Live Ventures - 10-Q quarterly report FY

(Mark One)

 

For the quarterly period ended December 31, 2005

 

For the transition period from _____________ to _______________

Commission File Number 0-24217

(Exact Name of Registrant as Specified in Its Charter)

 

(Registrant’s Telephone Number, Including Area Code)

 

 

 

 

 

 

 

 

 

All amounts, except share and per share amounts, are rounded to the nearest thousand dollars.

 

 

Effective October 1, 2004, the Company changed its method of accounting for forfeitures of restricted stock granted to employees, executives and consultants. Prior to this date, the Company recognized forfeitures as they occurred. Upon occurrence, the Company reversed the previously recognized expense associated with such grant. Effective October 1, 2004, the Company changed to an expense recognition method that is based on an estimate of the number of shares for which the service is expected to be rendered. The Company believes that this is a preferable method as it provides less volatility in expense recognition.

The impact of this change for periods prior to October 1, 2004 was an increase to income of $100,000 (less than $0.01 per share), net of taxes of $54,000, and has been reflected as a cumulative effect of a change in accounting principle in the Company’s consolidated statement of operations for the three months ended December 31, 2004. Because stock grants are now recorded net of estimated forfeitures, the cumulative effect of this change also reduced Additional Paid in Capital and Deferred Compensation by $1,013,000 and $1,166,000, respectively, at October 1, 2004.

Balance sheet information is as follows:

 

 

At December 31, 2005, future minimum annual lease payments under operating lease agreements for fiscal years ended September 30 are as follows:

On October 8, 2004, pursuant to the terms of a Letter Agreement with Jefferies & Company, Inc., the Company issued a total of 925,000 shares of common stock to Jefferies. These shares were issued in lieu of cash fees for Jefferies’ investment banking services. These shares were not issued under the Company’s 2003 Stock Plan. Of the total shares issued to Jefferies, 100,000 shares were issued without restrictions on transfer other than those imposed by Rule 144 under the Securities Act of 1933, as amended. The remaining 825,000 shares were granted pursuant to a Restricted Stock Agreement. Accordingly, these shares remain subject to restrictions on transfer and sale, which lapse in accordance with a vesting schedule depending on the achievement of certain performance goals, none of which were achieved as of December 31, 2005.

 

 

During the fourth quarter of fiscal 2005, the Company entered into a separation agreement with its Chief Operating Officer. Under the agreement, the Company made a cash payment of $80,000. No further amounts are owed under this agreement.

On November 3, 2005, the Company entered into a Separation Agreement with its Chief Executive Officer. Under the terms of the agreement, the Company is required to make a cash payment of $337,500 in the second quarter of fiscal 2006. The agreement also provides for the continued vesting of 700,000 shares of the Chief Executive Officers’ restricted stock awards that were granted in fiscal 2004 and 2005. The entire amount owed under the agreement has been accrued as of December 31, 2005.

The Company is party to certain legal proceedings incidental to the conduct of its business. Management believes that the outcome of pending legal proceedings will not, either individually or in the aggregate, have a material adverse effect on its business, financial position, results of operations, cash flows or liquidity.

During the third fiscal quarter of 2005, the Company recorded an accrual of $328,000 relating to a legal dispute with a former service provider. Based upon recent developments in this matter, YP Corp has increased the accrual by an additional $172,000 which has been reported in Other Income(Expense). The Company continues to pursue all legal means in defending itself in this matter

 

The following potentially dilutive securities were excluded from the calculation of net income per share because the effects are antidilutive:

The Company’s related party transactions occurring during fiscal 2005 and the first quarter of fiscal 2006 consisted exclusively of payments under termination agreements with former executives as described in Note 4.

 

 

 

On January 19, 2006, the Company entered into a Separation Agreement & General Release with Chris Broquist, its Chief Financial Officer, pursuant to which Mr. Broquist and the Company have agreed to terminate their employment relationship effective February 28, 2006. Pursuant to the terms of the Separation Agreement & General Release, among other items, Mr. Broquist will receive a severance package consisting of six months of compensation and health benefits and the continued vesting of his restricted stock and Mr. Broquist has agreed not to compete with the Company or solicit any of the employees of the Company for a period of two years.

At a meeting of the Board of Directors of the Company, held on January 8, 2006, John T. Kurtzweil, R.A. Johnson-Clague, Peter J. Bergmann and Paul Gottlieb each resigned from the Board of Directors of the Company and the respective committees of the Board of Directors on which they were serving. Subsequent to the foregoing resignations, Joseph F. Cunningham, Jr. and Elisabeth Demarse were elected to the Board of Directors of the Company. In addition, Daniel L. Coury, Sr., a current member of the Board of Directors, was elected Chairman of the Board and Mr. Cunningham was appointed to serve as the Chairman of the Audit Committee of the Board of Directors.

 

 

This portion of this Annual Report on Form 10-Q, includes statements that constitute “forward-looking statements.” These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “expects,” or “anticipates,” and do not reflect historical facts. Specific forward-looking statements contained in this portion of the Annual Report include, but are not limited to our (i) our expectation to continue to expand our telemarketing campaigns in the future; (ii) our expectation that any future changes in billing practices with our remaining LECs will not have a material adverse impact on our net revenues; (iii) our belief that cost of services will continue to be directly correlated to our usage of LEC billing channel; (iv) our belief that sales and marketing expenses will increase if we continue to our strategy of significant mailing and telemarketing activities; and (v) the belief that our existing cash on hand will provide us with sufficient liquidity to meet our operating needs for the next twelve months.

Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements and cause them to materially differ from those contained in the forward-looking statements include those identified in the section titled “Risk Factors”, as well as other factors that we are currently unable to identify or quantify, but that may exist in the future.

In addition, the foregoing factors may affect generally our business, results of operations, and financial position. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.

 

This section presents a discussion of recent developments and summary information regarding our industry and operating trends only. For further information regarding the events summarized herein, you should read this MD&A in its entirety.

 

We use a business model similar to print Yellow Pages publishers. We publish basic directory listings on the Internet free of charge. Our basic listings contain the business name, address, and telephone number for almost 17 million U.S. businesses. We strive to maintain a listing for almost every business in America in this format.

We generate revenues from advertisers that desire increased exposure for their businesses. As described below, advertisers pay us monthly fees in the same manner that advertisers pay additional fees to traditional print Yellow Pages providers for enhanced advertisement font, location or display. The users of our website are prospective customers for our advertisers, as well as the other businesses for which we publish basic listings.

Our primary product is our Internet Advertising Package™, or IAP. Under this package, advertisers pay for additional exposure by purchasing a Mini-WebPage™. In order to provide search traffic to our advertiser’s Mini-WebPage, we elevate the advertiser to a preferred listing status, at no additional charge. We also provide our IAP advertisers with enhanced presentation and additional unique products, such as larger font, bolded business name, map directions, ease of communication between our advertisers and users of our website, a link to the advertiser’s webpage, as well as other benefits.

 

The success of our business model is based on our ability to retain, add and efficiently bill our subscribers.

There have been different methodologies employed in the reporting of customer count. To more properly reflect customer count we now only count billed listings. A billed listing is defined by management as any listing that has successfully been submitted through one of our billing channels or in the case of listings billed by direct invoice only those listings that have paid for their listing at the end of the reporting period.

Management believes that this change when coupled with the knowledge of our average price and percentage of returns and allowances will provide greater insight into our business model for the public.

When this change is applied to the last 5 Quarters our key disclosures would look as follows:

 

We bill our customers through four primary channels: LEC billing, ACH billing, recurring credit card and direct invoice. During the end of 2004 and throughout 2005, we had been reducing our use of LEC billing channels as the LEC’s policies regarding the use of our check mailer as our primary letter of authorization prevented us from billing many existing customers through this particular billing channel. Additionally, the major LECs (i.e. Regional Bell Operating Companies or RBOCs) prevented us from billing any new customers acquired via check mailers. As such, we transitioned a significant number of our customers to alternate billing means, the most significant of which was ACH billing. ACH billing is less expensive than LEC billing; however, many of our customers view this as a less desirable billing method, leading to increased cancellations..

In fiscal 2006, we began acquiring new customers via telemarketing campaigns, which are allowed to be billed via LECs. These telemarketing campaigns have reopened the LEC billing channel as a viable billing channel Additionally, our monthly billing rates are higher for customers acquired via telemarketing campaigns. For these reasons, we expect to continue to expand our telemarketing campaigns in the future. Check mailings remain a component of our marketing efforts and a significant increase in the volume of our mailings have contributed to our recent revenue growth.

The following represents a summary of recent financial results:

 

(1) The following non-recurring items are relevant to our recent quarterly operating results, each of which are further described herein:

 

The following represents the breakdown of net billings by channel during recent fiscal quarters:

 

On January 19, 2006, we entered into a Separation Agreement with Chris Broquist, our Chief Financial Officer, pursuant to which Mr. Broquist and the Company have agreed to terminate their employment relationship effective February 28, 2006. Pursuant to the terms of the Separation Agreement & General Release, among other items, Mr. Broquist will receive a severance package consisting of six months of compensation and health benefits and the continued vesting of his restricted stock and Mr. Broquist has agreed not to compete with the Company or solicit any of the employees of the Company for a period of two years.

At a meeting of our Board of Directors, held on January 8, 2006, John T. Kurtzweil, R.A. Johnson-Clague, Peter J. Bergmann and Paul Gottlieb each resigned from our Board of Directors and their respective committees on which they were serving. Subsequent to the foregoing resignations, Joseph F. Cunningham, Jr. and Elisabeth Demarse were elected to the Board of Directors of the Company. In addition, Daniel L. Coury, Sr., a current member of our Board of Directors, was elected Chairman of the Board and Mr. Cunningham was appointed to serve as the Chairman of the Audit Committee of our Board of Directors.

On November 3, 2005, we entered into a Separation Agreement with Peter J. Bergmann in connection with his resignation as Chairman and President of our company. Under the terms of this agreement, Mr. Bergmann resigned as Chief Executive Officer during the second quarter of fiscal 2006. Mr. Bergmann will receive a cash payment of $337,500 and will continue to vest in a portion of his stock-based compensation earned during his tenure, in accordance with the terms of this agreement.

 

We have received a number of notices from the Attorney General offices of the States of Nevada, Nebraska, and Oregon concerning consumer complaints about the use of our direct mail solicitation. In Nebraska, the notice required us to cease and desist the use of our check mail program in that State immediately. The notices generally claim that the promotional check mailer practice engaged in by the Company violates state consumer protection statutes and deceptive trade practices acts.

We believe that the language in the various state statutes referenced is very vague as to what constitutes a deceptive trade practice or misleading practice, such that they are subject to wide-ranging constructions. Moreover, we do not believe that we are in violation of the referenced statutes. To this end, we are maintaining an ongoing dialogue with the various states in an effort to dispel such concerns, explain the non-deceptive nature of our business solicitations, and, if practicable, tailor our marketing practices so as to comply with the various states’ interpretation of what conduct would not violate the applicable consumer protection statutes.

Our current cooperative posture, however, does not obviate the possibility of a particular State Attorney General instituting formal action against us in a wider attempt to curb solicitations for business utilizing check promotions. We hope to continue our good faith discussions with these various States Attorney General offices in an effort to formulate a uniform set of standards to be used to determine if any specific check solicitation violates consumer protection laws. However, to the extent future standards are deemed too onerous, we may consider pursuing a legal course of action challenging those standards.

 

 

The increase in revenues for the three months ended December 31, 2005, as compared to December 31, 2004, was largely due to an increased customer count attributable to expanded marketing efforts. As discussed in “Executive Overview - Recent Operating Results” above, we increased our number of monthly check mailers and introduced telemarketing campaigns. Our use of telemarketing campaigns has reopened LEC billing as an effective means of billing new customers. Additionally, our monthly billing rates are higher for customers acquired through telemarketing efforts, which has also contributed to our revenue growth.

 

Although we have concentrations of risk with our billing aggregators (as described in the Notes to Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report) these aggregators bill via many underlying LECs. As we no longer have any significant concentrations of customers with any single LEC, we do not expect any future changes in billing practices with our remaining LECs to have a material adverse impact on our net revenues.

The price for our IAP product ranges from $17.95 to $39.95 per month.

We have recently begun acquiring new customers serviced through our LEC billing channels. To the extent we increase our use of LEC billing channels, our future cost of services as a percentage of net revenues is likely to increase.

The increase in our gross profits was due primarily to increased revenues as discussed above. Gross margins increased to 85.4% of net revenues in the first quarter of fiscal 2006 compared to 81.7% of net revenues in the first quarter of fiscal 2005 due to decreased dilution in fiscal 2006.

 

General and administrative expenses increased primarily due to approximately $338,000 of one-time settlement costs associated with the separation agreement with our former Chief Executive Officer that was incurred during the first quarter of fiscal 2006. We also experienced increased costs of approximately $208,000 associated with reconfirmation, mailing, billing and other customer-related expenses and increased non-cash compensation costs of approximately $245,000 associated with restricted stock awards to employees. These increases were offset by decreased cash compensation costs stemming from staffing reductions and other cost containment initiatives that took place during fiscal 2005.

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

 

Sales and marketing expense decreased in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005 due to a decrease in amortization expense and decreased advertising and promotional expenditures. We capitalize certain direct marketing expenses and amortize those costs over a period of time that approximates the estimated life of the customer. In the fourth quarter of fiscal 2005, this amortization period was reduced from 18 months to 12 months. Because the amount of capitalized costs that were subject to amortization was smaller during the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005, we incurred less amortization expense, despite the fact that the amortization period has been reduced.

We have recently expanded our direct mailings and telemarketing efforts, resulting in a recent increase in capitalized customer acquisition costs. To the extent that we continue to expand these efforts, we will experience future increases in sales and marketing expense related to this amortization.

The increase in depreciation and amortization expense is attributable to increased amortization of intangible assets associated with website development costs put in place during fiscal 2005 and amortization of a non-compete agreement that was acquired during the third quarter of fiscal 2005. Amortization relating to the capitalization of our direct mail marketing costs is included in marketing expenses, as discussed previously.

Our operating income increased substantially due primarily to revenue increases as previously described.

The change in other income (expense) for the first quarter of fiscal 2006 as compared to fiscal 2005 is due primarily to an increase in a legal accrual related to an ongoing dispute with a former service provider. Based upon recent developments in this matter, we have increased the $328,000 accrual previously recorded in the third quarter of fiscal 2005 by an additional $172,000 in the first quarter of fiscal 2006. We continue to pursue all legal means in defending this matter.

 

 

The change in our income tax benefit (provision) for the first quarter of fiscal 2006 as compared to fiscal 2005 is due almost entirely to our increase in profitability. We have not experienced a significant change in our effective tax rates during these periods.

The substantial increase in net income for the three months ended December 31, 2005 is due primarily to increased revenues, offset by increased income tax expense and the effects of the cumulative effect of accounting change in fiscal 2005, each of which is described above.

 

Net cash provided by operating activities decreased $1,579,070, or 61 %, to $1,009,298 for the three months ended December 31, 2005, compared to $2,588,368 for the three months ended December 31, 2004. During the first quarter of fiscal 2005, we generated a significant portion of our operating cash flow from the conversion of many of our customers from LEC billing to alternate billing channels that have a shorter collection time. During the first quarter of fiscal 2006, we did not have a significant amount of such conversions. Additionally, during the first quarter of fiscal 2006, we made substantial investments in direct customer acquisition costs as compared to the first quarter of fiscal 2005, where we had no such investments.

 

Our primary source of cash inflows is net remittances from our billing channels, including LEC billings and ACH billings. For LEC billings, we receive collections on accounts receivable through the billing service aggregators under contracts to administer this billing and collection process. The billing service aggregators generally do not remit funds until they are collected. Generally, cash is collected and remitted to us (net of dilution and other fees and expenses) over a 60- to 120-day period subsequent to the billing dates. Additionally, for each monthly billing cycle, the billing aggregators and LECs withhold certain amounts, or “holdback reserves,” to cover potential future dilution and bad debt expense. These holdback reserves lengthen our cash conversion cycle as they are remitted to us over a 12- to 18-month period of time. We classify these holdback reserves as current or long-term receivables on our balance sheet, depending on when they are scheduled to be remitted to us. For ACH billings, we generally receive the net proceeds through our billing service processors within 15 days of submission. Additionally, approximately 51% of our accounts receivable are due from a single aggregator.

 

Our most significant cash outflows include payments for marketing expenses and general operating expenses. Cash outflows for direct response advertising, our primary marketing strategy, typically occur in advance of expense recognition as these costs are capitalized and amortized over 12 months, the average estimated retention period for new customers. General operating cash outflows consist of payroll costs, income taxes, and general and administrative expenses that typically occur within close proximity of expense recognition.

 

There was no net cash used for investing activities for the first three months of fiscal 2006. During the first three months of fiscal 2005, cash used for investing activities was $8,732 which consisted of purchases of equipment.

 

Net cash used for financing activities was $90,026 for the first three months of fiscal 2006 and consisted exclusively of acquisitions of our common stock through our stock repurchase program.

We had working capital of $ 13,809,239 as of December 31, 2005, compared to $13,374,172 as of September 30, 2005. Our cash position increased during the past three months to over $9,000,000 at December 31, 2005 from approximately $8,100,000 at the end of fiscal 2005.

 

The credit facility requires us to maintain a “Leverage Ratio” (total liabilities to tangible net worth) that does not exceed 1.5-to-1 and a “Fixed Charge Ratio” (earnings before interest, taxes, depreciation, amortization and other non-cash charges minus any internally financed capital expenditures divided by the sum of debt service, rent under capital leases, income taxes and dividends) that is not less that 1.5-to-1 as determined quarterly on a 12-month trailing basis. The credit facility includes additional covenants governing permitted indebtedness, liens, and protection of collateral. As of December 31, 2005, we were in compliance with the covenants and are able to fully draw on the credit facility.

 

Until April 1, 2005, we were contractually obligated to pay a $0.01 per share dividend each quarter, subject to compliance with applicable laws, to all common stockholders, including those who hold unvested restricted stock. We are no longer required to pay quarterly dividends. Future dividend payments will be evaluated by the Board of Directors based upon earnings, capital requirements and financial position, general economic conditions, alternative uses of capital and other pertinent factors.

During the third quarter of fiscal 2005, our Board of Directors initiated the repurchase of up to $3 million of our common stock from time to time on the open market or in privately negotiated transactions. To date, we have reacquired 775,850 shares at an aggregate cost of $655,635 under the program.

The following table summarizes our contractual obligations at December 31, 2005 and the effect such obligations are expected to have on our future liquidity and cash flows: .

We believe that our existing cash on hand and cash flow from operations will provide us with sufficient liquidity to meet our operating needs for the next twelve months.

 

As of June 30, 2005, we did not participate in any market risk-sensitive commodity instruments for which fair value disclosure would be required under Statement of Financial Accounting Standards No. 107. We believe that we are not subject in any material way to other forms of market risk, such as foreign currency exchange risk or foreign customer purchases (of which there were none in the first three months of fiscal 2006 or in any of 2005) or commodity price risk.

 

 

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

 

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

 

Based on their review and evaluation as of the end of the period covered by this Form 10-Q, and subject to the inherent limitations all as described above, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective as of the end of the period covered by this report. They are not aware of any significant changes in our disclosure controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. During the period covered by this Form 10-Q, there have not been any changes in our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

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

 

SIGNATURES

 

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

YP.CORP.