LIVE VENTURES Inc - Quarter Report: 2006 June (Form 10-Q)
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the quarterly period ended June 30,
2006
|
o
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act
|
For
the transition period from _____________ to
_______________
|
|
Commission
File Number 0-24217
|
YP
CORP.
(Exact
Name of Registrant as Specified in Its Charter)
Nevada
(State
or Other Jurisdiction of Incorporation or Organization)
|
85-0206668
(IRS
Employer Identification No.)
|
4840
East Jasmine St. Suite 105
Mesa,
Arizona
(Address
of Principal Executive Offices)
|
85205
(Zip
Code)
|
(480)
654-9646
(Registrant’s
Telephone Number, Including Area Code)
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 þ
No
o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act). Yes o
No
þ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
þ
APPLICABLE
ONLY TO CORPORATE ISSUERS
The
number of shares of the issuer’s common equity outstanding as of August 1, 2006
was 48,731,594 shares of common stock, par value $.001.
INDEX
TO FORM 10-Q FILING
FOR
THE QUARTER ENDED JUNE 30, 2006
TABLE
OF CONTENTS
PART
I.
FINANCIAL
INFORMATION
Page
|
||
Item
1. Financial Statements
|
|
|
|
||
Consolidated Balance Sheets
|
|
|
as
of June 30, 2006 and September 30, 2005
|
3
|
|
Unaudited Consolidated Statements of Operations
|
|
|
for
the Three- and Nine-Month Periods Ended June 30, 2006 and
|
|
|
June
30, 2005
|
4
|
|
Unaudited Consolidated Statement of Cash Flows
|
|
|
for
the Nine-Month Periods Ended June 30, 2006 and
|
|
|
June
30, 2005
|
5
|
|
Notes to the Unaudited Consolidated Financial
Statements
|
6
|
|
|
||
Item
2. Management’s Discussion and Analysis of Financial Condition
|
|
|
and Results of Operations
|
12
|
|
|
||
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
22
|
|
|
||
Item
4. Controls and Procedures
|
22
|
|
|
||
PART
II
|
|
|
OTHER
INFORMATION
|
|
|
|
||
Item
1. Legal Proceedings
|
23
|
|
|
||
Item
1A. Risk Factors
|
23
|
|
|
||
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
23
|
|
|
||
Item
3. Defaults Upon Senior Securities
|
24
|
|
|
||
Item
4. Submission of Matters to a Vote of Security
Holders
|
24
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|
|
||
Item
5. Other Information
|
24
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|
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||
Item
6. Exhibits
|
24
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||
Signatures
|
25
|
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
YP
CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
June
30,
2006
|
September
30,
2005
|
||||||
(unaudited)
|
|||||||
Assets
|
|||||||
Cash
and equivalents
|
$
|
8,516,985
|
$
|
8,119,298
|
|||
Restricted
cash
|
—
|
500,000
|
|||||
Accounts
receivable, net
|
8,228,308
|
5,338,533
|
|||||
Prepaid
expenses and other current assets
|
559,008
|
602,103
|
|||||
Customer
acquisition costs, net
|
5,293,333
|
2,337,650
|
|||||
Deferred
tax asset
|
674,171
|
381,887
|
|||||
Total
current assets
|
23,271,805
|
17,279,471
|
|||||
Accounts
receivable, long term portion, net
|
585,850
|
873,299
|
|||||
Property
and equipment, net
|
209,245
|
396,862
|
|||||
Deposits
and other assets
|
95,438
|
62,029
|
|||||
Intangible
assets, net
|
5,363,065
|
6,108,823
|
|||||
Deferred
tax asset, long term
|
—
|
376,708
|
|||||
Total
assets
|
$
|
29,525,403
|
$
|
25,097,192
|
|||
|
|||||||
Liabilities
and Stockholders' Equity
|
|||||||
Accounts
payable
|
$
|
1,100,950
|
$
|
655,526
|
|||
Accrued
liabilities
|
635,236
|
803,268
|
|||||
Income
taxes payable
|
409,222
|
108,855
|
|||||
Total
current liabilities
|
2,145,408
|
1,567,649
|
|||||
Deferred
income taxes
|
178,203
|
—
|
|||||
Total
liabilities
|
2,323,611
|
1,567,649
|
|||||
Commitments
and contingencies
|
—
|
—
|
|||||
Series
E convertible preferred stock, $.001 par value, 200,000 shares
authorized,
|
|||||||
127,840
issued and outstanding, liquidation preference $38,202
|
10,866
|
10,866
|
|||||
Common
stock, $.001 par value, 100,000,000 shares authorized,
|
|||||||
48,751,594
and 48,837,694 issued and outstanding
|
48,742
|
48,838
|
|||||
Treasury
stock
|
(2,306,158
|
)
|
(2,171,740
|
)
|
|||
Paid
in capital
|
11,506,544
|
11,044,400
|
|||||
Deferred
stock compensation
|
(2,384,074
|
)
|
(3,247,535
|
)
|
|||
Retained
earnings
|
20,325,872
|
17,844,714
|
|||||
Total
stockholders' equity
|
27,201,792
|
23,529,543
|
|||||
Total
liabilities and stockholders' equity
|
$
|
29,525,403
|
$
|
25,097,192
|
See
accompanying notes to consolidated financial statements.
3
YP
CORP. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
||||||||
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|||||
Net
revenues
|
$
|
10,172,705
|
$
|
6,517,158
|
$
|
26,798,677
|
$
|
19,151,922
|
|||||
Cost
of services
|
2,329,584
|
925,805
|
5,034,393
|
2,921,322
|
|||||||||
Gross
profit
|
7,843,121
|
5,591,353
|
21,764,284
|
16,230,600
|
|||||||||
Operating
expenses:
|
|||||||||||||
General
and administrative expenses
|
3,129,807
|
3,251,975
|
10,600,755
|
9,685,457
|
|||||||||
Sales
and marketing expenses
|
2,485,950
|
1,565,536
|
6,134,854
|
4,896,063
|
|||||||||
Depreciation
and amortization
|
351,342
|
451,962
|
1,117,865
|
1,178,854
|
|||||||||
Total
operating expenses
|
5,967,099
|
5,269,473
|
17,853,474
|
15,760,374
|
|||||||||
Operating
income
|
1,876,022
|
321,880
|
3,910,810
|
470,226
|
|||||||||
Other
income (expense):
|
|||||||||||||
Interest
expense and other financing costs
|
—
|
—
|
(8,610
|
)
|
|||||||||
Interest
income
|
67,127
|
29,859
|
157,641
|
206,621
|
|||||||||
Other
income (expense)
|
(9,172
|
)
|
(584,988
|
)
|
(183,095
|
)
|
(477,535
|
)
|
|||||
Total
other income (expense)
|
57,955
|
(555,129
|
)
|
(25,454
|
)
|
(279,524
|
)
|
||||||
Income
before income taxes and cumulative
|
|||||||||||||
effect
of accounting change
|
1,933,977
|
(233,249
|
)
|
3,885,356
|
190,702
|
||||||||
Income
tax benefit (provision)
|
(701,990
|
)
|
83,465
|
(1,404,198
|
)
|
(92,982
|
)
|
||||||
Income
before cumulative effect of
|
|||||||||||||
accounting
change
|
1,231,987
|
(149,784
|
)
|
2,481,158
|
97,720
|
||||||||
Cumulative
effect of accounting change (net of
|
|||||||||||||
income
taxes of $53,764 in fiscal 2005)
|
—
|
—
|
—
|
99,848
|
|||||||||
Net
income
|
$
|
1,231,987
|
$
|
(149,784
|
)
|
$
|
2,481,158
|
$
|
197,568
|
||||
Net
income per common share:
|
|||||||||||||
Basic:
|
|||||||||||||
Income
applicable to common stock before cumulative effect of accounting
change
|
$
|
0.03
|
$
|
(0.00
|
)
|
$
|
0.06
|
$
|
0.00
|
||||
Cumulative
effect of accounting change
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
Net
income applicable to common stock
|
$
|
0.03
|
$
|
(0.00
|
)
|
$
|
0.06
|
$
|
0.00
|
||||
Diluted:
|
|||||||||||||
Income
applicable to common stock before cumulative effect of accounting
change
|
$
|
0.03
|
$
|
(0.00
|
)
|
$
|
0.05
|
$
|
0.00
|
||||
Cumulative
effect of accounting change
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
Net
income applicable to common stock
|
$
|
0.03
|
$
|
(0.00
|
)
|
$
|
0.05
|
$
|
0.00
|
||||
Weighted
average common shares outstanding:
|
|||||||||||||
Basic
|
44,642,094
|
44,860,228
|
44,748,047
|
46,060,709
|
|||||||||
Diluted
|
46,536,736
|
44,860,228
|
45,694,457
|
46,296,626
|
See
accompanying notes to consolidated financial statements.
4
YP
CORP. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
Nine
Months Ended June 30,
|
|
||||
|
|
2006
|
|
2005
|
|
||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
Net
income
|
$
|
2,481,158
|
$
|
197,568
|
|||
Adjustments
to reconcile net income to net cash
|
|||||||
provided
by operating activities:
|
|||||||
Depreciation
and amortization
|
1,117,865
|
1,178,854
|
|||||
Amortization
of deferred stock compensation
|
1,325,509
|
1,105,763
|
|||||
Issuance
of common stock as compensation for services
|
—
|
119,500
|
|||||
Gain
on settlement of debt
|
—
|
171,865
|
|||||
Cumulative
effect of accounting change
|
—
|
(99,848
|
)
|
||||
Deferred
income taxes
|
262,627
|
(782,962
|
)
|
||||
Provision
for uncollectible accounts
|
1,559,569
|
(54,492
|
)
|
||||
Changes
in assets and liabilities:
|
|||||||
Restricted
cash
|
500,000
|
(365,000
|
)
|
||||
Accounts
receivable
|
(4,161,895
|
)
|
2,956,306
|
||||
Customer
acquisition costs
|
(2,955,683
|
)
|
1,459,528
|
||||
Prepaid
and other current assets
|
43,095
|
(408,674
|
)
|
||||
Deposits
and other assets
|
(33,409
|
)
|
178,141
|
||||
Accounts
payable
|
445,424
|
(708,825
|
)
|
||||
Accrued
liabilities
|
(168,032
|
)
|
225,163
|
||||
Income
taxes payable
|
300,367
|
1,744,894
|
|||||
Advances
to affiliates (accrued interest)
|
—
|
(157,972
|
)
|
||||
Net
cash provided by operating activities
|
716,595
|
6,759,809
|
|||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
Expenditures
for intangible assets
|
(166,804
|
)
|
(346,751
|
)
|
|||
Purchases
of equipment
|
(17,686
|
)
|
(44,387
|
)
|
|||
Net
cash used for investing activities
|
(184,490
|
)
|
(391,138
|
)
|
|||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
Series
E preferred stock dividends
|
—
|
(780
|
)
|
||||
Repurchases
of common stock
|
(134,418
|
)
|
—
|
||||
Proceeds
from conversion of preferred stock
|
—
|
225
|
|||||
Common
stock dividends
|
—
|
(940,355
|
)
|
||||
Net
cash used for financing activities
|
(134,418
|
)
|
(940,910
|
)
|
|||
INCREASE
IN CASH AND CASH EQUIVALENTS
|
397,687
|
5,427,761
|
|||||
CASH
AND CASH EQUIVALENTS, beginning of period
|
8,119,298
|
3,576,529
|
|||||
CASH
AND CASH EQUIVALENTS, end of period
|
$
|
8,516,985
|
$
|
9,004,290
|
See
accompanying notes to consolidated financial
statements.
5
YP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1.
ORGANIZATION AND BASIS OF PRESENTATION
The
accompanying consolidated financial statements include the accounts of YP Corp.,
a Nevada Corporation, and its wholly owned subsidiaries (collectively the
“Company”). The Company is an Internet-based provider of yellow page directories
and advertising space on or through www.YP.com, www.YP.net
and www.Yellow-Page.net. No material or information contained on these websites
is a part of the notes or the quarterly report to which notes are attached.
All
material intercompany accounts and transactions have been
eliminated.
The
accompanying unaudited financial statements as of June 30, 2006 and for the
three and nine months ended June 30, 2006 and 2005, respectively,
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of
the
information and footnotes required by generally accepted accounting principles
for audited financial statements. In the opinion of the Company’s management,
the interim information includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for
the
interim periods. The footnote disclosures related to the interim financial
information included herein are also unaudited. Such financial information
should be read in conjunction with the consolidated financial statements and
related notes thereto as of September 30, 2005 and for the year then ended
included in the Company’s annual report on Form 10-K for the year ended
September 30, 2005.
All
amounts, except share and per share amounts, are rounded to the nearest thousand
dollars.
The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amount of assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during
the
reporting period. Significant estimates and assumptions have been used by
management in conjunction with establishing
allowances for customer refunds, non-paying customers, dilution and fees,
analyzing the recoverability of the carrying amount of intangible assets,
estimating amortization periods for direct response advertising costs,
estimating forfeitures of restricted stock and evaluating the recoverability
of
deferred tax assets. Actual results could differ from these estimates. Certain
prior period amounts have been revised to conform to the current period
presentation. These changes had no impact on previously reported net income
or
stockholders’ equity.
2.
ACCOUNTING CHANGES
Effective
October 1, 2004, the Company changed its method of accounting for forfeitures
of
restricted stock granted to employees, executives and consultants. Prior to
this
date, the Company recognized forfeitures as they occurred. Upon occurrence,
the
Company reversed the previously recognized expense associated with such grant.
Effective October 1, 2004, the Company changed to an expense recognition method
that is based on an estimate of the number of shares for which the service
is
expected to be rendered. The Company believes that this is a preferable method
as it provides less volatility in expense recognition.
Additionally,
while both methods of accounting for forfeitures are acceptable under current
guidance, the implementation of FAS 123R
(effective during the Company’s first
quarter of fiscal 2006) will no longer permit companies to recognize forfeitures
as they occur.
See
Note 8. As this new guidance will require the Company to change its method
of
accounting for restricted stock forfeitures, the Company has decided to adopt
such change as of the beginning of its fiscal year. The Company did not adopt
the provisions of FAS 123R prior to its effective date. Rather, the Company
changed its accounting for forfeitures under the allowed options prescribed
in
FAS 123.
The
impact of this change for periods prior to October 1, 2004 was an increase
to
income of $100,000 (less than $0.01 per share), net of taxes of $54,000, and
has
been reflected as a cumulative effect of a change in accounting principle in
the
Company’s consolidated statement of operations for the three months ended
December 31, 2004. Because stock grants are now recorded net of estimated
forfeitures, the cumulative effect of this change also reduced Additional Paid
in Capital and Deferred Compensation by $1,013,000 and $1,166,000, respectively,
at October 1, 2004.
6
YP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
3.
BALANCE SHEET INFORMATION
Balance
sheet information is as follows:
June,
2006
|
||||||||||
Current
|
|
Long-Term
|
|
Total
|
|
|||||
Gross
accounts receivable
|
$
|
10,938,000
|
$
|
681,000
|
$
|
11,619,000
|
||||
Allowance
for doubtful accounts
|
(2,710,000
|
)
|
(95,000
|
)
|
(2,805,000
|
)
|
||||
Net
|
$
|
8,228,000
|
$
|
586,000
|
$
|
8,814,000
|
|
|
September
30, 2005
|
|
|||||||
|
|
Current
|
|
Long-Term
|
|
Total
|
|
|||
Gross
accounts receivable
|
$
|
6,451,000
|
$
|
982,000
|
$
|
7,433,000
|
||||
Allowance
for doubtful accounts
|
(1,112,000
|
)
|
(109,000
|
)
|
(1,221,000
|
)
|
||||
Net
|
$
|
5,339,000
|
$
|
873,000
|
$
|
6,212,000
|
Components
of allowance for doubtful accounts are as follows:
June
30, 2006
|
September
30, 2005
|
||||||
Allowance
for dilution and fees on amounts due from billing
aggregators
|
$
|
2,075,000
|
$
|
923,000
|
|||
Allowance
for customer refunds
|
730,000
|
298,000
|
|||||
Other
allowances
|
—
|
—
|
|||||
|
$
|
2,805,000
|
$
|
1,221,000
|
|
June
30, 2006
|
September
30, 2005
|
|||||
Customer
acquisition costs:
|
|||||||
Customer
acquisition costs
|
9,437,000
|
3,622,000
|
|||||
Less:
Accumulated amortization
|
(4,144,000
|
)
|
(1,284,000
|
)
|
|||
Customer
acquisition costs, net
|
5,293,000
|
$
|
2,338,000
|
||||
|
June
30, 2006
|
September
30, 2005
|
|||||
Property
and equipment:
|
|||||||
Leasehold
improvements
|
$
|
448,000
|
$
|
439,000
|
|||
Furnishings
and fixtures
|
296,000
|
295,000
|
|||||
Office
and computer equipment
|
1,047,000
|
1,040,000
|
|||||
Total
|
1,791,000
|
1,774,000
|
|||||
Less:
Accumulated depreciation
|
(1,582,000
|
)
|
(1,377,000
|
)
|
|||
Property
and equipment, net
|
$
|
209,000
|
$
|
397,000
|
|
June
30, 2006
|
September
30, 2005
|
|||||
Intangible
assets:
|
|||||||
Domain
name
|
$
|
5,510,000
|
$
|
5,510,000
|
|||
Non-compete
agreements
|
3,465,000
|
3,465,000
|
|||||
Website
development
|
948,000
|
781,000
|
|||||
Software
licenses
|
53,000
|
53,000
|
|||||
Total
|
9,976,000
|
9,809,000
|
|||||
Less:
Accumulated amortization
|
(4,613,000
|
)
|
(3,700,000
|
)
|
|||
Intangible
assets, net
|
$
|
5,363,000
|
$
|
6,109,000
|
June
30, 2006
|
September
30, 2005
|
||||||
Accrued
liabilities:
|
|||||||
Litigation
accrual
|
$
|
—
|
$
|
328,000
|
|||
Deferred
revenue
|
219,000
|
291,000
|
|||||
Accrued
expenses - other
|
416,000
|
184,000
|
|||||
Accrued
liabilities
|
$
|
635,000
|
$
|
803,000
|
7
YP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
4.
COMMITMENTS AND CONTINGENCIES
At
June
30, 2006, future minimum annual lease payments under operating lease agreements
for fiscal years ended September 30 are as follows:
Fiscal
2006
|
$
|
100,000
|
||
Fiscal
2007
|
145,000
|
|||
Fiscal
2008
|
128,000
|
|||
Fiscal
2009
|
124,000
|
|||
Fiscal
2010
|
127,000
|
|||
Thereafter
|
97,000
|
|||
Total
|
$
|
721,000
|
Termination
Agreements with Related Parties
Prior
to
fiscal 2004, the Company entered into Executive Consulting Agreements with
four
entities, each of which was controlled by one of the Company’s four executive
officers. These agreements called for fees to be paid for the services provided
by these individuals as officers of the Company, as well as their respective
staffs. During fiscal 2004, the Company terminated the Executive Consulting
Agreements with the entities controlled by its former CEO, former Executive
Vice
President of Marketing, and former CFO. In fiscal 2005, the
Company terminated the remaining Executive Consulting Agreement with the entity
controlled by a former Executive Vice President. These
termination agreements provided for cash payments totaling $2,145,000 in
exchange for consulting services and non-compete agreements. Approximately
$1,643,000 of
the
settlement payments described above has been allocated to non-compete
agreements. The values attributed to the non-compete agreements are being
amortized on a straight line basis over the six-year life of the non-compete
agreements.
The
remaining $502,000 was allocated to the consulting service portion of the
termination agreements, which were originally expected to be rendered over
a
two-year period, In the fourth quarter of fiscal 2005, however, the Company
concluded all matters with respect to these parties, made all remaining payments
owed under the termination agreements, and expensed the remaining unamortized
amount of $212,000 attributed to the consulting services. All
amounts related to these agreements were paid by September 30,
2005.
During
the fourth quarter of fiscal 2005, the Company entered into a separation
agreement with its Chief Operating Officer. Under the agreement, the Company
made a cash payment of $80,000. No further amounts are owed under this
agreement.
On
November 3, 2005, the Company entered into a Separation Agreement with its
Chief
Executive Officer. Under the terms of the agreement, the Company made a cash
payment of $337,500 in the second quarter of fiscal 2006. The agreement also
provides for the continued vesting of 700,000 shares of the Chief Executive
Officers’ restricted stock awards that were granted in fiscal 2004 and 2005.
At
a
meeting of the Board of Directors of the Company, held on January 8, 2006,
John
T. Kurtzweil, R.A. Johnson-Clague, Peter J. Bergmann and Paul Gottlieb each
resigned from the Board of Directors of the Company and the respective
committees of the Board of Directors on which they were serving. Subsequent
to
the foregoing resignations, Joseph F. Cunningham, Jr. and Elisabeth DeMarse
were
elected to the Board of Directors of the Company. In addition, Daniel L. Coury,
Sr., a current member of the Board of Directors, was elected Chairman of the
Board and Mr. Cunningham was appointed to serve as the Chairman of the Audit
Committee of the Board of Directors.
On
January 19, 2006, YP Corp. (the Company) entered into a Separation Agreement
& General Release with its Chief Financial Officer. Under the terms of the
agreement, the Company made a cash payment of approximately $95,000 in the
second quarter of fiscal 2006. The agreement also provides for the continued
vesting of the Chief Financial Officers’ restricted stock awards (totaling
150,000 shares) that were granted in fiscal 2004 and 2005.
8
YP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
Litigation
The
Company is party to certain legal proceedings incidental to the conduct of
its
business. Management believes that the outcome of pending legal proceedings
will
not, either individually or in the aggregate, have a material adverse effect
on
its business, financial position, results of operations, cash flows or
liquidity.
During
the second quarter of fiscal 2006, the Company settled a legal dispute with
a
former service provider, resulting in a cash payment of $490,000. As the full
amount of the settlement was previously accrued, there was no expense incurred
in the current quarter associated with this settlement. In connection with
this
payment, the Company was no longer required to maintain its bond that was
previously reflected as restricted cash in the accompanying balance sheet
included elsewhere in this report. Accordingly, the bond has been released
and
this amount has been reclassified from restricted cash to cash in our balance
sheet as of June 30, 2006.
Other
Contractual Commitments
During
the second quarter of fiscal 2006, the Company entered into a contractual
arrangement with an attorney to settle previous claims and to engage the future
services of this attorney. Under the terms of the arrangement, the Company
made
cash payments during the quarter totaling $55,000 and granted 100,000 shares
of
restricted stock. Under the terms of the agreement, the Company is obligated
to
make future payments over the next two years totaling $294,750 in exchange
for
future services. Such amounts have not been accrued in the accompanying
financial statements as such payments are for future services.
During
the second quarter of fiscal 2006, we entered into a contractual arrangement
with a consulting firm to provide strategic and operational related consulting
services. Under the terms of the agreement and a subsequent amendment, we are
obligated to make future payments through February 2010 that vary based on
the
Company’s billed customer count subject to a minimum of $20,000 per month.
Current payments are approximately $100,000 per month. Such amounts have not
been accrued in the accompanying financial statements as such payments are
for
future services.
5.
NET INCOME
PER
SHARE
Net
income
per
share is calculated using the weighted average number of shares of common stock
outstanding during the year. Preferred stock dividends are subtracted from
net
income to
determine the amount available to common stockholders.
9
YP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
The
following table
presents
the computation of basic and diluted income per share:
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|||||||||
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
||||
Income
before cumulative effect of accounting change
|
$
|
1,232,000
|
$
|
(150,000
|
)
|
$
|
2,481,000
|
$
|
98,000
|
||||
Less:
preferred stock dividends
|
—
|
—
|
—
|
(1,000
|
)
|
||||||||
Income
applicable to common stock before cumulative effect of accounting
change
|
1,232,000
|
(150,000
|
)
|
2,481,000
|
97,000
|
||||||||
Cumulative
effect of accounting change
|
—
|
—
|
—
|
100,000
|
|||||||||
Net
income applicable to common stock
|
$
|
1,232,000
|
$
|
(150,000
|
)
|
$
|
2,481,000
|
$
|
197,000
|
||||
|
|||||||||||||
Basic
weighted average common shares outstanding
|
44,642,094
|
44,860,228
|
44,748,047
|
46,060,709
|
|||||||||
Add
incremental shares for:
|
|||||||||||||
Unvested
restricted stock
|
1,810,810
|
—
|
890,244
|
136,636
|
|||||||||
Series
E convertible preferred stock
|
74,573
|
—
|
53,080
|
75,565
|
|||||||||
Outstanding
warrants
|
9,259
|
—
|
3,086
|
23,716
|
|||||||||
Diluted
weighted average common shares outstanding
|
46,536,736
|
44,860,228
|
45,694,457
|
46,296,626
|
|||||||||
|
|||||||||||||
Net
income per share:
|
|||||||||||||
Basic:
|
|||||||||||||
Income
applicable to common stock before cumulative effect of accounting
change
|
$
|
0.03
|
$
|
(0.00
|
)
|
$
|
0.06
|
$
|
0.00
|
||||
Cumulative
effect of accounting change
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
Net
income applicable to common stock
|
$
|
0.03
|
$
|
(0.00
|
)
|
$
|
0.06
|
$
|
0.00
|
||||
|
|||||||||||||
Diluted:
|
|||||||||||||
Income
applicable to common stock before cumulative effect of accounting
change
|
$
|
0.03
|
$
|
(0.00
|
)
|
$
|
0.05
|
$
|
0.00
|
||||
Cumulative
effect of accounting change
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
Net
income applicable to common stock
|
$
|
0.03
|
$
|
(0.00
|
)
|
$
|
0.05
|
$
|
0.00
|
The
following potentially dilutive securities were excluded from the calculation
of
net income per share because the effects are antidilutive:
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
||||||||
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
||||
Warrants
to purchase shares of common stock
|
375,000
|
500,000
|
458,333
|
375,000
|
|||||||||
Series
E convertible preferred stock
|
—
|
127,840
|
—
|
—
|
|||||||||
Shares
of non-vested restricted stock
|
171,000
|
3,523,400
|
1,282,505
|
2,964,744
|
|||||||||
|
546,000
|
4,151,240
|
1,740,838
|
3,339,744
|
6.
RELATED PARTY TRANSACTIONS
The
Company’s related party transactions occurring during fiscal 2005 and the nine
months of fiscal 2006 consisted exclusively of payments under termination
agreements with former executives as described in Note 4.
10
YP
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
7.
CONCENTRATION OF CREDIT RISK
The
Company maintains cash balances at major nationwide institutions in Arizona
and
Nevada. Accounts are insured by the Federal Deposit Insurance Corporation up
to
$100,000. At June 30, 2006, the Company had bank balances exceeding those
insured limits by
approximately $5,136,000.
Financial
instruments that potentially subject the Company to concentrations of credit
risk are primarily trade accounts receivable. The trade accounts receivable
are
due primarily from business customers over widespread geographical locations
within the Local Exchange Carrier (“LEC”) billing areas across the United
States. The Company historically has experienced significant dilution and
customer credits due to billing difficulties and uncollectible trade accounts
receivable. The Company estimates and provides an allowance for uncollectible
accounts receivable. The handling and processing of cash receipts pertaining
to
trade accounts receivable is maintained primarily by three third-party billing
companies. The net receivable due from such billing services providers
represented 29%, 23% and 34%, respectively, of the Company’s total net accounts
receivable at June 30, 2006. Additionally, the Company’s receivable portfolio
includes amounts due from two service providers that handle and process our
ACH
billings. One such service provider represented approximately 12% of the
Company’s total net accounts receivable at June 30, 2006.
8.
RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, “Share-Based Payment” (“SFAS 123R”). Under this new standard, companies
will no longer be able to account for share-based compensation transactions
using the intrinsic method in accordance with APB 25. Instead, companies will
be
required to account for such transactions using a fair-value method and to
recognize the expense over the service period. This new standard also changes
the way in which companies account for forfeitures of share-based compensation
instruments. SFAS 123R will be effective for fiscal years beginning after June
15, 2005 and allows for several alternative transition methods. In light of
this
upcoming change, the Company decided
to change its method of accounting for forfeitures of restricted
stock,
under
current GAAP rules
effective October 1, 2004.
See Note
2. The Company has adopted the provisions of SFAS 123R in the
first
quarter
of
fiscal 2006
on a
prospective basis. This adoption did not have a material effect on its financial
condition or results of operations.
In
July
2006, the FASB issued FASB Interpretation No. 48 “Accounting For Uncertain Tax
Positions” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109 “Accounting for Income Taxes”. It prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48
is
effective for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact of FIN 48 to its financial position and results
of operations.
9.
SUBSEQUENT EVENT
In
July
2003, the Company entered into a licensing agreement with a vendor to license
the use of the URL www.yp.com
in
exchange for cash and restricted shares of the Company’s common stock. Under the
terms of this agreement, the licensor had the option of transferring the rights
to the URL and the restricted shares to the Company in exchange for $300,000.
In
July 2006, the licensor exercised this option, and transferred ownership of
the
URL and the restricted shares to the Company. As this option was deemed to
be a
purchase commitment, no liability was reflected in the Company’s financial
statements prior to the exercise of the option. The Company will capitalize
the
URL at its net acquisition price, computed as the $300,000 cash payment less
the
fair market value of the shares acquired (determined based on the stock price
on
the date of reacquisition) and will amortize this asset on a straight-line
basis
over its estimated useful life.
* * *
11
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For
a
description of our significant accounting policies and an understanding of
the
significant factors that influenced our performance during the three and nine
months ended June 30, 2006, this “Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations” (hereafter referred to as
“MD&A”) should be read in conjunction with the Consolidated Financial
Statements, including the related notes, appearing in Item 1 of this Quarterly
Report,
as well
as our Annual Report on Form 10-K for the year ended September 30,
2005.
Forward-Looking
Statements
This
portion of this Annual Report on Form 10-Q, 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) our expectation to continue to expand our telemarketing
campaigns in the future; (ii) our expectation that any future changes in billing
practices with our remaining LECs will not have a material adverse impact on
our
net revenues; (iii) our belief that cost of services will continue to be
directly correlated to our usage of LEC billing channel; (iv) our belief that
sales and marketing expenses will increase if we continue to our strategy of
significant mailing and telemarketing activities; and (v) the belief that our
existing cash on hand will provide us with sufficient liquidity to meet our
operating needs for the next twelve 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 the section titled “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
This
section presents a discussion of recent developments and summary information
regarding our industry and operating trends only. For further information
regarding the events summarized herein, you should read this MD&A in its
entirety.
Business
and Company Overview
We
use a
business model similar to print Yellow Pages publishers. 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.
Our
primary product is our Internet Advertising Package™, or IAP. Under this
package, advertisers pay for additional exposure by purchasing a Mini-WebPage™.
In order to provide search traffic to our advertiser’s Mini-WebPage, we elevate
the advertiser to a preferred listing status, at no additional charge. We also
provide our IAP advertisers with enhanced presentation and additional unique
products, such as larger font, bolded business name, map directions, ease of
communication between our advertisers and users of our website, a link to the
advertiser’s webpage, as well as other benefits.
12
Customer
Counts
The
success of our business model is based on our ability to retain, add and
efficiently bill our subscribers.
There
have been different methodologies employed in the reporting of customer count.
To more properly reflect customer count we changed our methodology in the first
quarter of fiscal 2006 to count billed listings. A billed listing is defined
by
management as any listing that has successfully been submitted through one
of
our billing channels or in the case of listings billed by direct invoice only
those listings that have paid for their listing at the end of the reporting
period.
Management
believes that this change when coupled with the knowledge of our average price
and percentage of returns and allowances will provide greater insight into
our
business model for the public.
The
following represent our counts for billed listings over the last six quarters.
Where applicable, we have included our previously reported customer count data
for comparative purposes:
Quarter
Ended
|
|
Average
Billed Listings During Quarter
|
Gross
Revenue
|
Returns
& Allowances (% of Gross Revenue)
|
Net
Revenues
|
Average
Monthly Gross Revenue per Average Billed Listing
|
||||||||||
June
30th, 2006
|
134,264
|
$
|
10,869,020
|
6.41
|
%
|
$
|
10,172,705
|
$
|
26.98
|
|||||||
March
31st, 2006
|
116,622
|
9,823,664
|
8.39
|
%
|
8,999,196
|
$
|
28.08
|
|||||||||
December
31st, 2005
|
90,809
|
8,328,583
|
8.43
|
%
|
7,626,776
|
$
|
30.57
|
|||||||||
September
30th, 2005
|
81,342
|
6,856,082
|
11.71
|
%
|
6,052,936
|
$
|
28.10
|
|||||||||
June
30th, 2005
|
83,096
|
7,419,827
|
12.17
|
%
|
6,517,158
|
$
|
29.76
|
|||||||||
March
31st, 2005
|
76,633
|
7,527,086
|
14.38
|
%
|
6,444,609
|
$
|
32.74
|
|||||||||
December
31st, 2004
|
82,579
|
7,502,125
|
17.49
|
%
|
6,190,155
|
$
|
30.28
|
Our
average monthly gross revenue per average billed listing declined in the last
two quarters, as a significant amount of our increase in billed listings was
via
a new fulfillment contract with a new LEC billing vendor. Under the terms of
this new contract, our gross revenues are, on average, approximately $3 lower
than those of our other LEC billing channels.
Recent
Operating Results
We
bill
our customers through four primary channels: LEC billing, ACH billing, recurring
credit card and direct invoice. During the end of 2004 and throughout 2005,
we
had been reducing our use of LEC billing channels as the LEC’s policies
regarding the use of our check mailer as our primary letter of authorization
prevented us from billing many existing customers through this particular
billing channel. Additionally, the major LECs (i.e. Regional Bell Operating
Companies or RBOCs) prevented us from billing any new customers acquired via
check mailers. As such, we transitioned a significant number of our customers
to
alternate billing means, the most significant of which was ACH billing. ACH
billing is less expensive than LEC billing; however, many of our customers
view
this as a less desirable billing method, leading to increased
cancellations.
In
fiscal
2006, we began acquiring new customers via telemarketing campaigns, which are
allowed to be billed via LECs. These telemarketing campaigns have reopened
certain LEC billing channels as a viable billing channel. Additionally, our
monthly billing rates are higher for customers acquired via telemarketing
campaigns. For these reasons, we expect to continue to expand our telemarketing
campaigns in the future, though check mailings remain a significant component
of
our marketing efforts. Although LEC channels include fees and other costs that
exceed those of other channels, the growth in LEC billings has contributed
to a
significant increase in our gross profit. We are in the process of petitioning
other LECs to reopen these billing channels as well.
13
The
following represents a summary of recent financial results:
Q3
2006
|
Q2
2006
|
Q1
2006
|
Q4
2005
|
Q3
2005
|
||||||||||||
Net
Revenues
|
$
|
10,172,705
|
$
|
8,999,196
|
$
|
7,626,776
|
$
|
6,052,936
|
$
|
6,517,158
|
||||||
Gross
margin
|
7,843,121
|
7,410,733
|
6,510,430
|
4,993,639
|
5,591,353
|
|||||||||||
Operating
expenses
|
5,967,099
|
6,196,731
|
5,689,644
|
6,295,000
|
5,269,473
|
|||||||||||
Operating
income (loss)
|
1,876,022
|
1,214,002
|
820,786
|
(1,301,361
|
)
|
321,880
|
||||||||||
Net
income (loss)(1)
|
1,231,987
|
814,140
|
435,031
|
(815,727
|
)
|
(149,784
|
)
|
(1)
The
following non-recurring items are relevant to our recent quarterly operating
results, each of which are further described herein:
· |
Third
quarter of fiscal 2006 - no significant non-recurring expenses were
incurred.
|
· |
Second
quarter of fiscal 2006 - includes an increase of general and
administrative expenses of approximately $80,000 related to separation
costs with our former Chief Financial Officer and $39,000 related
to
separation costs with other
employees.
|
· |
First
quarter of fiscal 2006 - includes an increase of general and
administrative expenses totaling approximately $338,000 related to
separation costs with our former Chief Executive Officer and an increase
in other expenses associated with an additional expense of $162,000
relating to an outstanding legal matter
.
|
· |
Fourth
quarter of fiscal 2005 - includes an increase of general and
administrative expenses totaling approximately $212,000 relating
to the
termination of consulting agreements with certain of our former officers
and an increase in sales and marketing expense of $921,000 associated
with
a change in the amortization period of our customer acquisition costs,
offset by a reduction of general and administrative expenses of
approximately $295,000 associated with the true-up of estimates of
forfeitures of restricted stock grants.
|
· |
Third
quarter of fiscal 2005 - includes losses of $328,000 associated with
a
litigation settlement and approximately $282,000 associated with
our
agreement to settle outstanding amounts due from two of our largest
stockholders (with the loss being equal to the difference between
the fair
value of debt forgiven and the value of the consideration
received).
|
The
following represents the breakdown of net billings by channel during recent
fiscal quarters:
Q3
2006
|
Q2
2006
|
Q1
2006
|
Q4
2005
|
Q3
2005
|
||||||||||||
LEC
billing
|
62
|
%
|
49
|
%
|
35
|
%
|
32
|
%
|
23
|
%
|
||||||
ACH
billing
|
33
|
%
|
43
|
%
|
54
|
%
|
54
|
%
|
64
|
%
|
||||||
Direct
billing and other
|
5
|
%
|
8
|
%
|
11
|
%
|
14
|
%
|
13
|
%
|
Other
Recent Developments
During
the second quarter of fiscal 2006, we began engaging the services of a
consulting firm that has expertise with LEC billing channels, with the intent
of
improving operational efficiencies and cash collection cycle times and reducing
the costs associated with fees, chargebacks and dilution. We have since expanded
their role to include consulting on various strategic initiatives and have
extended our contract with this firm through February 2010. Such services have
been expensed as incurred.
During
the second quarter of fiscal 2006, we settled our outstanding litigation with
a
former vendor, resulting in a cash payment of $490,000. As the full amount
of
the settlement was previously accrued, there was no expense incurred in the
current quarter associated with this settlement. In connection with this
payment, we are no longer required to maintain our bond that was previously
reflected as restricted cash in the accompanying balance sheet included
elsewhere in this report. Accordingly, the bond has been released and this
amount has been reclassified from restricted cash to cash in our balance sheet
as of June 30, 2006.
14
During
the second quarter of fiscal 2006, we entered into a contractual arrangement
with an attorney to settle previous claims and to engage the future services
of
this attorney. Under the terms of the arrangement an a subsequent amendment,
we
made cash payments during the quarter totaling $55,000 and granted 100,000
shares of restricted stock. We are obligated to make future payments over the
next two years totaling $294,750 in exchange for future services. Such amounts
have not been accrued in the accompanying financial statements as such payments
are for future services. This contract is terminated immediately upon the sale
of the Company.
We
bill a
significant number of our IAP 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
Automated Clearing House (ACH) Network and for electronic payments in the areas
of Internet commerce and other electronic payment means. In February 2006,
NACHA
issued an Operating Bulletin concerning the use of the back of a check to obtain
authorization for an ACH transaction. In this Operating Bulletin, NACHA
indicated that, while this practice of authorizing ACH debits by relying on
the
endorsement of a check is not expressly prohibited by the NACHA operating rules,
it does contain inherent risks that the underlying transaction was not properly
authorized or understood. Therefore, service providers in the electronic
payments network are encouraged to adopt appropriate policies to mitigate such
risks. We have yet to see any changes in the business practices of our service
providers as a result of this announcement. However, to the extent that such
business practices change, it could have an adverse impact on our ability to
bill a significant number of our clients and result in lost
revenues
On
January 19, 2006, we entered into a Separation Agreement with Chris Broquist,
our Chief Financial Officer, pursuant to which Mr. Broquist and the Company
have
agreed to terminate their employment relationship effective February 28, 2006.
Pursuant to the terms of the Separation Agreement & General Release, among
other items, Mr. Broquist will receive a severance package consisting of six
months of compensation and health benefits and the continued vesting of his
restricted stock and Mr. Broquist has agreed not to compete with the Company
or
solicit any of the employees of the Company for a period of two
years.
At
a
meeting of our Board of Directors, held on January 8, 2006, John T. Kurtzweil,
R.A. Johnson-Clague, Peter J. Bergmann and Paul Gottlieb each resigned from
our
Board of Directors and their respective committees on which they were serving.
Subsequent to the foregoing resignations, Joseph F. Cunningham, Jr. and
Elisabeth Demarse were appointed to the Board of Directors of the Company.
In
addition, Daniel L. Coury, Sr., a current member of our Board of Directors,
was
elected Chairman of the Board and Mr. Cunningham was appointed to serve as
the
Chairman of the Audit Committee of our Board of Directors.
On
November 3, 2005, we entered into a Separation Agreement with Peter J. Bergmann
in connection with his resignation as Chairman and President of our company.
Under the terms of this agreement, Mr. Bergmann resigned as Chief Executive
Officer during the second quarter of fiscal 2006. Mr. Bergmann will receive
a
cash payment of $337,500 and will continue to vest in a portion of his
stock-based compensation earned during his tenure, in accordance with the terms
of this agreement.
Attorneys
General Complaints Concerning Direct Marketing Mail Solicitation
We
have
received a number of inquiries from the Attorney General offices or other
regulatory agencies of several states, including a 20-state consortium,
investigating our promotional activities. In Nebraska, the notice required
us to
cease and desist the use of our check mail program in that State immediately.
These inquiries are in response to business complaints and seek to determine
whether the promotional check mailer practice engaged in by the Company violates
state consumer protection statutes and deceptive trade practices acts.
We
believe that the language in the various state statutes referenced is very
vague
as to what constitutes a deceptive trade practice or misleading practice, such
that they are subject to wide-ranging constructions. Moreover, we do not believe
that we are in violation of the referenced statutes. To this end, we are
maintaining an ongoing dialogue with the various states in an effort to dispel
such concerns, explain the non-deceptive nature of our business solicitations,
and, if practicable, tailor our marketing practices so as to comply with the
various states’ interpretation of what conduct would not violate the applicable
consumer protection statutes.
15
Our
current cooperative posture, however, does not obviate the possibility of an
agency instituting formal action against us in a wider attempt to curb
solicitations for business utilizing check promotions. We hope to continue
our
good faith discussions with these various agencies in an effort to formulate
a
uniform set of standards to be used to determine if any specific check
solicitation violates consumer protection laws. However, to the extent future
standards are deemed too onerous, we may consider pursuing a legal course of
action challenging those standards.
Results
of Operations
Net
Revenues
Net
Revenues
|
|||||||||||||
2006
|
2005
|
Change
|
Percent
|
||||||||||
Three
Months Ended June 30,
|
$
|
10,172,705
|
$
|
6,517,158
|
$
|
3,655,547
|
56
|
%
|
|||||
Nine
Months Ended June 30,
|
$
|
26,798,677
|
$
|
19,151,922
|
$
|
7,646,755
|
40
|
%
|
The
increase in revenues for the three and nine months ended June 30, 2006, as
compared to June 30, 2005, was largely due to an increased customer count
attributable to expanded marketing efforts, the reintroduction of the LEC
billing channel for new customers, and a new fulfillment contract with OneSource
Network.
Although
we have concentrations of risk with our billing aggregators (as described in
the
Notes to Unaudited Consolidated Financial Statements included elsewhere in
this
Quarterly Report) these aggregators bill via many underlying LECs, thereby
reducing our risk associated with credit concentrations. However, there are
a
few LECs that service a significant number of our customers. To the extent
that
future changes in their billing practices cause a disruption in our ability
to
bill through these channels, our revenues could be adversely affected.
The
majority of our IAP customers pay between $27.50 and $39.95 per month.
Cost
of Services
Cost
of Services
|
|||||||||||||
2006
|
2005
|
Change
|
Percent
|
||||||||||
Three
Months Ended June 30,
|
$
|
2,329,584
|
$
|
925,805
|
$
|
1,403,779
|
152
|
%
|
|||||
Nine
Months Ended June 30,
|
$
|
5,034,393
|
$
|
2,921,322
|
$
|
2,113,071
|
72
|
%
|
The
increase in cost of services for the three months ended June 30, 2006, as
compared to June 30, 2005, is largely due to an increase in LEC billings, which
have higher costs than other billing channels Billings through LEC channels,
comprised 62%, 49% and 36% of total billings in the first three fiscal quarters
of 2006, respectively, as compared to 23%, 25% and 49% of total billings in
the
first three fiscal quarters of 2005. The increase in cost of sales was less
dramatic when comparing the nine months ended June 30, 2006 as compared to
June
30, 2005 due to the fact that LEC billing was a smaller component of total
billings in the first quarter of fiscal 2006 as compared to the first quarter
of
fiscal 2005.
Gross
Profit
Gross
Profit
|
|||||||||||||
2006
|
2005
|
Change
|
Percent
|
||||||||||
Three
Months Ended June 30,
|
$
|
7,843,121
|
$
|
5,591,353
|
$
|
2,251,768
|
40
|
%
|
|||||
Nine
Months Ended June 30,
|
$
|
21,764,284
|
$
|
16,230,600
|
$
|
5,533,684
|
34
|
%
|
16
The
increase in our gross profits was due primarily to increased revenues as
discussed above. Gross margins decreased to 77% of net revenues in the third
quarter of fiscal 2006 compared to 86% of net revenues in the third quarter
of
fiscal 2005 due to increased dilution in fiscal 2006 resulting from the increase
in LEC billings. Gross margins decreased to 81% for the first nine months of
fiscal 2006 compared to 85% for the first nine months of fiscal 2005, primarily
as a result of the increase in LEC billings previously discussed.
General
and Administrative Expenses
General
and Administrative Expenses
|
|||||||||||||
2006
|
2005
|
Change
|
Percent
|
||||||||||
Three
Months Ended June 30,
|
$
|
3,129,807
|
$
|
3,251,975
|
$
|
(122,168
|
)
|
(4
|
)%
|
||||
Nine
Months Ended June 30,
|
$
|
10,600,755
|
$
|
9,685,457
|
$
|
915,298
|
9
|
%
|
General
and administrative expenses decreased for the quarter ended June 30, 2006
compared to the quarter ended June 30, 2005. In the quarter ended June 30,
2006
there was a decrease in customer expenses associated with reconfirmation
activities that took place during the same period in 2005, as well as a decrease
in compensation costs associated with headcount reductions, which was partially
offset by increased operational and strategic consulting services.
The
increase in general and administrative expenses for the nine months ended June
30, 2006, as compared to June 30, 2005, is largely due to the
following:
· |
An
increase in compensation expense of $513,000 stemming from: a)
approximately $433,000 of severance costs associated with the termination
of former officers and other personnel and b) increased non-cash
compensation costs of approximately $220,000 associated with restricted
stock awards. These costs were partially offset by general headcount
reductions in our customer service workforce.
|
· |
An
increase in consulting and professional fees of approximately $748,000
associated with operational and strategic consulting and director
and
officer turnover (temporary and placement services).
|
· |
A
decrease in mailing and other customer costs of approximately $293,000
associated with the reduction of paper invoices and other methods
of
correspondence with customers for which payment is unlikely to be
received.
|
· |
General
cost reductions of $121,000.
|
Our
general and administrative expenses consist largely of fixed expenses such
as
compensation, rent, utilities, etc.
Therefore, we do not consider short-term trends of general and administrative
expenses as a percent of revenues to be meaningful indicators for evaluating
operational performance.
The
following table sets forth our recent operating performance for general and
administrative expenses:
Q3
2006
|
Q2
2006
|
Q1
2006
|
Q4
2005
|
Q3
2005
|
||||||||||||
Compensation
for employees, leased employees,
officers and directors
|
$
|
1,860,102
|
$
|
2,414,777
|
$
|
2,423,537
|
$
|
2,265,275
|
$
|
2,115,672
|
||||||
Professional
fees and other G&A costs
|
1,024,108
|
900,439
|
843,366
|
672,328
|
618,738
|
|||||||||||
Reconfirmation,
mailing, billing and other customer-related
costs
|
245,597
|
396,883
|
491,947
|
407,554
|
517,565
|
17
Sales
and Marketing Expenses
Sales
and Marketing Expenses
|
|||||||||||||
2006
|
2005
|
Change
|
Percent
|
||||||||||
Three
Months Ended June 30,
|
$
|
2,485,950
|
$
|
1,565,536
|
$
|
920,414
|
59
|
%
|
|||||
Nine
Months Ended June 30,
|
$
|
6,134,854
|
$
|
4,896,063
|
$
|
1,238,791
|
25
|
%
|
Sales
and
marketing expense increased in the third quarter of fiscal 2006 as compared
to
the third quarter of fiscal 2005 due to an
increase in the amortization of capitalized costs associated with telemarketing
and direct mail campaigns.
We
capitalize certain direct marketing expenses and amortize those costs over
a
period of time that approximates the estimated life of the customer. In the
fourth quarter of fiscal 2005, this amortization period was reduced from 18
months to 12 months. Additionally, fiscal 2006 capitalized costs include
telemarketing and direct mail campaigns whereas fiscal 2005 capitalizable costs
only included direct marketing expenses. The decrease in amortization period,
coupled with a larger base of capitalizable costs, accounted for the increase
in
amortization expense.
The
increase in the first nine months of fiscal 2006 as compared to the first nine
months of fiscal 2005 was slightly less than that of third quarter of fiscal
2006 as compared to fiscal 2005. We had a smaller base of capitalized costs
in
the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005,
resulting in less amortization in the corresponding periods.
Depreciation
and Amortization
Depreciation
and Amortization
|
|||||||||||||
2006
|
2005
|
Change
|
Percent
|
||||||||||
Three
Months Ended June 30,
|
$
|
351,342
|
$
|
451,962
|
$
|
(100,620
|
)
|
(22
|
)%
|
||||
Nine
Months Ended June 30,
|
$
|
1,117,865
|
$
|
1,178,854
|
$
|
(60,989
|
)
|
(5
|
)%
|
Depreciation
and amortization remained largely consistent between the three and nine months
ended June 30, 2006 as compared to the three and nine months ended June 30,
2005. Depreciation and amortization consists of amortization of fixed assets,
capitalized website costs, intangible assets and non-compete agreements.
Amortization relating to the capitalization of our direct mail marketing costs
is included in marketing expenses, as discussed previously.
Operating
Income
Operating
Income (Loss)
|
|||||||||||||
2006
|
2005
|
Change
|
Percent
|
||||||||||
Three
Months Ended June 30,
|
$
|
1,876,022
|
$
|
321,880
|
$
|
1,554,142
|
483
|
%
|
|||||
Nine
Months Ended June 30,
|
$
|
3,910,810
|
$
|
470,226
|
$
|
3,440,584
|
732
|
%
|
Our
operating income increased substantially due primarily to revenue increases
as
previously described.
Other
Income (Expense)
Other
Income (Expense)
|
|||||||||||||
2006
|
2005
|
Change
|
Percent
|
||||||||||
Three
Months Ended June 30,
|
$
|
(9,172
|
)
|
$
|
(584,988
|
)
|
$
|
575,816
|
(98
|
)%
|
|||
Nine
Months Ended June 30,
|
$
|
(183,095
|
)
|
$
|
(477,535
|
)
|
$
|
294,440
|
(62
|
)%
|
Other
expenses decreased in the quarter and nine months ended June 30, 2006 compared
to the quarter and nine months ended June 30, 2005 primarily as the result
of
losses incurred during the third quarter of fiscal 2005 consisting of $328,000
associated with a litigation settlement and approximately $282,000 associated
with our agreement to settle outstanding amounts due from two of our largest
stockholders.
18
Income
Tax Benefit (Provision)
Income
Tax Benefit (Provision)
|
|||||||||||||
2006
|
2005
|
Change
|
Percent
|
||||||||||
Three
Months Ended June 30,
|
$
|
(701,990
|
)
|
$
|
83,465
|
$
|
(785,455
|
)
|
(941
|
)%
|
|||
Nine
Months Ended June 30,
|
$
|
(1,404,198
|
)
|
$
|
(92,982
|
)
|
$
|
(1,311,216
|
)
|
1410
|
%
|
The
changes in our income tax benefit (provision) for the three and nine months
ended June 30, 2006 as compared to the three and nine months ended June 30,
2005
is due almost entirely to our increase in profitability. We have not experienced
a significant change in our effective tax rates during these periods.
Cumulative
Effect of Accounting Change
Cumulative
Effect of Accounting Change
|
|||||||||||||
2006
|
2005
|
Change
|
Percent
|
||||||||||
Three
Months Ended June 30,
|
$
|
—
|
$
|
—
|
$
|
—
|
0
|
%
|
|||||
Nine
Months Ended June 30,
|
$
|
—
|
$
|
99,848
|
$
|
(99,848
|
)
|
0
|
%
|
During
the first fiscal quarter of 2005, we changed our method of accounting for
forfeitures of restricted stock awards to employees, officers, and directors.
Prior to October 1, 2004, we recognized forfeitures as they occurred.
Upon
occurrence, we reversed the previously recognized expense associated with such
grant. Effective October 1,
2004,
we
changed to an expense recognition method that is based on an estimate of the
number of shares that are ultimately expected to vest. We believe that this
is a
preferable method as it provides less volatility in expense recognition.
Additionally, while both methods of accounting for forfeitures are acceptable
under current guidance, the implementation of FAS 123R
(effective during the first
quarter of fiscal 2006) will no longer permit us to recognize forfeitures as
they occur.
This
change resulted in an increase to net income of $99,848, net of income taxes
of
$53,764, during the first quarter of fiscal 2005.
Net
Income (Loss)
Net
Income (Loss)
|
|||||||||||||
2006
|
2005
|
Change
|
Percent
|
||||||||||
Three
Months Ended June 30,
|
$
|
1,231,987
|
$
|
(149,784
|
)
|
$
|
1,381,771
|
(923
|
)%
|
||||
Nine
Months Ended June 30,
|
$
|
2,481,158
|
$
|
197,568
|
$
|
2,283,590
|
1156
|
%
|
The
increase in net income for the three and nine months ended June 30, 2006 as
compared to the three and nine months ended June 30, 2005 is due primarily
to
increased revenues, offset by increased cost of sales, general and
administrative, sales and marketing and income tax expense and the effects
of
the cumulative effect of accounting change in fiscal 2005, each of which is
described above.
Liquidity
and Capital Resources
Net
cash
provided by operating activities decreased $6,043,214 or 89%, to $716,595 for
the first nine months of fiscal 2006, compared to $6,759,809 for the first
nine
months of 2005. During the first nine months of fiscal 2005, we generated a
significant portion of our operating cash flow from the conversion of many
of
our customers from LEC billing to alternate billing channels that have a shorter
collection time. During the first nine months of fiscal 2006, the opposite
occurred - a substantial amount of new and existing customers were billed via
LEC billing channels which have a longer collection time. Additionally, during
the first nine months of fiscal 2006, we made substantial investments in direct
customer acquisition costs as compared to the first nine months of fiscal 2006,
where we had limited investments. The net changes in these two balance sheet
items caused a net decrease in our cash flows of over $11.5 million in the
first
nine months of fiscal 2006 as compared to the first nine months of fiscal 2005.
This decrease was offset by an increase in net income of over $2.2 million
and
an increase in noncash expenses of approximately $2,627,000. The remaining
differences were due to other changes in assets and liabilities.
19
Our
primary source of cash inflows is net remittances from our billing channels,
including LEC billings and ACH billings. For LEC billings, we receive
collections on accounts receivable through the billing service aggregators
under
contracts to administer this billing and collection process. The billing service
aggregators generally do not remit funds until they are collected. Generally,
cash is collected and remitted to us (net of dilution and other fees and
expenses) over a 60- to 120-day period subsequent to the billing dates.
Additionally, for each monthly billing cycle, the billing aggregators and LECs
withhold certain amounts, or “holdback reserves,” to cover potential future
dilution and bad debt expense. These holdback reserves lengthen our cash
conversion cycle as they are remitted to us over a 12- to 18-month period of
time. We classify these holdback reserves as current or long-term receivables
on
our balance sheet, depending on when they are scheduled to be remitted to us.
For ACH billings, we generally receive the net proceeds through our billing
service processors within 15 days of submission. Additionally, three LEC
aggregators and one ACH service provider accounted for 29%, 23%, 34% and 12%,
respectively, of our net accounts receivable at June 30, 2006.
Our
most
significant cash outflows include payments for marketing expenses and general
operating expenses. Cash outflows for direct response advertising and
telemarketing, our primary marketing strategies, typically occur in advance
of
expense recognition as these costs are capitalized and amortized over 12 months,
the average estimated retention period for new customers. General operating
cash
outflows consist of payroll costs, income taxes, and general and administrative
expenses that typically occur within close proximity of expense
recognition.
Cash
used
for investing activities was $184,490 for the first nine months of 2006,
consisting of $166,804 of expenditures for intangible assets and $17,686 of
equipment purchases. During the first nine months of fiscal 2005, cash used
for
investing was $391,138, consisting of $346,751 of expenditures for intangible
assets and $44,387 of equipment purchases.
Net
cash
used for financing activities was $134,418 for the first nine months of fiscal
2006, consisting of acquisitions of our common stock through our stock
repurchase program. During
the first nine months of fiscal 2005, cash used for financing activities totaled
$940,910, consisting primarily of common stock dividends. We have recently
suspended all payments of common stock dividends.
We
had
working capital of $21,126,397 as of June 30, 2006, compared to $15,711,822
as
of September 30, 2005. Our cash position increased during the past three months
to over $8,500,000 at June 30, 2006 from approximately $8,100,000 at the end
of
fiscal 2005.
Until
April 1, 2005, we were contractually obligated to pay a $0.01 per share dividend
each quarter, subject to compliance with applicable laws, to all common
stockholders, including those who hold unvested restricted stock. We are no
longer required to pay quarterly dividends. Future dividend payments will be
evaluated by the Board of Directors based upon earnings, capital requirements
and financial position, general economic conditions, alternative uses of capital
and other pertinent factors.
During
the third quarter of fiscal 2005, our Board of Directors initiated the
repurchase of up to $3 million of our common stock from time to time on the
open
market or in privately negotiated transactions. To date, we have reacquired
853,850 shares at an aggregate cost of $700,027 under the program.
During
the second quarter of fiscal 2006, we entered into a contractual arrangement
with an attorney to settle previous claims and to engage the future services
of
this attorney. Under the terms of the arrangement, we made cash payments during
the quarter totaling $55,000 and granted 100,000 shares of restricted stock.
We
are obligated to make future payments over the next two years totaling $294,750
in exchange for future services. Such amounts have not been accrued in the
accompanying financial statements as such payments are for future
services.
20
The
following table summarizes our contractual obligations at June 30, 2006 and
the
effect such obligations are expected to have on our future liquidity and cash
flows:
Payments
due by Period
|
||||||||||||||||||||||
Contractual
Obligations
|
Total
|
Fiscal
2006
|
Fiscal
2007
|
Fiscal
2008
|
Fiscal
2009
|
Fiscal
2010
|
Thereafter
|
|||||||||||||||
Lease
commitments
|
$
|
721,000
|
$
|
100,000
|
$
|
145,000
|
$
|
128,000
|
124,000
|
127,000
|
$
|
97,000
|
||||||||||
Contractual
commitments
|
$
|
1,414,750
|
$
|
105,000
|
$
|
426,750
|
$
|
303,000
|
$
|
240,000
|
$
|
100,000
|
$
|
240,000
|
We
believe that our existing cash on hand and cash flow from operations will
provide us with sufficient liquidity to meet our operating needs for the next
twelve months.
* * *
21
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
of
June 30, 2006, we did not participate in any market risk-sensitive commodity
instruments for which fair value disclosure would be required under Statement
of
Financial Accounting Standards No. 107. 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 the
first nine months of fiscal 2006 or in any of 2005) or commodity price
risk.
ITEM
4. CONTROLS
AND PROCEDURES
Disclosure
controls and procedures are designed with an objective of ensuring that
information required to be disclosed in our periodic reports filed with the
Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q,
is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission. Disclosure controls are
also designed with an objective of ensuring that such information is accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, in order to allow timely consideration regarding
required disclosures.
The
evaluation of our disclosure controls by our principal executive officer and
principal financial officer included a review of the controls’ objectives and
design, the operation of the controls, and the effect of the controls on the
information presented in this Quarterly Report. Our management, including our
chief executive officer and chief financial officer, does not expect that
disclosure controls can or will prevent or detect all errors and all fraud,
if
any. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Also, projections of any evaluation of the disclosure controls
and procedures to future periods are subject to the risk that the disclosure
controls and procedures may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Based
on
their review and evaluation as of the end of the period covered by this Form
10-Q, and subject to the inherent limitations all as described above, our
principal executive officer and principal financial officer have concluded
that
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are effective as of the
end
of the period covered by this report. They are not aware of any significant
changes in our disclosure controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including
any
corrective actions with regard to significant deficiencies and material
weaknesses. During the period covered by this Form 10-Q, there have not been
any
changes in our internal control over financial reporting that have materially
affected, or that are reasonably likely to materially affect, our internal
control over financial reporting.
22
PART
II - OTHER INFORMATION
ITEM
1.
LEGAL
PROCEEDINGS
None
ITEM
1A. RISK
FACTORS
The
following sets forth additional risk factors that represent material changes
from those previously disclosed in our Form 10-K for the year ended September
30, 2005.
Changes
in recent operating guidelines from regulatory agencies could impact our ability
to bill via our ACH channels.
In
February 2006, NACHA - The Electronic Payments Association (which develops
operating rules and business practices for the Automated Clearing House (ACH)
Network and for other electronic payments), issued an Operating Bulletin
concerning the use of the back of a check to obtain authorization for an ACH
transaction. In this Operating Bulletin, NACHA indicated that, while this
practice of authorizing ACH debits by relying on the endorsement of a check
is
not expressly prohibited by the NACHA operating rules, it does contain inherent
risks that the underlying transaction was not properly authorized or understood.
Therefore, service providers in the electronic payments network are encouraged
to adopt appropriate policies to mitigate such risks.
We
have
yet to see any changes in the business practices of our service providers as
a
result of this announcement. However, to the extent that such business practices
change, it could have an adverse impact on our ability to bill a significant
number of our clients and result in lost revenues. To date, we have not yet
formulated policies or procedures to address any future potential changes in
our
billing partners’ business practices.
We
acquire new customers via telemarketing activities performed by third-parties.
Changes in regulations concerning telemarketing activities, or a failure of
our
third-party vendors to comply with existing regulations, could result in a
loss
of customers and our ability to attract new customers via this marketing
channel.
We
currently utilize telemarketing activities as a significant means of attracting
new customers. Such telemarketing activities are regulated by the Federal
Communication Commission and statewide regulations. We outsource such
telemarketing activities to experienced third-party vendors. To the extent
that
these vendors fail to understand or comply with these regulations, our business
could be adversely affected. Likewise, changes in existing regulations could
impact our future ability to utilize telemarketing activities as a viable
marketing strategy.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer
Purchases of Equity Securities
Period
|
(a)
Total Number of Shares (or Units) Purchased
|
(b)
Average Price Paid per Share (or Unit)
|
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares (or Units)
that May
Yet Be Purchased Under the Plans or Programs
|
||||
April
2006
|
0
|
N/A
|
0
|
N/A
|
||||
May
2006
|
0
|
N/A
|
0
|
N/A
|
||||
June
2006
|
0
|
N/A
|
0
|
N/A
|
||||
Total
|
0
|
N/A
|
0
|
$_2,299,973(1)
|
(1) |
On
May 18, 2005, we announced the adoption of a $3 million stock repurchase
program. To date, we have purchased 853,850 shares at an aggregate
price
of $700,027.
|
23
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
None
ITEM
4. SUBMISSIONS
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM
5.
OTHER
INFORMATION
None
ITEM
6. EXHIBITS
The
following exhibits are either attached hereto or incorporated herein by
reference as indicated:
Exhibit
Number
|
Description
|
|
3.1
|
Amended
and Restated Articles of Incorporation of YP Corp. (incorporated
by
reference to the Company’s current report on Form 8-K filed with the SEC
on April 12, 2006).
|
|
10.1
|
Separation
Agreement & General Release, dated as of January 19, 2006, by and
between Chris Broquist and YP Corp. (incorporated
by reference to the Company’s current report on Form 8-K filed with the
SEC on January 25, 2006).
|
|
10.2
|
Employment
Agreement, dated as of February 6, 2006, by and between John Raven
and YP
Corp. (incorporated
by reference to the Company’s current report on Form 8-K filed with the
SEC on February 21, 2006).
|
|
10.3
|
Employment
Agreement, by and between YP Corp. and Gary Perschbacher, dated as
of
March 31, 2006. (incorporated by reference to the Company’s current report
on Form 8-K filed with the SEC on April 3, 2006).
|
|
31
|
Certifications
pursuant to SEC Release No. 33-8238, as adopted pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002
|
|
32
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
24
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
YP.CORP.
|
||
|
|
|
Dated:
August 8, 2006
|
/s/ Gary L. Perschbacher | |
Gary
L. Perschbacher
Chief
Financial Officer
|
25