Business context and reporting period
This is Loton, Corp.’s unaudited Form 10-Q for the quarter and six months ended September 30, 2015 (fiscal Q2 and first half of fiscal 2016). The filing identifies LiveXLive, Corp. as a wholly owned subsidiary; it does not identify LiveOne, Inc. as the registrant.
The business combined the KOKO live-music venue in Camden, London, with a newly formed digital live-music streaming business. Loton owns 50% of the entities operating KOKO and consolidates them. LiveXLive streamed the Rock in Rio festival in September and had a multi-year streaming agreement covering festivals through 2018.
Financial performance and position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $1.200 million, down 24.5% year over year | $3.137 million, down 8.7% |
| Gross margin | $1.023 million; 85.3% of revenue, versus 84.1% | $2.683 million; 85.5%, versus 84.5% |
| Operating expenses | $2.822 million, up 33.5% | $5.074 million, down 12.1% |
| Loss from operations | $1.799 million | $2.391 million |
| Net loss attributable to Loton shareholders | $1.886 million; basic and diluted loss per share $0.04 | $2.657 million; basic and diluted loss per share $0.06 |
| Operating cash flow | $1.737 million used, versus $1.485 million used in the prior-year six-month period |
At September 30, cash was $421,048, down from $866,951 at March 31. Current assets were $1.116 million against current liabilities of $6.234 million, implying a current ratio of about 0.18. Total liabilities were $7.262 million, exceeding total assets of $2.066 million; total deficit was $5.195 million. Related-party notes payable were $2.622 million, and a further $249,825 note payable was current. Financing activities provided $1.304 million during the six months, principally from related-party borrowing and equity sales.
Material changes versus the prior comparable period
- Quarterly revenue declined mainly because of five fewer live shows after the summer touring season and lower revenue per event for club nights. First-half revenue also reflected lower corporate-event revenue.
- Gross margin percentage improved as cost of revenue fell faster than sales, including a better mix and pricing of drink sales.
- Quarterly operating expenses rose, reflecting higher general and administrative costs and new streaming-production costs. First-half operating expenses fell, primarily because prior-year merger-related professional fees were lower.
- General and administrative expense increased 28.9% for the quarter and 24.6% for the half, attributed mainly to LiveXLive-related wages and promotional costs.
- Shares issued and outstanding increased from 43.276 million at March 31 to 44.471 million at September 30; the filing reports 45.442 million outstanding as of November 12.
Outlook, risks, contingencies, and unusual items
- Going concern: Management says accumulated deficits, recurring losses, and operating cash outflows raise substantial doubt about the company’s ability to continue as a going concern. Continued operations depend on executing the business strategy and raising additional funds; management says there is no assurance financing will be available. The statements include no adjustments that might be required if the company cannot continue as a going concern.
- Liquidity and strategy: The company depends on debt and equity financing and cash generated by KOKO. It said inadequate funding could require curtailing operations and noted it was exploring strategic alternatives for the KOKO entities. No quantified earnings or revenue guidance is provided.
- Debt and related parties: Trinad Capital held $1.000 million principal under one note and $1.186 million under a second note at September 30, plus accrued interest. The second note’s maximum advance amount was increased to $2.000 million on November 23, 2015. The company also owed a $1.000 million related-party management-service obligation. The filing describes ongoing monthly Trinad management fees and other related-party arrangements.
- Commitments: KOKO’s non-cancellable lease runs to November 2028; disclosed future minimum payments total approximately $10.914 million.
- Legal matter: A UK court quashed planning permission for a residential development next to KOKO on September 8, 2015 and ordered the council to pay Obar Camden’s costs of £35,000. The filing had warned that nearby residential development could create noise complaints and threaten the venue’s premises licence.
- Controls and filing status: The filing reports two material weaknesses: lack of written internal-control documentation and insufficient segregation of accounting duties. It also checks “No” for having filed all required Exchange Act reports during the prior 12 months.
- Subsequent personnel changes: LiveXLive President John Petrocelli resigned in October and forfeited 500,000 unvested restricted shares. New revenue and operations executives received restricted shares, as described in the filing.
Important facts for investors to verify
- Reconcile the quarterly net-loss figures: the financial statements report $1.886 million attributable to Loton shareholders, while MD&A reports $1.836 million.
- Reconcile Rock in Rio streaming-production costs: the operating-expense table reports $323,817 for the six months, while MD&A cites $223,817 for the event-related costs.
- Confirm current borrowing availability and repayment terms, especially the November amendment raising the Trinad note’s maximum advance amount, and assess dependence on related-party funding.
- Assess whether the streaming business can generate revenue sufficient to offset its startup, production, and promotional costs; the filing provides no quantified forecast.
- Review the going-concern disclosure, the material weaknesses, and the checked “No” response regarding timely filing of required reports.