Liveone, Inc. (Loton, Corp.) — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2016; filed February 13, 2017. The filing identifies the registrant as Loton, Corp., with LiveXLive, Corp. as its operating subsidiary. Interim financial statements are unaudited.
Business context and financial results
The company described its strategy as building a live and digital music business through LiveXLive. It sold its 50% interest in the KOKO venue investment in December 2016.
| Metric | Three months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2016 | Prior comparable period |
|---|---|---|---|
| Revenue | $0 | $225,000 | $0 in both 2015 periods, as restated |
| Operating expenses | $1,349,297 | $4,056,840 | $453,303 and $3,161,946, respectively |
| Operating loss | $(1,349,297) | $(3,831,840) | $(453,303) and $(3,161,946), respectively |
| Net loss | $(4,540,910) | $(9,143,122) | $(314,390) and $(2,960,686), respectively |
| Basic and diluted loss per share | $(0.05) | $(0.10) | $(0.00) and $(0.03), respectively |
The $225,000 in nine-month revenue was a license fee for producing a live video event. No quarterly revenue was reported from LiveXLive operations. Gross margin is not meaningful for the company’s reported periods because revenue was zero in the quarter and the filing provides no cost of revenue for its $225,000 of revenue.
Cash flow, liquidity, and debt
- Cash: $2.10 million at December 31, 2016, versus $36,898 at March 31, 2016. The balance sheet reports $2,098,488; the cash flow statement reports $2,098,489.
- Nine-month cash flows: $2.58 million used in operations, $2.16 million provided by investing activities (primarily the KOKO sale), and $2.48 million provided by financing. Net cash increased by $2.06 million.
- Liquidity: Current assets were $2.11 million and current liabilities $5.63 million, a working-capital deficit of approximately $3.52 million. Total liabilities were $5.99 million; stockholders’ deficit was $3.81 million.
- Debt and obligations: Current liabilities included $3.15 million of related-party notes, $273,172 on a note in default, $398,096 of accrued related-party interest, and a $1.00 million related-party services payable. Unsecured convertible notes were reported at $361,116 net of discount.
Material changes and unusual items
- Nine-month net loss increased by approximately $6.18 million year over year; quarterly net loss increased by approximately $4.23 million. SG&A rose by $894,894 for the nine months and $895,994 for the quarter.
- The company sold its KOKO interest for approximately $2.18 million and recorded a $2.79 million loss on sale and a $213,331 impairment/write-off of a related-party note receivable. It reported $132,832 of equity-method earnings from the investment before the sale during the nine-month period.
- Interest expense and financing-related charges increased. Nine-month results included $1.66 million of expense for warrants issued to extend a related-party note, as well as other warrant and conversion-related charges.
- Prior-year 2015 financial statements were restated, including to account for OCHL as an equity-method investment rather than a consolidated subsidiary and to correct other prior errors. Comparisons should be read on the restated basis.
- Common shares outstanding increased from 91,996,976 at March 31 to 100,941,430 at December 31, 2016. The filing reports 101,216,430 shares outstanding as of February 13, 2017.
Outlook, risks, and contingencies
- Going concern: Management said available funds were expected to support operations only through September 30, 2017 and that additional financing was needed. The company reported substantial doubt about its ability to continue as a going concern; future funding was not assured and could dilute shareholders or impose debt restrictions.
- Default: A $273,172 attorney-related note had not been extended and was in default as of the filing date.
- Legal and settlement matters: The dispute concerning KOKO was settled and the company completed the sale, but management disputed the valuation and said it intended to pursue claims against parties involved in the valuation and settlement process.
- Other commitments: The company incurred $350,000 in promotional-rights payment obligations and could owe additional amounts tied to net revenue collected.
- Controls: Management concluded disclosure controls were ineffective and reported material weaknesses, including inadequate written control procedures, insufficient segregation of duties, lack of an independent audit committee, and inadequate review controls. The filing also noted the prior-period restatement.
- The filing provides no specific revenue or profitability guidance. Management anticipated substantial losses over the next 12 months.
Important facts for investors to verify
- Available cash, operating cash burn, and the status and terms of any financing needed to extend the stated runway.
- Amounts, maturity dates, default status, and related-party terms of outstanding debt and accrued interest.
- The KOKO sale proceeds, recorded loss, discharged obligations, and status of the claims management said it intended to pursue.
- Revenue generation and cash requirements for LiveXLive, given minimal reported revenue and continuing losses.
- Share count, outstanding or newly issued securities, and potential dilution; also reconcile the one-dollar difference in reported ending cash.
- Progress in remediating material weaknesses and the implications of the restatement for prior-period comparisons.