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 six months ended March 31, 2012, this “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, 2011.

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 in this portion of the Quarterly Report include, but are not limited to (i) our expectation that continued growth in business demand for online advertising and websites will drive increased revenues; (ii) expectation that cost of sales will continue to be directly correlated to our use of our internal fulfillment of customers costs, (iii) belief that our existing cash on hand, together with additional cash generated from operations or obtained from other sources, such sources of cash possibly including stock issuances and loans will provide us with sufficient liquidity to meet our operating needs for the next 12 months and (iv) belief that our gross profit margin and selling, general and administrative costs will support the Company’s business plans and opportunities.

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, 2011 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 generally affect our business, results of operations and financial position. Forward-looking statements speak only as of the date the statements were made. We do not undertake and specifically decline any obligation to update any forward-looking statements.

Any information contained on our website www.livedeal.com or any other websites referenced in this Quarterly Report are not part of this Quarterly Report.

Our Company

LiveDeal, Inc. primarily provides local internet marketing services for small businesses. LiveDeal, through our wholly owned subsidiary (Velocity Marketing Concepts, Inc.), offers an affordable way for small businesses to extend their marketing reach to local, relevant customers via the Internet. 

We use the latest technologies to deliver best-in-breed online marketing solutions to our small business customers.  We have online advertising solutions to help small businesses grow their company and realize online success. 

Summary Business Description

We deliver affordable acquisition services to the small business segment through the InstantAgency® Suite of products and services. These products are currently sold through Velocity Marketing Concepts which targets complimentary aspects of the small business market.

The InstantAgency products include:

InstantProfile distributes a small business’ key contact and service information to the top Internet destinations (based on popularity), including search engines, internet directories, and social media networks. This gives the advertiser the ability to manage their business information in one location and maximize their reach to the many destinations a consumer may search for local business services.

InstantProfile’s social media platform, InstantBUZZ, not only creates a presence for the advertiser in select social media networks, it also allows the advertiser to use one location to broadcast their messages across their entire social media network. By leveraging this automation, our customers avoid the need to manage multiple logins for individual websites and duplicate submissions, thereby decreasing the time required to broadcast their messages through multiple social media channels.

Additionally, InstantProfile customers enjoy a suite of communication tools that assist them in communicating directly with their customers and employees. These communication tools include a conferencing solution to host calls with up to 10 participants and an online electronic fax solution with unlimited faxes included.

The key attribute the InstantAgency® products and services all have in common is high value, low cost marketing options that service the many needs of the small business customer. The suite of products and services was strategically chosen to be entry level products and services that can grow with a small business as it grows. For those starting with the more customized products and services, InstantAgency® can continue to drive more online visitors and callers and in turn customers based on the customer budget.  Our strategic advantage is the ability to service the small business customer regardless of their budget or online knowledge.

Recent Developments

Financial Performance

We have embarked on a significant change in business strategy to maintain our legacy business (directory services offering) and update it to meet current market requirements and move ahead of our competitors in this market segment.  We have continued to experience a decline in revenues due to the stop in new sales in July 2011. However, we have also reduced our costs of sales, primarily due to fulfillment cost reductions, ongoing costs and expenses and reduced ongoing operating losses. Our losses have decreased from $2,314,700 and $4,045,094, for the three and six months ended March 31, 2011 to $258,993 and $450,631 for the three and six months ended March 31, 2012 respectively.

Discontinued Operations

As part of our strategy to evaluate each of our business segments as separate entities, management noted that the direct sales business segment has incurred operating losses and declining revenues and did not fit with our change in strategic direction. Accordingly, in March 2011, we made the strategic decision to discontinue our direct sales business and product offerings. Prior financial statements have been restated to present the direct sales business segment as a discontinued operation.

The direct sales business segment accounted for no net revenues for the three and six months ended March 31, 2012 and $513,751 and $1,236,137 of net revenues for the three and six months ended March 31, 2011, respectively. Net revenues from this business segment are now included as part of income from discontinued operations in the accompanying unaudited condensed consolidated statements of operations.

Restructuring Activities

On November 30, 2010, the Board approved a reduction in force that resulted in the termination of 36 of our employees or approximately 60% of our workforce, effective December 1, 2010. The reduction in force was related to our ongoing restructuring and cost reduction efforts and strategy of focusing our resources on the development and expansion of our core InstantProfile product, the successor to our LEC-billed directory product. All terminated employees were involved in the marketing and sale of our InstantPromote product by its subsidiary, Local Marketing Experts, Inc.

During the three and six months ended March 31, 2011, we incurred expenses of $0 and $99,319 respectively, in connection with this reduction in force. Of the $99,319 incurred in the fiscal quarter ended December 31, 2011, $37,500 were incurred for one-time employee termination benefits payable in cash and the remaining expenses related to salaries and wages payable in cash to the affected employees. No expenses were incurred in the three and six months ended March 31, 2012 in connection with the restructuring activities.

Termination and Appointment of Principal Officers

On January 13, 2012, we terminated the employment of Kevin A. Hall, our President and Chief Executive Officer, effective as of January 20, 2012. Pursuant to the terms of Mr. Hall’s employment agreement, if he was terminated without cause, upon his resignation from the Board and execution of a customary release, Mr. Hall would be entitled to receive (among other things) a lump sum severance payment equal to three months of his current base salary, or $56,250. We have not made any severance payments to Mr. Hall because the parties have disputed the circumstances and consequences of his termination.

Effective as of January 20, 2012, our Board appointed Jon Isaac to serve as our President and Chief Executive Officer. Mr. Isaac was previously appointed to our Board by ICG on December 12, 2011, pursuant to the terms of the Securities Purchase Agreement described above under the heading “-Recent Developments-Equity Issuance). Mr. Isaac has agreed to be paid an annual salary of $1 for his services as President and Chief Executive Officer, and will be eligible to receive bonuses in the forms and amounts determined by our Compensation Committee in its sole discretion. We do not have a written employment agreement with Mr. Isaac.

Changes in Terms of Employment of Our Chief Financial Officer

Effective February 27, 2012, the terms of the May 20, 2011 employment agreement between LiveDeal and the Chief Financial Officer, Lawrence W. Tomsic were amended. The revision provides for a salary of $110,000 ( a 50% reduction) for the remainder of the contract and all 10,526 stock options will fully vest on May 20, 2012.

Appointments and Resignation to the Board of Directors

On January 19, 2012, Sheryle Bolton resigned as a member of the Board. Ms. Bolton formerly served as our Lead Director and was a member of our Audit Committee. Her resignation did not result from any disagreement with us on any matter relating to our operations, policies, or practices.

On January 25, 2012, the Board appointed Dennis Gao as a director to fill the vacancy created by Ms. Bolton’s resignation. Mr. Gao was subsequently elected to our Board at our annual meeting of stockholders held on February 23, 2012. Mr. Gao was also appointed as a member of the Board’s Audit Committee.

Formation of Restructuring Committee

In connection with the Purchase Agreement described in Note 6, the Board also established an ad hoc special committee (the “Restructuring Committee”) to evaluate a potential restructuring of the Company. The Board appointed each of the New Directors, as well as existing directors Sheryle Bolton and Thomas Clarke, to serve on the Restructuring Committee. Ms. Bolton no longer serves on the Restructuring Committee effective immediately upon her resignation from the Board of Directors.

Change in Independent Registered Public Accounting Firm

On January 10, 2012, the Company dismissed Mayer Hoffman McCann P.C. (“MHM”) and approved the engagement of Kabani & Company, Inc (“Kabani”) to replace MHM as our independent registered public accounting firm. Both actions were approved by our board’s Audit Committee. At the 2012 annual meeting of our stockholders on February 23, 2012, our stockholders ratified the appointment of Kabani as our independent registered public accounting firm.

Results of Operations

The following sets forth a discussion of our financial results for the three and six months ended March 31, 2012 as compared to the three and six months ended March 31, 2011. In evaluating our business, management reviews several key performance indicators including new customers, total customers in each line of business, revenues per customer, and customer retention rates. However, given the changing nature of our business strategy, we do not believe that presentation of these metrics would reveal any meaningful trends in our operations that are not otherwise apparent from the discussion of our financial results below.

Net revenues decreased in the second quarter and first six months of fiscal 2012 as compared to the second quarter and first six months of fiscal 2011 primarily due to the fact that new sales were paused July 15, 2011 when we began exploring new sales programs and improving our marketing and fulfillment services.

Cost of services decreased in the second quarter and first six months of fiscal 2012 as compared to the second quarter and first six months of fiscal 2011 primarily due to decreased costs associated with the decline in the number of our customers and the provisioning of fulfillment activities are now done by us rather than outside vendors.

Gross profit increased in the second quarter and first six months of fiscal 2012 as compared to the second quarter and first six months of fiscal 2011 primarily due to the decreased cost of fulfillment services as described above.

General and administrative expenses decreased in the second quarter of fiscal 2012 as compared to the second quarter of fiscal 2011 primarily due to the following:

General and administrative expenses decreased in the first six months of fiscal 2012 as compared to the first six months of fiscal 2011 primarily due to the following:

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

Sales and marketing expenses decreased in the second quarter and first six months of fiscal 2012 as compared to the second quarter and first six months of fiscal 2011 primarily due to the reduction in spending for marketing materials.

The reduction in operating loss for the second quarter and first six months of fiscal 2012 as compared to the second quarter and first six months of 2011 reflect a variety of changes in net revenues, cost of sales, general and administrative expenses and sales and marketing expenses, each of which is described above.

For the second quarter and first six months of fiscal 2012, we paid $41,000 and $85,000 in interest expense, respectively, primarily for the Everest Group loan.

In March 2011, we decided to discontinue the direct sales business and closed that business segment in May 2011 and reflected the change for previously reported periods. For more information, see discussions under the heading “Recent Developments-Discontinued Operations” above. The decline in profitability between the three and six months ended March 31, 2012 as compared to the three and six months ended March 31, 2011 reflects a decline in revenues as we discontinued that business in May 2011.

The reduction in net loss for the second quarter and first six months of fiscal 2012 as compared to the second quarter and first six months of 2011 are primarily attributable to changes in operating income, other income (expense) and discontinued operations, each of which is described above.

Liquidity and Capital Resources

Net cash generated in operating activities was approximately $6,000 for the first six months of fiscal 2012 as compared to cash used in operating activities of approximately $2,805,000 for the first six months of fiscal 2011, an improvement of $2,811,000. A decrease of $3,594,000 in our net loss accounted for the majority of this variance. The cash impacts of the decreased net loss were partially offset by a reduction of non-cash expenses of $965,000 including depreciation expense, stock compensation and bad debt expense. Changes in working capital and other current assets caused an increase in operating cash flows of $199,000 during the first six months of fiscal 2012 as compared to an increase in operating cash flows of $17,000 for the first six months of 2011. This working capital variance resulted primarily from the changes in accounts receivable and accounts payable. 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.

We discontinued the direct sales services business in March 2011 as discussed above under the heading “Recent Developments-Discontinued Operations”. We previously received upfront payments averaging approximately one-sixth of the gross contract amount. Subsequent payments were received on an installment basis after the application of the initial payment amounts and were billed ratably over the remaining life of the contract.

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.

In March 2012, we invested $8,000 in intangible assets primarily trade names and software development.

During the first six months of fiscal 2012, our cash flows from financing activities consisted of $2,150,000 received from the issuance of stock to investors, partially offset by $32,000 of payments on capital lease obligations and $250,000 of repayments of notes payable. During the first six months of fiscal 2011, our cash flows from financing activities consisted of $250,000 received from the issuance of stock to an investor, partially offset by $31,000 of payments on capital lease obligations.

We had working capital of $869,000 as of March 31, 2012 compared to $(1,050,000) as of September 30, 2011 with current assets increasing by $1,696,000 and current liabilities decreasing by $223,000 from September 30, 2011 to March 31, 2012. Increases in working capital are primarily attributable to the proceeds received from the issuance of stock to our investors partially offset by our operating net loss.

While we believe that our existing cash on hand is sufficient to finance our operations for the next twelve months, there can be no assurance that we will generate profitability or positive operating cash flows in the near future. To the extent that we cannot achieve profitability or positive operating cash flows, our business will be materially and adversely affected. Further, our business is likely to experience significant volatility in our revenues, operating losses, personnel involved, products or services for sale, and other business parameters, as management implements our new strategies and responds to operating results.

Off-Balance Sheet Arrangements

At March 31, 2012, we had no off-balance sheet arrangements, commitments or guarantees that require additional disclosure or measurement.