LIVE VENTURES Inc - Annual Report: 2007 (Form 10-K)
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)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
fiscal year ended September 30, 2007
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o
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TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF
1934
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For
the
Transition period from ________ to ____________
Commission
File Number: 0-24217
LiveDeal,
Inc.
(Exact
Name of Registrant as Specified in Its Charter)
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Nevada
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85-0206668
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(State
or Other Jurisdiction of Incorporation or Organization)
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(IRS
Employer Identification No.)
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4840
East Jasmine Street, Suite
105,
Mesa,
Arizona
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85205
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (480) 654-9646
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 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, or a non-accelerated filer. See definition of
“accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer x
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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 common stock held by non-affiliates computed
based
on the closing price of such stock on March 31, 2007 was approximately
$33,700,000.
The
number of shares outstanding of the registrant’s classes of common stock, as of
December 3, 2007, was 6,640,541 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement relating to the Registrant’s 2008 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form
10-K.
LIVEDEAL,
INC.
FORM
10-K
For
the year ended September 30,
2007
TABLE
OF CONTENTS
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Page
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Part
I
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Item
1.
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Item
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Item
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Item
2.
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Item
3.
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Item
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Part
II
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Item
5.
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Item
6.
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Item
7.
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Item
7A.
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Item
8.
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Item
9.
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62
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Item
9A.
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62
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Item
9B.
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63
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Part
III
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Item
10.
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63
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Item
11.
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63
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Item
12.
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Item
13.
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63
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Item
14.
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Part
IV
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Item
15.
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63
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68
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PART
I
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)
the expectation of increasing our future telemarketing efforts to generate
new
business given our discontinuance of activation checks; (iii) expectation of
increasing revenues through our national accounts programs, fulfillment
contracts, web hosting and other arrangements; (iv) expectation that our
technologies will increase recurrent use of our system by users of our directory
services; (v) belief in the growth of Internet usage and the Internet Yellow
Page market as described in recent press releases by The Kelsey
Group; (vi) belief that existing cash on hand will be sufficient to
meet our needs for the next 12 months; (vii) belief that recent acquisitions
to
bring telemarketing services in-house will yield future cost savings and (viii)
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.
ITEM
1.
Business
Our
Company
LiveDeal,
Inc., a Nevada corporation (formerly known as YP Corp.) (the “Company,” “we,”
“us,” or “our”) is a combined local online classifieds and Yellow Pages
marketplace, headquartered in Mesa, Arizona. Through our wholly-owned
subsidiary, Telco Billing, Inc. (“Telco”), located in Las Vegas, Nevada, we
publish our Yellow Pages online at or through the following URL’s:
www.Yellow-Page.Net, www.YP.Net,www.YP.Com and www.livedeal.com. Any
information contained on the foregoing websites or any other websites referenced
in this Annual Report are not a part of this Annual Report.
On
June
6, 2007, we completed our acquisition of LiveDeal, Inc, a California corporation
(“LiveDeal”). LiveDeal has developed and operates an online local
classifieds marketplace, www.livedeal.com which has millions of goods and
services listed for sale in almost every city and zip code across the U.S.
LiveDeal offers such classifieds functionality as fraud protection, identity
protection, e-commerce, listing enhancements, photos, community-building,
package pricing, premium stores, featured Yellow Page business listings and
advanced local search capabilities. Additionally, the LiveDeal technology lets
consumers search or browse for items in a particular city, state or zip
code.
On
July
10, 2007, we acquired substantially all of the assets and assumed certain
liabilities of OnCall Subscriber Management Inc. a Manila, Philippines-based
company that provides telemarketing services. This acquisition
allowed us to bring certain marketing efforts in-house, which we expect to
yield
future cost savings.
Summary
Business
Description
We
maintain a combined local online classifieds and Yellow Pages marketplace with
millions of goods and services listed for sale, in every city and zip code
across the U.S. By combining the benefits of classifieds, business listings,
mobile services, advertising/distribution networks and e-commerce into a single
online solution, we offer businesses and consumers an affordable and effective
solution for creating a web presence and marketing their products and services
locally. Through our online properties YP.com and LiveDeal.com, we enable buyers
and sellers to find and list business services, merchandise, real estate,
automobiles, pets and more in their local communities. Using LiveDeal’s
marketplace, consumers can search or browse for items in a particular city,
state or zip code, or reach out on a national or global scope if they so
choose.
Online
Classifieds
We
operate an online classified marketplace at our website
LiveDeal.com. We offer our standard non-commercial classified
advertisements to users at no charge. However, we offer additional
upgrades on a fee-for-service basis to promote these
listings. Additionally, commercial businesses utilize our online
marketplace to promote their businesses. We offer various online
storefronts to commercial businesses which permit these businesses to establish
a separate section within our site with their logos, enhanced listings and
other
features.
Advertisers
can also display graphical advertisements on the pages that are viewed by our
users across our website. For these advertising services, we earn revenue as
“impressions” are delivered. An “impression” is delivered when an advertisement
appears in pages viewed by users.
Yellow
Page
Marketplace
We
use a
business model similar to print Yellow Pages publishers for our Yellow Page
marketplace. 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. RH Donnelley indicated in its 2004 report that
the Internet is the future of the Yellow Pages. For advertisers, we
believe that online Yellow Pages provide significant competitive advantages
over
existing print directories. For example, the ability of online advertisers
to
access and modify their displays and advertisements often results in more
current information. Additionally, online advertisers can more
readily advertise temporary or targeted specials or discounts. 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, 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 long-term, 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. The circulated listing competes
for appearance in search results across the Internet through a paid advertising
agreement with Interchange Corp., which in turn circulates listings to
destinations such as epilot.com and local.com. Interchange Corp.
has agreements with approximately 300 search partners with over 3
billion searches per month to display advertising. We also have an
agreement with Yahoo! Search Services to improve our IAP advertisers’ appearance
in search results at several high-profile sites including www.msn.com,
www.altavista.com, www.cnn.com and www.infospace.com. In addition to our
paid advertising programs, our preferred listings are syndicated
to community portals at www.mycity.com. MyCity.com has a
national network of online city guides, focused on delivering local search
results.
Benefits
to Users of our
Website. We are a national online Yellow Pages. 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. We also believe that our
website meets or exceeds the local Yellow Page search capabilities of our major
competitors.
Products
and
Services
Internet
Advertising Package.
Our primary product is our Internet Advertising Package, or IAP. Under
this package, the advertiser pays for additional exposure by purchasing 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:
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Larger
font.
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Bolded
business name.
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A
“tagline” whereby the advertiser can differentiate itself from its
competitors.
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An
audio advertisement.
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Map
directions.
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A
Click2Call™ feature, whereby a user of our website can place a telephone
call to one of our advertising customers by clicking the icon that
is
displayed on the Mini-WebPage. This initiates a telephone call
by the advertiser to the user, in a conference call type format.
Once both
are connected, it functions as a regular telephone
call. Because we cover all charges for this telephone call, it
is free of charge to both the user and the IAP advertiser. We
have an agreement with WebDialogs, Inc. to provide this
service.
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A
link to the advertiser’s own webpage and email
address.
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Additional
distribution network for preferred listings. This feature gives additional
exposure to our IAP advertisers by placing their preferred listing
on
several online directory systems. There currently is no charge
to the IAP advertiser for these additional channels of
distribution.
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Our
IAP
advertisers generally pay between $27.50 and $39.95 per month. Our IAP and
the
Internet Dial-Up Package described below account for over 90% of our net
revenues.
Classified
Advertisements. For our classified business, we offer our
standard non-commercial classified advertisement at no
charge. However, we offer additional upgrades on a fee-for-service
basis to promote these listings. Additionally, commercial businesses
utilize our online marketplace to promote their businesses. We offer
various online storefronts to commercial businesses which permit these
businesses to establish a separate section within our site with their logos,
enhanced listings and other features.
Revenues
from the classified marketplace are only included in our fiscal 2007 operating
results from June 6, 2007, the date of our acquisition of
LiveDeal. Since the date of the LiveDeal acquisition, these products
have accounted for approximately 2 percent of our net revenues.
Banner
Advertisements. We offer banner advertisements and other
graphical advertisements to businesses. We work with our
advertisers to maximize the effectiveness of their campaigns by optimizing
advertisement formats and placement on our sites. We generate
revenues from these advertisements on a “click-through” basis from the
advertisements placed on the YP.com and LiveDeal.com sites. Since the
date of the LiveDeal acquisition, these products have accounted for
approximately 2 percent of our net revenues.
Other
Online
Services. We also offer our customers other products and
services to enhance their use of the Internet, including a simple, effective,
website development tool and a cost-effective Internet dial-up
package. These products accounted for less than 1% of our net
revenues in fiscal 2007.
Fulfillment
Services. Beginning in fiscal 2006, we began entering into
contracts with several third parties whereby we provide hosting, customer
service and certain administrative functions under a revenue sharing
agreement. We believe these agreements allow us to increase
operational efficiencies and expand our customer base.
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 LEC, (ii) 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 local exchange carrier, or 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. LEC billing accounted for approximately 63% of net billings
in fiscal 2007.
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 expense, 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 an Automated Clearing House, or 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 and our ACH
service providers, these third parties are entitled to withhold certain amounts
from our net proceeds to serve as a security deposit or “holdbacks” or
“reserves.” In the case of LEC billing aggregators, such amounts are
generally remitted to us over a 12-18 month period, depending on the terms
of
the respective agreements. ACH processors maintain a rolling reserve
based on average monthly volume.
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 Click2Call feature, 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 Click2Call feature,
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 limited by the
publishers’ infrequent re-publication schedule if they desire to change their
advertisement.
Basic
classified advertisements for non-commercial users are free, though we offer
a
variety of promotional options to improve selling success on a fee for service
basis, with such pricing ranging from $0.50 to $29.95 per
listing. Pricing for storefronts and other commercial
services are priced beginning at $9.95 per month for merchandise accounts and
$76.00 per month for automobile accounts, with additional promotional options
offered on a fee-for-service basis. Our pricing also is competitive
with print classified advertisements.
Marketing
As
with
leading online businesses such as Yahoo! and Google, we seek to develop a strong
brand and content offerings which will attract and engage users and
advertisers. In June 2007, we combined existing businesses in the
online classified advertising market (LiveDeal, Inc.) with the online Yellow
Page market (the former core YP Corp. business) to provide users with an
effective online venue for marketing their products and services
locally. We believe that the natural synergies associated with these
two businesses will allow us to create a content-rich and efficient marketplace
that will drive growth in users and advertisers.
We
utilize various online marketing methods to drive users and advertisers to
our
site. However, our primary marketing method is
telemarketing. In fiscal 2007, we acquired an existing telemarketing
vendor in the Philippines which added 170 employees and enables us to conduct
full-scale telemarketing efforts at a reduced cost. We expect that
this acquisition will provide us cost savings in the future.
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 high volume website.
To
focus
on a quality and timely product, we have divided our technology staff and
technology base into a business operations unit and an advanced technologies
group dedicated to our directory services product. Our business
operations support a sophisticated call center, automated billing of our
customers, customer relationship management, and automated mailing
campaign. Our advanced technologies group supports all research,
design, development and systems enhancements to the LiveDeal.com and YP.com
websites and internal systems. These operations are described in the
following paragraphs.
LiveDeal.com
and YP.com combines the local online classifieds and Yellow Pages marketplace
with millions of goods and services listed for sale, in every city and zip
code
across the U.S. By combining the benefits of classifieds, business listings
and
premium stores, feedback reviews, community chat boards, maps and directions,
telephone numbers, advertising/distribution networks and e-commerce into a
single online solution, LiveDeal offers businesses and consumers the most
affordable and effective solution for creating a web presence and marketing
their products and services locally. YP.com is LiveDeal's Yellow Pages website
and URL. Through its online properties YP.com and LiveDeal.com, LiveDeal enables
buyers and sellers to find and list business services, merchandise, real estate,
automobiles, pets and more in their local communities. Using LiveDeal’s
marketplace, consumers can search or browse for items in a particular city,
state or zip code, or reach out on a national or global scope if they so
choose.
LiveDeal
also partners with online and offline media to quickly and cost effectively
power their online classifieds and yellow pages via its dynamic
platform.
Salient
features of LiveDeal technology:
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Own
source code that includes cutting edge technology (J2EE, Struts,
XML,
Spring, Hybernate, JBoss, Apache,
etc):
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Linear
scaling architecture using low cost commodity
hardware:
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An
architecture based on redundancy for scalable quick user
responses:
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Proven
search technology which scales for large
volumes:
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Enhanced
security using HTTPS, Encryption, data obfuscation:
and
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Internationalized
Architecture for quick
localization.
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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 at our Santa
Clara, California and Mesa, Arizona 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.
The
Internet Yellow Pages and
Classified 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 March 2007 press release from The Kelsey Group, advertising revenues from
Internet Yellow Pages and Local Search are expected to grow from $4.1 billion
in
2006 to $11.1 billion globally in 2011, a 22.3% compound annual growth
rate. Recent studies have shown that while small and mid-size
businesses continue to utilize traditional media, they are increasingly turning
to targeted, vertical electronic media.
Internet
Yellow Pages provide the following advantages over print Yellow
Pages:
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More
current and extensive listing
information.
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Immediate
access to business listings across the nation from any
location.
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Broad
accessibility via computers and hand-held devices, such as mobile
phones
and personal digital assistants.
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Features
such as mapping, direct calling to the advertiser, and e-mail at
the click
of a button also may be available.
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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, 69.3% of the United States
population uses the Internet, a growth of 117.3% from 2000 to
2006. Search engines are a common method by which these users
navigate the Internet. Our expanding distribution network seeks to
allow our advertisers to benefit from this growth by receiving prominent
placement in search engine results.
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:
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We
have cross-marketing arrangements with reciprocal linking of websites
without any compensation to either party. These arrangements increase
the
page views for our advertisers’ listings by being listed on the linked
websites. These co-promotional arrangements typically are terminable
with
one month’s notice.
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We
have a license agreement with Palm, Inc. whereby we pay a fee to
be a
provider of Yellow Pages content on hand-held devices using the Palm
operating system. We provide this content to Palm through a
hypertext link from the Palm operating system to our
website.
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We
have an agreement with Yahoo! Search Services to provide visibility
to our
website so that we can provide traffic to our advertisers. In exchange
for
monthly fees, Yahoo! Search Services assists in helping us to be
one of
the highest placed sites when Yellow Pages searches are done on major
search engines, such as MSN and
Yahoo!.
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We
utilize WebDialogs in a co-promotional effort to provide automatic
dialing
services to our website users. These services allow these users to
place a
call to one of our IAP advertisers by simply clicking a button. This
function powers our Click2Call
feature.
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We
will begin featuring Yelp’s 1.8 million customer reviews on its online
classifieds and Yellow Pages platforms, giving LiveDeal users an
enormous
wealth of user-generated content about local area
businesses.
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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.
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 have advantages
in terms of brand name recognition.
We
believe that we are in a position to successfully compete in these markets
due
to the speed of our local search engine, the comprehensiveness of our database,
and the effectiveness of our marketing programs and our distribution
network. We also believe that the combination of local classifieds
and 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. 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 our listings and our Mini-WebPages provide users of our website with
readily available information that is easy to understand and from which they
can
make their buying decisions. We believe that our calling center is a
competitive advantage. Through our calling centers we continually
receive and process requests to update customer information on our website
and,
accordingly, we believe our site contains more useful and timely information
than that of our competitors. We further believe that this, in turn,
will translate into more page views and advertisers.
Employees
As
of
September 30, 2007, we had 85 full-time and 1 part-time employees in the United
States and 159 full-time employees in the Philippines. None of our
employees are covered by any collective bargaining agreements.
ITEM
1A. Risk
Factors
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. Accordingly, you should only consider investing in
our common stock if you can afford to lose your entire investment.
Risks
Related to Our
Business
We
face intense competition,
including from companies with greater resources, which could adversely affect
our growth and could lead to decreased revenues.
Several
companies, including Google, Microsoft, Verizon, and Yahoo!, currently market
Internet Yellow Pages or local search services that directly compete with our
services and products. We may not compete effectively with existing
and potential competitors for several reasons, including the
following:
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some
competitors have longer operating histories and greater financial
and
other resources than we have and are in better financial condition
than we
are;
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some
competitors have better name recognition, as well as larger, more
established, and more extensive marketing, customer service, and
customer
support capabilities than we have;
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some
competitors may supply a broader range of services, enabling them
to serve
more or all of their customers’ needs. This could limit our sales and
strengthen our competitors’ existing relationships with their customers,
including our current and potential IAP
advertisers;
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some
competitors may be able to better adapt to changing market conditions
and
customer demand; and
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barriers
to entry are not significant. As a result, other companies that
are not currently involved in the Internet-based Yellow Pages advertising
business may enter the market or develop technology that reduces
the need
for our services.
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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
quarterly 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:
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fluctuating
demand for our services, which may depend on a number of factors
including
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changes
in economic conditions and our IAP advertisers’
profitability,
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varying
IAP advertiser response rates to our direct marketing
efforts,
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our
ability to complete direct mailing solicitations on a timely basis
each
month,
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changes
in our direct marketing efforts,
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IAP
advertiser refunds or cancellations,
and
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our
ability to continue to bill through LEC billing, ACH billing or credit
card channels rather than through direct
invoicing;
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market
acceptance of new or enhanced versions of our services or
products;
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price
competition or pricing changes by us or our
competitors;
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new
product offerings or other actions by our
competitors;
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the
ability of our check processing service providers to continue to
process
and provide billing information regarding our solicitation
checks;
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the
amount and timing of expenditures for expansion of our operations,
including the hiring of new employees, capital expenditures, and
related
costs;
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technical
difficulties or failures affecting our systems or the Internet in
general;
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a
decline in Internet traffic at our
website;
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the
cost of acquiring, and the availability of, information for our database
of potential advertisers; and
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the
fixed nature of a significant amount of our operating
expenses.
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The
loss of our ability to bill IAP
advertisers through our Local Exchange Carriers on the IAP advertisers’
telephone bills would adversely impact our results of
operations.
We
rely
heavily on our ability to bill advertisers on their telephone bills through
their respective Local Exchange Carriers, or “LECs.” LEC billing has
steadily increased in recent quarters and accounted for 63% of net billings
in
2007.
The
existence of the LECs is the result of federal legislation. In the
same manner, Congress could pass future legislation that obviates the existence
of or the need for the LECs. Additionally, regulatory agencies could
limit or prevent our ability to use the LECs to bill our
advertisers. The introduction of and advancement of new technologies,
such as WiFi technology or other wireless-related technologies, could render
unnecessary the existence of fixed telecommunication lines, which also could
obviate the need for and access to the LECs. Finally, we have historically
been
affected by the LECs’ internal policies. With respect to certain
LECs, such policies are becoming more stringent. Our inability to use the LECs
to bill our advertisers through their monthly telephone bills would result
in
increased dilution and decreased revenues and would have a material adverse
impact on our financial condition and results of operations.
Our
revenue may decline over time due
to the involvement of the CLECs in the local telephone
markets.
Due
to
competition in the telephony industry, many business customers are finding
alternative telephone suppliers, such as Competitive Local Exchange Carriers,
or
CLECs, that offer less expensive alternatives to the LECs. When the
LECs effectuate a price increase, many business customers look for an
alternative telephone company, which may be a CLEC. When our
advertising customers switch service providers from the LECs to a CLEC, we
are
precluded from billing these customers on their monthly telephone bill and
must
instead convert them to alternative billing methods such as ACH billing or
direct invoicing. This conversion process can be disruptive to our
operations and result in lost revenue. We cannot provide any
assurances that our efforts will be successful. We may experience future
increases in dilution of our customer base that we are able to bill on their
monthly telephone bills, which, in turn, may result in decreases in our
revenue.
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 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. 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.
We
depend upon our executive officers
and key personnel.
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. Although we maintain key person
life insurance on the lives of our executive officers, such coverage may not
be
adequate to protect us in the event of loss of such personnel.
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.
Our
ability to efficiently process
new advertiser sign-ups and to bill our advertisers monthly depends upon our
third party service providers and billing aggregators and processors,
respectively.
We
currently use third party service providers to provide us with advertiser
information at the point of sign-up for our Internet Advertising
Package. Our ability to gather information to bill our advertisers at
the point of sign-up could be adversely affected if one or more of these
providers experiences a disruption in its operations or ceases to do business
with us.
We
also
depend upon our billing aggregators and service providers to efficiently bill
and collect monies through our LEC billing and ACH billing
channels. We currently have agreements with three billing
aggregators and two ACH service providers. Any disruption in these
third parties’ ability to perform these functions could adversely affect our
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.
The
market for our services is
uncertain.
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 Internet-base Yellow Pages services and other online services that we may
offer in the future. Advertisers may find Internet Yellow Pages
advertising to be less effective for meeting their business needs than
traditional methods of Yellow Pages or other advertising and
marketing. Our business, prospects, financial condition or results of
operations will be materially and adversely affected if potential advertisers
do
not adopt Internet Yellow Pages as an important component of their advertising
expenditures.
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, 2007, 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:
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the
pace of expansion of our
operations;
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our
need to respond to competitive pressures;
and
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future
acquisitions of complementary products, technologies or
businesses.
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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.
Our
business is subject to a strict
regulatory environment.
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. 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 over our promotional
activities, specifically the use of our check mailer for customer
acquisition. The main terms of this agreement were as
follows:
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We
paid a settlement fee of $2,000,000 to the state consortium, which
was
distributed among themselves;
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We
discontinued the use of activation checks as a promotional
incentive;
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We
temporarily suspended billing of any active customer that was acquired
in
connection with the use of an activation check while notifying
the
customer of their legal rights to cancel the service and providing
them a
60-day opportunity to receive a refund equivalent to the customer’s last
two payments; and
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We
agreed not to employ any collection efforts with respect to past-due
accounts of customers that were secured through the use of an activation
check.
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There
can
be no absolute assurance that the other states, 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 be unable to promote and
maintain our brands.
We
believe that establishing and maintaining the brand identities of our Internet
Yellow Pages services is a critical aspect of attracting and expanding a base
of
advertisers and users. Promotion and enhancement of our brands will
depend largely on our success in continuing to provide high quality
service. If advertisers and users do not perceive our existing
services to be of high quality, or if we introduce new services or enter into
new business ventures that are not favorably received by advertisers and users,
we will risk diluting our brand identities and decreasing their attractiveness
to existing and potential IAP advertisers.
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:
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cease
selling or using any of our products that incorporate the challenged
intellectual property, which would adversely affect our
revenue;
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obtain
a license from the holder of the intellectual property right alleged
to
have been infringed, which license may not be available on reasonable
terms, if at all; and
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redesign
or, in the case of trademark claims, rename our products or services
to
avoid infringing the intellectual property rights of third parties,
which
may not be possible and in any event could be costly and
time-consuming.
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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 IAP advertiser support
capabilities.
Our
ability to provide high-quality Internet Yellow Pages 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 IAP advertiser support capabilities in order to accommodate
any significant increases in the numbers of advertisers and users of our
websites. 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. If we do not expand and upgrade our infrastructure in a
timely manner, we could experience temporary capacity constraints that may
cause
unanticipated system disruptions, slower response times, and lower levels of
IAP
advertiser service. Our inability to upgrade and expand our
infrastructure and IAP advertiser support capabilities as required could impair
the reputation of our brand and our services, reduce the volume of users able
to
access our website, 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 IAP advertiser 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.
We
may not be able to effectively
integrate our newly acquired businesses.
During
2007, we acquired LiveDeal, an online local classifieds marketplace and Oncall
Subscriber Management, a call center in the Philippines that provides various
business process outsourcing, telemarketing, subscriber and other customer
services. These businesses do not generate existing cash
flows. To the extent that we do not successfully integrate these
businesses, we may experience a material adverse effect to our business,
financial condition and results of operations.
Our
operation of a subsidiary in the
Philippines poses risks and could impact our financial
condition.
In
fiscal
2007, we acquired Oncall Subscriber Management Inc., which operated a call
center in the Philippines, and created a Philippine subsidiary to carry on
that
business. We entered into those transactions to generate cost savings
in connection with our ongoing marketing efforts and do not presently anticipate
relying on our foreign operations for a significant portion of our
revenues. Still, our operation of a foreign subsidiary poses certain
risks to our business, including:
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changes
that might result from regulatory requirements, exchange rates, tariffs
and/or other economic barriers;
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difficulties
in staffing and managing the operations of our Philippine
subsidiary;
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differing
technology and systems standards;
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conflicting
laws and/or political conditions;
and
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risks
relating to accounting practices and/or tax laws enforced in foreign
jurisdictions.
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Failure
to achieve and maintain
effective internal controls in accordance with Section 404 of the Sarbanes-Oxley
Act could have a material adverse effect on our business and stock
price.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual
Report on Form 10-K for the fiscal year ending September 30, 2008, we will
be
required to furnish a report by our management on our internal control over
financial reporting. The internal control report must contain (i) a statement
of
management's responsibility for establishing and maintaining adequate internal
control over financial reporting, (ii) a statement identifying the framework
used by management to conduct the required evaluation of the effectiveness
of
our internal control over financial reporting, (iii) management's assessment
of
the effectiveness of our internal control over financial reporting as of the
end
of our most recent fiscal year, including a statement as to whether or not
internal control over financial reporting is effective, and (iv) a statement
that the Company's independent auditors have issued an attestation report on
management's assessment of internal control over financial
reporting.
In
order
to achieve compliance with Section 404 of the Act within the prescribed period,
we will need to engage in a process to document and evaluate our internal
control over financial reporting, which will be both costly and challenging.
In
this regard, management will need to dedicate internal resources, engage outside
consultants and adopt a detailed work plan to (i) assess and document the
adequacy of internal control over financial reporting, (ii) take steps to
improve control processes where appropriate, (iii) validate through testing
that
controls are functioning as documented, and (iv) implement a continuous
reporting and improvement process for internal control over financial
reporting. We can provide no assurance as to our, or our independent
auditors’, conclusions at September 30, 2008 with respect to the effectiveness
of our internal control over financial reporting under Section 404 of the Act.
There is a risk that neither we nor our independent auditors will be able to
conclude at September 30, 2008 that our internal controls over financial
reporting are effective as required by Section 404 of the Act.
During
the course of our testing we may identify deficiencies that we may not be able
to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act
for
compliance with the requirements of Section 404. In addition, if we fail to
achieve and maintain the adequacy of our internal controls, as such standards
are modified, supplemented or amended from time to time, we may not be able
to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those
related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to helping prevent financial fraud. If
we
cannot provide reliable financial reports or prevent fraud, our business and
operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our stock could drop
significantly.
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:
|
|
·
|
rapid
technological change;
|
|
|
·
|
changes
in advertiser and user requirements and
preferences;
|
|
|
·
|
frequent
new product and service introductions embodying new technologies;
and
|
|
|
·
|
the
emergence of new industry standards and practices that could render
our
existing service offerings, technology, and hardware and software
infrastructure obsolete.
|
In
order
to compete successfully in the future, we must
|
|
·
|
enhance
our existing services and develop new services and technology that
address
the increasingly sophisticated and varied needs of our prospective
or
current IAP advertisers;
|
|
|
·
|
license,
develop or acquire technologies useful in our business on a timely
basis;
and
|
|
|
·
|
respond
to technological advances and emerging industry standards and practices
on
a cost-effective and timely basis.
|
Our
future success may depend on
continued growth in the use of the Internet.
Because
Internet Yellow Pages is a relatively new and rapidly evolving industry, the
ultimate demand and market acceptance for our services will be subject to a
high
level of uncertainty. Significant issues concerning the commercial
use of the Internet and online service technologies, including security,
reliability, cost, ease of use, and quality of service, remain unresolved and
may inhibit the growth of Internet business solutions that use these
technologies. In addition, the Internet or other online services
could lose their viability due to delays in the development or adoption of
new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Our business,
prospects, financial condition, and results of operations would be materially
and adversely affected if the use of Internet Yellow Pages and other online
services does not continue to grow or grows more slowly than we
expect.
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:
|
|
·
|
decreased
demand in the Internet services
sector;
|
|
|
·
|
variations
in our operating results;
|
|
|
·
|
announcements
of technological innovations or new services by us or our
competitors;
|
|
|
·
|
changes
in expectations of our future financial performance, including financial
estimates by securities analysts and
investors;
|
|
|
·
|
our
failure to meet analysts’
expectations;
|
|
|
·
|
changes
in operating and stock price performance of other technology companies
similar to us;
|
|
|
·
|
conditions
or trends in the technology
industry;
|
|
|
·
|
additions
or departures of key personnel; and
|
|
|
·
|
future
sales of our common stock.
|
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.
Certain
provisions of Nevada law and
in our charter may prevent or delay a change of control of our
company.
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:
|
|
·
|
the
authority of our board to issue up to 5,000,000 shares of serial
preferred stock and to determine the price, rights, preferences,
and
privileges of these shares, without stockholder
approval;
|
|
|
·
|
all
stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent unless such action or proposal
is
first approved by our board of
directors;
|
|
|
·
|
special
meetings of the stockholders may be called only by the Chairman of
the
Board, the Chief Executive Officer, or the President of our company;
and
|
|
|
·
|
cumulative
voting is not allowed in the election of our
directors.
|
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.
The
reverse stock split that we
effected in fiscal 2007 could have an adverse impact on our common
stock.
Our
1-for-10 reverse stock split could cause a reduction in the total market value
of our common stock, increase the volatility of our stock price and has
increased the number of shares of common stock we may issue. Reduced
liquidity may reduce the value of our common stock and our ability to use our
equity as consideration for an acquisition or other corporate
opportunity. In addition, the reverse split has decreased the number
of shares outstanding, giving individual orders the potential to create
increased volatility in our stock price. As a result of the reverse
stock split, we are able to issue significantly more shares of our common stock
which could have a material adverse affect on the market price of our common
stock. We are currently authorized to issue 100,000,000 shares of
common stock and, as a result of the reverse stock split, have approximately
6,640,541 shares outstanding as of December 3, 2007.
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.
ITEM
1B. Unresolved
Staff Comments
Not
applicable.
ITEM
2.
Properties
We
have a
long-term operating lease with Arthur Grandlich d/b/a McKellips Corporate Square
for the 16,772 square foot corporate office that is located in Mesa,
Arizona. We pay rent of approximately $120,000 annually under this
lease, which expires in June 2011. This facility contains certain
administrative resources.
We
lease
a 3,500 square foot facility in Las Vegas, Nevada that functions as the primary
operating facility of Telco on a month-to-month basis. We pay rent of
approximately $8,000 per month.
We
lease
a 7,300 square foot facility in Santa Clara, California that functions as the
primary operating facility of our Live Deal, Inc. subsidiary. We pay rent of
approximately $8,200 per month under an operating lease that expires in June
2008.
We
lease
space in the Philippines for our telemarketing activities under an operating
lease that expires in February 2010. Monthly rent payments fluctuate
between $10,300 and $11,500 per month.
We
believe that these facilities are adequate for our current and anticipated
future needs and that both of these facilities and their contents are adequately
covered by insurance.
ITEM
3. Legal
Proceedings
We
are
party to certain legal proceedings and other various claims and lawsuits in
the
normal course of our business, which, in the opinion of management, are not
material to our business or financial condition.
ITEM
4. Submission
of Matters to a Vote of Security Holders
The
following matters were approved by the Company’s stockholders at a Special
Meeting of Stockholders held on August 2, 2007:
|
|
·
|
A
proposal to give the Company’s Board of Directors discretion to effect a
reverse stock split with respect to issued and outstanding shares
of our
common stock; and
|
|
|
·
|
A
proposal to amend and restate the Company’s Restated Articles of
Incorporation to change the Company’s name from “YP Corp.” to “LiveDeal,
Inc.”
|
Reverse
Stock
Split
The
allocation of votes to give the Company’s Board of Directors discretion to
effect a reverse stock split with respect to issued and outstanding shares
of
our common stock was as follows:
|
Votes
For
|
Votes
Against
|
Abstentions
and Broker Non-Votes
|
|
|
Proposal
to Give the Company’s Board of Directors Discretion to Effect a Reverse
Stock Split with Respect to Issued and Outstanding Shares of our
Common
Stock
|
52,886,335
|
3,962,852
|
371,700
|
Name
Change
The
allocation of votes to amend and restate the Company’s Restated Articles of
Incorporation to change the Company’s name from “YP Corp.” to “LiveDeal, Inc.”
was as follows:
|
Votes
For
|
Votes
Against
|
Abstentions
and Broker Non-Votes
|
|
|
Proposal
to Amend and Restate the Company’s Restated Articles of Incorporation to
Change the Company’s Name from “YP Corp.” to “LiveDeal,
Inc.”
|
56,443,009
|
162,052
|
625,826
|
PART
II
ITEM
5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our
Common Stock
Our
common stock trades publicly on the Over-The-Counter Bulletin Board (“OTCBB”)
under the symbol “LVDL”. The OTCBB is a regulated quotation service that
displays real-time quotes, last-sale prices and volume information in
over-the-counter equity securities. The OTCBB securities are traded by a
community of market makers that enter quotes and trade reports. This market
is
extremely limited and any prices quoted are not a reliable indication of the
value of our common stock.
The
following table sets forth the quarterly high and low bid prices per share
of
our common stock by the OTCBB during the last two fiscal years. The quotes
represent inter-dealer quotations, without adjustment for retail mark-up,
markdown or commission and may not represent actual transactions.
|
Fiscal Year
|
Quarter Ended
|
High
|
Low
|
||||||
|
2006
|
December
31, 2005
|
$ |
9.40
|
$ |
4.00
|
||||
|
March
31, 2006
|
$ |
10.30
|
$ |
5.10
|
|||||
|
June
30, 2006
|
$ |
13.00
|
$ |
9.50
|
|||||
|
September
30, 2006
|
$ |
10.80
|
$ |
7.90
|
|||||
|
2007
|
December
31, 2006
|
$ |
10.70
|
$ |
7.20
|
||||
|
March
31, 2007
|
$ |
12.10
|
$ |
7.60
|
|||||
|
June
30, 2007
|
$ |
8.70
|
$ |
6.60
|
|||||
|
September
30, 2007
|
$ |
8.00
|
$ |
6.00
|
|||||
Holders
of Record
On
December 3, 2007, there were approximately 136 holders of record of our common
stock according to our transfer agent. The Company has no record of the number
of shareholders who hold their stock in “street” name with various
brokers.
Dividend
Policy
We
have
one class of outstanding 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, payable in quarterly installments of $0.00375. At September 30,
2007, we had accrued but unpaid dividends totaling approximately
$4,300.
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
|
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 Programs2
|
(d)
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units)
that May Yet Be Purchased
Under the Plans
or Programs
|
||||||||||||
|
July
2007
|
-
|
N/A
|
-
|
$ |
1,000,000
|
|||||||||||
|
August
2007
|
44,224 | 1 | $ |
6.95
|
-
|
$ |
1,000,000
|
|||||||||
|
September
2007
|
-
|
N/A
|
-
|
$ |
1,000,000
|
|||||||||||
|
Total
|
44,224
|
$ |
6.95
|
-
|
$ |
1,000,000
|
||||||||||
1 In
August 2007, we acquired 44,224 shares of common stock at an aggregate price
of
$307,540 as part of arrangements with LiveDeal shareholders stemming from the
acquisition of LiveDeal, Inc. in June 2007.
2 On
May 18, 2005, we announced the adoption of a $3,000,000 stock repurchase plan,
under which 85,385 shares were repurchased at an aggregate price of $686,793.
On
May 25, 2007, the Company’s Board of Directors terminated the May 18, 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
Performance
Graph
ITEM
6. Selected
Financial Data
The
selected financial data presented below are derived from our historical
consolidated financial statements for the year ended September 30, 2007, which
have been audited by Mayer Hoffman McCann, P.C., our independent registered
public accounting firm and the years ended September 30, 2003 through 2006
which
were audited by Epstein, Weber & Conover, P.L.C., our former independent
registered public accounting firm. The selected financial data should
be read in conjunction with Management’s Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated financial statements
and the related notes thereto included elsewhere in this Annual
Report.
|
Year
Ended September
30,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
(1)
|
2004
|
2003
|
||||||||||||||||
|
Statement
of Operations
Data
|
||||||||||||||||||||
|
Net
revenues
|
$ |
26,340,361
|
$ |
31,957,947
|
$ |
24,361,995
|
38,954,823
|
$ |
26,396,093
|
|||||||||||
|
Cost
of services
|
4,204,276
|
4,030,280
|
3,137,756
|
6,544,598
|
4,102,395
|
|||||||||||||||
|
Gross
profit
|
22,136,085
|
27,927,667
|
21,224,239
|
32,410,225
|
22,293,698
|
|||||||||||||||
|
Operating
income (loss)
|
3,326,679
|
(1,562,357 | ) |
985,256
|
11,465,946
|
7,281,886
|
||||||||||||||
|
Net
income (loss)
|
1,753,918
|
(1,050,920 | ) |
725,146
|
8,184,930
|
6,472,705
|
||||||||||||||
|
Net
income (loss) per common share:
|
||||||||||||||||||||
|
Basic
|
$ |
0.34
|
$ | (0.23 | ) | $ |
0.16
|
$ |
1.73
|
$ |
1.43
|
|||||||||
|
Diluted
|
$ |
0.33
|
$ | (0.23 | ) | $ |
0.16
|
$ |
1.70
|
$ |
1.42
|
|||||||||
|
Weighted
average common shares outstanding:
|
||||||||||||||||||||
|
Basic
|
5,108,551
|
4,495,868
|
4,639,036
|
4,737,593
|
4,532,672
|
|||||||||||||||
|
Diluted
|
5,336,439
|
4,495,868
|
4,665,992
|
4,807,570
|
4,559,159
|
|||||||||||||||
|
Cash
dividends declared per common share
|
$ |
-
|
$ |
-
|
$ |
0.30
|
$ |
0.30
|
$ |
-
|
||||||||||
|
Statement
of Cash Flows
Data
|
||||||||||||||||||||
|
Net
cash provided by operating activities
|
$ |
1,765,496
|
$ |
2,422,001
|
$ |
6,990,161
|
$ |
4,818,203
|
$ |
4,762,238
|
||||||||||
|
Net
cash used in investing activities
|
(2,175,802 | ) | (1,904,201 | ) | (2,440,792 | ) | (2,192,500 | ) | (2,798,500 | ) | ||||||||||
|
Net
cash used in financing activities
|
(309,936 | ) | (237,336 | ) | (2,011,587 | ) | (1,428,022 | ) | (351,998 | ) | ||||||||||
|
Balance
Sheet
Data
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ |
5,674,533
|
$ |
6,394,775
|
$ |
6,114,311
|
$ |
3,576,529
|
$ |
2,378,848
|
||||||||||
|
Working
capital
|
11,315,872
|
13,908,560
|
13,374,171
|
12,484,833
|
6,615,537
|
|||||||||||||||
|
Property
and equipment, net
|
423,563
|
178,883
|
396,862
|
725,936
|
731,142
|
|||||||||||||||
|
Intangible
assets, net
|
7,372,147
|
5,722,604
|
6,108,823
|
3,326,274
|
3,512,952
|
|||||||||||||||
|
Total
assets
|
40,042,466
|
27,977,227
|
23,632,916
|
26,289,604
|
20,356,163
|
|||||||||||||||
|
Total
long term liabilities
|
-
|
-
|
-
|
848,498
|
-
|
|||||||||||||||
|
Total
stockholders' equity
|
37,707,871
|
22,376,373
|
22,065,266
|
23,572,393
|
15,709,315
|
|||||||||||||||
|
(1)
|
Includes
an increase to income of approximately $100,000 (net of income taxes
of
approximately $54,000) resulting from the cumulative effect of an
accounting change for forfeitures of restricted stock granted to
employees, executives and
consultants
|
All
per
share amounts have been retroactively restated for the effects of the 1-for-10
reverse stock split that occurred in fiscal 2007
ITEM
7. 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 fiscal year
ended
September 30, 2007, 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 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 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
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 Management’s
Discussion and Analysis of Financial Condition and Results of Operations in
its
entirety.
We
maintain a combined local online classifieds and Yellow Pages marketplace with
millions of goods and services listed for sale, in nearly every city and zip
code across the U.S. By combining the benefits of classifieds, business
listings, mobile services, advertising/distribution networks and e-commerce
into
a single online solution, we offer businesses and consumers an affordable and
effective solution for creating a web presence and marketing their products
and
services locally. Through our online properties YP.com and LiveDeal.com, we
enable buyers and sellers to find and list business services, merchandise,
real
estate, automobiles, pets and more in their local communities. Using LiveDeal’s
marketplace, consumers can search or browse for items in a particular city,
state or zip code, or reach out on a national or global scope if they so
choose.
Acquisition
of LiveDeal,
Inc.
On
June
6, 2007, we completed the acquisition of LiveDeal, Inc.
(“LiveDeal”). LiveDeal developed and operates an online local
classifieds marketplace, www.livedeal.com, which lists millions of goods and
services for sale in almost every city and zip code across the
U.S. The technology acquired in the acquisition offers such
classifieds functionality as fraud protection, identity protection, e-commerce,
listing enhancements, photos, community-building, package pricing, premium
stores, featured Yellow Page business listings and advanced local search
capabilities.
The
acquisition represents a major strategic event in our history and is expected
to
result in significant efficiencies as well as future growth
opportunities. With the acquisition of LiveDeal, we are now able to
supplement our telemarketing campaigns with online marketing
efforts. Our online traffic acquisition strategy includes activities
in e-mail marketing, search engine marketing (SEM) search engine optimization
(SEO) partnerships with major online marketing companies, and the generation
of
word of mouth advertising. We anticipate continued investment in
online advertising to bring increased traffic to our websites that should result
in increased value to the local business advertising community thereby driving
increased revenues.
The
aggregate purchase price of LiveDeal was $12,700,695, consisting of
approximately $12,328,045 of stock-based consideration and $372,650 of
acquisition-related expenses. The value of the combined 1,675,016
shares of Common Stock granted in the transaction was determined based on the
average closing market price of the Common Stock over the two day period before
and after the effective date of the acquisition.
The
following table presents the allocation of the acquisition cost, including
acquisition-related expenses, to the assets acquired and liabilities assumed,
based on their fair values:
|
Current
assets
|
$ |
962,877
|
||
|
Property,
plant and equipment
|
70,000
|
|||
|
Goodwill
|
7,349,366
|
|||
|
Intangible
assets
|
2,130,000
|
|||
|
Deferred
tax assets
|
3,545,618
|
|||
|
Other
non-current assets
|
10,846
|
|||
|
Total
assets acquired
|
14,068,707
|
|||
|
Current
liabilities
|
1,368,012
|
|||
|
Total
liabilities assumed
|
1,368,012
|
|||
|
Net
assets acquired
|
$ |
12,700,695
|
Further
information with respect to this acquisition is set forth in Note 4 to our
audited consolidated financial statements.
Acquisition
of OnCall Subscriber
Management Inc.
On
July
10, 2007, we acquired substantially all of the assets and assumed certain
liabilities of OnCall Subscriber Management Inc. (a Manila, Philippines-based
company), which OnCall purchased recently under option from 24 by 7 Contact
Solutions, Inc. The purchase price of the acquisition was approximately
$4,552,600 (including acquisition expenses of $52,600) payable in cash. The
acquisition added approximately 170 Philippines-based employees to our
workforce. We currently operate the acquired business through a
wholly owned subsidiary in the Philippines.
Name
Change and Reverse Stock
Split
The
following matters were approved by our stockholders at a Special Meeting of
Stockholders held on August 2, 2007:
|
|
·
|
A
proposal to give our Board of Directors discretion to effect a reverse
stock split with respect to issued and outstanding shares of our
common
stock; and
|
|
|
·
|
A
proposal to amend and restate our Restated Articles of Incorporation
to
change our name from “YP Corp.” to “LiveDeal,
Inc.”
|
Our
Board
of Directors effected a 1 for 10 reverse stock split effective on August 15,
2007. All shares amounts have been retroactively restated in this
Annual Report to reflect the effects of this reverse stock split.
Changes
in Officers and
Directors
On
June
6, 2007, the Company’s Board of Directors (the “Board”) increased the size of
the Board to seven and appointed Rajesh Navar and John Clay Evans to fill the
newly created vacancies.
Rajesh
Navar also serves as president of LiveDeal, Inc. Mr. Navar brings
more than 16 years experience in building high technology and Internet
companies. As an original member of the engineering and management team at
eBay,
Navar is one of the pioneers in e-commerce. Prior to founding LiveDeal, Navar
joined eBay in 1998, a start-up at that time, as a senior member of the
engineering team. Navar founded and built eBay's search technology, helping
build eBay into one of the worlds most successful and profitable e-commerce
companies. In September, 2005, Navar was honored among Silicon Valley Business
Journal's chronicle of "40 under 40" people to watch.
Mr.
Evans, a non-employee director, has been a business strategy consultant and
investment analyst in the information services and media industry since 2002.
He
remains an adviser to various private funds analyzing investments in this
industry. Previous to this he has been a fixed income and equity analyst and
portfolio manager for various funds and family offices. During this period
he has performed many strategic consulting for many companies such as Bankrate,
Inc. and many other companies. He studied American and Ancient History at
Columbia University in the City of New York.
Effective
August 3, 2007, Elisabeth DeMarse resigned from the board of LiveDeal, Inc.
due to her other business commitments. Ms. DeMarse did not have
any disagreement with the Company regarding its operations, policies or
practices.
On
November 20, 2007 the Board of Directors, of LiveDeal, Inc., elected Mr. Thomas
J. Clarke, Jr. as a director of the company effective
immediately. Mr. Clarke is currently the Chairman and Chief Executive
Officer of TheStreet.com (NASQ-TSCM). Prior to joining that company in 1999,
Mr.
Clarke was Chief Executive Officer of Thomson Financial Investor Relations.
At
that company, Mr. Clarke oversaw the sale of what was then Technimetrics Inc.
from Knight-Ridder to Thomson Corporation in 1998. Mr. Clarke has also held
management positions at companies such as McAuto Systems Corp. and Media
Records. Additionally, Mr. Clarke serves as a business information
advisor for Plum Holdings L.P., an institutional venture capital firm
specializing in early stage investments in media companies. He serves on the
University of Albany's executive advisory board of the Center for Comparative
Functional Genomics, and on the board of Standing Stone, Inc., developers of
disease state management solutions.
We
believe that the addition of these directors, two of whom are independent,
will
strengthen our corporate governance and the effectiveness of our
organization.
Restatements
During fiscal
2007, we revisited our consolidated financial statement
presentation. As such, we have determined that it is preferable
to make changes to certain classifications within our financial
statements. These changes are summarized as follows:
Balance
Sheet
|
|
·
|
Certain
investment accounts totaling $815,785 have been reclassified from
cash and
cash equivalents to
certificates of deposit and other investments based on the maturity
dates
of the underlying investments
|
|
|
·
|
Accrued
refunds and fees of $1,250,000 relating to the Attorneys’ General
settlement described in Note 10 have been reclassified from accounts
receivable, net to accrued liabilities in the accompanying consolidated
balance sheet as of September 30,
2006.
|
|
|
·
|
Certain
miscellaneous receivables totaling $23,819 at September 30, 2006
were
reclassified from prepaid expenses and other current assets to accounts
receivable, net in the accompanying consolidated balance
sheet.
|
Statement
of Operations
|
|
·
|
Dilution
and charge backs have
been reclassified from cost of services to a reduction in net revenues
in
the consolidated statement of
operations.
|
|
|
·
|
Monitoring
fees related to our
LEC billing channel have been reclassified from general and administrative
expenses to cost of
services.
|
|
|
·
|
Depreciation
and amortization
expenses that were previously separately stated are now included
in
general and administrative expenses in the consolidated statement of
operations.
|
|
|
·
|
Litigation
and related expenses
that were previously included in other income and expense are now
separately stated as a component of operating expenses in the consolidated
statement of
operations.
|
Our
auditors have reviewed these changes and concur with our current
presentation. All prior periods have been restated to conform to the
current period presentation. See Note 19 to our audited consolidated
financial statements.
Attorneys’
General
Settlement
On
December 14, 2006, we voluntarily entered into a settlement with thirty-four
states’ attorneys general to address their concerns over our promotional
activities, specifically the use of our check mailer for customer
acquisition. The main terms of this agreement were as
follows:
|
|
·
|
We
paid a settlement fee of $2,000,000 to the state consortium, which
was
distributed among themselves;
|
|
|
·
|
We
discontinued the use of activation checks as a promotional
incentive;
|
|
|
·
|
We
temporarily suspended billing of any active customer that was acquired
in
connection with the use of an activation check while notifying the
customer of their legal rights to cancel the service and providing
them a
60-day opportunity to receive a refund equivalent to the customer’s last
two payments; and
|
|
|
·
|
We
agreed not to employ any collection efforts with respect to past-due
accounts of customers that were secured through the use of an activation
check.
|
This
settlement limited our exposure to significant legal fees and costs that may
have been otherwise incurred had we decided to dispute these
inquiries. Further, we had been transitioning a significant amount of
our marketing efforts away from the use of activation checks toward the use
of
telemarketing and other marketing channels during 2005 and 2006. With
this settlement, we were able to accelerate this transition away from the use
of
activation checks and focus our marketing efforts toward improving the
effectiveness and efficiency of our telemarketing campaigns and other marketing
efforts.
Recent
Financial
Results
The
following represents a summary of recent financial results:
|
Q4
2007
|
Q3
2007
|
Q2
2007
|
Q1
2007
|
Q4
2006
|
Q3
2006
|
Q2
2006
|
Q1
2006
|
|||||||||||||||||||||||||
|
Net
Revenues
|
$ |
7,120,697
|
$ |
5,989,437
|
$ |
6,106,544
|
$ |
7,123,683
|
$ |
8,335,284
|
$ |
8,577,639
|
$ |
7,997,623
|
$ |
7,047,401
|
||||||||||||||||
|
Gross
margin
|
$ |
5,860,893
|
$ |
5,113,544
|
$ |
5,148,835
|
$ |
6,012,813
|
$ |
6,697,106
|
$ |
7,506,947
|
$ |
7,213,184
|
$ |
6,510,430
|
||||||||||||||||
|
Operating
expenses
|
$ |
4,956,356
|
$ |
4,537,182
|
$ |
4,043,109
|
$ |
5,272,759
|
$ |
9,053,783
|
$ |
6,276,713
|
$ |
7,081,323
|
$ |
7,078,205
|
||||||||||||||||
|
Operating
income (loss)
|
$ |
904,537
|
$ |
576,362
|
$ |
1,105,726
|
$ |
740,054
|
$ | (2,356,677 | ) | $ |
1,230,234
|
$ |
131,861
|
$ | (567,775 | ) | ||||||||||||||
|
Net
income (loss)
|
$ |
376,053
|
$ |
266,405
|
$ |
626,262
|
$ |
485,198
|
$ | (1,680,673 | ) | $ |
826,847
|
$ |
129,998
|
$ | (327,092 | ) | ||||||||||||||
Net
revenues in fiscal 2007 decreased by approximately $5,618,000 when compared
to
fiscal 2006. This decrease was primarily attributable to the
Attorneys’ General Settlement, which caused approximately 15,000 customer
cancellations in our ACH billing channel and prevented us from signing new
customers from our direct mail campaign in the first quarter of fiscal
2007. Revenues declined during the first three quarters of fiscal
2007, but have since increased in the fourth quarter of 2007. We do
not anticipate any further impacts to our results of operations as a result
of
this settlement.
Despite
lower revenues of $26.3 million in 2007 compared to $32 million in 2006, we
generated net income of approximately $1,754,000, or $0.33 per share on a
diluted basis, during fiscal 2007. Net income was negatively impacted
by approximately $1 million of direct response advertising costs incurred in
October 2006 for which we derived no benefit, $500,000 of additional tax expense
associated with the write-off of deferred tax assets related to our restricted
stock awards, and $377,000 of increased bad debt reserves resulting from the
bankruptcy filing of one of our billing aggregators, each of which is further
described below.
During
fiscal 2006, we generated net loss of approximately $1,051,000, or ($0.23)
per
share on a diluted basis. The net loss for 2006 includes non-recurring expenses
totaling approximately $4,144,000 or $0.92 per share consisting of approximately
$3,687,000 of settlement related matters with attorneys general and with a
former vendor and approximately $457,000 of severance costs, further described
below.
The
following non-recurring items are relevant to our fiscal 2007 and 2006 quarterly
operating results:
|
|
§
|
Fourth
quarter of fiscal 2007 – includes an increased bad debt reserve of
approximately $377,000 resulting from the Chapter 11 Bankruptcy filing
of
one of our LEC aggregators, representing our entire pre-petition
outstanding receivable balance. The aggregator continues to
operate as debtor-in-possession. We have since transitioned
this portion of our business to another
aggregator.
|
|
|
§
|
Second
quarter of fiscal 2007 – includes the reversal of approximately $200,000
of accrued expenses related to the Attorneys’ General
settlement.
|
|
|
§
|
First
quarter of fiscal 2007 – includes approximately $1,000,000 of direct
response advertising costs incurred in October 2006 for which we
derived
no benefit based on the Attorneys’ General settlement that was agreed to
in December 2006.
|
|
|
§
|
Fourth
quarter of fiscal 2006 – includes the following charges associated with
the Attorneys’ General settlement:
|
|
|
o
|
$2,000,000
payment to cover regulatory and related
expenses
|
|
|
o
|
$1,250,000
of accrued refunds and processing fees for existing customers that
wish to
cancel their service in response to the correspondence to be sent
per the
terms of the agreement
|
|
|
o
|
$275,000
of legal and professional fees
|
|
|
§
|
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.
|
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. We
generate
revenue from customer subscriptions for directory and advertising
services. Our billing and collection procedures include significant
involvement of outside parties, referred to as aggregators for LEC billing
and
service providers for ACH billing. Such processes are described
below.
ACH
Billing– For ACH
billing, we submit electronic billing information to our service providers,
who
in turn use this information as a basis for processing direct bank withdrawals
through an Automated Clearing House. We receive information regarding
records that are rejected or cannot otherwise be processed on a timely basis,
and we recognize revenue only for those items that are processed.
LEC
Billing– When a
customer subscribes to our service we create an electronic customer file, which
is the basis for the billing. We submit gross billings electronically
to third party billing aggregators. These billing aggregators compile and format
our electronic customer files and forward the billing records to the appropriate
LECs. The billing for our service flows through to monthly bills of
the individual LEC customers. The LECs collect our billing and remit
amounts to the billing aggregators, which in turn remit funds to
us. The following are significant accounting estimates and
assumptions used in the revenue recognition process with respect to these
billings.
|
·
|
Customer
refunds. We have a customer refund policy that allows
the customer to request a refund if they are not satisfied with the
service within the first 120 days of the subscription. We
accrue for refunds based on historical experience of refunds as a
percentage of new billings in that 120-day period. Customer
refunds are reserved and charged against gross
revenue.
|
|
·
|
Non-paying
customers. There are customers who may not pay the fee
for our services even though we believe they are valid
subscribers. Included in cost of services is an accrual for
estimated non-paying customers that are recorded at the time of
billing.
|
|
·
|
Dilution. We
recognize revenue during the month for which the service is provided
based
on net billings accepted by the billing aggregators. We
recognize revenue only for accepted records. However,
subsequent to this acceptance, there are instances in the LEC billing
process where a customer cannot be billed due to changes in telephone
numbers, telephone carriers, data synchronization issues,
etc. These amounts that ultimately cannot be billed, as well as
certain minor billing adjustments by the LECs are commonly referred
to as
“dilution.” Dilution is estimated at the time of billing and
charged to cost of services.
|
|
·
|
Fees. Both
the aggregator and the LEC charge processing
fees. Additionally, the LEC charges fees for responding to
billing inquiries by its customers, processing refunds, and other
customer-related services. Such fees are estimated at the time
of billing and charged to cost of
services.
|
Direct
bill
customers– If we are unable to bill via any other means, we bill
subscribers directly via paper invoices. Our collection rate on these
billings is significantly lower than those processed through the
LECs. We track collections on direct-billed customers and recognize
revenue from those customers based on the historical collection
rates.
Fulfillment
contracts– Beginning
in fiscal
2006, we began entering into contracts with several third parties whereby we
provide hosting, customer service and certain administrative functions under
revenue sharing agreements. We recognize revenues only for those
revenues for which we are entitled to when the related services are
performed.
Allowance
for Doubtful Accounts.
We
receive cash
through the processes discussed above. Under our contractual
arrangements with our third party aggregators and service providers, the LECs
and aggregators/service providers deduct from our gross billings amounts for
returns, nonpaying customers, dilution and fees to arrive at net proceeds
remitted to us. We estimate an allowance for doubtful accounts on the
basis of information provided by the billing aggregators and service
providers. This information is an indicator of timely payments made
by our subscribers. At September 30, 2007 and 2006, the allowance for
doubtful accounts was approximately 22% and 26% of gross accounts receivable,
respectively. The allowance at September 30, 2007 includes a reserve
of approximately $377,000 resulting from the Chapter 11 Bankruptcy filing of
one
of our LEC aggregators, representing our entire pre-petition outstanding
receivable balance. Notwithstanding this additional reserve, our
allowance decreased from September 30, 2006 to September 30, 2007 as we have
increased our quality control procedures over the submission of our billings
to
reduce the risk of dilution and noncollectibility.
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
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. We most recently completed an impairment test in the fourth
quarter of fiscal 2007. No long-lived assets were impaired during the
years ended September 30, 2007, 2006, and 2005.
Change
in Accounting Principle -
Capitalization of Customer Acquisition Costs and Amortization of those
Costs. We purchase mailing lists and send advertising
materials to prospective subscribers from those mailing lists as well as
outbound call campaigns. Customers subscribe to the services by
affirmatively responding to those advertising materials and calling campaigns,
which serve as the contract for the subscription. Previously, we
capitalized these customer acquisition costs and amortized them on a
straight-line basis over the average expected life of our customers based on
historical IAP advertiser attrition rates and other factors.
Prior
to
fiscal 2006, the majority of our capitalized customer acquisition costs related
to our mailing campaigns for which we amortized the costs based on historical
IAP advertiser attrition rates attributable to our entire customer
base. During fiscal 2006, we began increasing our expenditures for
telemarketing campaigns. The capitalization of such costs required
that we amortize the costs over the average expected life of acquired customers,
as determined on a cost-pool-by-cost-pool basis. Our systems do not
allow us to efficiently and accurately monitor customer lives by method of
acquisition. Therefore, we are unable to determine the average
expected life of those customers acquired via telemarketing versus those
acquired via mailing campaigns. As we cannot effectively evaluate
such costs on a cost-pool-by-cost-pool basis, we determined in fiscal 2006
that
the more preferable method of accounting for these costs is to expense them
when
incurred. We enacted this change in accounting principle during the
fourth quarter of fiscal 2006 and we have restated all periods presented to
reflect this new method of accounting for such costs.
Income
Taxes. Income taxes are accounted for using the asset and
liability method. 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 of $5,097,789 and $3,116,523 at
September 30, 2007 and 2006, respectively, which relate to various timing
differences between book and tax expense recognition.
In
anticipation of the adoption of FASB Interpretation No. 48, Accounting for Uncertainty
in Income
Taxes (FIN 48) – an interpretation of FASB Statement No.
109, Accounting
for Income Taxes (SFAS No. 109) in fiscal
2008, we
engaged an independent accounting firm to perform a preliminary analysis of
our
tax positions. Such investigation did not reveal any significant
uncertainties that would affect the carrying value of our deferred tax assets
and liabilities at September 30, 2007.
Stock-Based
Compensation. From time-to-time, we grant restricted stock
awards 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. 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 (see discussion below in “Results of Operations – Cumulative
Effect of Accounting Change”). 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
|
Year Ended
September 30,
|
Net
Revenues
|
Change from
Prior Year
|
Percent Change
from Prior Year
|
|||||||||
|
2007
|
$ |
26,340,361
|
$ | (5,617,586 | ) | (17.6 | )% | |||||
|
2006
|
$ |
31,957,947
|
$ |
7,595,952
|
31.2 | % | ||||||
|
2005
|
$ |
24,361,995
|
||||||||||
Net
revenues decreased in fiscal 2007 as compared to 2006 primarily attributable
to
the Attorneys’ General Settlement, which caused approximately 15,000 customer
cancellations in our ACH billing channel and prevented us from signing new
customers from our direct mail campaign in the first quarter of fiscal 2007.
As
a result of this settlement, we experienced an increase in customer
cancellations and a temporary disruption in our marketing
efforts. Revenues declined during the first three quarters of fiscal
2007, but have since increased in the fourth quarter of fiscal
2007. We do not anticipate any further impacts to our results of
operations as a result of this settlement.
The
increase in revenues for fiscal 2006, as compared to 2005, was largely due
to an
increased customer count attributable to expanded marketing efforts, the
reintroduction of certain LEC billing channels for new customers, and new
fulfillment contracts.
Although
we have concentrations of risk with our billing aggregators (as described in
the
Notes to Consolidated Financial Statements included elsewhere in this Annual
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.
Included
in net revenues for fiscal 2007 were $673,643 of revenues stemming from our
classified and online marketplace as a result of the acquisition of
LiveDeal
Cost
of Services
|
Year Ended
September 30,
|
Cost of
Services
|
Change from
Prior Year
|
Percent Change
from Prior Year
|
|||||||||
|
2007
|
$ |
4,204,276
|
$ |
173,996
|
4.3 | % | ||||||
|
2006
|
$ |
4,030,280
|
$ |
892,524
|
28.4 | % | ||||||
|
2005
|
$ |
3,137,756
|
||||||||||
Cost
of
services increased in fiscal 2007 as compared to fiscal 2006 due to an increase
in LEC billings, which have higher costs than other billing
channels. Also included in fiscal 2007 is a bad debt reserve of
approximately $377,000 resulting from the Chapter 11 Bankruptcy filing of one
of
our LEC aggregators, representing our entire pre-petition outstanding receivable
balance from this LEC. The increase in cost of services for the year ended
September 30, 2006, as compared to September 30, 2005, is also attributable
to
an increase in LEC billings. The following table sets forth billings
by channel for each of the following fiscal years:
|
2007
|
2006
|
2005
|
||||||||||
|
LEC
billing
|
63 | % | 48 | % | 30 | % | ||||||
|
ACH
billing
|
30 | % | 46 | % | 56 | % | ||||||
|
Direct
billing
|
4 | % | 6 | % | 14 | % | ||||||
|
Classified
|
3 | % | 0 | % | 0 | % | ||||||
We
expect
cost of services to continue to be directly correlated to our usage of LEC
billing channels.
Gross
Profit
|
Year Ended
September 30,
|
Gross
Profit
|
Change from
Prior Year
|
Percent Change
from Prior Year
|
|||||||||
|
2007
|
$ |
22,136,085
|
$ | (5,791,582 | ) | (20.7 | )% | |||||
|
2006
|
$ |
27,927,667
|
$ |
6,703,428
|
31.6 | % | ||||||
|
2005
|
$ |
21,224,239
|
||||||||||
The
changes in our gross profits were due primarily to changes in revenues and
increased cost of sales associated with higher utilization of LEC billing
channels. Gross margins were 84%, 87% and 87% of net revenues in fiscal 2007,
2006, and 2005, respectively.
General
and Administrative
Expenses
|
Year Ended
September 30,
|
General &
Administrative
Expenses
|
Change from
Prior Year
|
Percent Change
from Prior Year
|
|||||||||
|
2007
|
$ |
12,518,620
|
$ | (1,832,133 | ) | (12.8 | )% | |||||
|
2006
|
$ |
14,350,753
|
$ | (249,861 | ) | (1.7 | )% | |||||
|
2005
|
$ |
14,600,614
|
||||||||||
General
and administrative expenses decreased in fiscal 2007 as compared to fiscal
2006
due to the following:
|
|
·
|
A
decrease in compensation expense of approximately $1,887,000 resulting
from (i) a fiscal 2007 reduction in workforce stemming from the
discontinuance of our check mailer program and other business changes
which reduced our need for administrative support and (ii) a decrease
of
severance costs of $352,000 that were incurred in fiscal
2006;
|
|
|
·
|
A
reduction in customer related expenses of approximately $1,093,000
resulting from charges of approximately $924,000 in fiscal 2006 associated
with reconfirming customers acquired through our check activator
program
and $169,000 of other decreased customer related and collection expenses
as we reduced our usage of direct billing methods in fiscal
2007;
|
|
|
·
|
An
increase in our software and data license expenses of approximately
$360,000 primarily attributable to license fees associated with a
new
customer relationship management system acquired during fiscal
2007;
|
|
|
·
|
An
increase in travel costs of approximately $313,000 related to increased
investor relations activities, acquisitions in California and the
Philippines, and increased travel between our offices in Nevada and
Arizona;
|
|
|
·
|
An
increase in amortization expense of approximately $124,000 resulting
from
increased capitalized intangible assets, the most significant of
which
were marketing and technology-related intangible assets that were
acquired
through our acquisition of LiveDeal,
Inc.;
|
|
|
·
|
An
increase in investor relations expenses of $124,000 as we seek to
expand
and attract new investors; and
|
|
|
·
|
Other
cost increases of approximately
$227,000.
|
General
and administrative expenses decreased from fiscal 2006 to 2005 based on the
following:
|
|
·
|
A
decrease in mailing and other customer costs of approximately $662,000
associated with the reduction of paper invoices and other methods
of
correspondence with customers for which payment is unlikely to
be
received;
|
|
|
·
|
A
decrease in depreciation and amortization expense of approximately
$135,000 as a significant amount of our fixed assets and intangible
assets
recently became fully depreciated;
and
|
|
|
·
|
An
increase in consulting and professional fees of approximately $233,000,
primarily driven by $162,000 of executive search and placement services
and other miscellaneous activities;
|
|
|
·
|
An
increase in compensation expense of approximately $476,000 associated
with
the general increase in revenues and business activity in fiscal
2006. This increase was comprised of increases of approximately
(i) $352,000 of severance costs associated with the termination of
former
officers and other personnel, (ii) non-cash compensation costs of
$179,000
associated with restricted stock awards, (iii) $307,000 for Directors’
compensation and Executive bonuses, and (iv) increases in leased
and
contract employees and other miscellaneous compensation expenses
of
$131,000. These costs were partially offset by a decrease in
executive consulting fees of approximately
$493,000;
|
|
|
·
|
General
cost reductions of approximately
$162,000.
|
Our
general and administrative expenses consist largely of fixed and semi-fixed
expenses such as compensation, rent, and utilities. Therefore, we do
not consider short-term trends of general and administrative expenses as a
percentage of revenues to be meaningful indicators for evaluating operational
performance.
The
following table sets forth our recent operating performance for general and
administrative expenses:
|
Q4
2007
|
Q3
2007
|
Q2
2007
|
Q1
2007
|
Q4
2006
|
Q3
2006
|
Q2
2006
|
Q1
2006
|
|||||||||||||||||||||||||
|
Compensation
for employees, leased employees, officers and directors
|
$ |
1,535,115
|
$ |
1,760,439
|
$ |
1,877,103
|
$ |
1,873,582
|
$ |
2,073,646
|
$ |
1,908,099
|
$ |
2,475,244
|
$ |
2,476,713
|
||||||||||||||||
|
Professional
fees
|
184,507
|
529,139
|
319,948
|
394,028
|
347,247
|
313,533
|
282,148
|
416,088
|
||||||||||||||||||||||||
|
Reconfirmation,
mailing, billing and other customer-related costs
|
33,662
|
24,269
|
34,042
|
23,715
|
39,180
|
245,597
|
396,883
|
491,947
|
||||||||||||||||||||||||
|
Depreciation
and amortization
|
460,554
|
396,759
|
364,724
|
336,887
|
316,688
|
351,342
|
369,519
|
397,005
|
||||||||||||||||||||||||
|
Other
general and administrative costs
|
757,136
|
522,583
|
531,915
|
558,513
|
390,093
|
325,405
|
360,276
|
374,100
|
||||||||||||||||||||||||
Sales
and Marketing
Expenses
|
Year Ended
September 30,
|
Sales &
Marketing
Expenses
|
Change from
Prior Year
|
Percent Change
from Prior Year
|
|||||||||
|
2007
|
$ |
6,491,504
|
$ | (4,960,961 | ) | (43.3 | )% | |||||
|
2006
|
$ |
11,452,465
|
$ |
6,142,229
|
115.7 | % | ||||||
|
2005
|
$ |
5,310,236
|
||||||||||
Sales
and
marketing expenses decreased in fiscal 2007 as compared to fiscal 2006 primarily
due to the discontinuance of our direct mail campaigns and increased
efficiencies on our telemarketing campaigns, partially offset by an expansion
of
our telemarketing activities. We incurred approximately $5.3 million
of direct mail expenses in fiscal 2006. Such costs were reduced to
approximately $1 million in fiscal 2007 as we transitioned from direct mail
campaigns to telemarketing. While our telemarketing efforts have
increased significantly, we renegotiated contracts with our service providers
and, during the fourth quarter of fiscal 2007, brought a portion of these
activities in-house through the acquisition of OnCall Subscriber Management
Inc.
Sales
and
marketing expense increased in fiscal 2006 as compared to fiscal 2005 primarily
due to an increase in telemarketing expenditures from $153,000 in fiscal 2005
to
$5,245,000 in fiscal 2006. The remaining increase is due to increased
mailing campaigns partially offset by a decrease in branding
activities.
Litigation
and Related
Expenses
|
Year Ended
September 30,
|
Litigation and
Related Expenses
|
Change from
Prior Year
|
Percent Change
from Prior Year
|
|||||||||
|
2007
|
$ | (200,718 | ) | $ | (3,887,524 | ) | (105.4 | )% | ||||
|
2006
|
$ |
3,686,806
|
$ |
3,358,673
|
1023.6 | % | ||||||
|
2005
|
$ |
328,133
|
||||||||||
In
fiscal
2007, we had no significant outstanding, pending or threatened
litigation. We also concluded the Attorneys’ General settlement
(described in “Executive
Overview – Recent Developments and Outlook” above) and reversed our
remaining accruals of approximately $201,000.
The
impact of the Attorneys’ General settlement in fiscal 2006 consisted of a
settlement fee of $2,000,000, $1,250,000 of accrued refunds and related expenses
and $275,000 of legal fees. Also included in litigation and related
expenses for fiscal 2006 was a $162,000 expense related to the settlement of
an
outstanding matter with a vendor.
The
litigation and related expenses in fiscal 2005 consisted of an accrual of
$328,133 related to this vendor dispute.
Operating
Income
(Loss)
|
Year Ended
September 30,
|
Operating
Income (Loss)
|
Change from
Prior Year
|
Percent Change
from Prior Year
|
|||||||||
|
2007
|
$ |
3,326,679
|
$ |
4,889,036
|
312.9 | % | ||||||
|
2006
|
$ | (1,562,357 | ) | $ | (2,547,613 | ) | (258.6 | )% | ||||
|
2005
|
$ |
985,256
|
||||||||||
The
increase in operating income for fiscal 2007 as compared to fiscal 2006 is
primarily due to decreased operating and litigation related expenses, partially
offset by lower net revenues, each of which is described above. The
decrease in operating income for fiscal 2006 as compared to fiscal 2005 is
primarily due to the effects of the attorneys general settlement and changes
in
revenues and sales and marketing expenses as described above.
Other
Income
(Expense)
|
Year Ended
September 30,
|
Other Income
(Expense)
|
Change from
Prior Year
|
Percent Change
from Prior Year
|
|||||||||
|
2007
|
$ |
10,945
|
$ |
35,463
|
144.6 | % | ||||||
|
2006
|
$ | (24,518 | ) | $ |
197,758
|
(89.0 | )% | |||||
|
2005
|
$ | (222,276 | ) | |||||||||
Other
income (expense) in fiscal 2007 consists primarily of interest income on cash
and short term investment balances. In fiscal 2006, this account
included expenses associated with the settlement of minor outstanding claims,
partially offset by interest income. Other income (expense) for
fiscal 2005 included losses $282,000 associated with our agreement to settle
outstanding amounts due from two of our largest stockholders, partially offset
by interest income.
Income
Tax Provision
(Benefit)
|
Year Ended
September 30,
|
Income Tax
Provision (Benefit)
|
Change from
Prior Year
|
Percent Change
from Prior Year
|
|||||||||
|
2007
|
$ |
1,855,675
|
$ |
2,167,454
|
695.2 | % | ||||||
|
2006
|
$ | (311,779 | ) | $ | (683,816 | ) | (183.8 | )% | ||||
|
2005
|
$ |
372,037
|
||||||||||
The
change in our income tax provision (benefit) in each of the above years is
due
primarily to changes in our pre-tax income. However, in fiscal 2007
and 2006, we incurred additional income tax expense of $499,885 and $217,131
due
to book-tax differences in the recognition of restricted stock
awards. During these periods, a portion of our restricted stock
awards had vested and, due to declines in our stock price from grant date to
vest date, the tax effects of the vesting of these awards were less than the
carrying value of the related deferred tax assets.
Cumulative
Effect of Accounting
Change
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 SFAS
No. 123R (effective during the first quarter of fiscal 2006) no longer permits
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. Note that this change in accounting
principle was enacted prior to the adoption of SFAS No. 154, which requires
the
retroactive application of changes in accounting principles to all periods
presented.
Net
Income
(Loss)
|
Year Ended
September 30,
|
Net Income
(Loss)
|
Change from
Prior Year
|
Percent Change
from Prior Year
|
|||||||||
|
2007
|
$ |
1,753,918
|
$ |
2,804,838
|
266.9 | % | ||||||
|
2006
|
$ | (1,050,920 | ) | $ | (1,776,066 | ) | (244.9 | )% | ||||
|
2005
|
$ |
725,146
|
||||||||||
Changes
in net income (loss) are primarily attributable to changes in operating income
and changes in income tax expense. As the three years yielded
different operating results stemming from the impacts of the Attorneys’ General
settlement, changes in the use of billing channels, changes in marketing
strategies and other operating changes, see the respective financial statement
line item narratives included herein for a detailed analysis of changes in
our
results of operations.
Liquidity
and Capital
Resources
Net
cash
provided by operating activities decreased approximately $657,000, or 27.1%,
to
$1,765,000 for fiscal 2007 as compared to $2,422,000 for fiscal
2006. The decrease in cash generated from operations is primarily due
to the payment of over $3 million related to the attorney’s general settlement,
partially offset by increases in net income and other changes in working
capital. Net cash provided by operating activities decreased
approximately $4,568,000, or 65.4%, to $2,422,000 for the year ended September
30, 2006, compared to $6,990,000 for the year ended September 30,
2005. The decrease in cash generated from operations in fiscal 2006
is primarily due to an increase in accounts receivable and the related
provisions resulting from an increased reliance on the LEC billing
channel.
Our
primary source of cash inflows is net remittances from our billing channels,
including ACH billings and LEC billings. For ACH billings, we
generally receive the net proceeds through our billing service processors within
15 days of submission. 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 consolidated balance sheet,
depending on when they are scheduled to be remitted to us. As of
September 30, 2007, approximately 70% of our gross accounts receivable are
due
from three aggregators.
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
used in investing activities totaled $2,176,000 during fiscal 2007 and consisted
of $4,114,000 of net cash outflows for the acquisitions of LiveDeal, Inc. and
OnCall Subscriber Management Inc., $939,000 of expenditures for software and
intangible assets and $205,000 of purchases of equipment, partially offset
by
the liquidation of $3,082,000 of certificates of deposit and other
investments. During fiscal 2006, net cash used in investing
activities was $1,904,000 and consisted of investments of excess cash in
certificates of deposit and other investments, expenditures for intangible
assets and minor purchases of equipment. During fiscal 2005, cash
used for investing activities was $2,441,000, and also consisted of investments
of excess cash in certificates of deposit and other investments, expenditures
for intangible assets and minor purchases of equipment.
Net
cash
used for financing activities was $310,000 during fiscal 2007 and consisted
primarily of repurchases of stock owned by dissenting shareholders in connection
with the acquisition of LiveDeal, Inc. Net cash used for financing
activities was $237,000 during fiscal 2006 and consisted primarily of the
repurchase of our treasury stock. Cash used for financing activities
during fiscal 2005 was $2,012,000 and consisted predominantly of payments of
common stock dividends of $1,445,000 and purchases of treasury stock totaling
$566,000.
We
had
working capital of $11,316,000 as of September 30, 2007, compared to $13,909,000
as of September 30, 2006. Our cash position decreased to $5,675,000
at September 30, 2007 compared to $6,395,000 at September 30, 2006, as investing
and financing outflows exceeded cash flows from operations, each of which is
described above.
During
2005, our Board of Directors authorized the repurchase of up to $3,000,000
of
our common stock from time to time on the open market or in privately negotiated
transactions. We purchased a total of 85,385 shares at an aggregate
cost of $686,793 under the plan. On May 25, 2007, the Company’s Board of
Directors terminated the 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
During
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 year totaling
$145,000 and granted 10,000 shares of restricted stock. We are obligated to
make
future payments over the next year totaling $63,000 in exchange for future
services. Such amounts have not been accrued in the accompanying financial
statements as such payments are for future services.
During
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, we are obligated to make future payments through
July 2009 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. The future payments have not been accrued in the
accompanying financial statements as such payments are for future
services.
The
following table summarizes our contractual obligations at September 30, 2007
and
the effect such obligations are expected to have on our future liquidity and
cash flows:
|
Payments
Due by Fiscal
Year
|
||||||||||||||||||||||||||||
|
Total
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
||||||||||||||||||||||
|
Operating
lease commitments
|
$ |
2,942,292
|
$ |
830,833
|
$ |
800,639
|
$ |
509,923
|
$ |
407,523
|
$ |
314,789
|
$ |
78,585
|
||||||||||||||
|
Noncanceleable
service contracts
|
1,551,000
|
777,000
|
674,000
|
100,000
|
-
|
-
|
-
|
|||||||||||||||||||||
| $ |
4,493,292
|
$ |
1,607,833
|
$ |
1,474,639
|
$ |
609,923
|
$ |
407,523
|
$ |
314,789
|
$ |
78,585
|
|||||||||||||||
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.
At
September 30, 2007, we had no other off-balance sheet arrangements, commitments
or guarantees that require additional disclosure or measurement.
ITEM
7A.
Quantitative and Qualitative Disclosure about Market Risk
As
of
September 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 fiscal 2007 or 2006) or commodity price risk.
ITEM
8. Financial
Statements and Supplementary Data
LIVEDEAL,
INC.
INDEX
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
38
|
|
|
Consolidated
Financial Statements:
|
||
|
Consolidated
Balance Sheets at September 30, 2007 and 2006
|
40
|
|
|
Consolidated
Statements of Operations for the years ended September 30, 2007,
2006, and
2005
|
41
|
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended September 30, 2007,
2006, and 2005
|
42
|
|
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2007,
2006, and
2005
|
43
|
|
|
Notes
to Consolidated Financial Statements
|
44
|
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Stockholders and Board of Directors
LiveDeal,
Inc. and
Subsidiaries
We
have
audited the accompanying consolidated balance sheet of LiveDeal, Inc. and
Subsidiaries as of September 30, 2007 and the related statements of operations,
stockholders’ equity and cash flows for the year 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 audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. 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 audit provides 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, 2007, and the results of their operations
and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/
Mayer
Hoffman McCann P.C.
MAYER
HOFFMAN MCCANN P.C.
Phoenix,
Arizona
December
18, 2007
REPORT
OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To
the
Stockholders and Board
of
Directors of LiveDeal, Inc.:
We
have
audited the accompanying consolidated balance sheet of LiveDeal, Inc. (formerly
YP Corp.) and Subsidiaries as of September 30, 2006, and the related statements
of operations, stockholders’ equity and cash flows for each of the two years in
the period ended September 30, 2006. These financial statements are
the responsibility of the Company’s management. Our responsibility is
to express an opinion on these 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. 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 financial statements referred to above present fairly, in all
material respects, the consolidated financial position of LiveDeal, Inc.
(formerly YP Corp.) and Subsidiaries as of September 30, 2006, and the
consolidated results of its operations and cash flows for each of the two
years
in the period ended September 30, 2006, in conformity with accounting principles
generally accepted in the United States of America.
As
discussed in Note 19, to the consolidated financial statements, LiveDeal,
Inc.
has restated its financial statements as of September 30, 2006 and for each
of
the two years in the period ended September 30, 2006.
/s/
Epstein, Weber & Conover, PLC
Scottsdale,
Arizona
December
18, 2006, except as to Note 19
which is as of December 18, 2007
LIVEDEAL,
INC. AND
SUBSIDIARIES
CONSOLIDATED
BALANCE
SHEETS
|
September
30,
|
||||||||
|
Assets
|
2007
|
2006
|
||||||
|
(as
restated)
|
||||||||
|
Cash
and equivalents
|
$ |
5,674,533
|
$ |
6,394,775
|
||||
|
Certificates
of deposit and other investments
|
-
|
3,082,053
|
||||||
|
Accounts
receivable, net
|
6,919,180
|
8,015,600
|
||||||
|
Prepaid
expenses and other current assets
|
510,609
|
235,250
|
||||||
|
Deferred
tax asset
|
546,145
|
1,781,736
|
||||||
|
Total
current assets
|
13,650,467
|
19,509,414
|
||||||
|
Accounts
receivable, long term portion, net
|
1,941,996
|
1,140,179
|
||||||
|
Property
and equipment, net
|
423,563
|
178,883
|
||||||
|
Deposits
and other assets
|
103,057
|
91,360
|
||||||
|
Intangible
assets, net
|
7,372,147
|
5,722,604
|
||||||
|
Goodwill
|
11,683,163
|
-
|
||||||
|
Deferred
tax asset, long term
|
4,551,644
|
1,334,787
|
||||||
|
Income
taxes receivable
|
316,429
|
-
|
||||||
|
Total
assets
|
$ |
40,042,466
|
$ |
27,977,227
|
||||
|
Liabilities
and Stockholders'
Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Accounts
payable
|
$ |
1,138,265
|
$ |
773,653
|
||||
|
Accrued
liabilities
|
1,196,330
|
4,565,439
|
||||||
|
Income
taxes payable
|
-
|
261,762
|
||||||
|
Total
current liabilities
|
2,334,595
|
5,600,854
|
||||||
|
Total
liabilities
|
2,334,595
|
5,600,854
|
||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
Equity:
|
||||||||
|
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, 6,693,676
and
5,002,159 issued and outstanding
|
6,694
|
5,002
|
||||||
|
Treasury
stock (328,566 and 284,342 shares carried at cost)
|
(2,714,698 | ) | (2,407,158 | ) | ||||
|
Paid
in capital
|
23,325,888
|
12,294,186
|
||||||
|
Deferred
stock compensation
|
-
|
(2,854,122 | ) | |||||
|
Retained
earnings
|
17,079,121
|
15,327,599
|
||||||
|
Total
stockholders' equity
|
37,707,871
|
22,376,373
|
||||||
|
Total
liabilities and stockholders' equity
|
$ |
40,042,466
|
$ |
27,977,227
|
||||
See
accompanying notes to consolidated financial statements.
LIVEDEAL,
INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF
OPERATIONS
|
Year
ended September
30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(as
restated)
|
(as
restated)
|
|||||||||||
|
Net
revenues
|
$ |
26,340,361
|
$ |
31,957,947
|
$ |
24,361,995
|
||||||
|
Cost
of services
|
4,204,276
|
4,030,280
|
3,137,756
|
|||||||||
|
Gross
profit
|
22,136,085
|
27,927,667
|
21,224,239
|
|||||||||
|
Operating
expenses:
|
||||||||||||
|
General
and administrative expenses
|
12,518,620
|
14,350,753
|
14,600,614
|
|||||||||
|
Sales
and marketing expenses
|
6,491,504
|
11,452,465
|
5,310,236
|
|||||||||
|
Litigation
and related expenses
|
(200,718 | ) |
3,686,806
|
328,133
|
||||||||
|
Total
operating expenses
|
18,809,406
|
29,490,024
|
20,238,983
|
|||||||||
|
Operating
income (loss)
|
3,326,679
|
(1,562,357 | ) |
985,256
|
||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
expense and other financing costs
|
-
|
-
|
(8,610 | ) | ||||||||
|
Interest
income
|
271,969
|
224,176
|
242,965
|
|||||||||
|
Other
income (expense)
|
10,945
|
(24,518 | ) | (222,276 | ) | |||||||
|
Total
other income (expense)
|
282,914
|
199,658
|
12,079
|
|||||||||
| Income (loss) before income taxes and cumulative effect of accounting change |
3,609,593
|
(1,362,699 | ) |
997,335
|
||||||||
|
Income
tax provision (benefit)
|
1,855,675
|
(311,779 | ) |
372,037
|
||||||||
|
Cumulative
effect of accounting change (net of income taxes of $53,764 in
2005)
|
-
|
-
|
(99,848 | ) | ||||||||
|
Net
income (loss)
|
$ |
1,753,918
|
$ | (1,050,920 | ) | $ |
725,146
|
|||||
|
Net
income (loss) per common share:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Income
(loss) applicable to common stock before cumulative effect of accounting
change
|
$ |
0.34
|
$ | (0.23 | ) | $ |
0.14
|
|||||
|
Cumulative
effect of accounting change
|
$ |
-
|
$ |
-
|
$ |
0.02
|
||||||
|
Net
income applicable to common stock
|
$ |
0.34
|
$ | (0.23 | ) | $ |
0.16
|
|||||
|
Diluted:
|
||||||||||||
|
Income
(loss) applicable to common stock before cumulative effect of accounting
change
|
$ |
0.33
|
$ | (0.23 | ) | $ |
0.14
|
|||||
|
Cumulative
effect of accounting change
|
$ |
-
|
$ |
-
|
$ |
0.02
|
||||||
|
Net
income (loss) applicable to common stock
|
$ |
0.33
|
$ | (0.23 | ) | $ |
0.16
|
|||||
|
Weighted
average common shares outstanding:
|
||||||||||||
|
Basic
|
5,108,551
|
4,495,868
|
4,639,036
|
|||||||||
|
Diluted
|
5,336,439
|
4,495,868
|
4,665,992
|
|||||||||
See
accompanying notes to consolidated financial statements.
LIVEDEAL,
INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF
STOCKHOLDERS' EQUITY
|
Common
Stock
|
Preferred
Stock
|
Treasury
|
Paid-In
|
Deferred
|
Retained
|
|||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Stock
|
Capital
|
Compensation
|
Earnings
|
Total
|
||||||||||||||||||||||||||||
|
Balance,
October 1, 2004
|
5,085,879
|
$ |
5,086
|
128,340
|
$ |
10,909
|
$ |
-
|
$ |
12,197,719
|
$ | (5,742,814 | ) | $ |
17,101,493
|
$ |
23,572,393
|
|||||||||||||||||||
|
Common
stock issued for services
|
10,000
|
10
|
-
|
-
|
-
|
119,490
|
-
|
-
|
119,500
|
|||||||||||||||||||||||||||
|
Treasury
stock received as partial settlement of amounts due from
affiliates
|
(188,957 | ) | (189 | ) |
-
|
-
|
(1,606,131 | ) |
189
|
-
|
-
|
(1,606,131 | ) | |||||||||||||||||||||||
|
Treasury
stock acquired as part of stock repurchase program
|
(60,125 | ) | (60 | ) |
-
|
-
|
(565,609 | ) |
60
|
-
|
-
|
(565,609 | ) | |||||||||||||||||||||||
|
Series
E preferred stock dividends
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,439 | ) | (1,439 | ) | |||||||||||||||||||||||||
|
Conversion
of Series E preferred stock
|
50
|
-
|
(500 | ) | (43 | ) |
-
|
267
|
-
|
-
|
224
|
|||||||||||||||||||||||||
|
Common
stock issued in restricted stock plan
|
88,572
|
89
|
-
|
-
|
-
|
530,287
|
(530,376 | ) |
-
|
-
|
||||||||||||||||||||||||||
|
Amortization
of deferred stock compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
1,419,557
|
-
|
1,419,557
|
|||||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
725,146
|
725,146
|
|||||||||||||||||||||||||||
|
Common
stock dividends
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,444,763 | ) | (1,444,763 | ) | |||||||||||||||||||||||||
|
Cumulative
effect of accounting change
|
-
|
-
|
-
|
-
|
-
|
(1,166,426 | ) |
1,012,814
|
-
|
(153,612 | ) | |||||||||||||||||||||||||
|
Effect
of change in estimated forfeiture rate
|
||||||||||||||||||||||||||||||||||||
|
for
restricted stock plan
|
-
|
-
|
-
|
-
|
-
|
(593,284 | ) |
593,284
|
-
|
-
|
||||||||||||||||||||||||||
|
Canceled
stock
|
(51,650 | ) | (52 | ) |
-
|
-
|
-
|
52
|
-
|
-
|
-
|
|||||||||||||||||||||||||
|
Balance,
September 30, 2005
|
4,883,769
|
4,884
|
127,840
|
10,866
|
(2,171,740 | ) |
11,088,354
|
(3,247,535 | ) |
16,380,437
|
22,065,266
|
|||||||||||||||||||||||||
|
Treasury
stock acquired as part of stock repurchase program
|
(25,260 | ) | (26 | ) |
-
|
-
|
(134,418 | ) |
26
|
-
|
-
|
(134,418 | ) | |||||||||||||||||||||||
|
Treasury
stock acquired in connection with URL
purchase
|
(10,000 | ) | (10 | ) |
-
|
-
|
(101,000 | ) |
10
|
-
|
-
|
(101,000 | ) | |||||||||||||||||||||||
|
Series
E preferred stock dividends
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,918 | ) | (1,918 | ) | |||||||||||||||||||||||||
|
Common
stock issued in restricted stock plan
|
239,650
|
240
|
-
|
-
|
-
|
1,290,178
|
(1,290,418 | ) |
-
|
-
|
||||||||||||||||||||||||||
|
Amortization
of deferred stock compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
1,599,363
|
-
|
1,599,363
|
|||||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,050,920 | ) | (1,050,920 | ) | |||||||||||||||||||||||||
|
Effect
of change in estimated forfeiture rate
|
||||||||||||||||||||||||||||||||||||
|
for
restricted stock plan
|
-
|
-
|
-
|
-
|
-
|
(84,468 | ) |
84,468
|
-
|
-
|
||||||||||||||||||||||||||
|
Canceled
stock
|
(86,000 | ) | (86 | ) |
-
|
-
|
-
|
86
|
-
|
-
|
-
|
|||||||||||||||||||||||||
|
Balance,
September 30, 2006
|
5,002,159
|
5,002
|
127,840
|
10,866
|
(2,407,158 | ) |
12,294,186
|
(2,854,122 | ) |
15,327,599
|
22,376,373
|
|||||||||||||||||||||||||
|
Reclass
of deferred compensation
|
-
|
-
|
-
|
-
|
-
|
(2,854,122 | ) |
2,854,122
|
-
|
-
|
||||||||||||||||||||||||||
|
Series
E preferred stock dividends
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,396 | ) | (2,396 | ) | |||||||||||||||||||||||||
|
Common
stock issued in restricted stock plan
|
78,500
|
79
|
-
|
-
|
-
|
(79 | ) |
-
|
-
|
|||||||||||||||||||||||||||
|
Common
stock issued in acquisition
|
1,675,016
|
1,675
|
-
|
-
|
-
|
12,326,370
|
-
|
-
|
12,328,045
|
|||||||||||||||||||||||||||
|
Shares
acquired from LiveDeal shareholders
|
(44,224 | ) | (44 | ) | (307,540 | ) |
44
|
(307,540 | ) | |||||||||||||||||||||||||||
|
Issuance
of restricted stock in exchange for services
|
10,800
|
11
|
-
|
-
|
-
|
78,828
|
-
|
-
|
78,839
|
|||||||||||||||||||||||||||
|
Restricted
stock cancellations
|
(28,575 | ) | (29 | ) |
-
|
-
|
-
|
29
|
-
|
-
|
-
|
|||||||||||||||||||||||||
|
Amortization
of deferred stock compensation
|
-
|
-
|
-
|
-
|
-
|
1,480,632
|
-
|
-
|
1,480,632
|
|||||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,753,918
|
1,753,918
|
|||||||||||||||||||||||||||
|
Balance,
September 30, 2007
|
6,693,676
|
$ |
6,694
|
127,840
|
$ |
10,866
|
$ | (2,714,698 | ) | $ |
23,325,888
|
$ |
-
|
$ |
17,079,121
|
$ |
37,707,871
|
|||||||||||||||||||
See
accompanying notes to consolidated financial statements.
LIVEDEAL,
INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
Year
ended September
30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(as
restated)
|
(as
restated)
|
|||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
income (loss)
|
$ |
1,753,918
|
$ | (1,050,920 | ) | $ |
725,146
|
|||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
1,575,488
|
1,434,554
|
1,569,999
|
|||||||||
|
Amortization
of deferred stock compensation
|
1,480,632
|
1,599,363
|
1,419,557
|
|||||||||
|
Issuance
of common stock as compensation for services
|
78,839
|
-
|
119,500
|
|||||||||
|
Non-cash
interest income on advances to affiliates
|
-
|
-
|
(110,019 | ) | ||||||||
|
Non-cash
loss on transaction with affiliates
|
-
|
-
|
281,884
|
|||||||||
|
Cumulative
effect of accounting change
|
-
|
-
|
(99,848 | ) | ||||||||
|
Non-cash
compensation expense to Chief Executive Officer
|
88,680
|
-
|
-
|
|||||||||
|
Deferred
income taxes
|
1,564,352
|
(1,484,554 | ) | (507,259 | ) | |||||||
|
(Gain)
loss on disposal of equipment
|
4,128
|
(3,221 | ) |
-
|
||||||||
|
Provision
for uncollectible accounts
|
660,963
|
429,614
|
631,277
|
|||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Restricted
cash
|
-
|
500,000
|
(500,000 | ) | ||||||||
|
Accounts
receivable
|
(237,771 | ) | (3,300,144 | ) |
3,594,508
|
|||||||
|
Prepaid
and other current assets
|
(252,182 | ) |
293,437
|
(1,365,853 | ) | |||||||
|
Deposits
and other assets
|
(851 | ) | (29,331 | ) |
177,031
|
|||||||
|
Accounts
payable
|
(718,151 | ) |
118,127
|
(554,838 | ) | |||||||
|
Accrued
liabilities
|
(3,654,358 | ) |
3,762,169
|
260,786
|
||||||||
|
Income
taxes payable
|
(578,191 | ) |
152,907
|
1,348,290
|
||||||||
|
Net
cash provided by operating activities
|
1,765,496
|
2,422,001
|
6,990,161
|
|||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Acquisition
of businesses, net of cash acquired
|
(4,114,139 | ) |
-
|
-
|
||||||||
|
Expenditures
for intangible assets
|
(939,102 | ) | (801,416 | ) | (391,077 | ) | ||||||
|
Net
purchases/redemptions of certificates of
|
||||||||||||
|
deposits
and other investments
|
3,082,053
|
(1,077,066 | ) | (2,004,987 | ) | |||||||
|
Purchases
of equipment
|
(204,614 | ) | (25,719 | ) | (44,728 | ) | ||||||
|
Net
cash used in investing activities
|
(2,175,802 | ) | (1,904,201 | ) | (2,440,792 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Series
E preferred stock dividends
|
(2,396 | ) | (1,918 | ) | (1,439 | ) | ||||||
|
Common
stock dividends
|
-
|
-
|
(1,444,763 | ) | ||||||||
|
Proceeds
from conversion of preferred stock
|
-
|
-
|
224
|
|||||||||
|
Purchase
of treasury stock
|
(307,540 | ) | (235,418 | ) | (565,609 | ) | ||||||
|
Net
cash used in financing activities
|
(309,936 | ) | (237,336 | ) | (2,011,587 | ) | ||||||
|
(DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
(720,242 | ) |
280,464
|
2,537,782
|
||||||||
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
6,394,775
|
6,114,311
|
3,576,529
|
|||||||||
|
CASH
AND CASH EQUIVALENTS, end of year
|
$ |
5,674,533
|
$ |
6,394,775
|
$ |
6,114,311
|
||||||
See
accompanying notes to consolidated financial statements.
|
|
1.
|
ORGANIZATION
AND BASIS OF PRESENTATION
|
LiveDeal,
Inc. (the “Company”), formerly YP Corp., YP.Net, Inc. and RIGL Corporation, had
previously attempted to develop software solutions for medical practice billing
and administration. The Company was not successful in implementing
its medical practice billing and administration software products and looked
to
other business opportunities. The Company acquired Telco Billing,
Inc. (“Telco”) in June 1999, through the issuance of 1,700,000 shares of the
Company’s common stock (on a post-split adjusted basis). Prior to its
acquisition of Telco, the Company had not generated significant or sufficient
revenue from planned operations.
Telco
was
formed in April 1998 to provide advertising and directory listings for
businesses on its Internet website in a “Yellow Pages” format. Telco
provides those services to its subscribers for a monthly fee. These
services are provided primarily to businesses throughout the United
States. Telco became a wholly owned subsidiary of YP Corp. after the
June 1999 acquisition.
At
the
time that the transaction was agreed to, the Company had 12,567,770 common
shares issued and outstanding. As a result of the merger transaction
with Telco, there were 29,567,770 common shares outstanding, and the former
Telco stockholders held approximately 57% of the Company’s voting
stock. For financial accounting purposes, the acquisition was a
reverse acquisition of the Company by Telco, under the purchase method of
accounting, and was treated as a recapitalization with Telco as the
acquirer. Consistent with reverse acquisition accounting, (i) all of
Telco’s assets, liabilities, and accumulated deficit were reflected at their
combined historical cost (as the accounting acquirer) and (ii) the preexisting
outstanding shares of the Company (the accounting acquiree) were reflected
at
their net asset value as if issued on June 16, 1999.
On
June
6, 2007, the Company completed its acquisition of LiveDeal, Inc. (“LiveDeal”), a
California corporation. LiveDeal developed and operates an online
local classifieds marketplace, www.livedeal.com, which listed millions of goods
and services for sale in almost every city and zip code across the United
States. The technology acquired in the acquisition offers such
classifieds functionality as fraud protection, identity protection, e-commerce,
listing enhancements, photos, community-building, package pricing, premium
stores, featured Yellow Page business listings and advanced local search
capabilities.
On
July
10, 2007, the Company acquired substantially all of the assets and assumed
certain liabilities of OnCall Subscriber Management Inc., a Manila,
Philippines-based company that provides telemarketing services. The
acquisition took place through the Company’s wholly-owned subsidiary, “247
Marketing”, a Nevada corporation.
On
August
10, 2007, the Company filed amended and restated articles of incorporation
with
the Office of the Secretary of State of the State of Nevada, pursuant to which
the Company’s name was changed to LiveDeal, Inc., effective August 15,
2007. The name change was approved by the Company’s Board of
Directors pursuant to discretion granted to it by the Company’s stockholders at
a special meeting on August 2, 2007.
The
accompanying consolidated financial statements represent the consolidated
financial position and results of operations of the Company and include the
accounts and results of operations of the Company, LiveDeal, 247 Marketing,
Telco and Telco of Canada, Inc, the Company’s wholly owned subsidiaries, for the
years ended September 30, 2007, 2006, and 2005. The results of
LiveDeal and 247 Marketing are included from their respective acquisition dates
of June 6, 2007 and July 10, 2007, respectively.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Cash
and Cash
Equivalents: This includes all short-term highly liquid
investments that are readily convertible to known amounts of cash and have
original maturities of three months or less. At times, cash deposits
may exceed government-insured limits.
Principles
of
Consolidation: The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, LiveDeal, 247 Marketing,
Telco
Billing, Inc. and Telco of Canada, Inc. The results of LiveDeal and
247 Marketing are included from their respective acquisition dates of June
6,
2007 and July 10, 2007, respectively. All significant intercompany
accounts and transactions have been eliminated.
Customer
Acquisition
Costs: In the fourth quarter of fiscal 2006, the Company
enacted a change in accounting principle to expense customer acquisition costs
when incurred. A preferability letter was obtained by the Company’s
predecessor auditors and filed with the SEC in connection with the Company’s
Form 10-K for the year ended September 30, 2006. Prior periods have
been restated to reflect the retroactive application of this
change. See Note 3.
Property
and
Equipment: Property and equipment is stated at cost less
accumulated depreciation. Depreciation is recorded on a straight-line basis
over
the estimated useful lives of the assets ranging from three to five years.
Depreciation expense was $155,929, $246,919, and $373,803 for the years ended
September 30, 2007, 2006, and 2005, respectively.
Revenue
Recognition:
The Company’s revenue is generated by customer subscriptions of directory and
advertising services. Revenue is billed and recognized monthly for
services subscribed in that specific month. The Company utilizes
outside billing companies to perform billing services through two primary
channels:
|
|
·
|
direct
ACH withdrawals; and
|
|
|
·
|
inclusion
on the customer’s local telephone bill provided by their Local Exchange
Carriers, or LECs.
|
For
billings via ACH withdrawals, revenue is recognized when such billings are
accepted. For billings via LECs, the Company recognizes revenue based on net
billings accepted by the LECs. Due to the periods of time for which
adjustments may be reported by the LECs and the billing companies, the Company
estimates and accrues for dilution and fees reported subsequent to year-end
for
initial billings related to services provided for periods within the fiscal
year. Such dilution and fees are reported in cost of services in the
accompanying consolidated statements of operations. Customer refunds
are recorded as an offset to gross revenue.
Revenue
for billings to certain customers that are billed directly by the Company and
not through the outside billing companies is recognized based on estimated
future collections. The Company continuously reviews this estimate for
reasonableness based on its collection experience.
Income
Taxes: Income
taxes are accounted for using the asset and liability method. 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.
Net
Income (Loss) Per
Share: Net income (loss) per share is calculated in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Under
the provisions of
SFAS No. 128, basic net income per share is computed using the weighted average
number of common shares outstanding during the period except that it does not
include unvested restricted stock subject to cancellation. Diluted net income
per share is computed using the weighted average number of common shares and,
if
dilutive, potential common shares outstanding during the period. Potential
common shares consist of the incremental common shares issuable upon the
exercise of warrants, restricted shares and convertible preferred stock. The
dilutive effect of outstanding restricted shares and warrants is reflected
in
diluted earnings per share by application of the treasury stock method.
Convertible preferred stock is reflected on an if-converted basis.
Financial
Instruments: Financial instruments consist primarily of cash, cash
equivalents, accounts receivable, advances to affiliates and obligations under
accounts payable, accrued expenses and notes payable. The carrying
amounts of cash, cash equivalents, accounts receivable, accounts payable,
accrued expenses and notes payable approximate fair value because of the short
maturity of those instruments. The carrying amount of the advances to affiliates
approximates fair value because the Company charges what it believes are market
rate interest rates for comparable credit risk instruments. The Company has
applied certain assumptions in estimating these fair values. The use of
different assumptions or methodologies may have a material effect on the
estimates of fair values.
Use
of Estimates: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make 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. Actual results could differ from those
estimates.
Significant
estimates made in connection with the accompanying consolidated financial
statements include the estimate of dilution and fees associated with LEC
billings, the estimated reserve for doubtful accounts receivable, estimated
customer retention period used for the amortization of customer acquisition
costs, estimated forfeiture rates for stock-based compensation, and estimated
useful lives for intangible assets and property and equipment.
Stock-Based
Compensation: The Company from time-to-time grants restricted
stock awards to employees and executives. 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
Company accounts for stock awards issued to non-employees in accordance with
the
provisions of SFAS No. 123R and Emerging Issues Task Force (“EITF”) Issue No.
96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services. Under SFAS No.
123R and EITF No. 96-18, stock awards to non-employees are accounted for at
fair
value at their respective measurement date.
Impairment
of Long-lived
Assets: The Company assesses long-lived assets for impairment in
accordance with the provisions of SFAS No. 144, Accounting for the Impairment
or
Disposal of Long-Lived Assets. SFAS No. 144 requires that the Company
assess the issue of impairment of a long-lived asset annually or whenever there
is an indication that its carrying amount may not be recoverable. The
carrying amount of a long lived asset is not recoverable if it exceeds the
sum
of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. The amount of impairment loss, if any, is measured
as
the difference between the net book value of the asset and its estimated fair
value. For purposes of these tests, long-lived assets must be grouped with
other
assets and liabilities for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities. The Company
most recently completed an impairment evaluation in the fourth quarter of fiscal
2007. No long-lived assets were determined to be impaired during the
years ended September 30, 2007, 2006, and 2005.
Effects
of Reverse Stock
Split: Effective on August 15, 2007, the Company implemented a 1-for-10
reverse stock split with respect to issued and outstanding shares of its common
stock. The reverse stock split was approved by the Company’s Board of
Directors pursuant to discretion granted to it by the Company’s stockholders at
a special meeting on August 2, 2007. All per share amounts have been
retroactively restated for the effects of this reverse stock split.
Restatements: See
Note 19.
Recently
Issued Accounting
Pronouncements:
In
July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty
in Income
Taxes (FIN 48) – an interpretation of FASB Statement No. 109, Accounting for
Income Taxes (SFAS No. 109) (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in accordance with SFAS No. 109 and
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 return. Guidance is also provided on de-recognition, 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 does not expect the impact of FIN 48 to have a
material effect on its financial position and results of
operations.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 provides guidance on how prior
year misstatements should be considered when quantifying misstatements in the
current year financial statements. The SAB requires registrants to
quantify misstatements using both a balance sheet and an income statement
approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 does not change the guidance in SAB
99, “Materiality”, when evaluating the materiality of
misstatements. SAB 108 is effective for fiscal years ending after
November 15, 2006. The adoption of this pronouncement did not have a
material effect of the Company’s consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
No. 157). SFAS No. 157 establishes a framework for measuring fair
value under generally accepted accounting procedures and expands disclosures
on
fair value measurements. This statement applies under previously established
valuation pronouncements and does not require the changing of any fair value
measurements, though it may cause some valuation procedures to change. Under
SFAS No. 157, fair value is established by the price that would be received
to sell the item or the amount to be paid to transfer the liability of the
asset
as opposed to the price to be paid for the asset or received to transfer the
liability. Further, it defines fair value as a market specific valuation as
opposed to an entity specific valuation, though the statement does recognize
that there may be instances when the low amount of market activity for a
particular item or liability may challenge an entity’s ability to establish a
market amount. In the instances that the item is restricted, this pronouncement
states that the owner of the asset or liability should take into consideration
what affects the restriction would have if viewed from the perspective of the
buyer or assumer of the liability. This statement is effective for all assets
valued in financial statements for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of SFAS
No. 157 on its financial position and result of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial
Assets and Financial Liabilities, which provides companies with an option
to report selected financial assets and liabilities at fair
value. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year beginning after November 15, 2007 with early adoption
allowed. The Company has not yet determined the impact, if any, that
adopting this standard might have on its financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141(R)) and No. 160, Noncontrolling Interests
in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No.
160). SFAS No. 141(R) and SFAS No. 160 are products of a joint project between
the FASB and the International Accounting Standards Board. The
revised standards continue the movement toward the greater use of fair values
in
financial reporting. SFAS No. 141(R) will significantly change how business
acquisitions are accounted for and will impact financial statements both on
the
acquisition date and in subsequent periods. These changes include the expensing
of acquisition related costs and restructuring costs when incurred, the
recognition of all assets, liabilities and noncontrolling interests at fair
value during a step-acquisition, and the recognition of contingent consideration
as of the acquisition date if it is more likely than not to be
incurred. SFAS No. 160 will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
and classified as a component of equity. SFAS No. 141(R) and SFAS No.
160 are effective for both public and private companies for fiscal years
beginning on or after December 15, 2008 (January 1, 2009 for companies with
calendar year-ends). SFAS No. 141(R) will be applied prospectively. SFAS No.
160
requires retroactive adoption of the presentation and disclosure requirements
for existing minority interests. All other requirements of SFAS No. 160 shall
be
applied prospectively. Early adoption is prohibited for both
standards. The Company is currently evaluating the effects of these
pronouncements on its financial position and results of operations.
|
3.
|
ACCOUNTING
CHANGES
|
Change
in Accounting
Principle Subsequent to Adoption of SFAS No. 154 – Accounting for Customer
Acquisition Costs
Historically,
the Company had capitalized customer acquisition costs, consisting of mailing
lists and check mailers, and amortized them on a straight-line basis over the
average expected life of the related customers based on historical IAP
advertiser attrition rates and other factors.
Prior
to
fiscal 2006, the majority of the capitalized customer acquisition costs related
to the Company’s mailing campaigns, for which the Company amortized the costs
based on historical IAP advertiser attrition rates attributable to its entire
customer base. During fiscal 2006, the Company began increasing its
expenditures for telemarketing campaigns. The capitalization of such
costs requires that the Company amortize them over the average expected life
of
acquired customers, as determined on a cost-pool by cost-pool
basis. The Company’s systems do not allow us to efficiently and
accurately monitor customer lives by method of
acquisition. Therefore, the Company is unable to determine the
average expected life of those customers acquired via telemarketing versus
those
acquired via mailing campaigns and cannot assess the value of the future
benefits. As it cannot effectively evaluate such costs on a cost-pool
by cost-pool basis, the Company determined in fiscal 2006 that the more
preferable method of accounting for these costs is to expense them when
incurred. The Company enacted this change in accounting principle
during the fourth quarter of fiscal 2006 and, in accordance with SFAS No. 154,
has restated all periods presented to reflect this new method of accounting
for
such costs.
|
4.
|
ACQUISITIONS
|
LiveDeal,
Inc.
On
June
6, 2007, the Company acquired all of the outstanding common and preferred
stock of LiveDeal, Inc. ("LiveDeal") in exchange for 1,505,490 shares of Common
Stock. In addition, the Company issued an aggregate of 23,155 shares of
restricted Common Stock in exchange for the cancellation of all outstanding
LiveDeal options and warrants. Finally, the Company agreed to issue an
additional 146,371 shares of Company Stock in exchange for the cancellation
of
$1,021,666 of LiveDeal debt. Immediately following the transaction, LiveDeal
became be a wholly-owned subsidiary of the Company.
LiveDeal
has developed and operates an online local classifieds marketplace,
www.livedeal.com which has millions of goods and services listed for sale,
in
almost every city and zip code across the U.S. LiveDeal offers such classifieds
functionality as fraud protection, identity protection, e-commerce, listing
enhancements, photos, community-building, package pricing, premium stores,
featured Yellow Page business listings and advanced local search capabilities.
Additionally, the LiveDeal technology lets consumers search or browse for items
in a particular city, state or zip code.
At
the
site, users can search classifieds in any region and can look up businesses
in a
yellow pages database. As with most such classified ad sites, users are offered
a search window and a listing of subcategories. Sales are made
directly between the user (buyer) and seller, and an "email the seller" link
is
provided to assist in this process.
Among
the
interesting features of LiveDeal’s site is "Local AdWiz", which is a classifieds
and yellow pages distribution network, turning any web site or blog into a
unique and localized classifieds and Yellow Pages site in seconds. AdWiz gives
website publishers fresh local content and an instant revenue stream. Local
AdWiz pulls from millions of classified and yellow page listings across multiple
categories from people in cities and towns all over the U.S. AdWiz enables
the
listings to be republished dynamically on any website within
seconds.
The
aggregate purchase price of LiveDeal was $12,700,695, consisting of
approximately $12,328,045 of stock-based consideration and $372,650 of
acquisition-related expenses. The value of the combined 1,675,016
shares of common stock granted in the transaction was determined based on the
average closing market price of the common stock over the two day period before
and after the effective date of the acquisition. The purchase price
was determined based on an average of valuation estimates utilizing comparable
companies, precedent transactions and discounted cash flow
techniques. There are no contingent payments or commitments specified
in the agreement, except with respect to the employment agreement described
in
Note 10.
The
following table sets forth the allocation of the acquisition cost, including
acquisition-related expenses, to the assets acquired and liabilities assumed,
based on their estimated fair values:
|
Current
assets
|
$ |
962,877
|
||
|
Property,
plant and equipment
|
70,000
|
|||
|
Goodwill
|
7,349,366
|
|||
|
Intangible
assets
|
2,130,000
|
|||
|
Deferred
tax assets
|
3,545,618
|
|||
|
Other
non-current assets
|
10,846
|
|||
|
Total
assets acquired
|
14,068,707
|
|||
|
Current
liabilities
|
1,368,012
|
|||
|
Total
liabilities assumed
|
1,368,012
|
|||
|
Net
assets acquired
|
$ |
12,700,695
|
The
Company does not expect the goodwill to be tax-deductible. As the
Company only operates in one reportable segment, the entire goodwill balance
has
been allocated to that segment.
The
Company has estimated the fair value of LiveDeal’s identifiable intangible
assets at $2,130,000, allocated as follows:
|
Estimated
Fair
Value
|
Average
Remaining
Useful
Life
|
||||
|
Asset
class:
|
|||||
|
Marketing-based
intangible assets
|
$ |
1,500,000
|
20
years
|
||
|
Technology-based
intangible assets
|
630,000
|
5
years
|
|||
| $ |
2,130,000
|
||||
Marketing-based
intangible assets include trademarks, tradenames and internet domain names,
whereas technology-based intangible assets include computer software,
technology, databases, and trade secrets.
In
connection with its acquisition of LiveDeal, the Company repurchased an
aggregate of 44,224 shares of common stock from dissenting shareholders of
LiveDeal. The aggregate purchase price was $307,540.
OnCall
Subscriber
Management, Inc.
On
July
10, 2007, the Company
acquired substantially all of the assets and assumed certain liabilities of
OnCall Subscriber Management Inc. (a Manila, Philippines-based company), which
OnCall purchased recently under option from 24 by 7 Contact Solutions,
Inc. The Company completed the acquisition through 247 Marketing,
LLC, a wholly owned subsidiary, which established a subsidiary in the
Philippines (247 Marketing, Inc.) to operate the business. The
acquisition added 170 Philippines-based employees to the Company’s
workforce.
The
aggregate purchase price of the acquisition was approximately $4,552,600
(including acquisition-related expenses of $52,600), which was paid in cash
during fiscal 2007. The Company allocated $218,803 of the purchase
price to the estimated fair value of the equipment that was acquired and
$4,333,797 to goodwill. The Company does not expect the goodwill to
be tax-deductible. As the Company only operates in one reportable
segment, the entire goodwill balance has been allocated to that
segment.
Pro
Forma Financial
Information
The
following table provides pro forma results of operations for the three and
nine
months ended June 30, 2007 and 2006 as if LiveDeal had been acquired as of
the
beginning of each period presented. The pro forma results include
certain purchase accounting adjustments such as the estimated changes in
amortization expense on acquired intangible assets, increased compensation
expense resulting from the contractual obligation for Mr. Navar’s salary
(described in Note 10) and the elimination of interest expense on borrowings
that were satisfied through the acquisition. However, pro forma
results do not include any anticipated cost savings or other effects of the
planned integration of LiveDeal. Accordingly, such amounts are not
necessarily indicative of the results that would have occurred if the
acquisition had occurred on the dates indicated or that may result in the
future.
|
Year
ended September
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
(unaudited)
|
(unaudited)
|
|||||||
|
Net
revenues
|
$ |
28,057,074
|
$ |
34,159,380
|
||||
|
Net
loss
|
$ | (1,834,830 | ) | $ | (4,089,392 | ) | ||
|
Diluted
net loss per share
|
$ | (0.28 | ) | $ | (0.66 | ) | ||
The
Company did not provide pro forma information for the acquisition of OnCall
Subscriber Management Inc. as this entity was a carve-out of a larger
entity. As such, historical financial information of the acquired
entity on a standalone basis is unattainable.
|
5.
|
BALANCE
SHEET INFORMATION
|
Balance
sheet information is as follows:
|
September
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Receivables,
current, net
|
||||||||
|
Accounts
receivable, current
|
$ |
9,221,903
|
$ |
11,050,104
|
||||
|
Less:
Allowance for doubtful accounts
|
(2,302,723 | ) | (3,034,504 | ) | ||||
| $ |
6,919,180
|
$ |
8,015,600
|
|||||
|
Receivables,
long term, net
|
||||||||
|
Accounts
receivable, long term
|
$ |
2,101,071
|
$ |
1,374,624
|
||||
|
Less:
Allowance for doubtful accounts
|
(159,075 | ) | (234,445 | ) | ||||
| $ |
1,941,996
|
$ |
1,140,179
|
|||||
|
Total
receivables, net
|
||||||||
|
Gross
receivables
|
$ |
11,322,974
|
$ |
12,424,728
|
||||
|
Gross
allowance for doubtful accounts
|
(2,461,798 | ) | (3,268,949 | ) | ||||
| $ |
8,861,176
|
$ |
9,155,779
|
|||||
|
Components
of allowance for doubtful accounts are as follows:
|
||||||||
|
Allowance
for dilution and fees on amounts due from billing
aggregators
|
$ |
1,888,730
|
$ |
2,465,423
|
||||
|
Allowance
for customer refunds
|
573,068
|
803,526
|
||||||
| $ |
2,461,798
|
$ |
3,268,949
|
|||||
|
Property
and equipment, net
|
||||||||
|
Leasehold
improvements
|
$ |
455,286
|
$ |
447,681
|
||||
|
Furnishings
and fixtures
|
310,499
|
296,074
|
||||||
|
Office,
computer equipment and other
|
1,423,989
|
1,055,545
|
||||||
|
2,189,774
|
1,799,300
|
|||||||
|
Less:
Accumulated depreciation
|
(1,766,211 | ) | (1,620,417 | ) | ||||
| $ |
423,563
|
$ |
178,883
|
|||||
|
Intangible
assets, net
|
||||||||
|
Domain
name and marketing related intangibles
|
$ |
7,208,600
|
$ |
5,708,600
|
||||
|
Non-compete
agreement
|
3,465,000
|
3,465,000
|
||||||
|
Website
and technology related intangibles
|
3,006,093
|
1,436,991
|
||||||
|
13,679,693
|
10,610,591
|
|||||||
|
Less: Accumulated
amortization of intangible
|
(6,307,546 | ) | (4,887,987 | ) | ||||
| $ |
7,372,147
|
$ |
5,722,604
|
|||||
|
Accrued
liabilities
|
||||||||
|
Litigation
accrual
|
$ |
-
|
$ |
3,525,000
|
||||
|
Deferred
revenue
|
323,596
|
188,399
|
||||||
|
Accrued
payroll and bonuses
|
339,305
|
187,973
|
||||||
|
Accrued
expenses - other
|
533,428
|
664,067
|
||||||
| $ |
1,196,330
|
$ |
4,565,439
|
|||||
|
6.
|
ACCOUNTS
RECEIVABLE
|
The
Company provides billing information to third party billing companies for the
majority of its monthly billings. Two billing channels account for
the majority of the Company’s accounts receivable. Billings submitted are
“filtered” by these billing companies and the LECs. Net accepted
billings are recognized as revenue and accounts receivable. The
billing companies remit payments to the Company on the basis of cash ultimately
received from the LECs by those billing companies. The billing
companies and LECs charge fees for their services, which are netted against
the
gross accounts receivable balance. The billing companies also apply
holdbacks to the remittances for potentially uncollectible
accounts. These amounts will vary due to numerous factors and the
Company may not be certain as to the actual amounts on any specific billing
submittal until several months after that submittal. The Company
estimates the amount of these charges and holdbacks based on historical
experience and subsequent information received from the billing
companies. The Company also estimates uncollectible account balances
and provides an allowance for such estimates. The billing companies
retain certain holdbacks that may not be collected by the Company for a period
extending beyond one year. These balances have been classified as
long-term assets in the accompanying consolidated balance sheet.
The
Company experiences significant dilution of its gross billings by the billing
companies. The Company negotiates collections with the billing
companies on the basis of the contracted terms and historical
experience. The Company’s cash flow may be affected by holdbacks,
fees, and other matters, which are determined by the LECs and the billing
companies.
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 31%, 23%,
and 16%, respectively, of the Company’s total net accounts receivable at
September 30, 2007.
Subscription
receivables that are directly billed by the Company are valued and reported
at
the estimated future collection amount. Determining the expected collections
requires an estimation of both uncollectible accounts and
refunds. The net direct-billed subscriptions receivable at September
30, 2007 and 2006, respectively, were $150,323 and $261,880.
Certain
receivables have been classified as long-term because issues arise whereby
the
billing companies withhold certain amounts that are repaid over a 12 to 18
month
period of time. . The breakdown of current and long-term receivables
and their respective allowances is in Note 5 above.
|
7.
|
INTANGIBLE
ASSETS
|
The
Company’s 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 and
amortized over their estimated useful lives.
In
connection with the Company’s acquisition of Telco, the Company was required to
provide an accelerated payment of license fees for the use of the URL
Yellow-page.net. The URL is recorded at its cost of $5,000,000, net
of accumulated amortization. The URL is amortized over the
twenty-year term of the licensing agreement.
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 capitalized 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.
The
following summarizes the estimated future amortization expense related to
intangible assets:
|
Years ended September 30,
|
||||
|
2008
|
$ |
1,698,721
|
||
|
2009
|
1,587,565
|
|||
|
2010
|
1,012,902
|
|||
|
2011
|
391,289
|
|||
|
2012
|
345,387
|
|||
|
Thereafter
|
2,336,283
|
|||
|
Total
|
$ |
7,372,147
|
||
Total
amortization expense related to intangible assets was $1,419,559, $1,187,635
and
$1,196,198 for the years ended September 30, 2007, 2006 and 2005.
The
Company most recently completed an impairment test in the fourth quarter of
fiscal 2007. No long-lived assets were impaired during the years
ended September 30, 2007, 2006, and 2005.
|
8.
|
STOCKHOLDERS’
EQUITY
|
Common
Stock Issued for
Services
The
Company historically has granted shares of its common stock to officers,
directors and consultants as payment for services rendered. The value of those
shares was determined based on the trading value of the stock at the date at
which the counterparties’ performance is complete. During the year
ended September 30, 2007, the Company issued 10,800 shares to a consulting
firm
valued at $78,840 as payment for amounts previously accrued. During the year
ended September 30, 2006, there were no shares granted to officers, directors
and consultants other than grants of restricted stock as described in Note
14. During the year ended September 30, 2005, the Company issued
10,000 shares to a consulting firm valued at $119,500 for services
rendered.
Series
E Convertible
Preferred Stock
During
the year ended September 30, 2002, pursuant to an existing tender offer, holders
of 13,184 shares of the Company’s common stock exchanged said shares for 131,840
shares of Series E Convertible Preferred Stock, at the then $0.85 market value
of the common stock. The shares carry a $0.30 per share liquidation
preference and accrue dividends at the rate of 5% per annum on the liquidation
preference per share, payable quarterly from legally available funds. If such
funds are not available, dividends shall continue to accumulate until they
can
be paid from legally available funds. Holders of the preferred shares
are entitled, after two years from issuance, to convert them into common shares
on a ten-to-one basis together with payment of $0.45 per converted
share.
Treasury
Stock
The
Company’s treasury stock consists of shares repurchased on the open market or
shares received through various agreements with third parties. The
value of such shares is determined based on cash paid or quoted market
prices. During fiscal 2004, all then-outstanding treasury shares,
valued at $216,000 were retired. On April 1, 2005, the Company
acquired 188,957 shares valued at $1,606,000 as partial settlement of amounts
due from affiliates. On May 18, 2005, the Company’s Board of
Directors authorized a plan to repurchase up to $3,000,000 of common stock
from
time to time on the open market or in privately negotiated
transactions. In fiscal 2006, the Company acquired 25,260 shares for
$134,000 and in fiscal 2005, the Company acquired 60,125 shares for $566,000
under this plan. In July 2006, the Company acquired 10,000 shares
valued at $101,000 in connection with the exercise of its option to acquire
the
URL www.yp.com as described in Note 7.
On
May
25, 2007, the Company’s Board of Directors terminated the May 18, 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.
Dividends
During
the years ended September 30, 2007, 2006 and 2005, the Company accrued dividends
of $2,396, $1,918, and $1,439, respectively, to holders of Series E preferred
stock.
|
9.
|
NET
(LOSS)/INCOME PER SHARE
|
Net
(loss)/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.
The
following table presents the computation of basic and diluted income (loss)
per
share:
|
Year Ended
September 30, 2007
|
Year Ended
September 30, 2006
|
Year Ended
September 30, 2005
|
||||||||||
|
Income
(loss) before cumulative effect of accounting change
|
$ |
1,753,918
|
$ | (1,050,920 | ) | $ |
625,298
|
|||||
|
Less:
preferred stock dividends
|
(2,396 | ) | (1,918 | ) | (1,439 | ) | ||||||
|
Income
(loss) applicable to common stock before cumulative effect of accounting
change
|
1,751,522
|
(1,052,838 | ) |
623,859
|
||||||||
|
Cumulative
effect of accounting change
|
-
|
-
|
99,848
|
|||||||||
|
Net
income (loss) applicable to common stock
|
$ |
1,751,522
|
$ | (1,052,838 | ) | $ |
723,707
|
|||||
|
Basic
weighted average common shares outstanding:
|
5,108,551
|
4,495,868
|
4,639,036
|
|||||||||
|
Add
incremental shares for:
|
||||||||||||
|
Unvested
restricted stock
|
222,359
|
-
|
18,647
|
|||||||||
|
Series
E convertible preferred stock
|
5,529
|
-
|
7,358
|
|||||||||
|
Outstanding
warrants
|
-
|
-
|
952
|
|||||||||
|
Diluted
weighted average common shares outstanding:
|
5,336,439
|
4,495,868
|
4,665,992
|
|||||||||
|
Net
income (loss) per share:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Income
(loss) applicable to common stock before cumulative effect of accounting
change
|
$ |
0.34
|
$ | (0.23 | ) | $ |
0.14
|
|||||
|
Cumulative
effect of accounting change
|
$ |
-
|
$ |
-
|
$ |
0.02
|
||||||
|
Net
income (loss) applicable to common stock
|
$ |
0.34
|
$ | (0.23 | ) | $ |
0.16
|
|||||
|
Diluted:
|
||||||||||||
|
Income
(loss) applicable to common stock before cumulative effect of accounting
change
|
$ |
0.33
|
$ | (0.23 | ) | $ |
0.14
|
|||||
|
Cumulative
effect of accounting change
|
$ |
-
|
$ |
-
|
$ |
0.02
|
||||||
|
Net
income (loss) applicable to common stock
|
$ |
0.33
|
$ | (0.23 | ) | $ |
0.16
|
|||||
The
following potentially dilutive securities were excluded from the calculation
of
net income (loss) per share because the effects are antidilutive:
|
September
30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Warrants
to purchase shares of common stock
|
-
|
-
|
43,750
|
|||||||||
|
Series
E convertible preferred stock
|
-
|
12,784
|
-
|
|||||||||
|
Shares
of non-vested restricted stock
|
63,406
|
371,858
|
161,404
|
|||||||||
|
63,406
|
384,642
|
205,154
|
||||||||||
|
10.
|
COMMITMENTS
AND CONTINGENCIES
|
The
Company leases its office space and certain equipment under long-term operating
leases expiring through fiscal year 2013. Rent expense under these
leases was $526,617, $340,827, and $365,121 for the years ended September
30,
2007, 2006 and 2005, respectively.
At
September 30, 2007, future minimum annual lease payments under operating lease
agreements for fiscal years ended September 30 are as follows:
|
2008
|
$ |
830,833
|
||
|
2009
|
800,639
|
|||
|
2010
|
509,923
|
|||
|
2011
|
407,523
|
|||
|
2012
|
314,789
|
|||
|
Thereafter
|
78,585
|
|||
| $ |
2,942,292
|
Change
in Officers and
Employment Agreement
Effective
June 6, 2007, the Company appointed Rajesh Navar, 39, President of the Company.
In connection with this appointment and the LiveDeal acquisition described
in
Note 4 above, the Company entered into a three-year employment agreement with
Mr. Navar. The agreement provides for a base salary of $300,000 per year plus
participation in the Company's health, disability and dental benefits, insurance
programs, pension and retirement plans, and all other employee benefit and
compensation arrangements available to other senior officers of the Company.
Commencing in the second year, Mr. Navar's annual salary will be increased
on an
annual basis at a rate of at least 10% of the preceding year's annual salary.
The Company will also reimburse Mr. Navar for all business expenses incurred
by
him in connection with his employment with the Company.
The
agreement also provides that, if Mr. Navar's employment is terminated as a
result of his death, disability, for Cause (as defined in the agreement), the
agreement otherwise expires, or for any reason other than Good Reason (as
defined in the agreement), Mr. Navar or his estate, conservator or designated
beneficiary, as the case may be, will be entitled to payment of any earned
but
unpaid annual salary for the year in which Mr. Navar's employment is terminated
through the date of termination, as well as any accrued but unused vacation,
reimbursement of expenses, and vested benefits to which Mr. Navar is entitled
in
accordance with the terms of each applicable benefit plan. In the event Mr.
Navar's employment is terminated for any other reason or if Mr. Navar terminates
his own employment for Good Reason on or before the expiration of the Agreement,
and provided that Mr. Navar executes a valid release of any and all claims
that
Mr. Navar may have relating to his employment against the Company, Mr. Navar
will be entitled to receive any earned but unpaid annual salary for the year,
any accrued but unused vacation, reimbursement of expenses and vested benefits
to which Mr. Navar is entitled in accordance with the terms of each applicable
benefit plan, plus a lump sum amount equal to three months of annual salary
that
Mr. Navar would receive under the agreement if his employment with the Company
had not been terminated.
In
addition, in the event Mr. Navar's employment is terminated as a result of
his
death, Mr. Navar's estate, conservator or designated beneficiary, as the case
may be, will be entitled to receive, in addition to Mr. Navar's accrued salary
and benefits through the date of death, a lump sum payment equivalent to three
months of Mr. Navar's annual salary in effect at the time of death.
On
June
6, 2007, the Company also entered into a Noncompetition, Nondisclosure, and
Nonsolicitation Agreement with Mr. Navar, which provides that Mr. Navar will
not: (i) disclose the Company's confidential information; (ii) compete with
the
Company until the third anniversary of the agreement or for one year after
his
employment or service to the Company is terminated (unless he is terminated
for
Cause or Good Reason), whichever is longer; (iii) solicit employees of the
Company until the second anniversary of the agreement or for one year after
his
employment or service to the Company is terminated, whichever is longer; and
(iv) solicit clients of the Company until the third anniversary of the agreement
or for one year after his employment or service to the Company is terminated
(unless he is terminated for Cause or Good Reason), whichever is
longer.
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, and results of operations, cash flows or
liquidity.
During
the second quarter of fiscal 2006, the Company settled outstanding litigation
with a former vendor, resulting in a cash payment of $490,000. As $328,000
of
the settlement was previously accrued, there was $162,000 of expense incurred
in
the year ended September 30, 2006 associated with this settlement. In connection
with this payment, the Company is no longer required to maintain our bond that
was previously reflected as restricted cash in the accompanying consolidated
balance sheet. Accordingly, the bond has been released and this amount has
been
reclassified from restricted cash to cash in the consolidated balance sheet
as
of September 30, 2006.
On
December 14, 2006, the Company voluntarily entered into a settlement with
thirty-four states’ Attorneys General to address their concerns over our
promotional activities, specifically the use of its check mailer for customer
acquisition. The main terms of this agreement were as
follows:
|
|
·
|
The
Company paid a settlement fee of $2,000,000 to the state consortium,
which
they distributed among themselves;
|
|
|
·
|
The
Company discontinued the use of activation checks as a promotional
incentive;
|
|
|
·
|
The
Company temporarily suspended billing of any active customer that
was
acquired in connection with the use of an activation check while
notifying
the customer of their legal rights to cancel the service and providing
them a 60-day opportunity to receive a refund equivalent to the customer’s
last two payments; and
|
|
|
·
|
The
Company agreed not to employ any collection efforts with respect
to
past-due accounts of customers that were secured through the use
of an
activation check.
|
The
Company has recorded a charge of $3,525,000 in other income and expense in
the
accompanying consolidated statement of operations for fiscal 2006, consisting
of
a settlement accrual of $2,000,000, a reserve for refunds to existing customers
covered by the 60 day opportunity mentioned above and other related costs of
$1,250,000 and legal fees of $275,000. Management analyzed the number
of customers eligible and applied probabilities to estimate the additional
$1,250,000 in refunds and costs. Customers had through February 2007
to apply for these refunds. In fiscal 2007, the Company reversed
excess accruals for legal fees and refunds totaling $200,718.
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 year totaling $145,000 and granted 10,000
shares of restricted stock. Under the terms of the agreement, the
Company is obligated to make future payments over the next year totaling $63,000
in exchange for future services. Future amounts payable under this
agreement have not been accrued in the accompanying financial statements as
such
payments are for future services.
During
the third 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, we are obligated to make
future payments through July 2009 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. Future amounts payable
under this agreement have not been accrued in the accompanying financial
statements as such payments are for future services.
|
11.
|
PROVISION
FOR INCOME TAXES
|
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes.
Income
taxes for years ended September 30, is summarized as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Current
provision
|
$ |
291,273
|
$ |
1,172,823
|
$ |
879,805
|
||||||
|
Deferred
(benefit) provision
|
1,564,402
|
(1,484,602 | ) | (507,768 | ) | |||||||
|
Net
income tax (benefit) provision
|
$ |
1,855,675
|
$ | (311,779 | ) | $ |
372,037
|
|||||
A
reconciliation of the differences between the effective and statutory income
tax
rates for years ended September 30, is as follows:
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||
|
Federal
statutory rates
|
$ |
1,227,262
|
34 | % | $ | (463,318 | ) | 34 | % | $ |
339,094
|
34 | % | |||||||||||
|
State
income taxes
|
121,282
|
3 | % | (45,787 | ) | 3 | % |
33,510
|
3 | % | ||||||||||||||
|
Write
off of deferred tax asset related to vested restricted
stock
|
499,885
|
14 | % |
217,131
|
(16 | )% |
-
|
0 | % | |||||||||||||||
|
Other
|
7,246
|
0 | % | (19,805 | ) | 1 | % | (567 | ) | (0 | )% | |||||||||||||
|
Effective
rate
|
$ |
1,855,675
|
51 | % | $ | (311,779 | ) | 22 | % | $ |
372,037
|
37 | % | |||||||||||
At
September 30, deferred income tax assets and liabilities were comprised
of:
|
2007
|
2006
|
|||||||
|
Deferred
income tax assets:
|
||||||||
|
Book
to tax differences in accounts receivable
|
$ |
546,145
|
$ |
1,314,721
|
||||
|
Net
operating loss carryforwards
|
3,545,618
|
|||||||
|
Book
to tax differences in accrued expenses
|
-
|
467,065
|
||||||
|
Book
to tax differences for stock based compensation
|
951,246
|
1,280,007
|
||||||
|
Book
to tax differences in intangible assets
|
121,613
|
121,613
|
||||||
|
Total
deferred income tax asset
|
5,164,622
|
3,183,406
|
||||||
|
Deferred
income tax liabilities:
|
||||||||
|
Book
to tax differences in depreciation
|
66,833
|
66,883
|
||||||
|
Total
deferred income tax liability
|
66,833
|
66,883
|
||||||
|
Net
deferred income tax asset (liability)
|
$ |
5,097,789
|
$ |
3,116,523
|
||||
|
12.
|
RELATED
PARTY TRANSACTIONS
|
Changes
in Officers and
Directors
On
November 3, 2005, the Company entered into a Separation Agreement with its
former 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 provided for the continued vesting of 70,000 shares of the
Chief Executive Officer’s restricted stock awards that were granted in fiscal
2004 and 2005.
On
January 19, 2006, the Company entered into a Separation Agreement & General
Release with its former 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 provided for the
continued vesting of the Chief Financial Officers’ restricted stock awards
(totaling 15,000 shares) that were granted in fiscal 2004 and 2005.
On
September 19, 2006, the Company entered into an employment agreement with Daniel
L. Coury, Sr., which calls for Mr. Coury to serve as the Chief Executive Officer
and President of the Company. Mr. Coury had acted as interim Chief Executive
Officer since January 25, 2006. As permanent Chief Executive Officer and
President, Mr. Coury receives a salary of $420,000, plus 10% annual salary
increases, beginning with the Company’s fiscal year ending September 30, 2008;
an annual bonus of $150,000, provided the Company obtains certain performance
measures as established by the Company’s Board of Directors; a one-time bonus of
$150,000 if and when the common stock of the Company is listed on a national
exchange; and a grant of 100,000 shares of restricted stock of the Company
(“Restricted Shares”), which vest upon the earlier to occur of three years or a
“change of control” (as defined in the Company’s 2003 Stock Plan); provided,
however, that Mr. Coury is obligated to return one-third of the Restricted
Shares at the end of each fiscal year unless certain performance targets are
reached for that fiscal year.
Additionally,
in the event that Mr. Coury terminates his employment for “good reason” or the
Company terminates his employment other than for “Cause” or on account of his
death or “disability,” as each of those terms is defined in the employment
agreement, Mr. Coury will receive 12 months of continuing salary, and all
restricted stock granted to the employee prior to the employment agreement
and
the portion of the Restricted Shares that remain unvested and for which the
annual risk of forfeiture has lapsed due to annual performance targets being
achieved will be immediately accelerated.
On
September 19, 2006, the Company also amended the employment agreements of Gary
Perschbacher, the Company’s Chief Financial Officer, and John Raven, the
Company’s Chief Operating Officer. Mr. Perschbacher’s amended employment
agreement provides for an extension of the term until September 20, 2009; 10%
annual salary increases, beginning with the Company’s fiscal year ending
September 30, 2008; and a grant of 10,000 shares of restricted stock of the
Company pursuant to the Company’s 2003 Stock Plan. Mr. Raven’s amended
employment agreement provides for an extension of the term until September
20,
2009; an annual salary of $220,000, plus 10% annual salary increases, beginning
with the Company’s fiscal year ending September 30, 2008; a $25,000 cash bonus
upon execution of the employment agreement; and a grant of 2,500 shares of
restricted stock of the Company pursuant to the Company’s 2003 Stock
Plan.
On
September 19, 2006, the Company also granted to Joseph Cunningham, a member
of
the Company’s Board of Directors, 10,000 shares of restricted stock of the
Company in connection with his appointment to serve as Chairman of the Board
of
Directors and Chairman of the Company’s Audit Committee. Mr. Cunningham will
receive an aggregate of $6,000 per month in lieu of all other director
compensation for his service as Chairman of the Board and Chairman of the Audit
Committee.
|
13.
|
CONCENTRATION
OF CREDIT RISK
|
The
Company maintains cash balances at banks in Arizona and
Nevada. Accounts are insured by the Federal Deposit Insurance
Corporation up to $100,000
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 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 Company is dependent upon
these billing companies for collection of its accounts
receivable. The net receivable due from such billing services
providers represented 31%, 23% and 16%, respectively, of the Company’s total net
accounts receivable at September 30, 2007.
|
14.
|
STOCK-BASED
COMPENSATION
|
During
the year ended September 30, 2003, the Company’s board of directors and a
majority of it stockholders voted to terminate the Company’s 2002 Employees,
Officers & Directors Stock Option Plan and approved the Company’s 2003 Stock
Plan. The 300,000 shares of Company common stock previously allocated
to the 2002 Plan were re-allocated to the 2003 Plan. During the year
ended September 30, 2004, an additional 200,000 shares were authorized by the
board of directors and approved by the Company’s stockholders to be issued under
the 2003 Plan. All Company personnel and contractors are eligible to
participate in the plan.
As
of
September 30, 2007, 586,757 shares authorized under the 2003 Plan were granted
and remain outstanding, of which 144,850 have vested and 441,907 are in the
form
of restricted stock. These shares of restricted stock were granted to
the Company’s service providers, executives and directors. Of the
441,907, 35,541 shares vest on a cliff basis 1 year from the date of grant,
344,791 shares vest on a cliff basis 3 years from the date of grant, 33,750
vest
on a cliff basis 5 years from the date of grant, and 27,825 vest on a cliff
basis 10 years from the date of grant. Certain market performance
criteria may accelerate the vesting of a portion of these awards if the stock
price exceeds $50 per share. As of September 30, 2007, total
unrecognized compensation cost related to nonvested awards was
$1,708,057. The weighted average period over which such compensation
cost is to be recognized is 2.16 years.
The
following table sets forth the activity with respect to compensation-related
restricted stock grants:
|
Outstanding
(unvested) at September 30, 2004
|
446,260
|
|||
|
Granted
|
88,572
|
|||
|
Forfeited
|
(51,650 | ) | ||
|
Vested
|
-
|
|||
|
Outstanding
(unvested) at September 30, 2005
|
483,182
|
|||
|
Granted
|
239,650
|
|||
|
Forfeited
|
(86,000 | ) | ||
|
Vested
|
(101,225 | ) | ||
|
Outstanding
(unvested) at September 30, 2006
|
535,607
|
|||
|
Granted
|
78,500
|
|||
|
Forfeited
|
(28,575 | ) | ||
|
Vested
|
(143,625 | ) | ||
|
Outstanding
(unvested) at September 30, 2007
|
441,907
|
The
vesting of substantially all shares of restricted stock accelerates upon a
change of control, as defined in the 2003 Plan. Compensation expense
is determined at the date of grant, is equal to the stock price at the date
of
grant, and is deferred and recognized on a straight-line basis over the vesting
period. The weighted-average grant-date fair value of the shares outstanding
is
$1.34 per share.
During
the years ended September 30, 2007, 2006, and 2005, the Company recognized
compensation expense of $1,480,632, $1,599,363, and $2,012,841, respectively,
under the 2003 Plan and other restricted stock issuances.
At
September 30, 2007, there were no options exercisable or
outstanding. No options were granted in the years ended September 30,
2007, 2006 and 2005.
The
Company has issued warrants in connection with certain debt and equity
transactions. Warrants outstanding are summarized as
follows:
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Number of
|
Weighted Average
|
Number of
|
Weighted Average
|
Number of
|
Weighted Average
|
|||||||||||||||||||
|
Warrants
|
Exercise Price
|
Warrants
|
Exercise Price
|
Warrants
|
Exercise Price
|
|||||||||||||||||||
|
Warrants
outstanding at beginning of year
|
-
|
$ |
-
|
500,000
|
$ |
2.12
|
500,000
|
$ |
2.12
|
|||||||||||||||
|
Granted
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Expired
|
-
|
-
|
(500,000 | ) |
2.12
|
-
|
-
|
|||||||||||||||||
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Warrants
outstanding at September 30,
|
-
|
$ |
-
|
-
|
$ |
-
|
500,000
|
$ |
2.12
|
|||||||||||||||
The
warrants were granted in the year ended September 30, 2001 in connection with
the settlement with the former URL holder (See Note 7). The exercise
prices of the warrants range from $1.00 to $3.00. The fair value of
these options at the date of grant was negligible, estimated using the
Black-Scholes option-pricing model. All warrants had expired by September
2006.
|
15.
|
EMPLOYEE
BENEFIT PLAN
|
The
Company maintains a 401(k) profit sharing plan for its employees and service
providers who are eligible to participate in the plan upon reaching age 21
and
completion of three months of service. The Company made
contributions of $34,159, $8,105 and $7,000 to the plan for the years ended
September 30, 2007, 2006, and 2005, respectively.
|
16.
|
OTHER
INCOME (EXPENSE)
|
There
were no significant items in other income (expense) in the year ended September
30, 2007. In addition to interest income and interest expense, other income
(expense) includes the following items:
Year
ended September 30,
2006
|
|
a.
|
A
loss of $3,525,000 consisting of a settlement accrual of $2,000,000,
a
reserve for refunds of $1,250,000 and legal fees of $275,000 related
to
the attorneys general settlement described in Note 10;
and
|
|
|
b.
|
A
loss of $162,000 consisting of an additional accrual for the settlement
of
a matter with a former public relations
vendor;
|
Year
ended September 30,
2005
|
|
·
|
A
loss of $282,000 from a Transfer and Repayment Agreement with two
of the
Company’s shareholders, equal to the difference between the carrying value
of Advances to Affiliates and the value of the consideration
received;
|
|
17.
|
SEGMENT
REPORTING
|
The
Company operates one reportable segment – online marketplace and Yellow Page
services.
At
September 30, 2007, the Company’s long-lived assets included property and
equipment with a net book value of $205,743 that reside in the
Philippines. All other long-lived assets reside in the United
States.
|
18.
|
SELECTED
QUARTERLY FINANCIAL DATA
(UNAUDITED)
|
Quarterly
financial information for 2007 and 2006 follows:
|
Quarter
Ended
|
||||||||||||||||
|
December
31,
|
March
31,
|
June
30,
|
September
30,
|
|||||||||||||
|
2006
|
2007
|
2007
|
2007
|
|||||||||||||
|
Net
revenues
|
$ |
7,123,683
|
$ |
6,106,544
|
$ |
5,989,437
|
$ |
7,120,697
|
||||||||
|
Gross
profit
|
6,012,813
|
5,148,835
|
5,113,544
|
5,860,893
|
||||||||||||
|
Net
income
|
485,198
|
626,262
|
266,405
|
376,053
|
||||||||||||
|
Earnings
per share information:
|
||||||||||||||||
|
Basic
income per share
|
$ |
0.11
|
$ |
0.14
|
$ |
0.05
|
$ |
0.06
|
||||||||
|
Diluted
income per share
|
$ |
0.11
|
$ |
0.13
|
$ |
0.05
|
$ |
0.06
|
||||||||
|
Quarter Ended
|
||||||||||||||||
|
December 31,
|
March 31,
|
June 30,
|
September 30,
|
|||||||||||||
|
2005
|
2006
|
2006
|
2006
|
|||||||||||||
|
Net
revenues
|
$ |
7,047,401
|
$ |
7,997,623
|
$ |
8,577,639
|
$ |
8,335,284
|
||||||||
|
Gross
profit
|
6,510,430
|
7,213,184
|
7,506,947
|
6,697,106
|
||||||||||||
|
Net
income (loss)
|
(327,092 | ) |
129,998
|
826,847
|
(1,680,673 | ) | ||||||||||
|
Earnings
(loss) per share information:
|
||||||||||||||||
|
Basic
income (loss) per share
|
$ | (0.07 | ) | $ |
0.03
|
$ |
0.19
|
$ | (0.37 | ) | ||||||
|
Diluted
income (loss) per share
|
$ | (0.07 | ) | $ |
0.03
|
$ |
0.18
|
$ | (0.37 | ) | ||||||
|
19.
|
RESTATEMENTS
|
During
2007, the company revisited its consolidated financial statement presentation.
As such, it has determined it is preferable to make changes to certain
classifications within its financial statements. These changes are summarized
as
follows:
Balance
Sheet
|
|
·
|
Certain
investment accounts totaling $815,785 have been reclassified from
cash and
cash equivalent to
certificates of deposit and other investments based on the maturity
dates
of the underlying investments
|
|
|
·
|
Accrued
refunds and fees of $1,250,000 relating to the Attorneys’ General
settlement described in Note 10 have been reclassified from accounts
receivable, net to accrued liabilities in the accompanying consolidated
balance sheet as of September 30,
2006.
|
|
|
·
|
Certain
miscellaneous receivables totaling $23,819 at September 30, 2006
were
reclassified from prepaid expenses and other current assets to accounts
receivable, net in the accompanying consolidated balance
sheet.
|
Statement
of Operations
|
|
·
|
Dilution
and charge backs have
been reclassified from cost of services to a reduction in net revenues
in
the consolidated statement of
operations.
|
|
|
·
|
Monitoring
fees related to our
LEC billing channel have been reclassified from general and administrative
expenses to cost of
services.
|
|
|
·
|
Depreciation
and amortization
expenses that were previously separately stated are now included
in
general and administrative expenses in the consolidated statement of
operations.
|
|
|
·
|
Litigation
and related expenses
that were previously included in other income and expense are now
separately stated as a component of operating expenses in the consolidated
statement of
operations.
|
The
following tables set forth the impact of these restatements on the Company’s
statements of operations and balance sheet:
|
Balance
Sheet
|
September
30,
2006
|
|||||||||||
|
As
Originally
Reported
|
As
Adjusted
|
Effect
of change
|
||||||||||
|
Cash
and cash equivalents
|
$ |
7,210,560
|
$ |
6,394,775
|
$ |
(815,785
|
) | |||||
|
Certificates
of deposit and other investments
|
$ |
2,266,268
|
$ |
3,082,053
|
$ | 815,785 | ||||||
|
Accounts
receivable, net (current)
|
$ |
6,741,781
|
$ |
8,015,600
|
$ |
1,273,819
|
||||||
|
Prepaid
expenses and other current assets
|
$ |
259,069
|
$ |
235,250
|
$ | (23,819 | ) | |||||
|
Accrued
expenses
|
$ |
3,315,439
|
$ |
4,565,439
|
$ |
1,250,000
|
||||||
|
Income
Statement
|
Year
Ended September 30,
2006
|
|||||||||||
|
As
Originally
Reported
|
As
Adjusted
|
Effect
of change
|
||||||||||
|
Net
revenues
|
$ |
36,881,164
|
$ |
31,957,947
|
$ | (4,923,217 | ) | |||||
|
Cost
of services
|
$ |
8,069,239
|
$ |
4,030,280
|
$ | (4,038,959 | ) | |||||
|
Gross
profit
|
$ |
28,811,925
|
$ |
27,927,667
|
$ | (884,258 | ) | |||||
|
Gross
profit (as a percentage of net revenues)
|
78 | % | 87 | % | 9 | % | ||||||
|
Operating
expenses
|
$ |
26,687,475
|
$ |
29,490,024
|
$ |
2,802,549
|
||||||
|
Other
income (expense)
|
$ | (3,487,149 | ) | $ |
199,658
|
$ |
3,686,807
|
|||||
|
Net
income (loss)
|
$ | (1,050,920 | ) | $ | (1,050,920 | ) | $ |
-
|
||||
|
Year
Ended September 30,
2005
|
||||||||||||
|
As
Originally
Reported
|
As
Adjusted
|
Effect
of change
|
||||||||||
|
Net
revenues
|
$ |
25,204,858
|
$ |
24,361,995
|
$ | (842,863 | ) | |||||
|
Cost
of services
|
$ |
3,980,619
|
$ |
3,137,756
|
$ | (842,863 | ) | |||||
|
Gross
profit
|
$ |
21,224,239
|
$ |
21,224,239
|
$ |
-
|
||||||
|
Gross
profit (as a percentage of net revenues)
|
84 | % | 87 | % | 3 | % | ||||||
|
Operating
expenses
|
$ |
19,910,850
|
$ |
20,238,983
|
$ |
328,133
|
||||||
|
Other
income (expense)
|
$ | (316,054 | ) | $ |
12,079
|
$ |
328,133
|
|||||
|
Net
income (loss)
|
$ |
725,146
|
$ |
725,146
|
$ |
-
|
||||||
ITEM
9. Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosures
None.
ITEM
9A. Controls and
Procedures
Evaluation
of Disclosure 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 Annual Report on Form
10-K, is
recorded, processed, summarized, and reported within the time periods specified
by the Securities and Exchange Commission. Disclosure controls also
are 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 chief executive officer and
chief
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 Annual 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 initial review and evaluation as of September 30, 2007 (the “Evaluation
Date”), and subject to the inherent limitations described above, our principal
executive officer and principal financial officer 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) were effective as of the Evaluation
Date. Subsequent to the Evaluation Date, however, Mayer Hoffman
McCann P.C. advised our principal executive officer and principal financial
officer that it had identified a material weakness in our internal control
over
financial reporting as of the Evaluation Date, related to our computation
of the
weighted average number of shares of our common stock that were outstanding
for
the period covered by this Form 10-K. Because of the existence of
this weakness, our principal executive officer and principal financial
officer
have concluded that our disclosure controls and procedures were not effective
as
of the Evaluation Date.
Changes
in Internal
Controls
As
of
December 19, 2007, we believe we have addressed the material weakness in
our
internal controls over financial reporting described above. Because
the material weakness was a result of a formula linkage and other errors
in the
spreadsheet that we used to calculate the weighted average number of common
shares outstanding, an additional financial professional has been assigned
to
review the spreadsheet to ensure all formulae in the spreadsheets are properly
linked and that the shares listed in the spreadsheet tie to our stock
databases. Additionally, the finance department will provide a table
to the principal financial officer providing weighted average number
of shares sequentially by quarter as a reasonableness test. The
Company plans to further enhance these controls by acquiring automated
equity
management and administrative software to manage the complexities of equity
management and reporting.
Other
than the change described in the foregoing paragraph, our principal executive
officer and principal financial officer 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-K, there have
not been any other changes in our internal controls over financial reporting
that have materially affected, or that are reasonably likely to materially
affect, our internal control over financial
reporting.
ITEM
9B. Other
Information
None.
PART
III
Certain
information required by Part III is omitted from this Annual Report on Form
10-K
because we will file our definitive Proxy Statement for our 2008 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A of the Exchange Act
(the
“2008 Proxy Statement”) not later than 120 days after the end of the fiscal year
covered by this Annual Report. Certain information included in the 2008 Proxy
Statement is incorporated herein by reference.
|
ITEM
10.
|
Directors,
Executive Officers
and Corporate Governance
|
The
information required by this Item will be disclosed in our 2008 Proxy Statement
and is incorporated herein by reference.
The
Company has adopted a Code of Ethics that applies to its officers, directors
and
employees.
|
ITEM
11.
|
Executive
Compensation
|
Information
regarding director and executive compensation will be set forth in our 2008
Proxy Statement and is incorporated herein by reference.
|
ITEM
12.
|
Security
Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
|
Information
regarding security ownership of certain beneficial owners and management will
be
set forth in our 2008 Proxy Statement and is incorporated herein by
reference.
|
ITEM
13.
|
Certain
Relationships and
Related Transactions, and Director
Independence
|
The
information required by this Item will be disclosed in our 2008 Proxy Statement
and is incorporated herein by reference.
|
ITEM
14.
|
Principal
Accountant Fees and
Services
|
The
information required by this Item will be disclosed in our 2008 Proxy Statement
and is incorporated herein by reference.
PART
IV
|
ITEM
15.
|
Exhibits
and Financial
Statement Schedule
|
|
(1)
|
Financial
Statements are listed on the Index to Consolidated Financial Statements
on
page 40 of this Annual Report.
|
|
(2)
|
The
following represents financial statement schedules required to be
filed
with this Annual Report:
|
SCHEDULE
II – VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES
REPORT
OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ON SCHEDULE
To
the
Stockholders and Board of Directors
LIVEDEAL,
INC. AND
SUBSIDIARIES
We
have
audited the consolidated financial statements of LiveDeal,
Inc.
and Subsidiariesas of September 30, 2007 and for the year
then ended and have issued our report thereon dated December 18,
2007. Our audit was conducted for the purpose of forming an opinion
on the basic consolidated financial statements taken as a whole. The
information included in the accompanying Schedule II–Valuation and Qualifying
Accounts is presented for purposes of complying with the Securities and Exchange
Commission’s rules and is not a required part of the basic consolidated
financial statements. Such information for the year ended September
30, 2007 has been subjected to the auditing procedures applied in the audit
of
the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
/s/
Mayer Hoffman McCann
P.C.
Phoenix,
Arizona
December
18, 2007
|
Description
|
Balance at
Beginning
of
Period
|
Charged to
Costs
and
Expenses
|
Charged to
Other
Accounts
|
Deductions/
Writeoffs
|
Balance at
End
of
Period
|
|||||||||||||||
|
Allowance
for dilution and
fees on amounts due from billing aggregators
|
||||||||||||||||||||
|
Year
ended September 30, 2005
|
$ |
3,400,575
|
$ |
4,405,481
|
$ |
|
$ | (6,883,056 | ) | $ |
923,000
|
|||||||||
|
Year
ended September 30, 2006
|
$ |
923,000
|
$ |
5,274,762
|
$ |
|
$ | (3,732,339 | ) | $ |
2,465,423
|
|||||||||
|
Year
ended September 30, 2007
|
$ |
2,465,423
|
$ |
5,183,515
|
$ |
|
$ | (5,760,208 | ) | $ |
1,888,730
|
|||||||||
|
Allowance
for customer
refunds
|
||||||||||||||||||||
|
Year
ended September 30, 2005
|
$ |
269,662
|
$ |
4,177,741
|
$ |
|
$ | (4,149,403 | ) | $ |
298,000
|
|||||||||
|
Year
ended September 30, 2006
|
$ |
298,000
|
$ |
2,307,141
|
$ |
|
$ | (1,801,615 | ) | $ |
803,526
|
|||||||||
|
Year
ended September 30, 2007
|
$ |
803,526
|
$ |
2,281,995
|
$ |
|
$ | (2,512,453 | ) | $ |
573,068
|
|||||||||
(3) The
following exhibits are filed with or incorporated by reference into this Annual
Report.
|
Exhibit
Number
|
Description
|
Previously
Filed as Exhibit
|
File
Number
|
Date
Previously Filed
|
|||
|
2.1
|
Agreement
and Plan of Merger dated June 6, 2007, relating to the Registrant’s merger
with LiveDeal, Inc.
|
Exhibit
2.1 to the Registrant’s Current Report on Form 8-K filed on June 6,
2007
|
000-24217
|
6/6/07
|
|||
|
3.1
|
Amended
and Restated Articles of Incorporation
|
Exhibit
3.1 to the Registrant’s Current Report on Form 8-K filed on August 15,
2007
|
000-24217
|
8/15/07
|
|||
|
3.2
|
Amended
and Restated Bylaws
|
Attached
hereto
|
|||||
|
10.1
|
LiveDeal,
Inc. Amended and Restated 2003 Stock Plan*
|
Attached
hereto
|
|||||
|
10.2
|
Form
of 2003 Stock Plan Restricted Stock Agreement*
|
Exhibit
10 to the Registrant’s Quarterly Report on Form 10-QSB for the fiscal
quarter ending March 31, 2005
|
000-24217
|
5/16/05
|
|||
|
10.3
|
Standard
Industrial/Commercial Multi-Tenant Lease for Mesa facility,
dated June 1,
1998, between the Registrant and Art Grandlich, d/b/a McKellips
Corporate
Square
|
Exhibit
10.5 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year
ended September 30, 1999
|
000-24217
|
9/19/00
|
|||
|
10.4
|
Amendment
No. 1 to Standard Industrial/Commercial Multi-Tenant Lease
for Mesa
facility, dated August 17, 1998, between the Registrant
and Arthur
Grandlich, d/b/a McKellips Corporate Square
|
Exhibit
10.4 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2006
|
000-24217
|
12/29/06
|
|||
|
10.4.1
|
Amendment
No. 2 to Standard Industrial/Commercial Multi-Tenant Lease
for Mesa
facility, dated January 7, 2003, between the Registrant and
Arthur
Grandlich, d/b/a McKellips Corporate Square
|
Exhibit
10.14 to Amendment No. 2 to the Registrant’s Annual Report on Form
10-KSB/A for the fiscal year ended September 30, 2002
|
000-24217
|
7/8/03
|
|||
|
10.4.2
|
Amendment
No. 3 to Standard Industrial/Commercial Multi-Tenant Lease
for Mesa
facility, dated March 23, 2006, between the Registrant and J3 Harmon,
LLC, successor in interest to The Estate of Arthur
Grandlich
|
Exhibit
10.4.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2006
|
000-24217
|
12/29/06
|
|||
|
10.4.3
|
Amendment
No. 4 to Standard Industrial/Commercial Multi-Tenant Lease
for Mesa
facility, dated April 12, 2006, between the Registrant and J3 Harmon,
LLC, successor in interest to The Estate of Arthur
Grandlich
|
Exhibit
10.4.3 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2006
|
000-24217
|
12/29/06
|
|
10.5
|
Standard
Industrial Lease for Nevada facility, dated September 3,
2003, between the
Registrant and Tomorrow 33 Convention, LP
|
Exhibit
10.4 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year
ended September 30, 2003
|
000-24217
|
12/31/03
|
|||
|
10.6
|
Amendment
No. 1 to Standard Industrial Lease for Nevada facility, dated
October 4,
2006, between the Registrant and Tomorrow 33 Convention,
LP
|
Exhibit
10.6 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2006
|
000-24217
|
12/29/06
|
|||
|
10.7
|
Loan
and Security Agreement, dated April 13, 2004, between the
Registrant and
Merrill Lynch Business Financial Services, Inc.
|
Exhibit
10.1 to Amendment No. 1 to the Registrant’s Quarterly Report on Form
10-QSB for the fiscal quarter ended June 30, 2004
|
000-24217
|
12/29/04
|
|||
|
10.9
|
Employment
Agreement, dated September 19, 2006, between the Registrant
and Daniel L.
Coury, Sr.*
|
Exhibit
10.9 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2006
|
000-24217
|
12/29/06
|
|||
|
10.10
|
Employment
Agreement, dated September 19, 2006, between the Registrant
and Gary L.
Perschbacher*
|
Exhibit
10.10 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2006
|
000-24217
|
12/29/06
|
|||
|
10.11
|
Wholesale
Fulfillment Agreement, dated March 1, 2005, between Registrant
and
Fulfillment House and Company
|
Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed on May 4,
2006
|
000-2417
|
5/4/06
|
|||
|
10.12
|
Separation
Agreement, dated November 3, 2005, between the Registrant
and Peter J.
Bergmann*
|
Exhibit
10.1 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ending December 31, 2005
|
000-24217
|
2/14/06
|
|||
|
10.13
|
Employment
Agreement, dated February 6, 2006, between the Registrant
and John
Raven*
|
Exhibit
10.1 to the Registrant’s Current Report on Form 8-K
|
000-24217
|
2/21/06
|
|||
|
10.13.1
|
First
Amendment to Employment Agreement, dated September 19, 2006,
between the
Registrant and John Raven*
|
Exhibit
10.13.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2006
|
000-24217
|
12/29/06
|
|||
|
10.14
|
Exclusive
Domain Name Licensing Agreement, dated July 8, 2003, between
the
Registrant and Onramp Access, Inc.
|
Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed on July 22,
2003
|
000-24217
|
7/22/03
|
|||
|
10.15
|
Stock
Repurchase and Domain Name Transfer Agreement, dated July
21, 2006,
between Registrant and Onramp Access, Inc.
|
Exhibit
10.15 to the Registrant’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2006
|
000-24217
|
12/29/06
|
|||
|
10.16
|
Processing
Agreement, dated August 26, 2003, between the Registrant
and Integrated
Payment Systems Inc., d/b/a First Data
|
Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed on October 24,
2003
|
000-24217
|
10/24/03
|
|
10.17
|
Master
Services Agreement, dated August 1, 2002, between the Registrant
and
eBillit, Inc.
|
Exhibit
10.24 to Amendment No. 1 to the Registrant’s Quarterly Report on Form
10-QSB/A for the fiscal quarter ended March 31, 2003
|
000-24217
|
7/8/03
|
|||
|
10.18
|
Billings
and Related Services Agreement, dated September 1, 2001,
between the
Registrant and ACI Communications, Inc.
|
Exhibit
10.33 to Amendment No. 2 to the Registrant’s Annual Report on Form
10-KSB/A for the fiscal year ended September 30, 2002
|
000-24217
|
7/8/03
|
|||
|
10.19
|
Escrow
Agreement dated June 6, 2007, relating to the Registrant’s merger with
LiveDeal, Inc.
|
Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed on June 6,
2007
|
000-24217
|
6/6/07
|
|||
|
10.20
|
Employment
Agreement dated June 6, 2007, by and between the Registrant
and Rajesh
Navar*
|
Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed on June 6,
2007
|
000-24217
|
6/6/07
|
|||
|
10.21
|
Noncompetition,
Nondisclosure and Nonsolicitation Agreement dated June 6,
2007, by and
between the Registrant and Rajesh Navar*
|
Exhibit
10.3 to the Registrant’s Current Report on Form 8-K filed on June 6,
2007
|
000-24217
|
6/6/07
|
|||
|
10.22
|
Asset
Purchase Agreement dated as of July 10, 2007, relating to
the Registrant’s
acquisition of the assets of Oncall Subscriber Management
Inc.
|
Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed on July 16,
2007
|
000-24217
|
7/16/07
|
|||
|
10.23
|
Escrow
Agreement dated as of July 10, 2007, relating to the Registrant’s
acquisition of the assets of Oncall Subscriber Management
Inc.
|
Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed on July 16,
2007
|
000-24217
|
7/16/07
|
|||
|
14
|
Code
of Business Conduct and Ethics, Adopted December 31, 2003
|
Exhibit
14 to the Registrant’s Quarterly Report on Form 10-QSB for the period
ended March 31, 2004
|
000-24217
|
5/13/04
|
|||
|
21
|
Company
Subsidiaries
|
Attached
hereto
|
|||||
|
Consent
of Mayer Hoffman McCann P.C.
|
Attached
hereto
|
||||||
| Consent of Epstein Weber and Conover | Attached hereto | ||||||
|
Certifications
pursuant to SEC Release No. 33-8238, as adopted pursuant
to Section 302 of
the Sarbanes-Oxley Act of 2002
|
Attached
hereto
|
||||||
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of
the Sarbanes-Oxley Act of 2002
|
Attached
hereto
|
*
Management contract or compensatory plan or arrangement
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
Dated: December
20, 2007
|
/s/Daniel
L. Coury,
Sr.
|
|
Daniel
L. Coury, Sr.
|
|
|
Chief
Executive Officer
|
BOARD
OF
DIRECTORS
|
Signature
|
Title
|
Date
|
||
|
/s/
Daniel L. Coury,
Sr.
|
Chief
Executive Officer (Principal Executive
|
December
20, 2007
|
||
|
Daniel
L. Coury, Sr.
|
Officer) | |||
|
/s/
Gary L.
Perschbacher
|
Chief
Financial Officer (Principal Financial
|
December
20, 2007
|
||
|
Gary
L. Perschbacher
|
Officer and Principal Accounting Officer) | |||
|
/s/
Richard D.
Butler.
|
Director
|
December
20, 2007
|
||
|
Richard
D. Butler
|
||||
|
/s/
Thomas Clarke,
Jr.
|
Director
|
December
20, 2007
|
||
|
Thomas
Clark, Jr
|
||||
|
/s/
Joseph F. Cunningham,
Jr.
|
Chairman
of the Board
|
December
20, 2007
|
||
|
Joseph
F. Cunningham, Jr.
|
||||
|
/s/
John
Evans.
|
Director
|
December
20, 2007
|
||
|
John
Evans
|
||||
|
/s/
Benjamin
Milk.
|
Director
|
December
20, 2007
|
||
| Benjamin Milk | ||||
|
|
||||
|
/s/
Rajesh
Navar
|
President
and Director
|
December
20, 2007
|
||
|
Rajesh
Navar
|
68