LiveOne, Inc. (then Loton, Corp.) — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2016. The filing identifies the registrant as Loton, Corp.; LiveXLive, Corp. was its operating subsidiary. Amounts below are in U.S. dollars.
Business context and period
The company described its strategy as building a live and digital music business through LiveXLive, including live-event production and streaming. It also held a 50% equity-method investment in Obar Camden Holdings Ltd. (OCHL), which operated London’s KOKO venue. A September 2016 settlement agreement contemplated selling the company’s OCHL interest, subject to an independent valuation and closing conditions.
Financial results and liquidity
| Metric | Three months ended Sep. 30, 2016 | Three months ended Sep. 30, 2015, restated | Six months ended Sep. 30, 2016 | Six months ended Sep. 30, 2015, restated |
|---|---|---|---|---|
| Revenue | $225,000 | $0 | $225,000 | $0 |
| Operating loss | $(1,307,657) | $(1,831,850) | $(2,482,543) | $(2,707,643) |
| Net loss | $(1,746,149) | $(1,860,419) | $(3,550,119) | $(2,645,296) |
| Basic and diluted loss per share | $(0.02) | $(0.02) | $(0.04) | $(0.03) |
- The $225,000 of revenue was a license fee for production of a live video event. The filing does not present a company-level gross margin.
- Quarterly SG&A fell to $1.443 million from $1.742 million; six-month SG&A was essentially unchanged at $2.528 million. Related-party management fees were $90,000 for the quarter and $180,000 for the six months.
- Interest expense was $419,000 for the quarter and $1.131 million for the six months, versus $34,000 and $18,000, respectively, in the comparable periods. The six-month increase included amortization of debt discounts and other financing-related charges.
- Cash used in operations was $1.998 million for the six months; investing used $19,000 and financing provided $1.988 million. Cash declined from $36,898 at March 31 to $7,869 at September 30.
- At September 30, total assets were $5.347 million, including a $4.953 million OCHL investment. Current liabilities were $4.559 million, and the company reported a $4.448 million working-capital deficit. Total liabilities were $4.654 million.
- Related-party senior notes had $3.109 million of principal outstanding, reported net of a $1.052 million valuation discount as $2.057 million. The balance sheet also included a $269,135 note payable reported in default, $95,281 of net unsecured convertible notes, and a $1.000 million related-party services payable.
Material changes and unusual items
- The 2015 comparative statements were restated after the company determined it had improperly consolidated OCHL; it now accounts for its 50% interest using the equity method. This materially changed the presentation of prior-period revenue and expenses.
- During the six months, the company raised $1.25 million through a common-stock sale and received cash from warrant exercises and notes. It issued shares for services and warrants in connection with note extensions and conversions. Common shares outstanding increased from 91,996,976 at March 31 to 100,169,608 at September 30; the filing also records a 2-for-1 forward split and restates share amounts for it.
- The company extended related-party note maturities to June 30, 2017 in exchange for warrants. It converted $200,000 of convertible-note principal and $5,918 of interest into shares, with additional warrants issued as an inducement.
- The company’s 50% share of OCHL earnings was $63,669 for the six months, down from $79,912; OCHL recorded a net loss for the September quarter. The settlement contemplated a sale of the company’s OCHL interest, receipt of a valuation-based purchase price, and discharge of the Junior Note, but the filing does not establish that the transaction had closed.
Outlook, risks, and controls
- Management stated that available funds were expected to support operations only through December 31, 2016 and that additional financing, primarily debt or equity, was needed. It gave no assurance that financing would be available or acceptable; equity or convertible financing could dilute shareholders.
- The filing states that losses were expected to continue and that the working-capital deficit, operating loss, and operating cash use raised substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for a possible failure to continue as a going concern.
- The $269,135 note payable was past maturity and in default. A $213,331 related-party note receivable was also past due and in default.
- The Bengough dispute concerning OCHL and its operating subsidiary resulted in court proceedings, an interim order, and a settlement agreement with valuation, payment, and closing conditions. The petition included claims concerning governance and the Senior and Junior Notes; the company said it denied the allegations.
- Promotional-rights arrangements incurred $350,000 of payment obligations during the period and could require additional payments tied to a percentage of net revenue.
- Management concluded disclosure controls were not effective. Reported material weaknesses included lack of written control documentation, insufficient segregation of duties, no independent audit committee, and insufficient financial-reporting review controls; the filing connected the latter weakness to the prior restatement.
Important facts for investors to verify
- Whether the OCHL settlement and sale closed, the final valuation and proceeds, and the resulting treatment of the Junior Note and OCHL investment.
- Actual cash runway and availability, terms, and dilution impact of financing after September 30; subsequent advances disclosed were $25,000 from Trinad Capital and $200,000 from JJAT.
- The status and repayment terms of the defaulted $269,135 note and defaulted $213,331 related-party receivable, as well as related-party debt and accrued interest.
- Reconciliation of results: the statements report net losses of $1,746,149 for the quarter and $3,550,119 for six months, while MD&A gives different figures. The going-concern note also cites operating cash use of $1,957,841 in one passage, versus $1,997,841 in the cash-flow statement and elsewhere in MD&A.
- Progress in remediating the disclosed control weaknesses and any further effects of the restatement or equity issuance on reported results and share dilution.