Operating Leases and Service Contracts

The Company leases its office space and certain equipment under long-term operating leases expiring through fiscal year 2016. Rent expense under these leases was $350,822 and $465,811 for the years ended September 30, 2012 and 2011, respectively. The Company has also entered into several non-cancelable service contracts.

As of September 30, 2012, future minimum annual lease payments under operating lease agreements and non-cancelable service contracts for fiscal years ended September 30 are as follows:

Litigation

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

Except as described below, as of September 30, 2012, 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 routine 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 operation could change in the future.

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

On June 6, 2008, Global Education Services, Inc., which we refer to as GES, filed a consumer fraud lawsuit against us in the King County Superior Court in the State of Washington, alleging that our use of activator checks violated the Washington Consumer Protection Act and seeking class certification pursuant to Washington law. GES sought injunctive relief against our use of activator checks, damages in an amount equal to three times the damages allegedly sustained by the members of the putative class, exemplary damages for the alleged violation of law, and its fees and costs. We denied the allegations and commenced defending the litigation.

Early in 2010, the Court denied both parties’ dispositive motions, at which time they commenced settlement discussions. The parties reached a settlement and entered into a settlement agreement on or about November 5, 2012. Subject in each case to preliminary and final approval by the Court, the settlement agreement provides for $150,000 to be paid to plaintiff’s counsel, $10,000 to be paid to GES as the “representative plaintiff”, and $70 to be paid to each eligible tentative class member who properly submits a claims form and does not opt out of the settlement. On January 11, 2013, pursuant to a motion for preliminary approval filed by plaintiff’s counsel and not opposed by us (as agreed in the settlement agreement), the court granted preliminary approval to the proposed settlement and scheduled the final approval hearing for April 26, 2013. The settlement agreement and court order obligate us to send notices of the proposed settlement to the tentative class members and, thereafter, we expect that plaintiff’s counsel will seek final approval of the settlement by the Court. While as part of the settlement agreement we denied any wrongdoing, any liability and the appropriateness of class certification, we did agree not to oppose plaintiff’s motions for preliminary and final approval of the proposed settlement. We anticipate that the Court will grant final approval in our second quarter and that the required payments will be made during that quarter. As of September 30, 2012, the Company maintains an accrual of $150,000 related to this matter.

Sunpark 2000 LLC vs. Telco Billing, Inc.

On September 26, 2012, Sunpark 2000 LLC, which we refer to as Sunpark, filed a lawsuit against Telco Billing Inc., a subsidiary of LiveDeal, Inc., before the Eighth Judicial District Court (Clark County) of the State of Nevada. The complaint alleged we breached a lease agreement dated August 15, 2007 with Sunpark, which by its terms leased approximately 12,635 square feet of commercial real property in Las Vegas, Nevada to Telco Billing from November 1, 2007 until December 31, 2012. Sunpark is seeking lost rent damages of approximately $357,503 and repair expenses in excess of $2,500. Telco Billing denied the key allegations and asserted numerous affirmative defenses. The parties are in settlement discussions and have not yet commenced discovery. As of September 30, 2012, the Company maintains an accrual of $266,000 related to this matter.

LEC Billings

The Company has historically billed a significant amount of our legacy business revenues through LEC billing channels. The largest LEC billing companies have issued a notice to all clearinghouses that they will cease billing for third parties as of December 28, 2012. The Company anticipates that the three remaining LEC billing companies will also cease processing for third parties as of the end of 2012. If we are not able to obtain alternative billing methods for these customers, the number of legacy subscribers and our revenues will decline, which could materially and adversely affect our operating results and financial condition. The Company had approximately $877,000 of revenues billed through LEC billing channels for the year ended September 30, 2012. LEC billing channel costs related to those revenues equaled approximately $533,000 for the year ended September 30, 2012.

Except as referenced above, 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.