(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
LiveDeal, Inc (NASDAQ:LIVE) is a low float stock that has raced higher due to recent promotions. It is up 500% YTD and was up 35% on Friday alone. I think at these levels if you can get shares to short and are able to tolerate volatility, a short should be very profitable over the next 3-6 months.
From the most recent 10-K;
LiveDeal, Inc., provides specialized online marketing solutions to small-to-medium sized local businesses, or SMBs, that boost customer awareness and merchant visibility . We offer affordable tools for SMBs to extend their marketing reach to relevant prospective customers via the internet. We also provide SMBs promotional marketing with the ability to offer special deals and activities through LiveDeal.com and our online publishing partners.
It has been described as similar to Groupon (NASDAQ:GRPN). It's not exactly the same, but it's pretty close. However LiveDeal currently only operates in San Diego, Los Angeles, and San Francisco counties. Unlike Groupon, LiveDeal does real time deals. LiveDeal has been around for some time in one form or another.
We were originally incorporated in Nevada in 1996 as Renaissance Center, Inc. We started in the online marketing industry with YP.com, which had introduced the print yellow pages to the internet. We moved into the online classifieds business when we acquired LiveDeal, Inc., a California corporation, in June 2007, and changed our corporate name to LiveDeal, Inc. in August 2007.
Despite being pretty early on one big trend (the shift from paper Yellow Pages to online), this doesn't mean that they are right again. Here is why LiveDeal, Inc is a screaming short.
Who Is Promoting This Stock?
It's not a question of if, LiveDeal is certainly being promoted. Over the past week I have heard several ads on the CNBC radio channel on SiriusXM. The ads compare LiveDeal to Groupon and say that its low float will cause it to be the next stock to really take off. And take off it has, going from $3/ share to $21.50/ share in the course of a month. The claims by the promoters and advertisers are causing this increase, and when you throw in the low float you get a recipe for large and volatile moves. The company has also issued a steady stream of press releases. In the last month alone 9 press releases have been sent out.
Source: Yahoo Finance
These press releases come from a firm called "Stock Market Media Group" or "SMMG." On the bottom of these press releases we see this disclaimer.
SMMG is a full service IR firm specializing in Research and Content Development. It offers a platform for corporate stories to unfold through the media with Reports, Interviews and Articles. For more information and to read disclaimers and disclosures: www.stockmarketmediagroup.com. This report is the opinion of SMMG and was written based upon publicly available information. LiveDeal, Inc. hasn't endorsed or compensated SMMG for this report.
Apparently LiveDeal hasn't compensated SMMG for this report, and while this may be true, somebody with an interest in this stock going up has been compensating SMMG. According to their website SMMG charges the following prices for their services.
Source: Social Market Media Group
SMMG has published one research report and distributed many press releases through Marketwired. In what is perhaps the most vague and two-faced disclaimer I have ever read, SMMG says that they have been compensated $2,500 for services by a "third party bank wire."
Stock Market Media Group was compensated up to two-thousand five hundred dollars for the research, writing, production, and release of our update Report on LIVE by a third-party via bank wire.
So while we know that LiveDeal hasn't compensated SMMG on this report, somebody clearly is. In an effort to figure out who is working for Stock Market Media Group I attempted to find the articles of incorporation. All states allow you to search for these and it's totally free. Since the number listed on the SMMG website is a "646" number, I started looking in New York state. No companies with the name "Stock Market Media Group" have been registered in NY. Fine, perhaps they incorporated in Delaware or Connecticut, no dice there either. I ended up checking every single state for a corporation called "Stock Market Media Group" and was able to find none. They do not call themselves "Stock Market Media Group, LLC" on their website because they are not an incorporated company. Is this a bad sign, I don't know, but it is a red flag. I'm assuming that SMMG is the company behind the ads appearing on CNBC.
Who Is Auditing This Company?
According to the most recent 10-K LiveDeal is audited by "Kabani and Company." Unfortunately Kabani & Co. has been cited by the PCAOB for 10 deficiencies in audits performed in 2011. Some of the deficiencies that stood out to me were
- (3) the failure to perform sufficient procedures to evaluate transactions with related parties
- (7) the failure to perform sufficient procedures to test revenue
- (10) the failure, in four audits, to perform sufficient procedures to test amounts reported in statements of cash flows.
While these deficiencies were cited several years ago, it is still a red flag to potential investors. I'm not suggesting that Kabani & Co. is incompetent as they did say that LiveDeal was a "going concern," which should be yet another red flag.
Where Is The Company?
LiveDeal, Inc is located at 6240 McLeod Drive Suite 120 in Las Vegas, Nevada. However no mention of LiveDeal appears on the marquee. Not to say that it's not located there, but strange that a $80 million market cap company has no sign on the marquee of its office space.
Source: Google Earth Street View
Valuation and Is it Groupon?
I don't think of Groupon as a particularly good company, but I recognize that others think it has a place in consumer spending. LiveDeal has been aggressively compared Groupon in press releases and SMMG report. But it is not even close to being Groupon, and yet it is valued much more richly than it.
Source: SEC filings
Neither companies are profitable, so traditional valuation metrics are not applicable, but these should give you an idea of how overvalued LiveDeal is compared to Groupon. If Groupon which is relatively established and has had time to work out the kinks in a similar business model and still isn't profitable what makes you think that LiveDeal can do it. A LiveDeal's bull's response would be that "Amazon isn't profitable, Tesla isn't profitable!" That is because those companies have explicitly said that they are not targeting profitability.
Two Years Later, How Are The Goals Working?
In the press release issued when CEO Jon Isaac took over these were the goals he laid out.
My plan is to focus on increasing sales of LiveDeal's existing product lines, while developing new products and reducing overall expenses. With this new plan, the company can possibly achieve a turnaround to profitability within a short period of time. I hope that my fellow shareholders will share in my excitement for the next chapter of LiveDeal, Inc."
He said that a return to profitability in a short time frame was one of his main goals. I don't see how this is possible given that LiveDeal is trying to expand nationwide. Groupon is already nationwide and still isn't profitable. So how has he done on his other goals (the goals were stated on January 24th, 2012, almost exactly 2 years to the date)
Reduce Overall Expenses
General and Administrative expenses are up 25% and sales and marketing expenses are up 378%, suggesting that LiveDeal is unable to expand while also lowering costs.
Increase Sales of Existing Product Lines, While Developing New Products
Revenues fell 23%, so that didn't work out. But also important is that LiveDeal lost revenue from existing product lines.
Net revenues in fiscal 2013 decreased by $718,635, as compared to fiscal 2012, primarily due to the end of LEC billing, which resulted in a decrease of approximately $1.2 million, which was partially offset by increases in revenue of approximately $500,000 from the Company's online marketing product.
Return to Profitability
Source: All above images are sourced from company filings
Operating losses have increased 189% over the last year; another goal that hasn't played out.
In that same press release it was announced that the new CEO would be taking a salary of just $1.00.
"As a measure of my confidence in LiveDeal and its significant growth potential, I have agreed to a take a salary of $1.00 per year," commented Mr. Isaac. "As a fellow shareholder in the Company, I have a vested interest in driving the success of the Company. My primary goal is to achieve profitability and increase shareholder value. It's not uncommon to see things like this when a CEO wants to express confidence in the future of a company.
On January 13, 2012, our Board of Directors appointed Jon Isaac to serve as our President and Chief Executive Officer. At the time, the Company did not enter into a written Employment Agreement with Mr. Isaac, but he was paid an annual salary of $1 for his services and was eligible to receive bonuses in such forms and amounts as determined by the Company's Compensation Committee. On February 14, 2013, the Company entered into a written Employment Agreement with Jon Isaac, pursuant to which he will continue serving as our President and Chief Executive Officer for the period from January 1, 2013 to January 1, 2016. The material terms of the Employment Agreement are as follows:
•$200,000 annual base salary throughout the term of the Employment Agreement.
• A one-time discretionary bonus of $150,000 for services performed as President and Chief Executive Officer for the previous 12 months, to be paid in cash on or before March 31, 2013. This bonus was approved by the Company's Compensation Committee.
The CEO was paid a bonus of $150,000 for the services of his first year, effectively bringing his 2012 compensation up to $150,001. The pay is still pretty low by CEO standards but it is representative of saying one thing and then doing another. He is also being compensated for reasonable housing costs.
On January 8th LiveDeal announced the registration of 660,000 shares of common stock for sale.
We have entered into an engagement agreement with Chardan Capital Markets, LLC relating to the sale of shares of our common stock offered by this prospectus supplement and the accompanying prospectus. In accordance with the terms of the engagement agreement, we may offer and sell up to a maximum aggregate amount of 660,000 shares of our common stock, $0.001 par value per share, from time to time through Chardan, acting as agent.
Given that the publicly traded float is only ~ 1.34 million shares the sale of these shares will significantly increased the float by around 50%.
On January 9, 2014, we delivered a placement notice to Chardan to sell 12,200 shares of our common stock as part of the at-the-market offering. The shares were sold for approximately $8.93 per share, resulting in gross proceeds of approximately $109,000. Net proceeds to us, after payment of Chardan's 3% commission was approximately $106,000.
Just a couple of weeks ago insiders were happy to sell the stock at $8.93/ share. It currently trades at $22/ share. There are a lot more shares just waiting to be sold.
Isaac Organization And Regulatory Issues
On January of 2012 Isaac Organization also known as Isaac Capital Group, run by LiveDeal CEO Jon Isaac, acquired a stake in Legent Clearing, LLC. In September of 2012 Legent Clearing changed its name to Cor Clearing LLC. Then in December of 2013 FINRA fined Cor Clearing $1 million for "numerous failures to comply with anti-money laundering, financial reporting, and regulatory supervision."
Brad Bennett, Executive Vice President and Chief of Enforcement, said, "COR's history of multiple violations in these key compliance areas resulted from its weak culture of compliance. This is particularly troubling given the amount of deposits and sales of low-priced securities through COR's introducing firms - a major area of concern for FINRA. Because COR is a clearing firm, its role as a gatekeeper to the securities markets makes it imperative that the firm meet its critical supervisory and internal control obligations."
COR provides clearing services for approximately 86 correspondent firms through fully disclosed clearing arrangements. As a clearing firm, COR performs order processing, settlement and record keeping functions for introducing broker-dealers that do not maintain back-office facilities to perform these functions. It services introducing firms with significant numbers of accounts, conducting activity in low-priced securities, as well as third-party wire activity.
In its 2013 examination letter, FINRA identified microcap fraud and anti-money laundering compliance as regulatory priorities that it would focus on throughout the year because of the risk they pose to investor protection and market integrity. FINRA specified the importance that firms monitor customer accounts liquidating microcap and low-priced OTC securities to ensure, among other things, that the firm is not facilitating, enabling or participating in an unregistered distribution. FINRA found that COR's AML surveillance program did not reasonably address the risks of its business model. These types of accounts present a higher risk of money laundering and other fraudulent activity. In addition, many of these correspondent firms had been the subject of past disciplinary action for AML-related rule violations. Notwithstanding the heightened AML risk, FINRA found that COR's surveillance program failed to identify "red flags" related to its correspondent firms and transactions by their customers.
Particularly troubling were the statements regarding low-priced securities.
So What Is LiveDeal Worth?
I do not think that LiveDeal should be valued more richly than Groupon. Groupon has intellectual property to back up its service. LiveDeal has none and a much more specific target market than Groupon does. However if we apply a 3x P/S multiple to LiveDeal (which is what Groupon trades at) we would get LIVE trading at $2.25/ share. This represents 83% downside. I believe it will eventually trade in this range. A more realistic valuation would be around $9/ share where insiders were willing to sell in the shelf registration just a few weeks ago. This represents around 55% downside. I think this is reasonable and realistic over the next 3-6 months. This stock has been driven up by a low float and promotion. While there is nothing wrong with momentum being behind a stock the low float argument will soon be negated when all the shares are sold increasing the publicly traded float by around 50%. Those reasons are why I believe that the stock should fall by between 50-75% over the next 3-6 months. Eventually you can't justify the fundamentals of a stock price just because it has a low float and an ad you heard on CNBC Radio.
With a lot of publicity from a sketchy company and a low float, this stock was a recipe to explode higher. That move should be over now, however, and this stock will eventually fall. When it does fall, it will fall hard. It's a fairly tough borrow to find, but there are currently shares available to short. If you can justify the current valuation with the red flags, then more power to you. But I can't, and I think it is a short at $21/ share.
Note: I have contacted the company about my concerns and not yet received a response. I will provide an update when I receive a response. If you have any information regarding Stock Market Media Group or any ads you've heard feel free to contact me.
Disclosure: I am short LIVE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.