Live Ventures (LIVE) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.20549

FORM 10-Q

(Mark One)

x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

¨           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _______________

Commission File Number 001-33937

LiveDeal, Inc.

(Exact name of registrant as specified in its charter)

Nevada (State or other jurisdiction of incorporation or organization)	85-0206668 (IRS Employer Identification No.)
2490 East Sunset Road, Suite 100 Las Vegas, Nevada (Address of principal executive offices)	89120 (Zip Code)

 (702) 939-0230

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes o  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filero	Accelerated filer o
Non-accelerated filero   (do not check if a smaller reporting company)	Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o  No  þ

The number of shares of the issuer’s common stock, par value $.001 per share, outstanding as of August 1, 2010 was 6,053,917.

 

INDEX TO FORM 10-Q FILING

FOR THE QUARTER ENDED JUNE 30, 2010

TABLE OF CONTENTS

	Page
PART I
FINANCIAL INFORMATION
Item 1.   Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and September 30, 2009	3
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2010and2009	4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2010and2009	5
Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 4.   Controls and Procedures	23
PART II
OTHER INFORMATION
Item 1.  Legal Proceedings	24
Item 1A.   Risk Factors	25
Item 6.   Exhibits	25
Signatures	26

 

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LIVEDEAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			September 30,
	2010			2009
	(unaudited)
Assets
Cash and cash equivalents	$	4,144,198		$	7,568,030
Certificates of deposit		300,000			100,000
Accounts receivable, net		1,168,239			1,478,183
Prepaid expenses and other current assets		348,364			326,442
Income taxes receivable		-			1,490,835
Total current assets		5,960,801			10,963,490
Accounts receivable, long term portion, net		419,823			1,039,403
Property and equipment, net		453,137			615,906
Deposits and other assets		71,377			81,212
Intangible assets, net		2,094,205			2,336,714
Total assets	$	8,999,343		$	15,036,725
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable	$	372,943		$	549,681
Accrued liabilities		809,778			1,092,811
Current portion of capital lease obligation		60,549			69,612
Total current liabilities		1,243,270			1,712,104
Long term portion of capital lease obligation		53,131			117,073
Total liabilities		1,296,401			1,829,177
Commitments and contingencies
Stockholders' equity:
Series E convertible preferred stock, $0.001 par value, 200,000 shares authorized, 127,840 issued and outstanding, liquidation preference $38,202		10,866			10,866
Common stock, $0.001 par value, 100,000,000 shares authorized, 6,096,433 and 6,133,433 shares issued, 6,053,917 and 6,104,327 shares outstanding at June 30, 2010 and September 30, 2009, respectively		6,096			6,133
Treasury stock (42,515 and 29,106 shares carried at cost at June 30, 2010 and September 30, 2009, respectively)		(70,923	)		(45,041	)
Paid in capital		20,442,237			20,280,377
Accumulated deficit		(12,685,334	)		(7,044,787	)
Total stockholders' equity		7,702,942			13,207,548
Total liabilities and stockholders' equity	$	8,999,343		$	15,036,725

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

LIVEDEAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended June 30,						Nine Months Ended June 30,
	2010			2009			2010			2009
Net revenues	$	1,651,107		$	2,448,569		$	6,294,207		$	11,006,358
Cost of services		636,358			812,321			2,487,510			3,879,853
Gross profit		1,014,749			1,636,248			3,806,697			7,126,505
Operating expenses:
General and administrative expenses		2,357,797			3,812,983			9,457,739			12,126,364
Impairment of goodwill		-			-			-			4,350,042
Impairment of intangible assets		-			-			-			3,516,068
Sales and marketing expenses		1,826			130,627			262,937			2,416,012
Total operating expenses		2,359,623			3,943,610			9,720,676			22,408,486
Operating loss		(1,344,874	)		(2,307,362	)		(5,913,979	)		(15,281,981	)
Other income (expense):
Interest income, net		3,273			7,487			13,791			27,406
Other income (expense)		1,667			77,786			28,974			7,341,784
Total other income (expense)		4,940			85,273			42,765			7,369,190
Loss before income taxes		(1,339,934	)		(2,222,089	)		(5,871,214	)		(7,912,791	)
Income tax provision (benefit)		-			(105,117	)		(231,026	)		7,138,170
Loss from continuing operations		(1,339,934	)		(2,116,972	)		(5,640,188	)		(15,050,961	)
Discontinued operations
Income (loss) from discontinued component, including disposal costs		-			7,422			1,725			(8,393,384	)
Income tax provision (benefit)		-			2,773			644			(3,135,769	)
Income (loss) from discontinued operations		-			4,649			1,081			(5,257,615	)
Net loss	$	(1,339,934	)	$	(2,112,323	)	$	(5,639,107	)	$	(20,308,576	)
Earnings per share - basic and diluted1:
Loss from continuing operations	$	(0.22	)	$	(0.35	)	$	(0.94	)	$	(2.51	)
Discontinued operations		-			-			-			(0.88	)
Net loss	$	(0.22	)	$	(0.35	)	$	(0.94	)	$	(3.38	)
Weighted average common shares outstanding:
Basic		5,999,118			5,999,268			5,997,014			6,006,770
Diluted		5,999,118			5,999,268			5,997,014			6,006,770

1 Certain amounts may not total due to rounding of individual components.

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

LIVEDEAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months ended
	June 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,639,107	)	$	(20,308,576	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		658,957			2,088,425
Non-cash stock compensation expense		22,739			69,186
Amortization of deferred stock compensation		139,082			(207,098	)
Deferred income taxes		-			4,541,475
Provision for uncollectible accounts		698,138			1,023,211
Non-cash impairment of goodwill and intangibles		-			16,111,494
Gain on sale of customer list		-			(2,815,952	)
Gain on sale of internet domain name		-			(3,805,778	)
Gain on amendment of directory services contract		-			(642,268	)
Loss on disposal of property and equipment and intangible assets		27,647			37,943
Changes in assets and liabilities:
Accounts receivable		231,386			2,831,757
Prepaid expenses and other current assets		(21,922	)		104,057
Deposits and other assets		9,835			1,835
Accounts payable		(176,738	)		(442,825	)
Accrued liabilities		(283,033	)		170,619
Income taxes receivable and payable		1,490,835			(108,181	)
Net cash used in operating activities		(2,842,181	)		(1,350,676	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of internet domain name		-			3,850,000
Proceeds from sale of customer list		-			2,783,097
Proceeds from amendment of directory services contract		-			642,268
Proceeds from sale of property and equipment		4,999			-
Expenditures for intangible assets		(231,405	)		(626,119	)
Investment in certificate of deposits		(200,000	)		(100,000	)
Purchases of property and equipment		(54,921	)		(91,838	)
Net cash provided by (used in) investing activities		(481,327	)		6,457,408
CASH FLOWS FROM FINANCING ACTIVITIES:
Series E preferred stock dividends		(1,437	)		(1,437	)
Principal repayments on capital lease obligations		(73,005	)		(52,259	)
Purchase of treasury stock		(25,882	)		(487,480	)
Net cash used in financing activities		(100,324	)		(541,176	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(3,423,832	)		4,565,556
CASH AND CASH EQUIVALENTS, beginning of period		7,568,030			4,639,787
CASH AND CASH EQUIVALENTS, end of period	$	4,144,198		$	9,205,343
Supplemental cash flow disclosures:
Noncash financing and investing activities:
Accrued and unpaid dividends	$	1,437		$	1,437
Interest paid	$	4,877		$	5,997
Income tax paid (received)	$	(1,721,217	)	$	1,960

The accompanying notes are an integral part of these condensed consolidated financial statements

5

LIVEDEAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1:  Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of LiveDeal, Inc. (formerly YP Corp.), a Nevada corporation, and its wholly owned subsidiaries (collectively, the “Company”).  The Company delivers local customer acquisition services for small and medium-sized businesses to deliver an affordable way for businesses to extend their marketing reach to local, relevant customers via the Internet.

The accompanying condensed consolidated balance sheet as of September 30, 2009, which has been derived from audited consolidated financial statements, and the accompanying unaudited condensed consolidated financial statements as of June 30, 2010 andfor the three and nine months ended June 30, 2010 and June 30, 2009 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of the Company’s management, the interim information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results of operations for the three and nine months ended June 30, 2010are not necessarily indicative of the results to be expected for the year ending September 30, 2010. The footnote disclosures related to the interim financial information included herein are also unaudited. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto as of September 30, 2009 and for the fiscal year then ended included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.  Significant estimates and assumptions have been used by management throughout the preparation of the condensed consolidated financial statements, including in conjunction with establishing allowances for customer refunds, non-paying customers, dilution and fees, analyzing the recoverability of the carrying amount of intangible assets, estimating forfeitures of stock-based compensation and evaluating the recoverability of deferred tax assets.  Actual results could differ from these estimates.

Note 2:  Balance Sheet Information

Balance sheet information is as follows:

	June 30,			September 30,
	2010			2009
Receivables, current, net:
Accounts receivable, current	$	2,588,105		$	3,776,966
Less: Allowance for doubtful accounts		(1,419,866	)		(2,298,783	)
	$	1,168,239		$	1,478,183
Receivables, long term, net:
Accounts receivable, long term	$	884,628		$	1,581,946
Less: Allowance for doubtful accounts		(464,805	)		(542,543	)
	$	419,823		$	1,039,403
Total receivables, net:
Gross receivables	$	3,472,733		$	5,358,912
Allowance for doubtful accounts		(1,884,671	)		(2,841,326	)
	$	1,588,062		$	2,517,586

Our accounts receivable consist primarily of amounts due from customers of our directory services business.

6

LIVEDEAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)

	June 30,			September 30,
	2010			2009
Property and equipment, net:
Leasehold improvements	$	239,271		$	235,056
Furnishings and fixtures		319,004			336,067
Office, computer equipment and other		704,388			692,317
		1,262,663			1,263,440
Less: Accumulated depreciation		(809,526	)		(647,534	)
	$	453,137		$	615,906

	June 30,			September 30,
	2010			2009
Intangible assets, net:
Domain name and marketing related intangibles	$	1,509,600		$	6,699,600
Non-compete agreements		-			3,465,000
Website and technology related intangibles		1,911,382			4,678,970
		3,420,982			14,843,570
Less:  Accumulated amortization		(1,326,777	)		(12,506,856	)
	$	2,094,205		$	2,336,714

During fiscal 2009, a significant amount of the Company’s intangible assets were determined to be impaired and for comparative purposes, the original cost and accumulated amortization amounts were set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009.  As of June 30, 2010, the cost and accumulated amortization on all fully amortized assets were removed from the Company’s books.

	June 30,		September 30,
	2010		2009
Accrued liabilities:
Deferred revenue	$	110,757	$	148,916
Accrued payroll and bonuses		157,796		289,944
Accruals under revenue sharing agreements		164,087		314,754
Accrued expenses - other		377,138		339,197
	$	809,778	$	1,092,811

Note 3:  Restructuring Activities

On January 4, 2010, the Board of Directors of the Company (the “Board”) approved a reduction in force that resulted in the termination of approximately 33% of the Company's workforce, effective January 7, 2010.  On February 23, 2010, the Board approved an additional reduction in force that resulted in the termination of approximately 20% of the Company’s workforce, effective March 4, 2010.  These reductions in force were related to our ongoing restructuring and cost reduction efforts as the Board continues to explore a variety of strategic alternatives, including, but not limited to, the potential sale of the Company or certain of its assets and/or the acquisition of other entities or businesses.

The Company incurred expenses of $143,000 in connection with these reductions in force, consisting entirely of employee termination benefits.  All amounts were paid as of June 30, 2010.

Note 4:  Stock-based Compensation

From time to time, the Company grants restricted stock awards and stock options to officers, directors, employees 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 requisite service period.

7

LIVEDEAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)

During the three months and nine months ended June 30, 2010, the Company recognized compensation expense of $15,536 and $22,741, respectively, and $23,304 and $69,186 for the three and nine months ending June 30, 2009 respectively, related to stock option awards granted to certain employees and executives based on the grant date fair value of the awards, net of estimated forfeitures.  During the three months ended December 31, 2009, the Company changed the estimated forfeiture rate of awards from 40% to 60% based on actual forfeiture experience and other factors, resulting in a net benefit from the expense reversal of $8,160.  There were no such changes in the estimated forfeiture rate in the three months ending June 30, 2010.

On November 23, 2009, the Company granted an aggregate of 250,000 options to Richard Sommer, the Company’s then-current Chief Executive Officer, with an exercise price equal to the stock price on the date of grant and scheduled to vest according to the following schedule: 25% on October 29, 2010 (the first anniversary of the date of grant) and 1/36 of the remainder each month beginning on November 29, 2010.  In connection with Mr. Sommer’s resignation on January 4, 2010, all such options were forfeited.  Given this forfeiture, the Company elected not to expense such options because the effects on the financial statements would not have been material.  No other options were granted during the nine months ended June 30, 2010.

The Company had stock option activity summarized as follows during the nine months ended June 30, 2010:

				Weighted		Weighted		Weighted
				Average		Average		Average		Aggregate
	Number of			Exercise		Fair		Remaining		Intrinsic
	Shares			Price		Value		Contractual Life		Value
Outstanding at September 30, 2009		330,000
Granted at market price		250,000		$	1.95		n/m
Exercised		-			-
Forfeited		(530,000	)	$	1.70
Outstanding at June 30, 2010		50,000		$	1.45				8.4	$	-
Exercisable		19,792		$	1.45				8.4	$	-

As noted above, Mr. Sommer’s 250,000 options were forfeited in connection with his resignation on January 4, 2010.  The following table summarizes information about the Company’s outstanding stock options at June 30, 2010: 

Exercisable

Unexercisable

Total

Weighted

Weighted

Weighted

Number

Average

Number

Average

Number

Average

Range of Exercise Prices

Outstanding

Exercise Price

Outstanding

Exercise Price

Outstanding

Exercise Price

Less than $2.00 per share

19,792

$

1.45

30,208

1.45

50,000

$

1.45

At June 30, 2010, future stock compensation expense (net of estimated forfeitures) not yet recognized is $144,481, which the Company expects will be amortized over a weighted-average remaining vesting period of 2.4 years.

From time to time, the Company also has historically granted shares of restricted stock to certain individuals.  The following table sets forth the activity with respect to compensation-related restricted stock grants during the nine months ended June 30, 2010:

Outstanding (unvested) at September 30, 2009	106,425
Granted	-
Forfeited	(37,000	)
Vested	(20,000	)
Outstanding (unvested) at June 30, 2010	49,425

Total unrecognized stock compensation expense related to unvested awards totaled $181,142 at June 30, 2010, which the Company expects will be amortized over a weighted-average period of 1.6 years.

8

LIVEDEAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)

Note 5:  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 the three and nine months ended June 30, 2010, the Company acquired an aggregate of 0 and 13,310 shares of common stock for an aggregate purchase price of $0 and $25,882, respectively.  At June 30, 2010,an aggregate of 42,515 shares of common stock were held as treasury shares.

Note 6:  Net Loss per Share

Net loss per share is calculated using the weighted average number of shares of common stock outstanding during the period.  Basic weighted average common shares outstanding do not include shares of restricted stock that have not yet vested, although such shares are included as outstanding shares in the Company’s unaudited condensed consolidated balance sheet.  Diluted net loss per share is computed using the weighted average number of common shares outstanding and if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable from restricted shares, stock options and convertible preferred stock.  Preferred stock dividends are subtracted from net loss to determine the amount available to common stockholders.

The following table presents the computation of basic and diluted net loss per share:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2010			2009			2010			2009
Net loss from continuing operations	$	(1,339,934	)	$	(2,116,972	)	$	(5,640,188	)	$	(15,050,961	)
Less: preferred stock dividends		(479	)		(479	)		(1,437	)		(1,437	)
Net loss from continuing operations applicable to common stock		(1,340,413	)		(2,117,451	)		(5,641,625	)		(15,052,398	)
Income (loss) from discontinued operations		-			4,649			1,081			(5,257,615	)
Net loss applicable to common stock	$	(1,340,413	)	$	(2,112,802	)	$	(5,640,544	)	$	(20,310,013	)
Basic weighted average common shares outstanding:		5,999,118			5,999,268			5,997,014			6,006,770
Add incremental shares for:
Unvested restricted stock		-			-			-			-
Series E convertible preferred stock		-			-			-			-
Stock options		-			-			-			-
Diluted weighted average common shares outstanding:		5,999,118			5,999,268			5,997,014			6,006,770
Earnings per share - basic and diluted1:
Loss from continuing operations	$	(0.22	)	$	(0.35	)	$	(0.94	)	$	(2.51	)
Discontinued operations		-			-			-			(0.88	)
Net loss	$	(0.22	)	$	(0.35	)	$	(0.94	)	$	(3.38	)

1 Certain amounts may not total due to rounding of individual components.

The following potentially dilutive securities were excluded from the calculation of diluted net loss per share because the effects were antidilutive based on the application of the treasury stock method and because the Company incurred net losses during the period:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2010		2009		2010		2009
Options to purchase shares of common stock		50,000		330,000		300,912		427,554
Series E convertible preferred stock		127,840		127,840		127,840		127,840
Shares of non-vested restricted stock		49,425		125,175		70,513		167,528
		227,265		583,015		499,265		722,922

 

9

LIVEDEAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)

Note 7:  Income Taxes

During the year ended September 30, 2009, the Company established a valuation allowance against its deferred tax assets.  The Company determined that such a valuation allowance was necessary given the current and expected near term losses and the uncertainty with respect to the Company’s ability to generate sufficient profits from its new business model.  Therefore, the Company established a valuation allowance for all deferred tax assets in excess of those expected to be realizable through the application of operating loss carrybacks.

During the nine months ended June 30, 2010, the Company recognized an income tax benefit of $230,382 associated with a true up to our income tax receivable based on information received during the preparation of our 2009 tax returns.

Note 8:  Commitments and Contingencies

Operating Leases and Service Contracts

As of June 30, 2010, future minimum annual payments under operating lease agreements and non-cancelable service contracts for fiscal years ending September 30 are as follows:

	Payments Due by Fiscal Year
	Total		2010		2011		2012		2013		2014		Thereafter
Operating lease commitments	$	943,101	$	125,674	$	423,375	$	315,331	$	78,720	$	-	$	-
Noncanceleable service contracts		1,008,375		234,792		635,583		138,000		-		-		-
	$	1,951,476	$	360,466	$	1,058,958	$	453,331	$	78,720	$	-	$	-

This table excludes minimum payment obligations under capital leases as such obligations are set forth elsewhere in this footnote.

Capital leases

As of June 30, 2010, future obligations under non-cancelable capital leases are as follows for the fiscal years ended September 30:

2010	$	16,036
2011		64,143
2012		37,417
2013		-
2014		-
Thereafter		-
Total minimum lease payments		117,596
Less imputed interest		(3,916	)
Present value of minimum lease payments		113,680
Less: current maturities of capital lease obligations		(60,549	)
Noncurrent maturities of capital lease obligations	$	53,131

Litigation

Except as described below, as of June 30, 2010, the Company was not a party to any pending material legal proceedings other than claims that arise in the normal conduct of its business.  While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on its consolidated financial condition or results of operations, litigation is subject to inherent uncertainties.  If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the Company’s net income in the period in which a ruling occurs.  The Company’s estimate of the potential impact of the following legal proceedings on its financial position and its results of operations could change in the future.

The Company has not recorded any accruals pertaining to its legal proceedings as they do not meet the criteria for accrual under FASB ASC 450.

10

LIVEDEAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)

Joe Cunningham v. LiveDeal, Inc. et al.

On July 16, 2008, Joseph Cunningham, who was at the time a member of LiveDeal's Board of Directors, filed a complaint with the U.S. Department of Labor’s Occupational Safety and Health Administration (“OSHA”) alleging that the Company and certain members of its Board had engaged in discriminatory employment practices in violation of the Sarbanes-Oxley Act of 2002’s statutory protections for corporate whistleblowers when the Board of Directors removed him as Chairman on May 22, 2008. In his complaint, Mr. Cunningham asked OSHA to order his appointment as Chief Executive Officer of the Company or, in the alternative, to order his reinstatement as Chairman of the Board.  Mr. Cunningham also sought back pay, special damages and litigation costs.  In July 2010, OSHA notified the Company that Mr. Cunningham had amended his complaint on May 10, 2010 to add the allegation that the shareholders’ decision not to reelect him to the Board was also a discriminatory employment practice.  From December 2008 to July 2010, the Company had not received any correspondence from OSHA.

Global Education Services, Inc. v. LiveDeal, Inc.

On June 6, 2008, Global Education Services, Inc. ("GES") filed a consumer fraud class action lawsuit against the Company in King County (Washington) Superior Court.  GES has alleged in its complaint that the Company's use of activator checks violated the Washington Consumer Protection Act.  GES is seeking injunctive relief against the Company’s use of the checks, as well as a judgment in an amount equal to three times the alleged damages sustained by GES and the members of the class.  The Company has denied the allegations.  The court denied both parties’ dispositive motions.  Litigation is ongoing.

Complaint filed by Illinois Attorney General against LiveDeal, Inc.

On November 12, 2008, the Illinois Attorney General filed a complaint in the Circuit Court of the Seventh Judicial Circuit of the State of Illinois (Sangamon County) against the Company requesting money damages and injunctive relief for claims that we employed deceptive and unfair acts and practices in violation of the Illinois Consumer Fraud and Deceptive Business Act in a telemarketing campaign that in part promoted premium Internet Yellow Page listings to Illinois consumers.  LiveDeal has denied the allegations and is vigorously defending the claim.  Legal proceedings in the matter are ongoing.

LiveDeal, Inc. v. OnCall Superior Management (“OSM”) and SMeVentures, Inc. (“SME”)

On February 3, 2010, LiveDeal, OSM and SME executed a Settlement Agreement and Mutual Release pursuant to which LiveDeal agreed to pay OSM and SME a total of $300,000 in cash in exchange for their agreement to terminate all litigation with respect to the 2006 and 2007 contracts that were the basis for this dispute.  The parties also entered into a new Services Agreement pursuant to which OSM agreed to provide certain services to LiveDeal in exchange for cash payments totaling $125,000.

As of June 30, 2010, the Company has paid all amounts due under the settlement agreement and the new services agreement. The $300,000 settlement payment was expensed in the first quarter of fiscal 2010. No amounts have been expensed related to the new services agreement as such services have yet to be provided by OSM and SME, and the $125,000 payment is included as part of prepaid expenses and other current assets in the accompanying unaudited consolidated balance sheet at June 30, 2010.

Note 9:  Concentration of Credit Risk

The Company maintains cash balances at major nationwide institutions in Arizona, California and Nevada.  Accounts are insured by the Federal Deposit Insurance Corporation up to $250,000.

The Company has concentrations of receivables with respect to certain wholesale accounts and remaining holdbacks with Local Exchange Carrier (“LEC”) service providers.  Four such entities accounted for 28%, 27%, 18% and 13% of gross receivables at June 30, 2010 and three such entities accounted for 23%, 22%, and 18% of gross receivables at September 30, 2009.

 

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LIVEDEAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)

Note 10:  Segment Reporting

Prior to fiscal 2009, the Company operated as an integrated business and had only one reportable segment.  During the second quarter of fiscal 2009, the Company implemented a corporate initiative that evaluates its different product lines as separate business units.  As part of this strategy, management has begun evaluating operating performance by reviewing the profitability of these product lines on a standalone basis.  Therefore, the Company now has two reportable operating segments (excluding the discontinued classifieds business):  Directory Services and Direct Sales - Customer Acquisition Services.  The Company has yet to identify and allocate operating costs or impairment charges to its reportable segments below the gross profit level.  Additionally, the reportable segments share many common costs, including, but not limited to, IT support, office and administrative expenses.  Therefore, the following table of operating results does not allocate costs to its reportable segments below the gross profit level:

	Nine Months Ended June 30, 2010
	Directory Services		Direct Sales - Customer Acquisition Services		Unallocated			Consolidated
Net revenues	$	3,201,600	$	3,092,607	$	-		$	6,294,207
Cost of services		221,251		2,266,259		-			2,487,510
Gross profit		2,980,349		826,348		-			3,806,697
Operating expenses		-		-		9,720,676			9,720,676
Operating income (loss)		2,980,349		826,348		(9,720,676	)		(5,913,979	)
Other income (expense)		-		-		42,765			42,765
Income (loss) before income taxes and discontinued operations	$	2,980,349	$	826,348	$	(9,677,911	)	$	(5,871,214	)

	Nine Months Ended June 30, 2009
	Directory Services		Direct Sales - Customer Acquisition Services		Unallocated			Consolidated
Net revenues	$	8,068,710	$	2,937,648	$	-		$	11,006,358
Cost of services		2,518,160		1,361,693		-			3,879,853
Gross profit		5,550,550		1,575,955		-			7,126,505
Operating expenses		-		-		22,408,486			22,408,486
Operating income (loss)		5,550,550		1,575,955		(22,408,486	)		(15,281,981	)
Other income (expense)		-		-		7,369,190			7,369,190
Income (loss) before income taxes and discontinued operations	$	5,550,550	$	1,575,955	$	(15,039,296	)	$	(7,912,791	)

The Company has yet to allocate its assets to each respective segment.  While some software costs are specific to each business, most of the Company’s fixed assets and software architecture are shared among its segments.  Therefore, the Company is currently unable to provide asset information with respect to each of its reportable segments, except as it pertains to accounts receivable as set forth below:

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LIVEDEAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)

	June 30, 2010
	Directory Services		Direct Sales - Customer Acquisition Services		Total
Accounts receivable, net - short term	$	1,050,950	$	117,289	$	1,168,239
Accounts receivable, net - long term		419,823		-		419,823
Total accounts receivable, net	$	1,470,773	$	117,289	$	1,588,062

	September 30, 2009
	Directory Services		Direct Sales - Customer Acquisition Services		Total
Accounts receivable, net - short term	$	1,442,037	$	36,146	$	1,478,183
Accounts receivable, net - long term		1,039,403		-		1,039,403
Total accounts receivable, net	$	2,481,440	$	36,146	$	2,517,586

The Company has no intersegment revenues.  All of the Company’s revenues are derived from sales to external customers, from operations in the United States, and no single customer accounts for more than 10 percent of the Company’s revenues.

Note 11:  Liquidity

While the Company believes that its existing cash on hand will provide it with sufficient liquidity to meet its operating needs for the next 12 months, it will not be able to stay in business in the future without improvements in its profitability, additional financing or a fundamental change in its business.  As the Company continues to maintain its existing business lines, it is simultaneously exploring other strategic initiatives.

Note 12:  Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”), which provides guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. ASU 2009-13 requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price. ASU 2009-13 is effective for the first annual reporting period beginning on or after June 15, 2010 and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. Early adoption is permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. ASU 2009-13 will be effective for the Company on October 1, 2010. We are currently evaluating the impact that the adoption of ASU 2009-13 will have on our financial condition, results of operations, and disclosures.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For a description of our significant accounting policies and an understanding of the significant factors that influenced our performance during the three and nine months ended June 30, 2010, this “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” (hereafter referred to as “MD&A”) should be read in conjunction with the condensed consolidated financial statements, including the related notes, appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

Forward-Looking Statements

This portion of this Quarterly Report on Form 10-Q includes statements that constitute “forward-looking statements.”  These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “intends,” “expects,” or “anticipates,” and do not reflect historical facts.  Specific forward-looking statements contained herein include, but are not limited to, our belief that our existing cash on hand will provide us with sufficient liquidity to meet our operating needs for the next 12 months; that our customer acquisition services will account for a larger percentage of total net revenues in the future; expectations about stock option and restricted stock vesting; trends relating to our accounts receivable; the timing, amount and expectations about the cost and impact of legal proceedings that we are involved in; our expectation that we will experience declining revenues in our Directory Services segment; trends in Internet advertising and customer acquisition strategies; our expectation that we will continue to experience operating losses and operating cash outflows; our plans and expectations with respect to new product and service offerings in our Directory Services segment; and strategic alternatives we may pursue and their potential impact on the Company.  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 our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 under 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.

Our Company

LiveDeal, Inc. (the “Company”) provides local customer acquisition services for small businesses to deliver an affordable way for businesses to extend their marketing reach to local, relevant customers via the Internet.  LiveDeal delivers local search engine marketing (“SEM”) utilizing an inside sales team.  LiveDeal resells search products from Google, Yahoo!, Bing and others as part of its SEM marketing and also provides website, hosting and Internet syndication services.  LiveDeal, Inc. is headquartered in Las Vegas, Nevada.  For more information, please visit www.livedeal.com.

We have two inter-related primary lines of business: (1) we deliver a suite of customer acquisition services for small businesses, sold via telemarketing and supported by our websites, distribution network, and best of breed software developed to manage search and other Internet services efficiently, and (2) we deliver a suite of promotional and operational support services for small businesses that include but are not limited to submission in local online maps and directories, webhosting, newsletters, teleconferencing, electronic fax, file storage, and call routing sold via telemarketing and supported by an online, self service customer portal.

Summary Business Description

Direct Sales Services (also known as Telesold Suite Services)

Commencing in February 2008, we added a new line of business.  This line of business is based around using telesales and Internet customer acquisition technologies to deliver a suite of customer acquisition services to small businesses.We believe the most significant of these customer acquisition services is Internet search and search-related advertising services.  The Company’s strategy is to position its solutions where 85-95% of Internet and mobile search activity for local business services occurs:  search engine results, the most popular business directories, and the top social network destinations.  This development is intended to create a presence, and  enable individuals and businesses to find our customers without ever going to a specific directory.  The small business whose website information or advertising message is identified by a search becomes the likely recipient of that business.  The Company’s research indicates there are half a billion unique local searches a month on Google.  On Yahoo alone, 100 million unique visitors per month search with “local intent”. On top of that data, rapidly rising smart-phone sales will increase mobile search utilization.  Therefore, we believe utilizing mobile, Internet search and related advertising is fast becoming a necessity for small businesses.

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Another key Internet development is the rise of user review sites and services, such as Yelp.com and social networking sites, such as Facebook.  At these sites, consumers let each other know about their experiences with local businesses.  They rate and comment on the businesses.  The sites also tend to provide some aspects of traditional directories as well as new services, such as placing businesses on a local map, providing driving directions, etc.  At these sites, as with Internet search, consumers can select businesses for their commerce without ever using a traditional directory.  Consumers are instead pursuaded to frequent a specific business based on the experiences of others.

With the emergence of these new Internet capabilities, and others that are fast emerging, the role of directories, both paper and Internet, is becoming less relevant in the customer acquisition process.  Search, review and social networking sites are becoming the new standard.  We believe these sites will provide the greatest value for both customers and businesses.

Our websites offer businesses and consumers an affordable and effective solution for creating a web presence and marketing their products and services to a local audience through these new online media.

Our suite currently includes the following menu of services, but the range of services we deliver is designed to shift over time, based on the needs of our small business customers and the ever-changing state of Internet technology:

§ Website URL acquisition services whereby we obtain website address names on behalf of our small business clients;

§ Website development and deployment services where we create, house and manage websites on behalf of our small business clients;

§ Website traffic and audience development services, which utilize sophisticated search engine marketing techniques, partnerships with other websites and other techniques to generate traffic to our customers’ websites, whether created by us or not;

§ Website analytics and performance reports that generate information for our customers about activities on their websites and generate leads for their businesses based on Internet activities;

§ Directory services whereby we provide both basic and enhanced directory listings for our customers on our own directory and on partner directories; and

§ Business listing syndication whereby we provide for our customers a single point to publish their information on the top directories, create their point of presence in the search results of the major search engines, and broadcast their latest “happenings” on the most popular social networking destinations

Directory Services

We use a business model similar to print Yellow Pages publishers for our Yellow Page directory.  We publish basic directory listings on the Internet.  Our directory listings contain the name, address and telephone number for almost 17 million U.S. businesses.  We strive to maintain a listing for almost every business in America in this format and we generate revenue from the sale of various advertising packages to listed businesses.  Previously, we shifted our business focus away from this line of business and sold our primary URL and a portion of our customer list, which contributed to a 60% decrease in net revenues in the nine months ended June 30, 2010 compared to the same period in 2009.  We expect to continue to experience declining future revenues from this segment.

To counter the decrease in this line of business, we have redefined our business to business offerings to include a suite of promotional and operational support services for small businesses. Packages have been officially released to the marketplace.

 

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Recent Developments

Change in Business Strategy and Risks Associated with Such Changes

In fiscal 2009, we underwent a significant change in our business strategy as a result of declining revenues in our legacy businesses (Directory Services) and other economic and regulatory forces.  We embarked on a transformation of our business away from our Directory Services business and focused our efforts toward developing our Direct Sales Services line of business.  As part of this change in strategy, we initiated a series of key events including:

· We shut-down our Philippines-based call center;

· We discontinued our classified business;

· We sold a portion of our customer list associated with our Directory Services business;

· We sold our www.yp.com Internet domain name; and

· We experienced several management changes including turnover of our most senior executive positions.

As a result of these events and transactions, we have experienced a significant decline in revenues and have incurred recent operating losses and increased operating cash outflows.  These losses and operating cash outflows are expected to continue indefinitely as we address our new line of business.  The risks associated with our Company are outlined in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2009.  We encourage all investors, prospective investors and other readers to refer to these risk factors.

As discussed above, we have recently redefined ourstrategy in our Directory Services segment to include a suite of promotional and operational support services for small businesses, which we believe we can offer in bundles to achieve competitive advantages as compared to our peers.  In addition, we are currently exploring a number of other strategic alternatives.  Such alternatives may include, but are not limited to, potential partnership, joint venture, divestiture, or liquidation strategies.  We make no statements with respect to the feasibility or likelihood of such transactions, or whether any such scenario or combination of scenarios necessarily may be in the best interest of all shareholders should they happen to occur.

Management Changes

On November 23, 2009, the Company and Richard F. Sommer, our then-current Chief Executive Officer, entered into an amendment to Mr. Sommer's Employment Agreement dated as of May 19, 2009 (the “Employment Agreement”). This amendment, provided that Mr. Sommer was entitled to an option to purchase 250,000 shares of our common stock at an exercise price of $1.95 per share, which was equal to the closing price of our common stock on the date of grant.  The option was granted pursuant to our 2003 Stock Plan and was scheduled to vest according to the following schedule: 25% on October 29, 2010 (the first anniversary of the date of grant) and 1/36 of the remainder each month beginning on November 29, 2010.

Previously, the Employment Agreement provided that Mr. Sommer was entitled to a success fee payable in cash equal to 2% of the excess above $9,000,000 of any cash distributed to or received by our stockholders in the form of a dividend, in the event of liquidation or upon a change of control.  Pursuant to this amendment, that provision was deleted and replaced with the option grant described above.  Other than as described above, the original terms of Mr. Sommer’s Employment Agreement remained in full force and effect.

Effective January 2, 2010, Rajeev Seshadri resigned as our Chief Financial Officer and was replaced by Lawrence W. Tomsic.  Mr. Tomsic recently served as Controller for Alliance Residential Company, an apartment complex with 3,221 units and $90 million in annual sales.  Previously, he was a Controller and Chief Financial Officer for various clients of JKL Consulting (including a planned unit development and a concrete contractor) from 2006-2008 and Chief Financial Officer of John R. Wood, Inc. (a real estate brokerage focusing on luxury residential housing and commercial properties) from 1997-2006.  Mr. Tomsic worked as a financial officer and in other management positions for various companies (including U.S. Home Corporation and Collier Enterprises) from 1983-1997.  He was also a senior auditor for Deloitte & Touche for three years.  Mr. Tomsic holds a B.S. in Accounting from the University of Delaware and an M.B.A. from the University of Denver.

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On January 4, 2010, Mr. Sommer resigned as our Chief Executive Officer.  As a result of his departure, Mr. Sommer also resigned as a member of our Board.  Following Mr. Sommer’s departure, Kevin A. Hall was appointed as our interim Chief Operating Officer (COO).  Mr. Hall has been serving as our General Counsel and Vice President of Human Resources and Business Development since April 2009, and he continues to serve in those capacities.On May 20, 2010, the Board appointed Mr. Hall as President and Chief Operating Officer of the Company.

Restructuring Activities

On January 4, 2010, our Board approved a reduction in force that resulted in the termination of approximately 33% of the Company's workforce, effective January 7, 2010.  On February 23, 2010, our Board approved an additional reduction in force that resulted in the termination of approximately 20% of our workforce, effective March 4, 2010.  These reductions in force were related to our ongoing restructuring and cost reduction efforts as the Board continues to explore a variety of strategic alternatives, including, but not limited to, the potential sale of the Company or certain of its assets and/or the acquisition of other entities or businesses.

We incurred charges of $143,000 in connection with the reductions in force, consisting of one-time employee termination benefits.  All amounts were paid as of June 30, 2010.

Results of Operations

The following sets forth a discussion of our financial results for the three and nine monthsended June 30, 2010 as compared to the three andnine monthsended June 30, 2009.  In evaluating our business, management reviews several key performance indicators including new customer signups, total customers in each line of business, revenues per customer, customer retention rates, etc.  However, given the changing nature of our business strategy, the decline in emphasis on our Directory Services segment and the infancy of our new Direct Sales Services line of business, we do not believe that presentation of such metrics would reveal any meaningful trends in our operations that are not otherwise apparent from the discussion of our financial results below.

Net Revenues

	Net Revenues
	2010		2009		Change			Percent
Three Months Ended June 30,	$	1,651,107	$	2,448,569	$	(797,462	)		(33	)%
Nine Months Ended June 30,	$	6,294,207	$	11,006,358	$	(4,712,151	)		(43	)%

Net revenues decreased in the thirdquarter of fiscal 2010 as compared to the third quarter of fiscal 2009 due primarily to a decrease of approximately $318,000 in sales of our Directory Service products, reflecting the de-emphasis of this business line and the effects of the sale of our URL and a portion of our customer list during fiscal 2009.  We also experienced a decrease in sales of our customer acquisition services of approximately $479,000 as we have been undergoing strategic shifts in our product line and substantially decreased sales personnel during the staff reductions and retrained and supplemented the remaining sales staff.

Net revenues decreased in the first nine months of fiscal 2010 as compared to the first nine months of fiscal 2009 due to a decrease of approximately $4,900,000 in sales of our Directory Service products, partially offset by an increase in sales of our Direct Sale Services of $155,000.  The significant decrease in the Directory Service products reflects the sale of our URL and a portion of our customer list during fiscal 2009.

Cost of Services

	Cost of Services
	2010		2009		Change			Percent
Three Months Ended June 30,	$	636,358	$	812,321	$	(175,963	)		(22	)%
Nine Months Ended June 30,	$	2,487,510	$	3,879,853	$	(1,392,343	)		(36	)%

Cost of services decreased in the thirdquarter of fiscal 2010 as compared to the thirdquarter of fiscal 2009 attributable to a $353,000 decrease in costs associated with our Directory Services business, offset by a $177,000 increase in costs associated with our Direct Sales Services.  A portion of the change in these costsreflects changes in our revenue mixas a result of our new business strategy.

 

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Costs of services decreased in the first nine months of fiscal 2010 as compared to the first nine months of fiscal 2009 for similar reasons, with a $2,297,000 decrease in costs related to our Directory Services segment offset by increased costs related to our Direct Sales Services segment of approximately $905,000.

Gross Profit

	Gross Profit
	2010		2009		Change			Percent
Three Months Ended June 30,	$	1,014,749	$	1,636,248	$	(621,499	)		(38	)%
Nine Months Ended June 30,	$	3,806,697	$	7,126,505	$	(3,319,808	)		(47	)%

Gross profit decreased in the thirdquarter and first nine months of fiscal 2010 as compared to the thirdquarter and first nine months of fiscal 2009 due to a decline in revenues offset by changes in gross margins in our various lines of business.  The following table sets forth changes in our gross margin by business segment:

	Three Months Ended June 30,
	2010			2009
Direct sales -
customer acquisition services -
Gross profit	$	58,944		$	715,263
Gross margin		8.9	%		62.8	%
Directory services -
Gross profit	$	955,805		$	920,985
Gross margin		96.3	%		70.3	%

	Nine Months Ended June 30,
	2010			2009
Direct sales -
customer acquisition services -
Gross profit	$	826,348		$	1,575,955
Gross margin		26.7	%		53.6	%
Directory services -
Gross profit	$	2,980,349		$	5,550,550
Gross margin		93.1	%		68.8	%

The decrease in gross profit for Direct Sales is primarily due to an increase in bad debt as a result of a full review and cleanup of all customer accounts.  The Directory Services increases in Gross Profit are due to a reduction in bad debt expense caused by higher collections of accounts receivable reserves.    

General and Administrative Expenses

	General and Administrative Expenses
	2010		2009		Change			Percent
Three Months Ended June 30,	$	2,357,797	$	3,812,983	$	(1,455,186	)		(38	)%
Nine Months Ended June 30,	$	9,457,739	$	12,126,364	$	(2,668,625	)		(22	)%

General and administrative expenses decreased in the thirdquarter of fiscal 2010 as compared to the third quarter of fiscal 2009 primarily due to the following:

·      Decreased compensation costs of approximately $1,425,000 primarily attributable to reductions in our workforce resulting from actions taken in fiscal 2009 including the closure of our Santa Clara office and reductions in the workforce in January 2010 and March 2010; and

·      Other expense decreases of $315,000, including, but not limited  to, rent and utilities, services and fees, office and supplies expenses, office closure expenses, travel and entertainment and other corporate expenses associated with our office closures, reductions in force and other cost containment initiatives; partially offset by

 

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·      Increased professional fees of approximately $255,000 related to increased legal expenses incurred in response to certain legal actions brought against us; and

·      Increased depreciation and amortization expense of $29,000.

General and administrative expenses decreased in the first nine months of fiscal 2010 as compared to the first nine months of fiscal 2009 for similar reasons, as outlined below:

·      Decreased compensation costs of approximately $2,651,000 primarily attributable to reductions in our workforce resulting from actions taken in fiscal 2009 and fiscal 2010, including the closure of our Santa Clara office and reductions in the workforce in January 2010 and March 2010, partially offset by payments of $70,000 for separation expenses related to changes in management in the first quarter of fiscal 2010and $143,000 of termination benefits related to our restructuring activities in the second quarter of fiscal 2010;

·      A decrease of approximately $647,000 of depreciation and amortization expense primarily attributable to the impairment of intangible assets in the second quarter of fiscal 2009; and

·      Other expense decreases of $271,000, including rent and utilities, services and fees, office and supplies, office closure expenses, travel and entertainment and other corporate expenses associated with our office closures, reductions in force and other cost containment initiatives; partially offset by

·      Increased professional fees of approximately $901,000 related to increased legal expenses incurred in response to certain legal actions brought against us.

The following table sets forth our recent operating performance for general and administrative expenses:

		Q3 2010		Q2 2010		Q1 2010		Q4 2009		Q3 2009		Q2 2009		Q1 2009
Compensation for employees,    officers and directors	$	967,323	$	1,352,108	$	2,241,198	$	2,054,709	$	2,392,081	$	2,311,056	$	2,508,836
Professional fees		677,507		1,023,582		488,993		336,273		421,700		411,564		455,832
Depreciation and amortization		215,102		218,200		225,653		211,336		186,077		560,383		559,289
Other general and administrative costs		497,865		544,162		1,006,046		451,300		813,124		771,352		735,070

Included in other general and administrative expenses for the first quarter of fiscal 2010 was an accrual of $300,000 related to a legal settlement with OSM and SMe.  See Part II, Item 1.  Legal Proceedings in this report for further information.

Impairment of Goodwill and Intangible Assets

	Impairment of Goodwill and Intangible Assets
	2010		2009		Change			Percent
Three Months Ended June 30,	$	-	$	-	$	-			n/a
Nine Months Ended June 30,	$	-	$	7,866,110	$	(7,866,110	)		n/a

As described previously, we incurred an impairment charge in the second quarter of fiscal 2009 to write-down goodwill and other intangible assets.  No such charges were incurred in first nine months of fiscal 2010.

Sales and Marketing Expenses

	Sales and Marketing Expenses
	2010		2009		Change			Percent
Three Months Ended June 30,	$	1,826	$	130,627	$	(128,801	)		(99	)%
Nine Months Ended June 30,	$	262,937	$	2,416,012	$	(2,153,075	)		(89	)%

Sales and marketing expenses decreased in the third quarter of fiscal 2010 as compared to the third quarter of fiscal 2009 primarily due to cost containment initiatives.  Virtually all of our sales and marketing activities in the third quarter of fiscal 2010 consisted of in-house personnel activities whose costs are included in general and administrative expenses.

 

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Operating Loss

	Operating Loss
	2010			2009			Change		Percent
Three Months Ended June 30,	$	(1,344,874	)	$	(2,307,362	)	$	962,488		(42	)%
Nine Months Ended June 30,	$	(5,913,979	)	$	(15,281,981	)	$	9,368,002		(61	)%

The decreasein operating lossfor the third quarter of fiscal 2010 as compared to the third quarter of fiscal 2009 is primarily due to decreases in general and administrative expenses and sales and marketing expenses as a result of our cost containment initiatives, partially offset by a decrease in our gross profit each of which is described above.  The decrease in operating loss for the first nine months of fiscal 2010 as compared to the first nine months of fiscal 2010 was due to the factors described above as well as the impacts of the impairment charges that occurred in the second quarter of fiscal 2009, which is described above.

 Total Other Income (Expense)

	Total Other Income (Expense)
	2010		2009		Change			Percent
Three Months Ended June 30,	$	4,940	$	85,273	$	(80,333	)		(94	)%
Nine Months Ended June 30,	$	42,765	$	7,369,190	$	(7,326,425	)		(99	)%

During the first quarter of fiscal 2010, we recognized $50,000 of income related to the adjustment of certain accruals associated with the sale of a portion of our customer list that occurred in the previous year.

During the second quarter of fiscal 2009, we entered into an agreement to sell a portion of our customer list associated with our Directory Services business, resulting in a gain of $2,815,952.  We also amended another Directory Services contract in consideration of accelerated payments on our outstanding accounts receivables and some anticipated future billings which resulted in an increase in other income of $642,268 for the three and nine months ended June 30, 2009, respectively.

During the first quarterof fiscal 2009, we entered into an agreement to sell our Internet domain name “www.yp.com” to YellowPages.com for a cash payment of $3,850,000.  We had net gain from the sale of that asset of $3,805,778, which is reflected in other income for the first quarter of fiscal 2009.  

The remaining activity in fiscal 2010 and fiscal 2009 consisted primarily of interest income on cash balances and short-term investments.

Income Tax Provision (Benefit)

	Income Tax Provision (Benefit)
	2010			2009			Change			Percent
Three Months Ended June 30,	$	-		$	(105,117	)	$	105,117			(100	)%
Nine Months Ended June 30,	$	(231,026	)	$	7,138,170		$	(7,369,196	)		(103	)%

In the second quarter of fiscal 2009, the Company established a valuation allowance against all deferred tax assets given the uncertainty with respect to future operations and we continue to maintain a full valuation allowance against such assets.  Accordingly, there is no tax expense or benefit for the third quarter of fiscal 2010.  The income tax provision during the first nine monthsof fiscal 2010 reflects a true up to our income tax receivable that occurred in the second quarter of fiscal 2010 based on information received during the finalization of our 2009 tax returns.  The income tax provision in the thirdquarter of fiscal 2009 and first nine months of fiscal 2009 reflects the tax impacts of changes in our pre-tax income, coupled with the establishment of a valuation allowance in the second quarter of fiscal 2009, which increased our income tax provision by $9,392,488.  The income tax benefit for the three months ended June 30, 2009 relates to the effects of a true up for the fiscal 2008 tax return, resulting in a greater-than-expected refund.While we are optimistic about our plans for our new business strategy, we determined that such a valuation allowance was necessary given the current and expected near term losses and the uncertainty with respect to our ability to generate sufficient profits from our new business model.  Therefore, we established a valuation allowance for all deferred tax assets in excess of those expected to be realizable through the application of operating loss carrybacks.

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Income (Loss) from Discontinued Operations

	Income (Loss) from Discontinued Operations
	2010		2009			Change			Percent
Three Months Ended June 30,	$	-	$	4,649		$	(4,649	)		(100	)%
Nine Months Ended June 30,	$	1,081	$	(5,257,615	)	$	5,258,696			(100	)%

During the second quarter of fiscal 2009, we discontinued our Directory Services business.  All prior periods have been restated to reflect the classifieds operating results, net of tax, as discontinued operations.  The decrease in loss in the first nine monthsof fiscal 2010 as compared to the first nine monthsof fiscal 2009 reflects the wind down of this line of business and the effects of the impairment charges (and related tax effects) which were incurred during fiscal 2009.

Net Income (Loss)

	Net income (loss)
	2010			2009			Change		Percent
Three Months Ended June 30,	$	(1,339,934	)	$	(2,112,323	)	$	772,389		(37	)%
Nine Months Ended June 30,	$	(5,639,107	)	$	(20,308,576	)	$	14,669,469		(72	)%

Changes in net income (loss) are primarily attributable to changes in operating income, other income (expense), income tax expense and discontinued operations, each of which is described above.

Liquidity and Capital Resources

Net cash used in operating activities was approximately $2,842,000 for the first nine monthsof fiscal 2010 as compared to approximately $1,351,000 for the first nine monthsof fiscal 2009.  While our net loss decreased by $14,669,000 in the first nine monthsof fiscal 2010 as compared to the first nine monthsof fiscal 2009, the net loss for the prior period included a non- cash impairment charge of $16,111,000 offset by gains on the sale of our domain name and customer list of $6,622,000, which are not included as part of operating cash flows.  Other factors contributing to the change in operating cash flows include a decrease in non-cash expenses of $5,365,000(including depreciation and amortization, stock-based compensation, deferred income taxes, provisions for uncollectible accounts and other non-cash gains and losses) in the first nine monthsof fiscal 2010 as compared to the first nine monthsof fiscal 2009 and changes in working capital and other asset balances which negatively impacted cash flows by $1,307,000, consisting primarily of significant accounts receivable collections in the first nine months of fiscal 2009 offset primarily by income tax refunds received in the first nine months of fiscal 2010.  Our primary source of cash inflows has historically been net remittances from Directory Services customers processed in the form of ACH billings and LEC billings.  In the first nine monthsof fiscal 2010, we have been transitioning away from our previous Directory Services offerings toward our Direct Sales Services and new business to business services offerings, including our newly defined business to business self service options. While we have experienced significant revenue declines in the Directory Services segment, our accounts receivable have not shrunk commensurately as we have holdback accounts with our LEC billing service providers that are remitted to us over an extended period of time – typically between 120 and 180 days. We have concentrations of receivables with respect to certain wholesale accounts and remaining holdbacks with LEC service providers.  As of June 30, 2010, four such entities accounted for 28%, 27%, 18% and 13% of gross accounts receivable.

With respect to our Direct Sales Services, we generally receive upfront payments averaging approximately one-sixth of the gross contract amount.  Subsequent payments are received on an installment basis after the application of the initial payment amounts and are billed ratably over the remaining life of the contract.  Most customers purchasing these services elect to use their credit cards to make payments, and therefore our collections are usually made within a few days of the installment due date.

Our most significant cash outflows include payments for general operating expenses, including payroll costs, and general and administrative expenses that typically occur within close proximity of expense recognition.

 

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Net cash used for investing activities totaled approximately $481,000 for the first nine monthsof fiscal 2010 consisting of  $286,000 for equipment and software development costs and $200,000 to purchase a certificate of deposit.  Net cash provided by investing activities was $6,457,000 for the first nine monthsof fiscal 2009 which was attributable to the sale of our Internet domain name www.yp.com, the sale of a portion of our customer list related to our directory services business, and an amendment to an existing Directory Services contract which provided aggregate cash inflows of $7,275,000, partially offset by purchases of equipment and software development costs of $718,000 and the purchase of a certificate of deposit of $100,000.

Net cash used for financing activities was approximately $100,000 during the first nine monthsof fiscal 2010 compared to approximately $541,000 during the first nine monthsof fiscal 2009, primarily attributable to a reduction in the amount of treasury stock repurchases due to a suspension of the program.  The timing of stock repurchases is influenced by market forces and our cash needs and requirements.

We had working capital of $4,718,000 as of June 30, 2010 compared to $9,251,000 as of September 30, 2009 with current assets decreasing by $5,003,000 and current liabilities decreasing by $469,000 from September 30, 2009 to June 30, 2010.  Declines in working capital are primarily attributable to our operating net loss.

Contractual Obligations

The following table summarizes our contractual obligations at June 30, 2010 and the effect such obligations are expected to have on our future liquidity and cash flows:

	Payments Due by Fiscal Year
	Total		2010		2011		2012		2013		2014		Thereafter
Operating lease commitments	$	943,101	$	125,674	$	423,375	$	315,331	$	78,720	$	-	$	-
Capital lease commitments		117,595		16,036		64,143		37,417		-		-		-
Noncanceleable service contracts		1,008,375		234,792		635,583		138,000		-		-		-
	$	2,069,071	$	376,502	$	1,123,101	$	490,748	$	78,720	$	-	$	-

This table includes the service contract associated with the litigation settlement entered into on February 3, 2010 as previously described.  While 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, we will not be able to stay in business in the future without improvements in our profitability, additional financing or a fundamental change in our business.

At June 30, 2010, we had no off-balance sheet arrangements, commitments or guarantees that require additional disclosure or measurement.

 

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures are designed with an objective of ensuring that information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission.  Disclosure controls are also designed with an objective of ensuring that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, in order to allow timely consideration regarding required disclosures.

The evaluation of our disclosure controls by our principal executive officer and principal financial officer included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Quarterly Report.  Our management, including our principal executive officer and principal financial officer, does not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Also, projections of any evaluation of the disclosure controls and procedures to future periods are subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on their review and evaluation as of the end of the period covered by this Quarterly Report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective as of the end of the period covered by this report.  During the period covered by this Quarterly Report, there have not been any changes in our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Except as described below, as of June 30, 2010, the Company was not a party to any pending material legal proceedings other than claims that arise in the normal conduct of its business.  While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on its consolidated financial condition or results of operations, litigation is subject to inherent uncertainties.  If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the Company’s net income in the period in which a ruling occurs.  The Company’s estimate of the potential impact of the following legal proceedings on its financial position and its results of operations could change in the future.

The Company has not recorded any accruals pertaining to its legal proceedings as they do not meet the criteria for accrual under FASB ASC 450.

Joe Cunningham v. LiveDeal, Inc. et al.

On July 16, 2008, Joseph Cunningham, who was at the time a member of LiveDeal's Board of Directors, filed a complaint with the U.S. Department of Labor’s Occupational Safety and Health Administration (“OSHA”) alleging that the Company and certain members of its Board had engaged in discriminatory employment practices in violation of the Sarbanes-Oxley Act of 2002’s statutory protections for corporate whistleblowers when the Board of Directors removed him as Chairman on May 22, 2008. In his complaint, Mr. Cunningham asked OSHA to order his appointment as Chief Executive Officer of the Company or, in the alternative, to order his reinstatement as Chairman of the Board.  Mr. Cunningham also sought back pay, special damages and litigation costs.  In July 2010, OSHA notified the Company that Mr. Cunningham had amended his complaint on May 10, 2010 to add the allegation that the shareholders’ decision not to reelect him to the Board was also a discriminatory employment practice.  From December 2008 to July 2010, the Company had not received any correspondence from OSHA.

Global Education Services, Inc. v. LiveDeal, Inc.

On June 6, 2008, Global Education Services, Inc. ("GES") filed a consumer fraud class action lawsuit against the Company in King County (Washington) Superior Court.  GES has alleged in its complaint that the Company's use of activator checks violated the Washington Consumer Protection Act.  GES is seeking injunctive relief against the Company’s use of the checks, as well as a judgment in an amount equal to three times the alleged damages sustained by GES and the members of the class.  The Company has denied the allegations.  The court denied both parties’ dispositive motions.  Litigation is ongoing.

Complaint filed by Illinois Attorney General against LiveDeal, Inc.

On November 12, 2008, the Illinois Attorney General filed a complaint in the Circuit Court of the Seventh Judicial Circuit of the State of Illinois (Sangamon County) against the Company requesting money damages and injunctive relief for claims that we employed deceptive and unfair acts and practices in violation of the Illinois Consumer Fraud and Deceptive Business Act in a telemarketing campaign that in part promoted premium Internet Yellow Page listings to Illinois consumers.  LiveDeal has denied the allegations and is vigorously defending the claim.  Legal proceedings in the matter are ongoing.

 

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ITEM 1A.  RISK FACTORS

There have been no material changes to the factors disclosed in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

ITEM 6. EXHIBITS

The following exhibits are either attached hereto or incorporated herein by reference as indicated:

Exhibit Number	Description
31	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Section 1350 Certifications

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LiveDeal, Inc.
Dated:  August 12, 2010	/s/ Lawrence W. Tomsic
	Lawrence W. Tomsic
	Chief Financial Officer

  

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