Liveone, Inc. (filing registrant: Loton, Corp.) — Form 10-Q
Reporting period: Quarter ended September 30, 2014; the filing also reports six-month results. The filing identifies the company as Loton, Corp., not Liveone, Inc. The company changed its fiscal year-end to March 31 in connection with its April 2014 merger.
Business context
After the April 28, 2014 reverse acquisition, the company’s primary business was the KOKO live music venue and nightclub in Camden, London, operated by Obar Camden. The company held an indirect 50% interest in Obar Camden Holdings Limited (OCHL); a proposed share exchange to obtain the other 50% had not closed. Management was pursuing a possible sale of its interest in OCHL and Obar Camden.
Financial performance and position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue, 2014 | $1.589 million | $3.437 million |
| Revenue, 2013 | $1.185 million | $2.814 million |
| Gross margin, 2014 | $1.336 million (84.1%) | $2.904 million (84.5%) |
| Gross margin, 2013 | $1.003 million (84.7%) | $2.380 million (84.6%) |
| Net loss before non-controlling interest, 2014 | $883,657 | $3.028 million |
| Net income before non-controlling interest, 2013 | $49,178 | $231,812 |
| Net loss attributable to Loton stockholders, 2014 | $813,720 | $2.341 million |
- Revenue rose 34.2% for the quarter and 22.1% for the six-month period, attributed to higher live-event sales, a luxury club event in the six-month period, and currency translation.
- Operating expenses were $2.114 million for the quarter and $5.775 million for six months, including $1.376 million of merger transaction costs in the six-month period. Operating losses were $778,098 and $2.871 million, respectively.
- Six-month cash used in operations was $1.485 million, versus $21,911 used in the prior-year period. Investing activities provided $45,100, while financing activities provided $1.428 million. Cash declined by $69,237 to $661,971.
- At September 30, current assets were $1.388 million and current liabilities were $3.750 million, for negative working capital of $2.362 million. Total liabilities were $6.319 million and total equity was a deficit of $3.822 million.
- The balance sheet reported $2.022 million of related-party notes payable, plus $59,893 accrued related-party interest. Accounts payable were $1.208 million. The filing reports no material capital-expenditure commitments and no material off-balance-sheet arrangements.
- Common shares outstanding were 38,243,750 at September 30 and 38,560,000 as of November 10. The company raised $150,000 through three September stock sales at $1 per share.
Material changes, outlook, and risks
- Revenue growth was accompanied by higher costs: six-month cost of revenue rose 22.8%, while operating expenses rose 177.6%. Gross margin percentage was broadly stable year over year.
- The company reported limited cash, recurring losses, and dependence on financing and cash generated by OCHL to fund operations and debt service. It warned that inadequate financing or operating cash could prevent execution of its business plan.
- On September 23, 2014, Olly Bengough resigned as CEO and director. The proposed transfer of his OCHL shares remained incomplete, leaving the company with a 50% interest and shared governance constraints.
- Management was negotiating a sale of its OCHL/Obar Camden interest, with an investment bank contemplated if a sale was not completed by December 31, 2014. The filing cautions that a sale may not occur or may not be on acceptable terms; a sale could also leave the company needing financing or an acquisition to continue operations.
- A related-party management agreement with Trinad Management included a $1 million fee due at the end of its term and quarterly fees. The parties were negotiating an extension and deferral; no completed extension is disclosed.
- After quarter-end, a Forbearance Agreement was entered into on October 30, 2014. The filing describes a $500,000 payment and a concurrent $250,000 principal credit, with remaining principal reported as $876,124 under one expense note and $438,062 under another. Interest continued to accrue. The agreement also provided for sale negotiations and potential investment-bank engagement. Verify the transaction’s allocation and resulting debt balances against the underlying agreement.
- Disclosure controls were deemed ineffective, with two material weaknesses: no written documentation of internal controls and insufficient segregation of accounting duties. The filing reports no material legal proceedings and no formal financial guidance.
Important facts for investors to verify
- Confirm the correct issuer and reporting entity: the supplied filing is Loton, Corp.’s 2014 Form 10-Q, despite the request identifying Liveone, Inc.
- Reconcile the statement of operations’ quarterly and six-month net income/loss, non-controlling-interest allocation, and EPS with the MD&A; some presented figures appear inconsistent.
- Verify the current amount, maturity, and payment status of related-party notes, including the post-quarter-end Forbearance Agreement payment and principal credits.
- Assess the likelihood and terms of a sale of the company’s 50% OCHL interest, the unresolved share exchange, and the company’s financing needs if the sale proceeds or does not proceed.
- Track cash burn, negative working capital, related-party fees, dilution, and remediation of the disclosed material weaknesses.