The
Company acquired 148,820 shares of its common stock at market prices during the
year ended September 30, 2008 at an aggregate cost of $525,844. All
of these shares have been retired.
During
the year ended September 30, 2009, the repurchase plan was increased by another
$500,000, and the Company acquired an aggregate of 346,110 shares of its common
stock at market prices at an aggregate cost of $532,521. All but 29,106 shares
of repurchased common stock were retired as of September 30, 2009.
Securities
Authorized for Issuance Under Equity Compensation Plans
Reference
is made to Note 13 of the notes to our consolidated financial statements for
certain disclosures about the Company’s equity compensation
plans. Performance
Graph
Compare
5-Year Cumulative Total Return
Among
LiveDeal, Inc., Wilshire 5000 Index
And
Dow Jones Internet Index
 Assumes
$100 Invested on September 30, 2004
Assumes
Dividends, if any, Reinvested
Fiscal
Year Ended September 30, 2009
Not
required for smaller reporting companies.
For a
description of our significant accounting policies and an understanding of the
significant factors that influenced our performance during the fiscal year ended
September 30, 2009, this “Management’s Discussion and Analysis” should be read
in conjunction with the Consolidated Financial Statements, including the related
notes, appearing in Item 8 of this Annual Report.
Forward-Looking
Statements
This
portion of this Annual Report on Form 10-K includes statements that constitute
“forward-looking statements.” These forward-looking statements are
often characterized by the terms “may,” “believes,” “projects,” “expects,” or
“anticipates,” and do not reflect historical facts. Specific
forward-looking statements contained in this portion of the Annual Report
include, but are not limited to our (i) expectation that continued investment in
online advertising to bring increased traffic to our websites will drive
increased revenues; (ii) expectation that there are no further impacts to our
results of operations from the Attorneys’ General settlement; (iii) expectation
that cost of sales will continue to be directly correlated to our use of the LEC
billing channel and (iv) belief that our existing cash on hand will provide us
with sufficient liquidity to meet our operating needs for the next 12
months.
Forward-looking
statements involve risks, uncertainties and other factors, which may cause our
actual results, performance or achievements to be materially different from
those expressed or implied by such forward-looking
statements. Factors and risks that could affect our results and
achievements and cause them to materially differ from those contained in the
forward-looking statements include those identified in Item 1A. Risk Factors, as
well as other factors that we are currently unable to identify or quantify, but
that may exist in the future.
In
addition, the foregoing factors may affect generally our business, results of
operations, and financial position. Forward-looking statements speak
only as of the date the statement was made. We do not undertake and
specifically decline any obligation to update any forward-looking
statements.
Executive
Overview
Our
Company
LiveDeal,
Inc. provides local customer acquisition services for small businesses combined
with an Internet Yellow Pages directory to deliver an affordable way for
businesses to extend their marketing reach to local, relevant customers via the
Internet. Through its online property, www.livedeal.com,
LiveDeal delivers local search engine marketing (SEM) such as its LiveClicks ™
and LiveAdvisor™ products that combine leading technology with a strong
partnership model and an inside sales team to create an efficient platform local
businesses need to create and optimize their Internet search advertising
campaigns. LiveDeal partners with Google, Yahoo!, MSN and others. LiveDeal, Inc.
is headquartered in Las Vegas, Nevada. For more information, please visit www.livedeal.com.
Through its wholly-owned subsidiary, Telco Billing, Inc.,
LiveDeal publishes a small business directory online at
www.yellowpages.livedeal.com.
We have
two inter-related primary lines of business: (1) we deliver a suite of audience
acquisition services for small businesses, sold via telemarketing and supported
by our websites and software that we have developed to manage search and other
Internet services efficiently, and (2) we maintain an Internet Yellow Pages
service for every city and zip code across the U.S.
Summary
Business Description
Direct Sales
Services also
known as Telesold Suite Services. Since
February 2008, we have added a new line of business that utilizes, but is not
entirely dependent on, our directory websites and billing services. This line of
business is based around using telesales and sophisticated Internet customer
acquisition technologies to deliver a suite of customer acquisition services to
small businesses.
The most
significant of these customer acquisition services is Internet search and the
tying of Internet advertising services to search. This development is intended
to enable customers to find the businesses they need without ever going to a
directory. The small business whose website information or
advertising message is associated with a successful search becomes the likely
recipient of that business. So, utilizing Internet search and related
advertising is fast becoming a necessity for small businesses.
Another
key Internet development is the rise of locally oriented user review sites and
services, such as Yelp.com. At these sites, consumers let each other
know about their experiences with local businesses. They rate and comment on the
businesses. The sites also tend to provide some aspects of
traditional directories as well as new services, such as placing businesses on a
local map, providing driving directions, etc. At these sites, as with
Internet search, consumers can select businesses for their commerce without ever
using a traditional directory.
With the
emergence of these new Internet capabilities, and others that are fast emerging,
the role of directories, both paper and Internet, is steadily becoming a less
preferred customer acquisition process, where search and review sites are
becoming the new standard, where we believe the greatest value for both customer
and business resides.
Our
websites, by combining the benefits of business listings, mobile services,
advertising/distribution networks and e-commerce into a single online solution,
offer businesses and consumers an affordable and effective solution for creating
a web presence and marketing their products and services locally.
Our
websites also support our audience acquisition services by providing locally and
vertically targeted Internet pages that are effective at producing website
traffic, form fills and phone calls and other valuable customer interactions on
behalf of our small business customers. Our Telesold audience
acquisition services are not limited to our own websites. Our suite currently
includes the following activities, but the range of activities we deliver is
designed to shift over time, based on the needs of our small business customers
and the ever-changing state of Internet technology:
In the
aggregate, the contribution of these services to our overall revenues
has grown rapidly and represented 31% of our net revenues in fiscal
2009 as compared to 3% of our net revenues in the fiscal 2008. In the
fourth quarter of fiscal 2009, these services represented 58% of net
revenues.
Business
Directory
We use a
business model similar to print Yellow Pages publishers for our Yellow Page
directory. We publish basic directory listings on the Internet free
of charge. Our basic listings contain the business name, address and
telephone number for almost 17 million U.S. businesses. We strive to maintain a
listing for almost every business in America in this format and we generate
revenue from the sale of various advertising packages to listed
businesses. As we have shifted our business strategy away from this
line of business and sold our primary URL and a portion of our customer list, we
expect to experience declining future revenues from this segment.
Recent
Events & Transactions
Financial
Performance
We have
embarked on a significant change in business strategy to deemphasize our legacy
business (directory services offering) and focus on our new line of business
consisting of Internet-based customer acquisition strategies for small
businesses. We have also completed transactions that have allowed us
to monetize certain assets associated with our directory services business,
including the sale of a portion of our customer list and our primary URL, www.yp.com, each of
which is described elsewhere in this section. As a result, we have
experienced a decline in revenues and gross profit over the last several
quarters. During this time our revenues from our new customer
acquisition services business segment has grown to $1,402,888, which represented
58% of net revenues during the fourth quarter of fiscal 2009, up from $343,240
or 6% of net revenues in the fourth quarter of fiscal 2008. While we
have yet to achieve sufficient sales in our new business to allow us to achieve
operating profitability, we achieved significant growth in revenues in this
business segment during fiscal 2009.
Change in Business
Strategy
In and
around February 2009, we evaluated our business and adopted a new business
strategy that moved away from our Yellow Pages business to one which addressed
each of our business segments as separate entities. This evaluation was
necessitated by the growth in our Direct Sales - Customer Acquisition Services
business lines that provide Internet-based customer acquisition strategies for
small business, as well as declining revenues from our traditional business line
(i.e. directory services). Additionally, current economic and
regulatory forces, both general and specific to our industry, impacted our
consideration of our existing business model and strategy. Some of
these factors include the following:
As a
result, we made significant changes to our business strategy during the second
quarter of fiscal 2009. We decided to move our strategic focus
away from our directory services and Classified
businesses. Additionally, we discontinued the operations
of our Philippines-based call center which had historically provided
telemarketing services to support our directory services business - specifically
those directory services which were sold during the second quarter of fiscal
2009. These strategic changes impacted our financial
statements during the second quarter of fiscal 2009 in the following
manner:
Our new
strategic focus is on delivering a suite of Internet-based, local search
driven, customer acquisition services for small businesses, sold via
telemarketing and supported by our websites and internally developed
software.
Sale of www.yp.com
On
November 5, 2008, we entered into an agreement to
sell our Internet domain name “www.yp.com” to YellowPages.com for a
cash payment of $3,850,000. Although our future focus is on the sale of
customer acquisition services for small and medium-sized businesses, we still
receive revenues from the sale of Internet Advertising Packages, which targeted
users of our www.yp.com property. We have transitioned these
customers to advertising on www.yellowpages.livedeal.com.
Management
Changes
On
January 20, 2009, we announced the following managerial changes, which occurred
during and shortly after the three months ended December 31, 2008:
On May
19, 2009, Richard F. Sommer was appointed as our new President and Chief
Executive Officer ("CEO"), effective immediately, to replace Mike Edelhart, the
outgoing CEO, whose employment as CEO terminated the same day. Mr.
Sommer has served as a member of our Board of Directors since June
2008. Following his appointment as President and Chief Executive
Officer, Mr. Sommer remained a director but has no longer been a member of our
Compensation Committee or Corporate Governance and Nominating Committee, both of
which are required to consist only of independent directors under NASDAQ Listing
Rules.
Mr.
Sommer, 46, is a former Chief Executive Officer of ZipRealty and served on the
Board of Directors of ZipRealty from September 2006 until December 15,
2008. Prior to joining ZipRealty, Mr. Sommer was the Chief Executive
Officer of HomeGain.com. In addition to his leadership of HomeGain,
Mr. Sommer served as Senior Vice President of Business Development for the
mortgage banking division of IndyMac Bank. He also served as
President and Managing Director of international real estate operations for
Realtor.com. Mr. Sommer also co-founded and was President and Chief
Executive Officer of Accordus, a technology infrastructure company serving the
health care products industry. From 1988 until 1998, Mr. Sommer was
founder, President and Chief Executive Officer of De La Cruz Occupational
Healthcare. He began his career with McKinsey & Co. Mr. Sommer
graduated cum laude in 1983 from Princeton University with a degree in politics
and was a Rhodes Scholar at Oxford University, where he earned a Master's Degree
in international political economy. In 1990, Mr. Sommer earned a law
degree from the Stanford Law School.
In
connection with Mr. Edelhart’s termination, we entered into a separation
agreement dated July 8, 2009 that provided for a one-time payment of $62,500 to
Mr. Edelhart together with a payment for accrued vacation and certain other
expenses. We recognized expenses totaling $93,195 associated with Mr.
Edelhart’s departure during the quarter ended June 30, 2009. As of
September 30, 2009, we had an outstanding liability of $13,289 related to unpaid
termination costs.
Also, in
connection with the restructuring activities described below and as part of
refinements to our business strategy, certain managerial positions were
eliminated in June 2009, including the positions of Vice President of Product
Management and Vice President of Technology Strategy,
respectively. See “Restructuring Activities” below.
Impairment of Goodwill and
Other Intangibles
In and
around February 2009, in connection with the strategic changes described above
and at the direction of our Audit Committee, we commenced an interim reporting
period review of our goodwill and intangible assets for
impairment. We evaluate goodwill and other long-lived assets for
impairment on an annual basis or whenever facts and circumstances indicate that
impairment may exist. Economic and regulatory forces, both general
and specific to our industry, caused management to consider our existing
business model and strategy as described in “Change in Business Strategy”
included herein.
In
light of the changes in our business, we determined that a triggering event had
occurred and initiated an impairment analysis. Based upon the analysis,
management determined that the following items were impaired:
The
following is a summary of these impaired assets and their net book values, which
were fully written off in the second quarter of fiscal 2009:
Included
in the assets that became obsolete through the sale of a portion of our customer
list were $722,103 related to non-compete agreements and $537,577 of assets
associated with the Philippines call-center.
We
performed an initial assessment of impairment prior to filing our Form 10-Q for
the period ended December 31, 2008, and disclosed an estimated impairment charge
of $14,300,000. We reevaluated these amounts and increased the
corresponding impairment charge to $14,676,568 after identifying additional
impaired website and technology related intangible assets related to the items
identified earlier. Since that time, we sold a portion of our
customer list, which resulted in an additional impairment charge of
approximately $1,400,000, consisting of approximately $175,000 of website and
technology related intangibles and $1,200,000 of other assets made obsolete as
described above. We performed an annual goodwill and intangible assets
impairment review in connection with our fiscal year-end financial closing for
2009. Management’s analysis considered input from an independent
third party business appraisal firm. Management confirmed the results of the
impairment review performed in the quarter ended March 31, 2009. The annual
impairment review assigned certain of the goodwill and intangible assets to the
Company’s classifieds business whose discontinuation was initiated in the
quarter ended March 31, 2009. The impairment charges associated with the
classifieds business are now included as part of discontinued operations in the
accompanying statement of operations.
Sale of Customer List and
Other Income
On March
9, 2009, in connection with our shift in strategic focus away from our
classified and directory services business, we entered into an agreement to sell
a portion of our customer list associated with our directory services
business. This customer list was sold for $3,093,202, of which
$2,783,097 was paid by the buyer and received during the second quarter of
fiscal 2009 with the remaining amount held back in escrow pending the resolution
of potential claims, if any. Such claims are contractually limited to
the amount held in escrow ($154,617 as of September 30, 2009) , and are expected
to be settled in fiscal 2010. Net of certain accruals for transaction
costs and transaction-related contingencies, we recorded a gain of $3,040,952,
which is reflected in other income.
We also
amended another directory services contract in consideration of accelerated
payments on our outstanding accounts receivable and some anticipated future
billings that resulted in an increase in other income of $642,268 for the three
and nine months ended June 30, 2009, respectively. Together with the
partial customer list sale described above, these customers and contract
accounted for $5,146,073 of revenue in fiscal 2009. As a result of
these transactions, we have no future service obligations to these customers and
no longer expect to generate future revenues from these sources.
Discontinued
Operations
As part
of the Company’s strategy to evaluate each of its business segments as separate
entities, management noted that the classifieds business has incurred
significant operating losses and determined that it did not fit with the
Company’s change in strategic direction. Accordingly, in and around
February 2009, we made the strategic decision to discontinue our classifieds
business and product offerings. We initiated shutdown activities in
March 2009 (including the notification of certain impacted vendors and
employees) and concluded such activities by the end of June 2009,
including the shutdown of the website previously used for classifieds
activities. Accordingly, we do not expect any future revenues from
this business segment and are reflecting the results of the classifieds business
as discontinued operations. Prior year financial statements have been
restated to present the classifieds operations as a discontinued
operation. The
classifieds business accounted for $227,575 and $1,862,503 of net revenues in
the fiscal years ended September 30, 2009 and 2008, respectively, which are now
included as part of loss from discontinued operations in the accompanying
consolidated statements of operations.
Restructuring
Activities
On June
9, 2009, we implemented a restructuring plan previously approved by our Board of
Directors that included a reduction in force that resulted in the termination of
approximately 13% of our workforce. As part of this plan, we also initiated
activities to close certain of our facilities. We took these actions
in order to reduce costs and improve our cost structure in the current operating
environment and in light of changes in our strategic
focus. Substantially all restructuring activities were completed in
July 2009.
In
connection with these activities, we incurred expenses, consisting primarily of
cash expenditures, of $327,408 which have been reflected as part of general and
administrative expenses in the accompanying consolidated statement of operations
for the year ended September 30, 2009. Of the restructuring charges
incurred, $277,059 related to severance costs and $50,349 related to office
closure costs. As of September 30, 2009, we had an outstanding
liability of $13,289 related to unpaid office closure costs. All
restructuring costs were related to the consolidation of operations at our Las
Vegas, Nevada facility.
Other Contractual
Agreements
On
November 30, 2008, each of the following agreements was terminated pursuant to
notices of termination delivered to us by our respective
counterparties:
Under the
agreements, we provided certain fulfillment and directory services to the
customers of Sharednet, OneSource Web Hosting and Blabble Networks, respectively
(collectively, the "Wholesalers"). In exchange for such services, the
Wholesalers remitted 90% of the related fees collected to us. Such fees
accounted for approximately $5.3 million, or 18%, of our net revenues in fiscal
2008. The agreements accounted for about 12,000 of our approximately
65,000 customers as of that date.
Critical
Accounting Estimates and Assumptions
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires our management to make certain estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. As
such, in accordance with the use of accounting principles generally accepted in
the United States of America, our actual realized results may differ from
management’s initial estimates as reported. Summaries of our
significant accounting policies are detailed in the notes to the consolidated
financial statements, which are an integral component of this
filing.
The
following summarizes critical estimates made by management in the preparation of
the consolidated financial statements.
Revenue
Recognition.
Direct Sales – Customer
Acquisition Services. Our direct sales contracts typically
involve upfront billing for an initial payment followed by monthly billings over
the contractual period. We recognize revenue on a straight line basis
over the contractual period. Billings in excess of recognized revenue
are included as deferred revenue in the accompanying consolidated balance
sheets.
Previously,
we recognized the value of the noncancelable portion of the Direct Sales’
customer contract as a receivable and billed the customer for the amount of the
contract over the period of the contract. We only recognized a portion of the
contract value as revenue each month, approximately pro-rating the contract to a
monthly amount, with the remainder of the noncancelable portion of the contract
maintained as a deferred revenue liability. In the quarter ended June
30, 2009, we corrected our balance sheet presentation related to our direct
sales contracts to include in accounts receivable only those amounts that are
outstanding receivables after having been billed in accordance with the terms of
the contract. Directory
Services. We generate revenue from customer subscriptions for
directory and advertising services. We recognize revenues as services
are rendered. In some instances, we receive payments in advance of
rendering services, whereupon such revenues are deferred until the related
services are rendered. Our billing and collection procedures include
significant involvement of outside parties, referred to as aggregators for LEC
billing and service providers for ACH billing. We provide allowances
for customer refunds, non-paying customers and fees which are estimated at the
time of billing.
Allowance for Doubtful Accounts.
We
estimate allowances for doubtful accounts for accounts that are billed directly
by us as well as those serviced by third party aggregators and service providers
(Processors).
During
fiscal 2009, several revenue streams that were billed through our various LEC
sales channels were terminated either as a result of a sale of assets or upon
the cessation of billing agreements. We reflect the amounts held in reserve by
the Processors as accounts receivable in the accompanying consolidated balance
sheet. During the period that we received settlements from our billings through
these LEC channels, the level of the reserves held by the Processors changed
accordingly and the Processors often calculated the holdback amounts from the
settlements due to us as ‘rolling reserves’ that we believe are actuarially
estimated by them based on the level of business, the expectation of future
billings from which to replenish such reserves, and other factors. The costs and
expenses related to such settlements and reserve holdback amounts were recorded
as expenses during the period that the settlements were received. With the
cessation of such settlements, the costs and expenses are now related to the
maintenance of the reserves held by the Processors. The reserves now held are
not changing due to the cessation of billing activities by us, and accordingly,
we have now made estimates of the costs and expenses that we are likely to incur
to collect the holdback amounts held as reserves. These estimates lead to an
accrual of expected costs over the expected length of the collection period of
the accounts receivable and, therefore, to an increase in the allowances,
instead of recording such expenses as period costs as they are actually incurred
as would have been the case if we continued to have regular billings through the
Processors.
The
allowance at September 30, 2009 included a reserve allowance of $723,489
resulting from the Chapter 11 Bankruptcy filing of one of our LEC aggregators,
representing a reduction in the estimated collectability of our entire
pre-petition outstanding receivable balance of $777,755. The aggregate of
accounts receivable balances from the LEC operations that do not have billing
activity as of September 30, 2009 was $3,554,149, and the aggregate of
corresponding allowances was $2,032,385. These aggregate amounts include the
accounts receivable balances and allowances for the accounts held by the Chapter
11 trustee.
Carrying Value of
Intangible Assets. Our intangible assets consist of
licenses for the use of Internet domain names or Universal Resource Locators, or
URLs, capitalized website development costs, other information technology
licenses and marketing and technology related intangibles acquired through the
acquisition of LiveDeal, Inc. All such assets are capitalized at
their original cost (or at fair value for assets acquired through business
combinations) and amortized over their estimated useful lives. We
capitalize internally generated software and website development costs in
accordance with the provisions of the FASB Accounting Standards Codification
(“ASC”) ASC 350, “Intangibles – Goodwill and Other”.
We
evaluate the recoverability of the carrying amount of intangible assets at least
annually and whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be fully recoverable. In the
event of such changes, impairment would be assessed if the expected undiscounted
net cash flows derived for the asset are less than its carrying
amount.
An
impairment was estimated and recorded as first described our Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2009 and described elsewhere
in this Form 10-K. In 2009, the Company performed an intangible assets
evaluation using the appraisal methods as prescribed under the provisions of ASC
360, “Property Plant and Equipment”, which prescribes methods for determining
impairment of long-lived assets. Management’s review considered input
from an independent third party business appraisal firm
Goodwill. We
evaluate our goodwill for potential impairment on an annual basis or whenever
events or circumstances indicate that an impairment may have occurred in
accordance with the provisions of ASC 350, which requires that goodwill be
tested for impairment using a two-step process. The first step of the goodwill
impairment test, used to identify potential impairment, compares the estimated
fair value of the reporting unit containing our goodwill with the related
carrying amount. If the estimated fair value of the reporting unit exceeds its
carrying amount, the reporting unit’s goodwill is not considered to be impaired
and the second step is unnecessary. As a result of this analysis,
first described in our Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2009 and described elsewhere in this Form 10-K, it was
determined that the entire goodwill balance attributable to the Company’s
acquisitions of OnCall Subscriber Management and LiveDeal, Inc. were
impaired.
Customer Acquisition
Costs. We acquire customers primarily through outbound call
campaigns whereby we incur costs which include the acquisition of calling lists,
personnel costs, etc. Customers subscribe to the services by
affirmatively responding to those campaigns, which serve as the contract for the
subscription. Calling campaign costs are expensed as
incurred. We also incur costs to acquire customers in connection with
certain fulfillment contracts. Such costs are capitalized and
amortized over the expected life of the related revenue stream.
Income
Taxes. Income taxes are accounted for using the asset and
liability method as prescribed by ASC 740 “Income Taxes”. Under this method,
deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which these temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance would be provided for those deferred tax assets for which if it is
more likely than not that the related benefit will not be
realized. We have estimated net deferred income
tax assets (net of
valuation allowances) of
$0 and $4,812,623 at September 30, 2009 and 2008, respectively, which relate to
various timing differences between book and tax expense recognition. A full valuation allowance
has been established against all net deferred tax assets as of September 30,
2009 based on estimates of recoverability. While we have optimistic plans for our
new business strategy, we determined that such a valuation
allowance was necessary given the current and expected near term losses and the
uncertainty with respect to our ability to generate sufficient profits from our
new business model. Therefore, we established a valuation allowance
for all deferred tax assets in excess of those expected to be realizable through
the application of operating loss carrybacks.
We
performed an analysis of uncertain tax positions and we did not identify any
significant uncertainties that would affect the carrying value of our deferred
tax assets and liabilities or our income taxes receivable at September 30,
2009.
Stock-Based
Compensation. From time to time, we grant restricted
stock awards and options to employees, directors, executives, and
consultants. Such awards are valued based on the grant date
fair-value of the instruments, net of estimated forfeitures. The value of each
award is amortized on a straight-line basis over the vesting period. The
impacts of changes in such estimates on unamortized deferred compensation cost
are recorded as an adjustment to compensation expense in the period in which
such estimates are revised.
Results
of Operations
Net
Revenues
Net
revenues in fiscal 2009 decreased by approximately $9,982,000, due primarily to
our change in business strategy away from our directory services business and
the sales of our www.yp.com URL and a
portion of our customer list in fiscal 2009, which was partially offset by an
increase in revenues from our customer acquisition services business
segment. Net revenues in our directory services business decreased by
approximately $13,448,000 to $9,331,000 in fiscal 2009 as compared to
$22,779,000 in fiscal 2008. Net revenues in our customer acquisition
services business segment increased by approximately $3,467,000 to $4,108,000 in
fiscal 2009 as compared to $641,000 in fiscal 2008. The increase in
net revenues from our customer acquisition services reflects a change in
business strategy and our focus toward developing this portion of our
business. We expect that revenues from our directory services
business will continue to decline in the future as we focus our efforts toward
our new business segment. Although we anticipate our revenues from
customer acquisition services will continue to grow, this business is unproven
at this time and there can be no assurance that we will meet our objectives of
revenue growth and profitability.
Cost
of Services
Cost of
services increased in fiscal 2009 as compared to fiscal 2008, as a result of
increasing per-customer costs in our directory services business and the growth
in net revenues in our customer acquisition services business which has higher
costs as compared to our directory services segment.
Cost of
services in our customer acquisition services business were approximately
$2,768,000 in fiscal 2009 as compared to $548,000 in fiscal 2008 which reflects
our growth in revenues in this business segment. See discussion of
gross margins elsewhere in this section.
Cost of services in our directory
services business were approximately $3,624,000 in fiscal 2009 as compared to
$3,793,000 in fiscal 2008 despite a 60% reduction in revenues. During
2009, we experienced cost increases in our directory services business on a per
customer basis due to increased regulatory requirements and an increase in
per-customer charges billed to us from our third party service
providers. These factors contributed to our strategic shift away from
directory services as our primary line of business. Gross
Profit
Gross
profit decreased approximately $12,033,000 in fiscal 2009 as compared to fiscal
2008 reflecting a decrease in net revenues and a decline in gross margins in our
directory services business. The following table sets forth changes
in our gross margin by business segment.
General
and Administrative Expenses
General and administrative expenses
decreased in fiscal 2009 as compared to fiscal 2008 due to the
following:
The
following table sets forth our recent operating performance for general and
administrative expenses:
Sales
and Marketing Expenses
Sales and
marketing expenses decreased in fiscal 2009 as compared to fiscal 2008 due to
the following:
Impairment
of Goodwill and Intangible Assets
As described previously, we incurred an
impairment charge in the second quarter of fiscal 2009 to write-down goodwill
and other intangible assets. No such charges were incurred in fiscal
2008.
Operating
Loss
The
increase in our operating loss for fiscal 2009 as compared to fiscal 2008 is
primarily due to the impairment charge, decreased gross profit and changes in
operating expenses, each of which is described above.
Total
Other Income (Expense)
During
the second quarter of fiscal 2009, we entered into an agreement to sell a
portion of our customer list associated with our directory services business,
resulting in a gain of $2,816,000, which was increased to $3,041,000 in the
fourth quarter of fiscal 2009 through the adjustment of certain accruals
associated with the transaction. We also amended another directory
services contract in consideration of accelerated payments on our outstanding
accounts receivables and some anticipated future billings that resulted in an
increase in other income of $642,000 in fiscal 2009. During
the first quarter of fiscal 2009, we entered into an agreement to
sell our Internet domain name “www.yp.com” to
YellowPages.com for a cash payment of $3,850,000. We had net
gain from the sale of that asset of $3,806,000, which is reflected in other
income.
The
remaining activity in fiscal 2009 and fiscal 2008 consisted primarily of
interest income on cash balances and short-term investments.
Income
Tax Provision (Benefit)
The
change in our income tax provision (benefit) is due primarily to the
establishment of a $10,586,854 valuation allowance established during fiscal
2009 against our net deferred tax assets, partially offset by changes in our
pretax net loss and miscellaneous permanent differences. While we
have optimistic plans for our new business strategy, we determined that
such a valuation allowance was necessary given the current and expected near
term losses and the uncertainty with respect to our ability to generate
sufficient profits from our new business model. Therefore, we
established a valuation allowance for all deferred tax assets in excess of those
expected to be realizable through the application of operating loss
carrybacks.
Loss
from Discontinued Operations
During
the second quarter of fiscal 2009, we discontinued our classifieds business, as
described above. All prior periods have been restated to reflect the
classifieds operating results, net of tax, as discontinued
operations. Included in the loss for fiscal 2009 is the impairment of
goodwill and other intangibles as previously described.
Net
Loss
Changes
in net loss are primarily attributable to changes in operating income, income
tax expense and discontinued operations, each of which is described
above.
Liquidity and
Capital Resources>
Net cash
generated by operating activities decreased approximately $4,295,000, or 322%,
to ($2,963,000) for the year ended September 30, 2009, compared to $1,331,000
for the year ended September 30, 2008. The increase of cash used in
operations is primarily due to a decrease in gross profit of $12,033,000
reflecting declines in our legacy businesses, partially offset by $3,098,000 of
increased collections of accounts receivable, $2,777,000 of reduced sales and
marketing expenses, $1,700,000 of reduced customer acquisition costs, and
$163,000 of changes in other operating expenses and working capital
balances.
Our
primary source of cash inflows has historically been net remittances from
directory services customers processed in the form of ACH billings and LEC
billings. In the nine months ended September 30, 2009, we have been
transitioning away from directory services toward our Direct Sales Services,
whose billings experience shorter collection times. Accordingly we
have been able to reduce our collection times and our outstanding accounts
receivable balances. As of September 30, 2009, no single
customer accounted for greater than 10% of accounts
receivable.
With
respect to our Direct Sales Services, we generally receive upfront payments
averaging approximately one-sixth of the gross contract
amount. Subsequent payments are received on an installment basis
after the application of the initial payment amounts and are billed ratably over
the remaining life of the contract. Most customers purchasing these services
elect to use their credit cards to effect payments, and therefore our
collections are usually made within a few days of the installment due
date.
With
respect to our discontinued operations, our historical cash flows have
approximated our income (loss) from discontinued operations as set forth on our
consolidated statements of operations, except with respect to impairment charges
that were recorded during the second quarter of fiscal 2009.
Our most
significant cash outflows include payments for marketing expenses and general
operating expenses. General operating cash outflows consist of
payroll costs, income taxes, and general and administrative expenses that
typically occur within close proximity of expense recognition.
Net cash
provided by investing activities during fiscal 2009 totaled approximately
$6,494,000 as compared to cash outflows of $1,817,000 during fiscal 2008. The
primary sources of the cash provided by our investing activities in fiscal 2009
were the sale of our Internet domain name www.yp.com, the sale
of a portion of our customer list related to our directory services business,
and an amendment to an existing directory services contract, which provided
aggregate cash inflows of $7,430,000. Additionally, in fiscal 2009,
we had expenditures for purchases of equipment and intangible assets totaling
approximately $836,000. During the year ended September 30, 2009, we
also invested $100,000 in certificates of deposit. During the year
ended September 30, 2008, we had $1,227,000 of cash outflows for intangible
assets related to our website and internally developed software and $589,000 of
purchases of equipment.
Net cash
used for financing activities was approximately $603,000 during fiscal 2009 and
was attributable to $533,000 of treasury stock repurchases and $70,000 of
principal repayments on capital lease obligations. Net cash used for
financing activities was $549,000 during fiscal 2008 and included $526,000 of
treasury stock repurchases and $23,000 of principal repayments on capital lease
obligations.
We had
working capital of $9,251,000 as of September 30, 2009 compared to $11,260,000
as of September 30, 2008. Our cash position increased to $7,568,000
at September 30, 2009 compared to $4,640,000 at September 30, 2008, as we had a
significant decline in cash flows from operations, partially offset by cash
provided by investing activities as we monetized several of our assets
associated with our legacy business, including our primary URL and a portion of
our customer list.
On May
25, 2007, the Company’s Board of Directors terminated the previously enacted
2005 stock repurchase plan and replaced it with a new plan authorizing
repurchases of up to $1,000,000 of common stock from time to time on the open
market or in privately negotiated transactions. We purchased a total
of 148,820 shares at an aggregate cost of $525,844 under the 2007 plan through
September 30, 2008. The repurchase plan was increased by another $500,000
on October 23, 2008, and we acquired an aggregate of 346,110 shares of common
stock for an aggregate repurchase price of $532,521 during fiscal
2009.
We
believe that our existing cash on hand and additional cash generated from
operations will provide us with sufficient liquidity to meet our operating needs
for the next 12 months.
The
following table summarizes our contractual obligations at September 30, 2009 and
the effect such obligations are expected to have on our future liquidity and
cash flows:
At
September 30, 2009, we had no other off-balance sheet arrangements, commitments
or guarantees that require additional disclosure or measurement.
As of
September 30, 2009, we did not participate in any market risk-sensitive
commodity instruments for which fair value disclosure would be required. We
believe that we are not subject in any material way to other forms of market
risk, such as foreign currency exchange risk or foreign customer purchases (of
which there were none in fiscal 2009 or 2008) or commodity price
risk. LIVEDEAL,
INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
To the
Stockholders and Board of Directors
LiveDeal,
Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of LiveDeal, Inc. and
Subsidiaries as of September 30, 2009 and 2008 and the related consolidated
statements of operations, stockholders’ equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for
our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of LiveDeal, Inc. and
Subsidiaries as of September 30, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
As
discussed in Note 3 to the consolidated financial statements, the consolidated
balance sheet as of September 30, 2008 has been restated.
/s/ Mayer
Hoffman McCann P.C.
MAYER
HOFFMAN MCCANN P.C.
Phoenix,
Arizona
December
23, 2009 LIVEDEAL,
INC. AND SUBSIDIARIES
See
accompanying notes to consolidated financial statements. LIVEDEAL,
INC. AND SUBSIDIARIES
See
accompanying notes to consolidated financial statements. LIVEDEAL,
INC. AND SUBSIDIARIES
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