UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from __________________ to __________________
Commission File Number:
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Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| ☒ | Smaller reporting company | ||
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As of August 12, 2022, there were
LIVEONE, INC.
TABLE OF CONTENTS
| Page | |||
| PART I — FINANCIAL INFORMATION | F-1 | ||
| Item 1. | Financial Statements | F-1 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 1 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 13 | |
| Item 4. | Controls and Procedures | 13 | |
| PART II — OTHER INFORMATION | 15 | ||
| Item 1. | Legal Proceedings | 15 | |
| Item 1A. | Risk Factors | 15 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24 | |
| Item 3. | Defaults Upon Senior Securities | 24 | |
| Item 4. | Mine Safety Disclosures | 24 | |
| Item 5. | Other Information | 24 | |
| Item 6. | Exhibits | 25 | |
| Signatures | 27 | ||
i
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
F-1
LiveOne, Inc.
(formerly LiveXLive Media, Inc.)
Condensed Consolidated Balance Sheets
(Unaudited, in thousands, except share and per share amounts)
| June 30, | March 31, | |||||||
| 2022 | 2022 | |||||||
| Assets | (Audited) | |||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expense and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Accrued royalties | ||||||||
| Notes payable, current portion | ||||||||
| Deferred revenue | ||||||||
| Total Current Liabilities | ||||||||
| Senior secured convertible notes, net | ||||||||
| Unsecured convertible notes, net – related party | ||||||||
| Senior secured line of credit | ||||||||
| Notes payable, net | ||||||||
| Lease liabilities, noncurrent | ||||||||
| Other long-term liabilities | ||||||||
| Deferred income taxes | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Treasury stock | ( | ) | - | |||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-2
LiveOne, Inc.
(formerly LiveXLive Media, Inc.)
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except share and per share amounts)
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue: | $ | $ | ||||||
| Operating expenses: | ||||||||
| Cost of sales | ||||||||
| Sales and marketing | ||||||||
| Product development | ||||||||
| General and administrative | ||||||||
| Amortization of intangible assets | ||||||||
| Total operating expenses | ||||||||
| Income (loss) from operations | ( | ) | ||||||
| Other income (expense): | ||||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Forgiveness of PPP loans | ||||||||
| Other income | ||||||||
| Total other income (expense), net | ||||||||
| Income (loss) before income taxes | ( | ) | ||||||
| (Benefit from) provision for income taxes | ( | ) | ||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Net income (loss) per share - basic | $ | $ | ( | ) | ||||
| Net income (loss) per share – diluted | $ | $ | ( | ) | ||||
| Weighted average common shares – basic | ||||||||
| Weighted average common shares – diluted | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-3
LiveOne, Inc.
(formerly LiveXLive Media, Inc.)
Condensed Consolidated Statement of Stockholders’ Equity (Deficit)
(Unaudited, in thousands, except share and per share amounts)
| Common Stock | Additional Paid in | Accumulated | Common Stock in Treasury | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Shares | Amount | Deficit | ||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Shares issued pursuant to restricted stock units | - | - | ||||||||||||||||||||||||||
| Treasury stock purchases | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Common Stock | Additional Paid in | Accumulated | Total Stockholders’ Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Interest paid in kind | - | |||||||||||||||||||
| Purchase price adjustment in connection with CPS acquisition | - | |||||||||||||||||||
| Shares issued in connection with Secured Convertible Notes | ||||||||||||||||||||
| Shares issued pursuant to restricted stock units | ||||||||||||||||||||
| Shares issued upon exercise of stock options | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-4
LiveOne, Inc.
LiveXLive Media, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Interest paid in kind | ||||||||
| Stock-based compensation | ||||||||
| Amortization of debt discount | ||||||||
| Change in fair value of bifurcated embedded derivatives | ( | ) | ||||||
| Change in fair value of contingent consideration liability | ( | ) | ( | ) | ||||
| Forgiveness of PPP Loans | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Inventories | ( | ) | ||||||
| Other assets | ||||||||
| Deferred revenue | ( | ) | ||||||
| Accrued royalties | ||||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Purchases of intangible assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Payments on capital lease liability | ( | ) | ||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from drawdown on senior secured revolving line of credit | ||||||||
| Purchase of treasury stock | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net change in cash, cash equivalents and restricted cash | ( | ) | ||||||
| Cash, cash equivalents and restricted cash, beginning of period | ||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Fair value of options issued to employees, capitalized as internally-developed software | $ | $ | ||||||
| Fair value of | $ | $ | ||||||
| Fair value of shares issued in connection with CPS acquisition | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-5
LiveOne, Inc.
(formerly LiveXLive Media, Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended June 30, 2022 and 2021
Note 1 — Organization and Basis of Presentation
Organization
LiveOne, Inc. (formerly LiveXLive Media, Inc.) together with its subsidiaries (“we,” “us,” “our”, the “Company” or “LiveOne”) is a Delaware corporation headquartered in Beverly Hills, California. The Company is a creator-first, music, entertainment and technology platform focused on delivering premium experiences and content worldwide through memberships, live and virtual events.
The Company was reincorporated in the State of Delaware on August 2, 2017, pursuant to a reincorporation merger of Loton, Corp (“Loton”) with and into LiveXLive Media, Inc., Loton’s wholly owned subsidiary at the time. As a result of the reincorporation merger, Loton ceased to exist as a separate entity, with LiveXLive Media, Inc. being the surviving entity. Effective as of October 5, 2021, the Company changed its name to LiveOne, Inc. On December 29, 2017, the Company acquired Slacker, Inc. (“Slacker”), an Internet music and radio streaming service incorporated in the state of Delaware, and it became a wholly owned subsidiary of LiveOne. On February 5, 2020, the Company acquired (i) React Presents, LLC a Delaware limited liability company (“React Presents”), and it became a wholly owned subsidiary of LiveXLive Events, LLC, a wholly owned subsidiary of the Company and (ii) indirectly Spring Awakening, LLC, which is a wholly owned subsidiary of React Presents, a producer, promoter and manager of in person live music festivals and events. On July 1, 2020, the Company through its wholly owned subsidiary, LiveXLive PodcastOne, Inc., acquired Courtside Group, Inc. (dba PodcastOne) (“PodcastOne”) (see Note 4 – Business Combinations). On December 22, 2020, the Company through its wholly owned subsidiary LiveXLive Merchandising, Inc., acquired Custom Personalization Solutions, Inc. (“CPS”) (see Note 4 – Business Combinations). On October 17, 2021, the Company through its wholly owned subsidiary LiveXLive PR, Inc., acquired Gramophone Media, Inc. (“Gramophone”) (see Note 4 – Business Combinations).
Basis of Presentation
The presented financial information includes the financial information and activities of Gramophone for the three months ended June 30, 2022 (91 days) and for the three months ended June 30, 2021 (0 days).
The unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2022, and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s unaudited condensed consolidated financial statements for the three months ended June 30, 2022. The results for the three months ended June 30, 2022 are not necessarily indicative of the results expected for the full fiscal year ending March 31, 2023 (“fiscal 2023”). The condensed consolidated balance sheet as of March 31, 2022 has been derived from the Company’s audited balance sheet included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on June 29, 2022 (the “2022 Form 10-K”).
The interim unaudited condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete audited financial statements. Therefore, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the 2021 Form 10-K.
Going Concern and Liquidity
The Company’s condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
The Company’s principal
sources of liquidity have historically been its debt and equity issuances and its cash and cash equivalents (which cash, cash equivalents
and restricted cash amounted to $
F-6
The Company’s ability
to continue as a going concern is dependent on its ability to execute its growth strategy and on its ability to raise additional funds.
The Company filed a new universal shelf Registration Statement on Form S-3 (the “New Shelf S-3”) with the SEC, which was declared
effective by the SEC on February 17, 2022. Under the New Shelf S-3, the Company has the ability to raise up to $
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Acquisitions are included in the Company’s condensed consolidated financial statements from the date of the acquisition. The Company uses purchase accounting for its acquisitions, which results in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the Company’s previously issued financial statements have been reclassified to conform to the current year presentation.
Note 2 — Summary of Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies from those previously disclosed in the consolidated financial statements included in the 2022 10-K, other than those included below.
COVID-19
In March 2020, the World Health
Organization declared the outbreak of the novel coronavirus disease (“COVID-19”) as a pandemic. The global impact of the COVID-19
pandemic has had a negative effect on the global economy, disrupting the financial markets creating increasing volatility and overall
uncertainty. The Company began to experience modest adverse impacts of the COVID-19 pandemic in the fourth quarter of fiscal year ended
March 31, 2020 and became more adverse throughout the fiscal year ended March 31, 2021 and up to the third quarter of fiscal year ended
March 31, 2022. Although the impact has subsided, the Company expects to continue experiencing modest adverse impacts throughout the fiscal
year ending March 31, 2023. The Company’s event and programmatic advertising revenues were directly impacted throughout the 2022
and 2021 fiscal years with all on-premise in-person live music festivals and events postponed in 2021 fiscal year and mixed demand from
historical advertising partners in 2022 fiscal year. Further, one of the Company’s larger customers also experienced a temporary
halt to its production as a result of COVID-19, which negatively impacted the Company’s near-term member growth in the 2021 fiscal
year. During the fiscal year ended March 31, 2021, the Company enacted several initiatives to counteract these near-term challenges, including
salary reductions, obtaining a Paycheck Protection Program (“PPP”) loan (see Note 8 - Notes Payable) and pivoting its live
music production to
On March 27, 2020, the Coronavirus
Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in the United States. The CARES Act provides numerous
tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses
and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. The Company evaluated
the provisions of the CARES Act and determined it is eligible for Employee Retention Credits related to payroll taxes paid during the
quarter ended September 30, 2021. In accordance with ASC 105-10-05-02, the Company analogized to International Financial Reporting Standards
(“IFRS”), specifically International Accounting Standards (“IAS”) 20, Accounting for Government Grants and
Disclosures of Government Assistance, and determined that the payroll tax credit will be recognized as a reduction to the payroll
tax expense when it is reasonably assured that the credit will be received. As of March 31, 2022, the Company received confirmation the
credit would be approved and recognized the credit of $
On December 29, 2020, the Consolidated Appropriations Act (“CAA”) was enacted in the United States. The CAA provides numerous tax provisions and most notably for the Company changes the tax treatment of those expenses paid for with a PPP loan from non-deductible to deductible. The Company is in the process of evaluating the provisions of the CAA including obtaining a second draw Paycheck Protection Program loans and applying for the potential eligibility for Employee Retention Credits and does not anticipate the provisions included will have a material impact on its provision for income taxes.
F-7
Use of Estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue, allowance for doubtful accounts, inventory calculations and reserves, the assigned value of acquired assets and assumed and contingent liabilities associated with business combinations and the related purchase price allocation, useful lives and impairment of property and equipment, intangible assets, goodwill and other assets, the fair value of the Company’s equity-based compensation awards and convertible debt and debenture instruments, fair values of derivatives, and contingencies. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities. Given the overall uncertainty surrounding the COVID-19 pandemic, there is a reasonable possibility that actual results could differ from those estimates and such differences could be material to the financial position and results of operations, specifically in assessing when the collectability of revenue related consideration is probable, and the impairment assessment of goodwill, indefinite lived assets or long-lived assets that are depreciated or amortized.
Revenue Recognition Policy
The Company accounts for a contract with a customer when an approved contract exists, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectability of substantially all of the consideration is probable. Revenue is recognized when the Company satisfies its obligation by transferring control of the goods or services to its customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company uses the expected value method to estimate the value of variable consideration on advertising and with original equipment manufacturer contracts to include in the transaction price and reflect changes to such estimates in periods in which they occur. Variable consideration for these services is allocated to and recognized over the related time period such advertising and membership services are rendered as the amounts reflect the consideration the Company is entitled to and relate specifically to the Company’s efforts to satisfy its performance obligation. The amount of variable consideration included in revenue is limited to the extent that it is probable that the amount will not be subject to significant reversal when the uncertainty associated with the variable consideration is subsequently resolved.
Practical Expedients
The Company elected the practical expedient and recognized the incremental costs of obtaining a contract, if any, as an expense when incurred if the amortization period of the asset that would have been recognized is one year or less.
Gross Versus Net Revenue Recognition
The Company reports revenue on a gross or net basis based on management’s assessment of whether the Company acts as a principal or agent in the transaction and is evaluated on a transaction by transaction basis. To the extent the Company acts as the principal, revenue is reported on a gross basis net of any sales tax from customers, when applicable. The determination of whether the Company acts as a principal or an agent in a transaction is based on an evaluation of whether the Company controls the good or service prior to transfer to the customer. Where applicable, the Company has determined that it acts as the principal in all of its membership service, sponsorship, and merchandising streams and may act as principal or agent for its ticketing/live events, advertising and licensing revenue streams.
F-8
The Company’s revenue is principally derived from the following services:
Membership Services
Membership services revenue substantially consist of monthly to annual recurring membership fees, which are primarily paid in advance by credit card or through direct billings arrangements. The Company defers the portions of monthly to annual recurring membership fees collected in advance and recognizes them in the period earned. Membership revenue is recognized in the period of services rendered. The Company’s membership revenue consists of performance obligations that are satisfied over time. This has been determined based on the fact that the nature of services offered are membership based where the customer simultaneously receives and consumes the benefit of the services provided regardless of whether the customer uses the services or not. As a result, the Company has concluded that the best measure of progress toward the complete satisfaction of the performance obligation over time is a time-based measure. The Company recognizes membership revenue straight-line through the membership period.
Membership Services consist of:
Direct member, mobile service provider and mobile app services
The Company generates revenue for membership services on both a direct basis and through memberships sold through certain third-party mobile service providers and mobile app services (collectively the “Mobile Providers”). For memberships sold through the Mobile Providers, the member executes an on-line agreement with Slacker outlining the terms and conditions between Slacker and the member upon purchase of the membership. The Mobile Providers promote the Slacker app through their e-store, process payments for memberships, and retain a percentage of revenue as a fee. The Company reports this revenue gross of the fee retained by the Mobile Providers, as the member is Slacker’s customer in the contract and Slacker controls the service prior to the transfer to the member. Membership revenues from monthly memberships sold directly through Mobile Providers are subject to such Mobile Providers’ refund or cancellation terms. Revenues from Mobile Providers are recognized net of any such adjustments for variable consideration, including refunds and other fees. The Company’s payment terms vary based on whether the membership is sold on a direct basis or through Mobile Providers. Memberships sold on a direct basis require payment before the services are delivered to the customer. The payment terms for memberships sold through Mobile Providers vary, but are generally payable within 30 days.
Third-Party Original Equipment Manufacturers
The Company generates revenue for membership services through memberships sold through a third-party Original Equipment Manufacturer (the “OEM”). For memberships sold through the OEM, the OEM executes an agreement with Slacker outlining the terms and conditions between Slacker and the OEM upon purchase of the membership. The OEM installs the Slacker app in their equipment and provides the Slacker service to the OEM’s customers. The monthly fee charged to the OEM is based upon a fixed rate per vehicle, multiplied by the variable number of total vehicles which have signed up for a paid membership. The number of customers, or the variable consideration, is reported by OEMs and resolved on a monthly basis. The Company’s payment terms with OEM are up to 30 days.
Advertising Revenue
Advertising revenue primarily consist of revenues generated from the sale of audio, video, and display advertising space to third-party advertising exchanges. Revenues are recognized based on delivery of impressions over the contract period to the third-party exchanges, either when an ad is placed for listening or viewing by a visitor or when the visitor “clicks through” on the advertisement. The advertising exchange companies report the variable advertising revenue performed on a monthly basis which represents the Company’s efforts to satisfy the performance obligation. Additionally, following the acquisition of PodcastOne, the Company began deriving revenue from podcast advertising. PodcastOne earns advertising revenues primarily for fees earned from advertisement placement purchased by the customer during the time the podcast is delivered to the viewing audience, under the terms and conditions as set forth in the applicable podcasting agreement calculated using impressions.
From time to time the Company
enters into barter transactions involving advertising provided in exchange for goods and services. Revenue from barter transactions is
recognized based on delivery of impressions and in the same manner as described above. Services received are charged to expense when received
or utilized. If services are received prior to the delivery of impressions, a liability is recorded. If delivery of impressions have occurred
before the receipt of goods or services, a receivable is recorded. Barter revenue for the three months ended June 30, 2022 and 2021 was
$
F-9
Licensing Revenue
Licensing revenue primarily consists of sales of licensing rights to digitally stream the Company’s live music services. Licensing revenue is recognized when the Company satisfies its performance obligation by transferring control of the goods or services to its customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services, which is typically when the live event has aired. Any license fees collected in advance of an event are deferred until the event airs.
Sponsorship Revenue
Sponsorship revenue primarily consists of sales of sponsorship programs that provide sponsors with opportunities to reach the Company’s customers. Sponsorship revenue is recognized as the event airs. Any sponsorship fees collected in advance of the contract term (typically an event) are deferred until the event airs. The Company reports sponsorship revenue on a gross basis as the Company acts as the principal in the underlying transactions.
Merchandising Revenue
Revenue is recognized upon
the transfer of control to the customer. The Company recognizes revenue and measures the transaction price net of taxes collected from
customers and remitted to governmental authorities. Sales also include shipping and handling charges billed to customers, with the related
freight costs included in cost of goods sold. Sales commissions are expensed as incurred and are recorded in sales and marketing expenses
in the consolidated statements of operations. The Company’s customer contracts do not have a significant financing component due to their
short durations, which are typically effective for one year or less and have payment terms that are generally 30 to 60 days. Wholesale
revenue is generally recognized when products are shipped, depending on the applicable contract terms. The Company records a refund liability
for expected returns based on prior returns history, recent trends, and projections for returns on sales in the current period. The refund
liability at June 30, 2022 and 2021 was less than $
Ticket/Event Revenue
Ticket/Event revenue is primarily from the sale of tickets and promoter fees earned from venues or other co-promoters under one of several formulas, including a fixed guaranteed amount and/or a percentage of ticket sales or event profits.
Revenue from the promotion or production of an event is recognized at a point in time when the show occurs. Revenue collected in advance of the event is recorded as deferred revenue until the event occurs. Revenue collected from sponsorship agreements, which is not related to a single event, is classified as deferred revenue and recognized over the term of the agreement or operating season as the benefits are provided to the sponsor.
Revenue from the Company’s ticketing operations primarily consists of service fees charged at the time a ticket for an event is sold in either the primary or secondary markets, including both online pay-per-view (“PPV”) tickets as well as ticket physically purchased through a ticket sale vendor. For primary tickets sold to the Company’s PPV and festival events the revenue for the associated ticket service charges collected in advance of the event is recorded as deferred revenue until the event occurs. For PPV arrangements that include multiple performance obligations, i.e. delivery of the online stream, sponsorships, digital meet and greet, or physical merchandise, the Company allocates the total contract consideration to each performance obligation using the standalone selling price. If the standalone selling price is not readily determinable, it is estimated using observable inputs including an adjusted market based approach, expected cost plus margin, or the residual approach.
F-10
Net Income (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed using the weighted-average number of common shares and the dilutive effect of contingent shares outstanding during the period. Potentially dilutive contingent shares, which primarily consist of stock options issued to employees, directors and consultants, restricted stock units, warrants issued to third parties and accounted for as equity instruments and convertible notes would be excluded from the diluted earnings per share calculation because their effect is anti-dilutive.
At June 30, 2022 and 2021,
the Company had
Basic earnings per share is calculated using our weighted-average outstanding common shares. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method. In periods when we have a net loss, stock awards are excluded from our calculation of earnings per share as their inclusion would have an antidilutive effect.
The following table shows the calculation of diluted shares:
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Shares used in computation of basic earnings per share | ||||||||
| Total dilutive effect of outstanding stock awards | ||||||||
| Shares used in computation of diluted earnings per share | ||||||||
Business Combinations
The Company accounts for its business combinations using the acquisition method of accounting where the purchase consideration is allocated to the underlying net tangible and intangible assets acquired, based on their respective fair values. The excess of the purchase consideration over the estimated fair values of the net assets acquired is recorded as goodwill. Identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree are recognized and measured as of the acquisition date at fair value. Additionally, any contingent consideration is recorded at fair value on the acquisition date and classified as a liability. Goodwill is recognized to the extent by which the aggregate of the acquisition-date fair value of the consideration transferred and any noncontrolling interest in the acquiree exceeds the recognized basis of the identifiable assets acquired, net of assumed liabilities. Determining the fair value of assets acquired, liabilities assumed and noncontrolling interests requires management’s judgment and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses and cash flows, weighted average cost of capital, discount rates, estimates of customer turnover rates, estimates of terminal values, and royalty rates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities, when purchased, of three months or less.
The following table provides amounts included in cash, cash equivalents and restricted cash presented in the Company’s condensed consolidated statements of cash flows for the three months ended June 30, 2022 and 2021 (in thousands):
| 2022 | 2021 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and cash equivalents and restricted cash | $ | $ | ||||||
F-11
Restricted Cash and Cash Equivalents
The Company maintains certain
letters of credit agreements with its banking provider, which are secured by the Company’s cash for periods of less than one year.
As of June 30, 2022 and March 31, 2022, the Company had restricted cash of $
Allowance for Doubtful Accounts
The Company evaluates the collectability of its accounts receivable based on a combination of factors. Generally, it records specific reserves to reduce the amounts recorded to what it believes will be collected when a customer’s account ages beyond typical collection patterns, or the Company becomes aware of a customer’s inability to meet its financial obligations.
The Company believes that
the credit risk with respect to trade receivables is limited due to the large and established nature of its largest customers and the
nature of its membership receivables. At June 30, 2022, the Company had one customer that made up
The Company’s accounts receivable at June 30, 2022 and March 31, 2022 is as follows (in thousands):
| June 30, | March 31, | |||||||
| 2022 | 2022 | |||||||
| Accounts receivable, gross | $ | $ | ||||||
| Less: Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
Inventories
Inventories, principally raw materials awaiting final customization process, are stated at the lower of cost or net realizable value. Inventories are relieved on a first-in, first-out basis.
The carrying value of inventories is reduced for any excess and obsolete inventory. Excess and obsolete reductions are determined based on currently available information, including the likely method of disposition, such as through sales to individual customers and liquidations, and the age of inventory.
Paycheck Protection Program Loans
In response to the COVID-19
pandemic, the PPP was established under the CARES Act and administered by the U.S. Small Business Administration (“SBA”).
Companies who met the eligibility requirements set forth by the PPP could qualify for PPP loans provided by local lenders, which supports
payroll, rent and utility expenses (“qualified expenses”). If the loan proceeds are fully utilized to pay qualified expenses
over the covered period, as further defined by the PPP, the full principal amount of the PPP loan may qualify for loan forgiveness, subject
to potential reduction based on the level of full-time employees maintained by the organization during the covered period as compared
to a baseline period. During the year ended March 31, 2022, the Company received confirmation from the SBA that $
As the loans were forgiven
and we were released from being the primary obligor, the Company recognized income in the amount forgiven in accordance with ASC 470-20.
The Company recognized a gain on forgiveness of the PPP loans of none and $
Concentration of Credit Risk
The Company maintains cash
balances at commercial banks. Cash balances commonly exceed the $
F-12
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in more timely recognition of credit losses. The guidance is effective for fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, and interim periods within those fiscal years. The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40). The FASB issued this ASU to address issues identified as a result of the complexity associated with GAAP for certain financial instruments with characteristics of liabilities and equity. Complexity associated with the accounting is a significant contributing factor to numerous financial statement restatements and results in complexity for users attempting to understand the results of applying the current guidance. In addressing the complexity, the FASB focused on amending the guidance on convertible instruments and the guidance on the derivatives scope exception for contracts in an entity’s own equity. For convertible instruments, the FASB decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The FASB concluded that eliminating certain accounting models simplifies the accounting for convertible instruments, reduces complexity for preparers and practitioners, and improves the decision usefulness and relevance of the information provided to financial statement users. In addition to eliminating certain accounting models, the FASB also decided to enhance information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance on the basis of feedback from financial statement users. The FASB decided to amend the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. The FASB observed that the application of the derivatives scope exception guidance results in accounting for some contracts as derivatives while accounting for economically similar contracts as equity. The FASB also decided to improve and amend the related EPS guidance. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The FASB decided to allow entities to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is currently evaluating the impact this ASU will have on its financial statements and related disclosures, as well as the timing of adoption and the application method.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statement presentation or disclosures.
Note 3 — Revenue
The following table represents a disaggregation of revenue from contracts with customers for the three months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | ||||||||
| Membership Services | $ | $ | ||||||
| Advertising | ||||||||
| Merchandising | ||||||||
| Sponsorship and Licensing | ||||||||
| Ticket/Event | ||||||||
| Total Revenue | $ | $ | ||||||
For some contracts, the Company may invoice up front for services recognized over time or for contracts in which the Company has unsatisfied performance obligations. Payment terms and conditions vary by contract type, although terms generally cover monthly payments. In the circumstances where the timing of invoicing differs from the timing of revenue recognition, the Company has determined its contracts do not include a significant financing component. The Company has elected to apply the practical expedient under ASC 606-10-50-14 and not provide disclosure of the amount and timing of performance obligations as the performance obligations are part of a contract that has an original expected duration of one year or less.
F-13
For the three months ended
June 30, 2022 and 2021, one customer accounted for
The following table summarizes the significant changes in the deferred revenue balances during the three months ended June 30, 2022 (in thousands):
| Contract Liabilities | ||||
| Balance as of March 31, 2022 | $ | |||
| Revenue recognized that was included in the contract liability at beginning of period | ( | ) | ||
| Increase due to cash received, excluding amounts recognized as revenue during the period | ||||
| Balance as of June 30, 2022 | $ | |||
Note 4 — Business Combinations
Gramophone
On October 17, 2021, the Company’s
wholly owned subsidiary, LiveXLive PR, Inc., acquired
| Fair Value of Consideration Transferred: | ||||
| Cash | $ | |||
| Common stock | ||||
| Contingent consideration | ||||
| Total | $ | |||
Goodwill resulted from acquisition as it is intended to augment and diversify the Company’s single reportable segment. The Company accounted for the acquisition as a business combination. As a result of the acquisition of the stock of Gramophone, the goodwill is not deductible for tax purposes.
F-14
The following table summarizes the fair value of the assets assumed in the Gramophone acquisition (in thousands):
| Asset Type | Amortization Period (Years) | Fair Value | ||||||
| Cash and cash equivalents | $ | |||||||
| Accounts receivable | ||||||||
| Trade name | ||||||||
| Customer list | ||||||||
| Goodwill | ||||||||
| Deferred revenue | ( | ) | ||||||
| Deferred tax liability | ( | ) | ||||||
| Accrued liabilities | ( | ) | ||||||
| Net assets acquired | $ | |||||||
The Company incurred less
than $
PodcastOne
On July 1, 2020, the Company’s
wholly owned subsidiary, LiveXLive PodcastOne, Inc., acquired
| Fair Value of Consideration Transferred: | ||||
| Common stock | $ | |||
| Contingent consideration | ||||
| Total | $ | |||
Goodwill resulted from acquisition as it is intended to augment and diversify the Company’s single reportable segment. The Company accounted for the acquisition as a business combination. As a result of the acquisition of the stock of PodcastOne, the goodwill is not deductible for tax purposes.
The following table summarizes the fair value of the assets assumed in the PodcastOne acquisition (in thousands):
| Asset Type | Weighted Average Amortization Period (Years) |
Fair Value | ||||
| Cash and cash equivalents | $ | |||||
| Accounts receivable | ||||||
| Prepaid expense and other assets | ||||||
| Property and equipment | ||||||
| Content creator relationships | ||||||
| Trade name | ||||||
| Goodwill | ||||||
| Accounts payable and accrued liabilities | ( |
) | ||||
| Deferred tax asset | ||||||
| Allowance for deferred tax asset | ( |
) | ||||
| Note payable | ( |
) | ||||
| Net assets acquired | $ | |||||
F-15
The fair value of the assets
acquired includes accounts receivable of $
CPS
On December 22, 2020, the
Company’s wholly owned subsidiary, LiveXLive Merchandising, Inc., acquired
The Company further agreed
to issue up to approximately
| Fair Value of Consideration Transferred: | ||||
| Common stock | $ | |||
| Additional paid-in capital – common stock to be issued | ||||
| Contingent consideration | ||||
| Total | $ | |||
Goodwill resulted from acquisition as it is intended to augment and diversify the Company’s single reportable segment. The Company accounted for the acquisition as a business combination. As a result of the acquisition of the stock of CPS, the goodwill is not deductible for tax purposes.
The following table summarizes the fair value of the assets assumed in the CPS acquisition (in thousands):
| Asset Type | Weighted Average Amortization Period (Years) | Fair Value | ||||||
| Cash and cash equivalents | $ | |||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepaid expense | ||||||||
| Property and equipment | ||||||||
| Wholesale relationship | ||||||||
| Domain name | ||||||||
| Customer list | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Right of use asset | ||||||||
| Lease liability | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Deferred tax liability | ( | ) | ||||||
| Other liabilities | ( | ) | ||||||
| Net assets acquired | $ | |||||||
The fair value of the assets
acquired includes accounts receivable of $
F-16
Supplemental Pro Forma Information (Unaudited)
The pro forma financial information as presented below is for informational purposes only and is not indicative of the Company’s operations that would have been achieved from the acquisitions had they taken place at the beginning of the fiscal years ended March 31, 2022.
The following table presents the revenues, net loss and earnings per share of the combined company for the three months ended June 30, 2021 as if the acquisition of Gramophone had been completed on April 1, 2021 (in thousands, except per share data).
Three Months Ended June 30, | ||||
| 2021 | ||||
| Revenues | $ | |||
| Net loss | ( | ) | ||
| Net loss per share – basic and diluted | $ | ( | ) | |
The Company’s unaudited
pro forma supplemental information is based on estimates and assumptions which the Company believes are reasonable and reflect amortization
of intangible assets as a result of the acquisition. The pro forma results are not necessarily indicative of the results that would have
been realized had the acquisitions been consummated as of the beginning of the periods presented. The pro forma amounts include the historical
operating results of the Company, with adjustments directly attributable to the acquisition which included amortization of acquired intangible
assets of $
Note 5 — Property and Equipment
The Company’s property and equipment at June 30, 2022 and March 31, 2022 was as follows (in thousands):
| June 30, | March 31, | |||||||
| 2022 | 2022 | |||||||
| Property and equipment, net | ||||||||
| Computer, machinery, and software equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Capitalized internally developed software | ||||||||
| Total property and equipment | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation expense was $
F-17
Note 6 — Goodwill and Intangible Assets
Goodwill
The Company currently has one reporting unit. The following table presents the changes in the carrying amount of goodwill for the three months ended June 30, 2022 (in thousands):
| Goodwill | ||||
| Balance as of March 31, 2022 | $ | |||
| Acquisitions | ||||
| Balance as of June 30, 2022 | $ | |||
Indefinite-Lived Intangible Assets
The following table presents the changes in the carrying amount of indefinite-lived intangible assets in the Company’s reportable segment for the three months ended June 30, 2022 (in thousands):
| Tradenames | ||||
| Balance as of March 31, 2022 | $ | |||
| Acquisitions | ||||
| Impairment losses | ||||
| Balance as of June 30, 2022 | $ | |||
Finite-Lived Intangible Assets
The Company’s finite-lived intangible assets were as follows as of June 30, 2022 (in thousands):
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||
| Software | $ | $ | $ | |||||||||
| Intellectual property (patents) | ||||||||||||
| Customer relationships | ||||||||||||
| Content creator relationships | - | |||||||||||
| Domain names | ||||||||||||
| Brand and trade names | ||||||||||||
| Non-compete agreement | ||||||||||||
| Customer lists | ||||||||||||
| Total | $ | $ | $ | |||||||||
The Company’s finite-lived intangible assets were as follows as of March 31, 2022 (in thousands):
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||
| Software | $ | $ | $ | |||||||||
| Intellectual property (patents) | ||||||||||||
| Customer relationships | ||||||||||||
| Content creator relationships | - | |||||||||||
| Domain names | ||||||||||||
| Brand and trade names | ||||||||||||
| Non-compete agreement | ||||||||||||
| Customer lists | ||||||||||||
| Total | $ | $ | $ | |||||||||
F-18
The Company’s amortization
expense on its finite-lived intangible assets was $
The Company expects to record amortization of intangible assets for fiscal years ending March 31, 2023 and future fiscal years as follows (in thousands):
| For Years Ending March 31, | ||||
| 2023 (remaining nine months) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ | ||||
Note 7 — Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at June 30, 2022 and March 31, 2022 were as follows (in thousands):
| June 30, | March 31, | |||||||
| 2022 | 2022 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Lease liabilities, current | ||||||||
| $ | $ | |||||||
Note 8 — Notes Payable
| June 30, | March 31, | |||||||
| 2022 | 2022 | |||||||
| SBA loan | $ | $ | ||||||
| Less: Current portion of Notes payable | ( | ) | ( | ) | ||||
| Notes payable | $ | $ | ||||||
SBA Loan
On June 17, 2020, the Company
received the proceeds from a loan in the amount of less than $
PPP Loans
In April 2020, the Company
received proceeds of $
On March 20, 2021, the Company
received proceeds of $
The Company recognized a $
F-19
Note 9 — Unsecured Convertible Notes
The Company’s unsecured convertible notes payable at June 30, 2022 and March 31, 2022 were as follows (in thousands):
| June 30, 2022 | March 31, 2022 | |||||||
| Unsecured Convertible Notes - Related Party | ||||||||
| 8.5% Unsecured Convertible Note - Due June 3, 2024 | $ | $ | ||||||
| 8.5% Unsecured Convertible Notes - Due June 3, 2024 | ||||||||
| Net | ||||||||
| Less: Unsecured Convertible Notes, Current | ||||||||
| Unsecured Convertible Notes, Net, Long-term | $ | $ | ||||||
The Company incurred interest
expense of $
Unsecured Convertible Notes – Related Party
As of June 30, 2022 and March 31, 2022, the Company had outstanding 8.5% unsecured convertible notes payable (the “Trinad Notes”) issued to Trinad Capital Master Fund Ltd. (“Trinad Capital”), a fund controlled by Mr. Ellin, the Company’s Chief Executive Officer, Chairman, director and principal stockholder, as discussed below. The Trinad Notes are convertible into shares of the Company’s common stock at a fixed conversion price of $3.00 per share.
The first Trinad Note was issued on February 21, 2017, to convert aggregate principal and interest of $3.6 million under the first senior promissory note and second senior promissory note with Trinad Capital previously issued on December 31, 2014 and April 8, 2015, respectively. The first Trinad Note was due on March 31, 2018 and was extended to May 31, 2023, and in July 2022 the Trinad Notes were extended until July 1, 2024 (See Note 20 – Subsequent Events). At June 30, 2022, the balance due of $6.0 million, which included $1.5 million of accrued interest, was outstanding under the first Trinad Note. At March 31, 2022, the balance due of $5.9 million, which included $1.4 million of accrued interest, was outstanding under the first Trinad Note.
On August 11, 2021, the Company
entered into an Amendment of Notes Agreement (the “Amendment Agreement”) with Trinad Capital pursuant to which the maturity
date of all of the Trinad Notes was extended to May 31, 2023, and in consideration of such extension, the Company issued to Trinad Capital
The Company may not redeem any of the Trinad Notes prior to maturity without Trinad Capital’s consent.
Unsecured Convertible Promissory Note
On February 5, 2020,
F-20
At June 30, 2021,
Effective December 31,
2021, the Note holder converted the Note in whole pursuant to an exchange agreement entered into during the year ended March 31, 2022,
which provided for an exchange of the Note into shares of the Company’s common stock at a price of $
Note 10 — Secured Convertible Notes
The Company’s senior secured convertible notes at June 30, 2022 and March 31, 2022 were as follows (in thousands):
| June 30, 2022 | March 31, 2022 | |||||||
| Secured Convertible Notes | $ | $ | ||||||
| Fair value of embedded derivatives | ||||||||
| Less: Discount | ( | ) | ( | ) | ||||
| Net | ||||||||
| Less: Current Portion, accrued interest | ||||||||
| Secured Convertible Notes, long-term | $ | $ | ||||||
On September 15, 2020 (the
“Closing Date”),
The Harvest Notes, as amended,
mature on June 3, 2024, accrue interest at
The current portion of accrued interest related to the Harvest Notes is included in Accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets.
The Company’s obligations
under the Harvest Notes may be accelerated upon the occurrence of certain customary events of default (as defined in the Harvest Notes)
and are guaranteed under a Subsidiary Guarantee, dated as of the Closing Date (the “Subsidiary Guarantee”), entered into by
all of the Company’s subsidiaries (the “Guarantors”) in favor of the Purchaser. The Company’s obligations under
the Harvest Notes and the Guarantors’ obligations under the Subsidiary Guarantee are secured under a Security Agreement, dated as
of the Closing Date (the “Security Agreement”), and an Intellectual Property Security Agreement, dated as of the Closing Date
(the “IP Security Agreement”), by a lien on all of the Company’s and the Guarantors’ assets and intellectual property,
subject to certain exceptions. The Harvest Notes require the Company to maintain aggregate cash deposits of $
In May 2021, the Company evaluated this agreement and determined that it was required to be accounted for as troubled debt restructuring under ASC 470-60, Troubled Debt Restructurings by Debtors. As a result, the Company recorded the shares of common stock issued to the Purchaser as an increase to Additional Paid In Capital and a corresponding debt discount included in Secured Convertible Notes, net in the accompanying condensed consolidated balance sheets.
F-21
In connection with the SPA, and the Harvest Notes subsequent extension, Robert S. Ellin, the Company’s CEO, Chairman, director and principal stockholder, agreed not to dispose of any equity securities of the Company owned by Mr. Ellin or any entity of which he is the beneficial owner and not to cease to be the beneficial owner of any other equity securities of the Company of which Mr. Ellin was the beneficial owner as of June 3, 2021 until the Harvest Notes are paid in full (subject to certain customary exceptions), without the Purchaser’s prior written consent.
The Harvest Notes and the Shares were issued in private placement transaction that was not registered under the Securities Act, in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder.
The Company recorded $
The Company was in compliance with all debt covenants associated with their senior secured convertible debt as of June 30, 2022.
Note 11 — Senior Secured Revolving Line of Credit
On June 2, 2021, the Company
entered into a Business Loan Agreement with East West Bank (the “Senior Lender”), which provides for a revolving credit facility
collateralized by all of the assets of the Company and its subsidiaries. In connection with the Business Loan Agreement, the Company entered
into a Promissory Note with the Senior Lender and established the revolving line of credit in the amount of $
The principal balance under
the Revolving Credit Facility as of June 30, 2022 was $
Note 12 — Related Party Transactions
As of June 30, 2022 and March 31, 2022, the Company had unsecured convertible Trinad Notes outstanding which were issued to Trinad Capital as described in Note 9 – Unsecured Convertible Notes.
F-22
Note 13 — Leases
The Company leases a space at a location under a non-cancellable operating lease with a remaining lease term of 1 year, which originally expired in fiscal year 2022 and was renewed for an additional year. On December 22, 2020, the Company acquired CPS which included the assumption of an operating lease for a 55,120 square foot light manufacturing facility located in Addison Illinois, expiring June 30, 2024.
The Company leases several
office locations with lease terms that are less than 12 months or are on month to month terms. Rent expense for these leases totaled less
than $
Operating lease costs for the three months ended June 30, 2022 and 2021 consisted of the following (in thousands):
| Three Months Ended June 30, | Three Months Ended June 30, | |||||||
| 2022 | 2021 | |||||||
| Fixed rent cost | $ | |||||||
| Short term lease cost | ||||||||
| Total operating lease cost | $ | |||||||
Supplemental balance sheet information related to leases was as follows (in thousands):
| Operating leases | June 30, 2022 | March 31, 2022 | ||||||
| Operating lease right-of-use assets | $ | |||||||
| Operating lease liability, current | $ | |||||||
| Operating lease liability, noncurrent | ||||||||
| Total operating lease liabilities | $ | |||||||
The operating lease right-of-use assets are included in other assets and current operating lease liabilities are included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets.
Maturities of operating lease liabilities as of June 30, 2022 were as follows (in thousands):
| For Years Ending March 31, | ||||
| 2023 (remaining nine months) | $ | |||
| 2024 | ||||
| 2025 | ||||
| Total lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Present value of operating lease liabilities | $ | |||
Significant judgments
Discount rate – the
Company’s lease is discounted using the Company’s incremental borrowing rate of
Options – the lease term is the minimum noncancelable period of the lease. The Company does not include option periods unless the Company determined it is reasonably certain of exercising the option at inception or when a triggering event occurs.
Lease and non-lease components – Non lease components were considered and determined not to be material
F-23
Note 14 — Other Long-Term Liabilities
The amount included in Other long-term liabilities is comprised of a contingent consideration liability resulting from the business combination with Gramophone (Note 4 - Business Combinations) and is carried at fair value (see Note 19 - Fair Value Measurements).
Note 15 — Commitments and Contingencies
Promotional Rights
Certain of the Company’s
content acquisition agreements contain minimum guarantees, and require that the Company makes upfront minimum guarantee payments.
Contractual Obligations
As of June 30, 2022, the Company is obligated under agreements with Content Providers and other contractual obligations to make guaranteed payments as follows: $3.7 million for the fiscal year ending March 31, 2023, $0.5 million for the fiscal year ending March 31, 2024, $0.3 million for the fiscal year ending March 31, 2025 and $0.2 million for the fiscal year ending March 31, 2026.
On a quarterly basis, the Company records the greater of the cumulative actual content acquisition costs incurred or the cumulative minimum guarantee based on forecasted usage for the minimum guarantee period. The minimum guarantee period is the period of time that the minimum guarantee relates to, as specified in each agreement, which may be annual or a longer period. The cumulative minimum guarantee, based on forecasted usage, considers factors such as listening hours, revenue, members and other terms of each agreement that impact the Company’s expected attainment or recoupment of the minimum guarantees based on the relative attribution method.
Several of the Company’s content acquisition agreements also include provisions related to the royalty payments and structures of those agreements relative to other content licensing arrangements, which, if triggered, could cause the Company’s payments under those agreements to escalate. In addition, record labels, publishers and performing rights organizations with whom the Company has entered into direct license agreements have the right to audit the Company’s content acquisition payments, and any such audit could result in disputes over whether the Company has paid the proper content acquisition costs. However, as of June 30, 2022, the Company does not believe it is probable that these provisions of its agreements discussed above will, individually or in the aggregate, have a material adverse effect on its business, financial position, results of operations or cash flows.
Employment Agreements
Legal Proceedings
On April 10, 2018, Joseph
Schnaier, Danco Enterprises, LLC (an entity solely owned by Mr. Schnaier, “Danco”), Wantmcs Holdings, LLC (Mr. Schnaier is
the managing member) and Wantickets (Mr. Schnaier is the
F-24
On June 28, 2022, SoundExchange, Inc. (“SX”) filed a complaint in the U.S. District Court, Central District of California, against the Company and Slacker. The complaint alleges that the defendants have failed to make the necessary music royalty payments and corresponding late fees required under the Digital Millennium Copyright Act late allegedly due to SX. SX filed an application for an order to file the complaint under seal. The Company believes it has already adequately reserved for the amounts due to SX in the Company’s financial statements included in this Quarterly Report. The Company is currently negotiating with SX to resolve this matter and if necessary, intends to hire counsel to defend the defendants in this matter.
During each of the quarters ended June 30, 2022 and 2021, the Company recorded legal settlement expenses relating to potential claims arising in connection with litigation brought against the Company by certain third-parties were not material and were included in general and administrative expenses in the accompanying condensed consolidated statement of operations.
From time to time, the Company is involved in legal proceedings and other matters arising in connection with the conduct of its business activities. Many of these proceedings may be at preliminary stages and/or seek an indeterminate amount of damages. In the opinion of management, after consultation with legal counsel, such routine claims and lawsuits are not significant and we do not currently expect them to have a material adverse effect on our business, financial condition, results of operations, or liquidity.
Note 16 — Employee Benefit Plan
The Company sponsors a 401(k)
plan (the “401(k) Plan”) covering all employees. Prior to March 31, 2019, only Slacker employees were eligible to participate
in the 401(k) Plan. Employees are eligible to participate in the 401(k) Plan the first day of the calendar month following their date
of hire.
Note 17 — Stockholders’ Deficit
Issuance of Restricted Shares of Common Stock for Services to Consultants and Vendors
During the three months ended
June 30, 2022, the Company incurred $
2016 Equity Incentive Plan
The Company’s board
of directors and stockholders approved the Company’s 2016 Equity Incentive Plan, as amended (the “2016 Plan”) which
reserved a total of
The Company recognized share-based
compensation expense of $
F-25
Authorized Common Stock and Authority to Create Preferred Stock
The Company has the authority
to issue up to
The Company may issue shares of preferred stock from time to time in one or more series, each of which will have such distinctive designation or title as shall be determined by the Company’s board of directors and will have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issue of such class or series of preferred stock as may be adopted from time to time by the Company’s board of directors. The Company’s board of directors will have the power to increase or decrease the number of shares of preferred stock of any series after the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased, the shares constituting such decrease will resume the status of authorized but unissued shares of preferred stock.
While the Company does not currently have any plans for the issuance of preferred stock, the issuance of such preferred stock could adversely affect the rights of the holders of common stock and, therefore, reduce the value of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of the common stock until and unless the Company’s board of directors determines the specific rights of the holders of the preferred stock; however, these effects may include: restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock, or delaying or preventing a change in control of the Company without further action by the stockholders.
Stock Repurchase Program
In December 2020, we announced
that our board of directors has authorized the repurchase up to
Note 18 — Business Segment and Geographic Reporting
The Company determined its operating segments in accordance with ASC 280, “Segment Reporting” (“ASC 280”).
Management has determined
that the Company has
The Company’s single operating segment is also consistent with our internal organizational structure, the way we assess operating performance and allocate sources.
Customers
F-26
Geographic Information
All material revenues of the Company are derived from the United States. All long-lived assets of the Company are located in the United States.
Note 19 — Fair Value Measurements
The following table presents the fair value of the Company’s financial liabilities that are measured at fair value on a recurring basis (in thousands):
| June 30, 2022 | ||||||||||||||||
| Fair | Hierarchy Level | |||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration liability from Gramophone acquisition | $ | $ | $ | $ | ||||||||||||
| Bifurcated embedded derivative on senior secured convertible note payable | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| March 31, 2022 | ||||||||||||||||
| Fair | Hierarchy Level | |||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration liability from PodcastOne acquisition | $ | $ | $ | $ | ||||||||||||
| Contingent consideration liability from Gramophone acquisition | ||||||||||||||||
| Bifurcated embedded derivative on senior secured convertible note payable | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The following table presents a reconciliation of the Company’s financial liabilities that are measured at Level 3 within the fair value hierarchy (in thousands):
| Amount | ||||
| Balance as of March 31, 2022 | $ | |||
| Change in fair value of bifurcated embedded derivatives, reported in earnings | ||||
| Settlement of PodcastOne contingent consideration | ( | ) | ||
| Change in fair value of contingent consideration liabilities, reported in earnings | ||||
| Balance as of June 30, 2022 | $ | |||
F-27
Bifurcated embedded derivative on senior secured convertible notes payable and unsecured convertible notes payable
The fair value of the bifurcated embedded derivatives on senior secured convertible notes payable and unsecured convertible notes payable was determined using the following significant unobservable inputs:
| June 30, | March 31, | |||||||
| 2022 | 2022 | |||||||
| Bifurcated embedded derivative on secured convertible notes payable: | ||||||||
| Market yield | % | % | ||||||
Significant increases or decreases in the inputs noted above in isolation could result in a significantly lower or higher fair value measurement.
The Company determined that
as of the assessment date, the fair value of the bifurcated embedded derivatives is less than $
The Company did not elect the fair value measurement option for the following financial assets or liabilities. The fair values of certain financial instruments measured at amortized cost and the hierarchy level the Company used to estimate the fair values are shown below (in thousands):
| June 30, 2022 | ||||||||||||||||
| Carrying | Hierarchy Level | |||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Senior secured convertible notes payable, net | $ | $ | $ | $ | ||||||||||||
| Unsecured convertible notes payable related party, net | ||||||||||||||||
| March 31, 2022 | ||||||||||||||||
| Carrying | Hierarchy Level | |||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Senior secured convertible notes payable, net | ||||||||||||||||
| Unsecured convertible notes payable related party, net | ||||||||||||||||
F-28
The fair values of financial instruments not included in these tables are estimated to be equal to their carrying values as of June 30, 2022 and March 31, 2022. The Company’s estimates of the fair values were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop the estimated fair values.
The fair value of the financial assets and liabilities, where the Company did not elect the fair value measurement option, were determined using the following significant unobservable inputs:
| June 30, | March 31, | |||||||
| 2022 | 2022 | |||||||
| Senior secured convertible notes payable, net (binomial lattice model): | ||||||||
| Market yield | % | % | ||||||
| Unsecured convertible notes payable related party, net (yield model with a Black-Scholes-Merton option pricing model): | ||||||||
| Market yield | % | % | ||||||
Significant increases or decreases in the inputs noted above in isolation would result in a significantly lower or higher fair value measurement.
Cash equivalents and restricted cash equivalents primarily consisted of short-term interest-bearing money market funds with maturities of less than 90 days and time deposits. The estimated fair values were based on available market pricing information of similar financial instruments.
Due to their short maturity, the carrying amounts of the Company’s accounts receivable, accounts payable, accrued expenses and other long-term liabilities approximated their fair values as of June 30, 2022 and March 31, 2022.
The Company’s note payable is not publicly traded and fair value is estimated to equal carrying value. The Company’s senior secured line of credit, senior secured convertible notes and unsecured convertible notes payable with fixed rates are not publicly traded and the Company has estimated fair values using a variety of valuation models and market rate assumptions detailed above. The senior secured convertible notes payable and unsecured convertible notes are valued using a binomial lattice model and a yield model with a Black-Scholes-Merton option pricing model, respectively. The Company has estimated the fair value of contingent consideration related to the acquisitions of PodcastOne, CPS and Gramophone based on the number of shares issuable based on the achievement of certain provisions within the purchase agreement, as detailed in Note 4 – Business Combinations, using the quoted price of the Company’s common stock. The inputs used to fair value the contingent consideration on the date of acquisition were also used as of the balance sheet date.
Note 20 — Subsequent Events
PodcastOne’s Private Placement
On July 15, 2022 (the “Closing Date”), Courtside Group,
Inc. (dba PodcastOne) (“PodcastOne”), a wholly owned subsidiary of the Company, completed a private placement offering (the
“Financing”) of PodcastOne’s unsecured convertible notes with an original issue discount of
F-29
In
connection with the Financing, the Company announced that it intends to spin-out PodcastOne as a separate public company before the end
of its current fiscal year and plans to dividend a portion of PodcastOne’s common equity to the Company’s stockholders as
of a future to be determined record date, in each case subject to obtaining applicable approvals and consents, complying with applicable
rules and regulations and satisfying applicable public market trading and listing requirements. Among other things, the Company agreed
not to effect any Qualified Financing or Qualified Event (each as defined below), as applicable, unless PodcastOne’s post-money
valuation at the time of the Qualified Event is at least $
The Notes mature one year from the Closing Date, subject to a one-time
three-month extension at PodcastOne’s election (the “Maturity Date”). The Notes bear interest at a rate of
In connection with the issuance of the Notes, each Purchaser received
five-and-one-half-year warrants to purchase such number of Warrant Shares equal to the
Furthermore, in connection with the closing of the Financing, the Purchasers and PodcastOne’s directors and officers entered into lock-up agreements with PodcastOne pursuant which they agreed, subject to certain exceptions, not to sell any shares of PodcastOne’s common stock beneficially owned by them or securities convertible, exchangeable or exercisable into, shares of common stock of PodcastOne beneficially owned, until the earliest to occur, if any, of (i) the termination of the underwriting agreement with respect to the Qualified Financing before the sale of any securities to the underwriters of the Qualified Financing, (ii) the termination of the Qualified Financing or Qualified Event, as applicable and (iii) with respect to the Purchasers, three months from the date of the consummation of the Qualified Financing or Qualified Event, as applicable, and with respect to PodcastOne’s officers and directors, six months from the date of the consummation of the Qualified Financing or Qualified Event, as applicable.
F-30
Secured Convertible Note Amendment
The Company and the Noteholders also agreed that if (i) at least $5,000,000 of the original principal amount of the Harvest Notes is not repaid by the Company on or prior to January 1, 2023, the conversion price of the Harvest Notes shall be amended to $3.00 per share, and the Company shall issue to the Noteholders in aggregate an additional 250,000 shares of the Company’s common stock; (ii) at least $7,500,000 of the original principal amount of the Harvest Notes is not repaid by the Company on or prior to June 30, 2023, the conversion price of the Harvest Notes shall be further amended to $2.50 per share, and the Company shall then issue to the Noteholders in aggregate an additional 500,000 shares of the Company’s common stock; and (iii) the entire principal amount of the Harvest Notes then outstanding is not repaid by the Company on or prior to January 1, 2024, the conversion price of the Harvest Notes shall be further amended to $2.25 per share, and the Company shall then issue to the Noteholders in aggregate an additional 750,000 shares of the Company’s common stock. In addition, in consideration of the Loan Modification, the Company issued to the Noteholders in aggregate 500,000 shares of the Company’s common stock. The shares were issued and to the extent applicable, will be issued, to the Noteholders as restricted securities in a private placement transaction exempt from the registration requirements of the Securities Act.
The Company and the Noteholders further agreed to certain Harvest Note repayment conditions as provided in the Amendments in the event that the Company or any of its subsidiaries completes an equity or debt financing in the future or if Mr. Ellin ceases to be the Company’s Chief Executive Officer and unless an equally or better qualified CEO, as determined by the majority of the Company’s then-independent directors is appointed within the time provided by the Amendments, in each case prior to the full repayment of the Harvest Notes.
In connection with the Loan Modification, effective as of the Effective
Date, the Company entered into the Amendment of Notes Agreement (the “Trinad Amendment”) with Trinad Capital pursuant to which
the maturity date of all of the Trinad Notes was extended to
Stock Repurchase
Subsequent to June 30, 2022 and as of August 9, 2022, the Company repurchased
Revolving Credit Facility Extension
In August 2022, the Company extended the maturity date of its revolving credit facility to June 2024.
Stock Issuances
In August 2022, the Company
issued
On August 4, 2022, Slacker
extended for
F-31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used herein, “LiveOne,” the “Company,” “we,” “our” or “us” and similar terms include LiveOne, Inc. and its subsidiaries, unless the context indicates otherwise. The following discussion and analysis of our business and results of operations for the three months ended June 30, 2022, and our financial conditions at that date, should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”).
Forward-Looking Statements
Certain statements contained in this Quarterly Report that are not statements of historical fact constitute “forward-looking statements” within the meaning of the Securities Litigation Reform Act of 1995, notwithstanding that such statements are not specifically identified. These forward-looking statements relate to expectations or forecasts for future events, including without limitation our earnings, revenues, expenses or other future financial or business performance or strategies, or the impact of legal or regulatory matters on our business, results of operations or financial condition. These statements may be preceded by, followed by or include the words “may,” “might,” “will,” “would,” “could,” “should,” “will likely result,” “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “continue,” “target” or the negative or other variations thereof or comparable terminology. These forward-looking statements are not guarantees of future performance and are based on information available to us as of the date of this Quarterly Report and on our current expectations, forecasts and assumptions, and involve substantial risks and uncertainties. Actual results may vary materially from those expressed or implied by the forward-looking statements herein due to a variety of factors, including: our reliance on one key customer for a substantial percentage of our revenue; our ability to consummate any proposed financing, acquisition, spin-out, distribution or transaction, including the proposed spin-out of PodcastOne or its pay-per-view business, the timing of the closing of such proposed event, including the risks that a condition to closing would not be satisfied within the expected timeframe or at all or that the closing of any proposed financing, acquisition, spin-out, distribution or transaction, the timing of the closing of such proposed event will not occur; PodcastOne's ability to list on a national exchange; our ability to continue as a going concern; our reliance on one key customer for a substantial percentage of our revenue; if and when required, our ability to obtain additional capital, including to fund our current debt obligations and to fund potential acquisitions and capital expenditures; our ability to attract, maintain and increase the number of our users and paid members; our ability to identify, acquire, secure and develop content; our ability to successfully implement our growth strategy, our ability to acquire and integrate our acquired businesses, the ability of the combined business to grow, including through acquisitions which we are able to successfully integrate, and the ability of our executive officers to manage growth profitably; the outcome(s) of any legal proceedings pending or that may be instituted against us, our subsidiaries, or third parties to whom we owe indemnification obligations; changes in laws or regulations that apply to us or our industry; our ability to recognize and timely implement future technologies in the music and live streaming space; our ability to capitalize on investments in developing our service offerings, including the LiveXLive App to deliver and develop upon current and future technologies; significant product development expenses associated with our technology initiatives; our ability to deliver end-to-end network performance sufficient to meet increasing customer demands; our ability to timely and economically obtain necessary approval(s), releases and or licenses on a timely basis for the use of our music content on our service platform; our ability to obtain and maintain international authorizations to operate our service over the proper foreign jurisdictions our customers utilize; our ability to expand our service offerings and deliver on our service roadmap; our ability to timely and cost-effectively produce, identify and or deliver compelling content that brands will advertise on and or customers will purchase and or subscribe to across our platform; general economic and technological circumstances in the music and live streaming digital markets; our ability to obtain and maintain licenses for content used on legacy music platforms; the loss of, or failure to realize benefits from, agreements with our music labels, publishers and partners; unfavorable economic conditions in the airline industry and economy as a whole; our ability to expand our domestic or international operations, including our ability to grow our business with current and potential future music labels, festivals, publishers, or partners; the effects of service interruptions or delays, technology failures, material defects or errors in our software, damage to our equipment or geopolitical restrictions; costs associated with defending pending or future intellectual property infringement actions and other litigation or claims; increases in our projected capital expenditures due to, among other things, unexpected costs incurred in connection with the roll out of our technology roadmap or our plans of expansion in North America and internationally; fluctuation in our operating results; the demand for live and music streaming services and market acceptance for our products and services; our ability to generate sufficient cash flow to make payments on our indebtedness; our incurrence of additional indebtedness in the future; our ability to repay the convertible notes at maturity; the effect of the conditional conversion feature of the convertible notes; our compliance with the covenants in our credit agreement; the effects of the global COVID-19 pandemic; risks and uncertainties applicable to the businesses of our subsidiaries; and other risks and uncertainties set forth herein. Other factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those set forth below in Part II – Item 1A. Risk Factors of this Quarterly Report and in Part I – Item 1A. Risk Factors of our 2022 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on June 29, 2022 (the “2022 Form 10-K”), as well as other factors and matters described herein or in the annual, quarterly and other reports we file with the SEC. Except as required by law, we do not undertake any obligation to update forward-looking statements as a result of as a result of new information, future events or developments or otherwise.
1
Overview of the Company
We are a pioneer in the acquisition, distribution and monetization of live music, Internet radio, podcasting and music-related streaming and video content. Our principal operations and decision-making functions are located in North America. We manage and report our businesses as a single operating segment. Our senior management regularly reviews our operating results, principally to make decisions about how we allocate our resources and to measure our segment and consolidated operating performance. In prior fiscal years we generated a majority of our revenue primarily through membership services from our streaming radio and music services, and to a lesser extent through advertising and licensing across our music platform. In the fourth quarter of our fiscal year ended March 31, 2020, we began generating ticketing, sponsorship, and promotion-related revenue from live music events through our February 2020 acquisition of React Presents. In May 2020, we launched a new pay-per-view (“PPV”) offering enabling new forms of artist revenue including digital tickets, tipping, digital meet and greets, merchandise sales and sponsorship. In July 2020, we entered the podcasting business with the acquisition of PodcastOne and in December 2020, we entered the merchandising business with the acquisition of CPS. In October 2021, we entered artist and brand development and music-related press relations business through our acquisition of Gramophone.
For the three months ended June 30, 2022 and 2021, we reported revenue of $23.2 million and $38.8 million, respectively. We have one and two external customers that accounted for more than 10% of its revenue during the three months ended June 30, 2022 and 2021. Such customers original equipment manufacturer (the “OEM”) who provides premium Slacker service in all of their new vehicles and a production customer in connection with the June 2021 Social Gloves event. In the three months ended June 30, 2022 and 2021, total revenue from the OEM was $10.0 million and $6.9 million, respectively. In the three months ended June 30, 2022 and 2021, total revenue from the production customer was none and $6.4 million, respectively.
Key Corporate Developments for the Quarter Ended June 30, 2022
During the quarter ended June 30, 2022, we successfully livestreamed 20 live events with 35 artists livestreamed.
We ended the June 30, 2022 quarter with approximately 1,594,000 paid members on our music platform, up from approximately 1,162,000 at June 30, 2021, representing 37% annual growth.
Basis of Presentation
The following discussion and analysis of our business and results of operations and our financial conditions is presented on a consolidated basis. In addition, a brief description is provided of significant transactions and events that have an impact on the comparability of the results being analyzed.
Opportunities, Challenges and Risks
During our fiscal year ended March 31, 2022, we (i) acquired Gramophone (effective October 2021) (ii) accelerated the number of live events digitally live streamed across our platform, and (iii) increased our sponsorship revenue from live events when compared to prior fiscal years. As a result of these actions, our revenue for the three months ended June 30, 2022 was comprised of 52% from paid customers’ membership, 39% from advertising (which includes PodcastOne), 8% from merchandise (which includes CPS), 1% from ticketing and events, and 1% from sponsorship and licensing. As the impact of COVID-19 eases around the world and related government actions are relaxed in the markets in which we operate, we expect to gradually increase our production of on-premise live music events and generate revenue through co-promotion fees, sponsorships, food and beverage and ticket sales of on-premise live events in the near term.
We believe there is substantial near and long-term value in our live music content. We believe the monetary value of broadcasting live music will follow a similar evolution to live sporting events such as the National Football League, Major League Baseball and the National Basketball Association, whereby sports broadcasting rights became more valuable as the demand for live sporting events increased over the past 20 years. As a thought leader in live music, we plan to acquire the broadcasting rights to as many of the top live music events and festivals that are available to us. In the near term, we will continue aggregating our digital traffic across these festivals and monetizing the live broadcasting of these events through advertising, brand sponsorships and licensing of certain broadcasting rights outside of North America. The long-term economics of any future agreement involving festivals, programming, production, broadcasting, streaming, advertising, sponsorships, and licensing could positively or negatively impact our liquidity, growth, margins, relationships, and ability to deploy and grow our future services with current or future customers, and are heavily dependent upon the easing and elimination of the COVID-19 pandemic.
2
With the acceleration of our live events, we have also begun to package, produce and broadcast our live music content on a 24/7/365 basis across our music platform and grow our paid members. Recently, we have entered into distribution relationships with a variety of platforms, including Roku, AppleTV, Amazon Fire, linear OTT platforms such as STIRR and XUMO. As we continue to have more distribution channels, rights and viewership and expand our original programming capabilities, we believe there is a substantial opportunity to increase our brand, advertising, viewership and membership capabilities and corresponding revenue, domestically and globally.
We believe our operating results and performance are, and will continue to be, driven by various factors that affect the music industry. Our ability to attract, grow and retain users to our platform is highly sensitive to rapidly changing public music preferences and technology and is dependent on our ability to maintain the attractiveness of our platform, content and reputation to our customers. Beyond fiscal year 2023, the future revenue and operating growth across our music platform will rely heavily on our ability to grow our member base in a cost effective manner, continue to develop and deploy quality and innovative new music services, provide unique and attractive content to our customers, continue to grow the number of listeners on our platform and live music festivals we stream, grow and retain customers and secure sponsorships to facilitate future revenue growth from advertising and e-commerce across our platform.
As our music platform continues to evolve, we believe there are opportunities to expand our services by adding more content in a greater variety of formats such as podcasts and video podcasts (“vodcasts”), extending our distribution to include pay television, OTT and social channels, deploying new services for our members, artist merchandise and live music event ticket sales, and licensing user data across our platform. Our acquisitions of PodcastOne, CPS and Gramophone are reflective of our flywheel operating model. Conversely, the evolution of technology presents an inherent risk to our business. Today, we see large opportunities to expand our music services within North America and other parts of the world where we will need to make substantial investments to improve our current service offerings. As a result, and during the fiscal year ending March 31, 2023, we will continue to invest in product and engineering to further develop our future music apps and services, and we expect to continue making significant product development investments to our existing technology solutions over the next 12 to 24 months to address these opportunities.
As our platform matures, we also expect our Contribution Margins*, adjusted earnings before income tax, depreciation and amortization (“Adjusted EBITDA”)* and Adjusted EBITDA Margins* to improve in the near and long term, which are non-GAAP measures as defined in section following below titled, “Non-GAAP Measures”. Historically, our live events business has not generated enough direct revenue to cover the costs to produce such events, and as a result generated negative Contribution Margins*, Adjusted EBITDA* Adjusted EBITDA Margins* and operating losses. Beginning in late March 2020, the COVID-19 pandemic had an adverse impact on on-premise live music events and festivals. Historically, we produced and digitally distributed the live music performances of many of these large global music events to fans all around the world. With the elimination of any fan-attended music events, festivals and concerts, we shifted our operating model beginning in April 2020 towards self-producing live music events that were 100% digital (e.g., artists not performing in front of live fans and solely for digital distribution).
Growth in our music services is also dependent upon the number of customers that use and pay for our services, the attractiveness of our music platform to sponsors and advertisers and our ability to negotiate favorable economic terms with music labels, publishers, artists and/or festival owners, and the number of consumers who use our services. Growth in our margins is heavily dependent on our ability to grow the membership base in a cost-efficient manner, coupled with the managing the costs associated with implementing and operating our services, including the costs of licensing music with the music labels, producing, streaming and distributing video and audio content and sourcing and distributing personalized products and gifts. Our ability to attract and retain new and existing customers will be highly dependent on our abilities to implement and continually improve upon our technology and services on a timely basis and continually improve our network and operations as technology changes and as we experience increased network capacity constraints as we continue to grow.
3
For the majority of our agreements with festival owners, we acquire the global broadcast rights. Moreover, the digital rights we acquire principally include any format and screen, and future rights to VR and AR. For the three months ended June 30, 2022 and 2021, all material amounts of our revenue were derived from customers located in the United States and moreover, one of our customers accounted for 43% and 18% of our consolidated revenue. This significant concentration of revenue from one customer poses risks to our operating results, and any change in the means this customer utilizes our services beyond June 30, 2022 could cause our revenue to fluctuate significantly.
Moreover, and with the addition of PodcastOne and CPS in July and December 2020, respectively, the percentage of this customer revenue concentration decreased and this trend is expected to continue in the future. In the long term, we plan to expand our business internationally in places such as Europe, Asia Pacific and Latin America, and as a result will continue to incur significant incremental upfront expenses associated with these growth opportunities.
Effects of COVID-19
An outbreak of a novel strain of coronavirus, COVID-19 in December 2019 subsequently became a pandemic after spreading globally, including the United States. The global impact of the COVID-19 pandemic has had a negative effect on the global economy, disrupting the financial markets creating increasing volatility and overall uncertainty. We began to experience modest adverse impacts of the COVID-19 pandemic in the fourth quarter of fiscal year ended March 31, 2020 and became more adverse throughout the fiscal year ended March 31, 2021 and up to the third quarter of fiscal year ended March 31, 2022. Although the impact has subsided, we expect to continue experiencing modest adverse impacts throughout the fiscal year ending March 31, 2023. Our event and programmatic advertising revenues were directly impacted throughout the 2021 fiscal year and mid-way through the 2022 fiscal year with all on-premise in-person live music festivals and events postponed and mixed demand from historical advertising partners. Further, one of our larger customers also experienced a temporary halt to its production as a result of COVID-19, which negatively impacted our near-term member growth in the 2021 fiscal year. During the fiscal year ended March 31, 2021, we enacted several initiatives to counteract these near-term challenges, including salary reductions, obtaining a Paycheck Protection Program loan and pivoting its live music production to 100% digital. The Company began producing, curating, and broadcasting digital music festivals and events across its platform which has resulted in the growth in the number of live events streamed, related sponsorship revenue and overall viewership. We also launched a new PPV offering in May 2020, enabling new forms of artist revenue including digital tickets, tipping, digital meet and greet and merchandise sales. However, there is uncertainty as to the duration and overall impact of the COVID-19 pandemic, which could result in an adverse material change in a future period to our results of operations, financial position and liquidity.
The extent to which COVID-19 impacts our results will depend on future developments, including new information which may emerge concerning the severity of the coronavirus and the actions taken by us and our partners to contain the coronavirus or treat its impact, among others. The impact of the suspension or cancellation of in-person live festivals, concerts or other live events, and any other continuing effects of COVID-19 on our business operations (such as general economic conditions and impacts on the advertising, sponsorship and ticketing marketplace and our partners), may result in a decrease in our revenues, and if the global COVID-19 epidemic continues for an extended period, our business, financial condition and results of operations could be materially adversely affected.
4
Consolidated Results of Operations
Three Months Ended June 30, 2022, as compared to Three Months Ended June 30, 2021
The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results (in thousands):
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue: | $ | 23,222 | $ | 38,767 | ||||
| Operating expenses: | ||||||||
| Cost of sales | 15,382 | 30,940 | ||||||
| Sales and marketing | 2,366 | 4,748 | ||||||
| Product development | 1,617 | 2,155 | ||||||
| General and administrative | 2,209 | 9,377 | ||||||
| Amortization of intangible assets | 1,411 | 1,506 | ||||||
| Total operating expenses | 22,985 | 48,726 | ||||||
| Income (loss) from operations | 237 | (9,959 | ) | |||||
| Other income (expense): | ||||||||
| Interest expense, net | (997 | ) | (1,060 | ) | ||||
| Forgiveness of PPP loans | - | 2,511 | ||||||
| Other income | 2,105 | 459 | ||||||
| Total other income (expense), net | 1,108 | 1,910 | ||||||
| Income (loss) before income taxes | 1,345 | (8,049 | ) | |||||
| (Benefit from) provision for income taxes | (3 | ) | 2 | |||||
| Net income (loss) | $ | 1,348 | $ | (8,051 | ) | |||
| Net income (loss) per share - basic | $ | 0.02 | $ | (0.10 | ) | |||
| Net income (loss) per share – diluted | $ | 0.02 | $ | (0.10 | ) | |||
| Weighted average common shares – basic | 82,072,822 | 76,982,057 | ||||||
| Weighted average common shares – diluted | 82,126,622 | 76,982,057 | ||||||
The following table sets forth the depreciation expense included in the above line items (in thousands):
| Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Depreciation expense | ||||||||||||
| Cost of sales | $ | 25 | $ | 11 | 136 | % | ||||||
| Sales and marketing | 47 | 32 | 44 | % | ||||||||
| Product development | 705 | 599 | 18 | % | ||||||||
| General and administrative | 127 | 231 | -45 | % | ||||||||
| Total depreciation expense | $ | 904 | $ | 873 | 4 | % | ||||||
5
The following table sets forth the stock-based compensation expense included in the above line items (in thousands):
| Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Stock-based compensation expense | ||||||||||||
| Cost of sales | $ | 78 | $ | 303 | -74 | % | ||||||
| Sales and marketing | 74 | 1,453 | -95 | % | ||||||||
| Product development | 124 | 159 | -22 | % | ||||||||
| General and administrative | 512 | 3,171 | -84 | % | ||||||||
| Total stock-based compensation expense | $ | 788 | $ | 5,086 | -85 | % | ||||||
The following table sets forth our results of operations, as a percentage of revenue, for the periods presented:
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | 100 | % | 100 | % | ||||
| Operating expenses | ||||||||
| Cost of sales | 60 | % | 80 | % | ||||
| Sales and marketing | 10 | % | 12 | % | ||||
| Product development | 7 | % | 6 | % | ||||
| General and administrative | 10 | % | 24 | % | ||||
| Amortization of intangible assets | 6 | % | 4 | % | ||||
| Total operating expenses | 99 | % | 126 | % | ||||
| Income (loss) from operations | 1 | % | -26 | % | ||||
| Other income (expense), net | 5 | % | 5 | % | ||||
| Income (loss) before income taxes | 6 | % | -21 | % | ||||
| Income tax provision | 0 | % | 0 | % | ||||
| Net income (loss) | 6 | % | -21 | % | ||||
Revenue
Revenue was as follows (in thousands):
| Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Membership services | $ | 12,082 | $ | 9,084 | 33 | % | ||||||
| Advertising | 8,942 | 7,937 | 13 | % | ||||||||
| Merchandising | 1,848 | 3,660 | -49 | % | ||||||||
| Sponsorship and licensing | 114 | 5,136 | -98 | % | ||||||||
| Ticket/Event | 235 | 12,950 | -98 | % | ||||||||
| Total Revenue | $ | 23,222 | $ | 38,767 | -40 | % | ||||||
Membership Revenue
Membership revenue increased $3.0 million, or 33%, to $12.1 million for the three months ended June 30, 2022, as compared to $9.1 million for the months ended June 30, 2021. The increase was primarily as a result of member growth with our largest OEM customer.
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Advertising Revenue
Advertising revenue increased $1.0 million, or 13%, to $8.9 million for the three months ended June 30, 2022, as compared to $7.9 million for the three months ended June 30, 2021, which is primarily attributable to an increase in the number of advertising content sold.
Merchandising
Merchandising revenue decreased to $1.8 million, or 49%, for the three months ended June 30, 2022, as compared to $3.7 million the three months ended June 30, 2021 due to a reduction in marketing spending by retail partners, a significant partner being offline for the quarter and reduced customer demand.
Sponsorship and Licensing
Sponsorship and licensing revenue decreased by $5.0 million, or 98%, to $0.1 million for the three months ended June 30, 2022, as compared to $5.1 million for the three months ended June 30, 2021. The decrease was primarily due to the sponsorship and licensing revenues earned related to the Social Gloves event held during the three months ended June 30, 2021 with no comparable event held during the current year period.
Ticket/Event
Ticket/Event revenue decreased by $12.7 million, or 98%, to $0.2 million for the three months ended June 30, 2022, as compared to $13.0 million for the three months ended June 30, 2021, driven by PPV ticket fees and production revenues earned related to the Social Gloves event held during the three months ended June 30, 2021, with no comparable event held during the current year period.
Cost of Sales
Cost of sales was as follows (in thousands):
| Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Membership | $ | 7,155 | 6,456 | 11 | % | |||||||
| Advertising | 7,202 | 7,460 | -3 | % | ||||||||
| Production and Ticketing | (255 | ) | 14,510 | -102 | % | |||||||
| Merchandising | 1,280 | 2,514 | -49 | % | ||||||||
| Total Cost of Sales | $ | 15,382 | $ | 30,940 | -50 | % | ||||||
Membership
Membership cost of sales increased by $0.7 million, or 11%, to $7.2 million for the three months ended June 30, 2022, as compared to $6.5 million for the three months ended June 30, 2021. The increase in costs during the current quarter due to a growth in membership.
Advertising
Advertising cost of sales decreased by $0.3 million, or 3%, to $7.2 million for the three months ended June 30, 2022, as compared to $7.5 million for the three months ended June 30, 2021. The decrease was primarily due to an improvement in revenue share agreements compared to the prior year period.
Production and Ticketing
Production cost of sales decreased by $14.8 million, or 102%, to a credit of $0.3 million for the three months ended June 30, 2022, as compared to $14.5 million for the three months ended June 30, 2021. The decrease was primarily due to production costs of approximately $12.3 million related to the Social Gloves event held during the prior year quarter. In addition, the Company was able to negotiate credits with some vendors on amounts previously owed during the three months ended June 30, 2022.
Merchandising
Merchandising cost of sales decreased by $1.2 million, or 49%, to $2.5 million for the three months ended June 30, 2022, as compared to $2.5 million for the three months ended June 30, 2021 due to a reduction in sales.
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Other Operating Expenses
Other operating expenses were as follows (in thousands):
| Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Sales and marketing expenses | $ | 2,366 | $ | 4,748 | -50 | % | ||||||
| Product development | 1,617 | 2,155 | -25 | % | ||||||||
| General and administrative | 2,209 | 9,377 | -76 | % | ||||||||
| Amortization of intangible assets | 1,411 | 1,506 | -6 | % | ||||||||
| Total Other Operating Expenses | $ | 7,603 | $ | 17,786 | -57 | % | ||||||
Sales and Marketing Expenses
Sales and Marketing expenses decreased by $2.4 million, or 50%, to $2.4 million for the three months ended June 30, 2022, as compared to $4.7 million for the three months ended June 30, 2021, primarily driven by a decrease of $1.5 million in stock compensation expense and a reduction in advertising of $0.9 million.
Product Development
Product development expenses decreased by $0.5 million, or 25%, to $1.6 million for the three months ended June 30, 2022, as compared to $2.2 million for the three months ended June 30, 2021, which was driven by temporary salary reductions and a decrease in employees.
General and Administrative
General and administrative expenses decreased by $7.2 million, or 76%, to $2.2 million for the three months ended June 30, 2022, as compared to $8.4 million for the three months ended June 30, 2021, largely due to a decrease in share-based compensation of $2.8 million, legal fees of $1.9 million, salaries and benefits of $1.3 million and a $1.2 million reduction in overhead costs.
Amortization of Intangible Assets
Amortization of intangible assets decreased $0.1 million, or 6%, to $1.4 million for the three months ended June 30, 2022, as compared to $1.5 million for the three months ended June 30, 2021. There were no significant additions of intangibles during the three months ended June 30, 2022.
Total Other Income (Expense)
Total other income (expense) was as follows (in thousands):
| Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Total other income (expense), net | $ | 1,128 | $ | 1,910 | -41 | % | ||||||
Total other income (expense) decreased by $0.8 million, or 41%, to $1.1 million of income for the three months ended June 30, 2022, as compared to $1.9 million of income for the three months ended June 30, 2021. The decrease is primarily driven by the $2.5 million gain on forgiveness of our PPP loans during the quarter ended June 30, 2021 compared to a gain of $2.2 million attributed to the settlement of the PodcastOne contingent liability.
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Non-GAAP Measures
Contribution Margin
Contribution Margin is a non-GAAP financial measure defined as Revenue less Cost of Sales.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as net income (loss) before (a) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (b) legal, accounting and other professional fees directly attributable to acquisition activity, (c) employee severance payments and third party professional fees directly attributable to acquisition or corporate realignment activities, (d) certain non-recurring expenses associated with legal settlements or reserves for legal settlements in the period that pertain to historical matters that existed at acquired companies prior to their purchase date, (e) depreciation and amortization (including goodwill impairment, if any), and (f) certain stock-based compensation expense. We use Adjusted EBITDA to evaluate the performance of our operating segment. We believe that information about Adjusted EBITDA assists investors by allowing them to evaluate changes in the operating results of our business separate from non-operational factors that affect net income (loss), thus providing insights into both operations and the other factors that affect reported results. Adjusted EBITDA is not calculated or presented in accordance with GAAP. A limitation of the use of Adjusted EBITDA as a performance measure is that it does not reflect the periodic costs of certain amortizing assets used in generating revenue in our business. Accordingly, Adjusted EBITDA should be considered in addition to, and not as a substitute for, operating income (loss), net income (loss), and other measures of financial performance reported in accordance with GAAP. Furthermore, this measure may vary among other companies; thus, Adjusted EBITDA as presented herein may not be comparable to similarly titled measures of other companies.
Adjusted EBITDA Margin
Adjusted EBITDA Margin is a non-GAAP financial measure that we define as the ratio of Adjusted EBITDA to Revenue.
The following table sets forth the reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP financial measure for the three months ended June 30, 2022 (in thousands):
| Net Income (Loss) | Depreciation and Amortization | Stock-Based Compensation | Non- Recurring Acquisition and Realignment Costs | Other (Income) Expense | (Benefit) Provision for Taxes | Adjusted EBITDA | ||||||||||||||||||||||
| Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||
| Operations | $ | 2,239 | $ | 2,309 | $ | 375 | $ | 192 | $ | (1,915 | ) | $ | - | $ | 3,200 | |||||||||||||
| Corporate | (891 | ) | 6 | 413 | (1,563 | ) | 807 | (3 | ) | (1,231 | ) | |||||||||||||||||
| Total | $ | 1,348 | $ | 2,315 | $ | 788 | $ | (1,371 | ) | $ | (1,108 | ) | $ | (3 | ) | $ | 1,969 | |||||||||||
| Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||
| Operations | $ | (3,013 | ) | $ | 2,371 | $ | 2,144 | $ | 237 | $ | (542 | ) | $ | - | $ | 1,197 | ||||||||||||
| Corporate | (5,038 | ) | 8 | 2,942 | 505 | (1,368 | ) | 2 | (2,949 | ) | ||||||||||||||||||
| Total | $ | (8,051 | ) | $ | 2,379 | $ | 5,086 | $ | 742 | $ | (1,910 | ) | $ | 2 | $ | (1,752 | ) | |||||||||||
The following table sets forth the reconciliation of Contribution Margin to Revenue, the most comparable GAAP financial measure (in thousands):
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue: | $ | 23,222 | $ | 38,767 | ||||
| Less: | ||||||||
| Cost of sales | (15,382 | ) | (30,940 | ) | ||||
| Amortization of developed technology | (777 | ) | (772 | ) | ||||
| Gross Profit | 7,063 | 7,055 | ||||||
| Add back amortization of developed technology: | 777 | 772 | ||||||
| Contribution Margin | $ | 7,840 | $ | 7,827 | ||||
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Business Segment Results
Operations
Our Operations operating results were, and discussions of significant variances are, as follows (in thousands):
| Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Revenue | $ | 23,222 | $ | 38,767 | -40 | % | ||||||
| Cost of Sales | 15,382 | 30,940 | -50 | % | ||||||||
| Sales & Marketing, Product Development and G&A | 5,943 | 9,876 | -40 | % | ||||||||
| Intangible Asset Amortization | 1,411 | 1,506 | -6 | % | ||||||||
| Operating Income (Loss) | 486 | (3,555 | ) | -114 | % | |||||||
| Operating Margin | 2 | % | -9 | % | 11 | % | ||||||
| Adjusted EBITDA* | $ | 3,200 | $ | 1,197 | 167 | % | ||||||
| Adjusted EBITDA Margin* | 14 | % | 3 | % | 11 | % | ||||||
| * | See “—Non-GAAP Measures” above for the definition and reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin. |
Revenue
Revenue decreased by $15.5 million, or 40%, $23.2 million during the three months ended June 30, 2022, as compared to $38.8 million for the three months ended June 30, 2021, primarily due to a decrease of $12.7 million in ticket and event revenue primarily due to PPV ticket fees and production revenues earned related to the Social Gloves event held during the prior year quarter which did not occur in the current quarter. In addition, sponsorship revenue decreased $5.0 million and merchandising decreased by $1.8 million due to the Social Gloves event not occurring in the current quarter and a decrease in demand for merchandise. The decrease was offset by an increase in membership revenue of $3.0 million and advertising revenue of $1.0 million due to growth in our PodcastOne sales.
Operating Income (Loss)
Operating income (loss) increased by $4.0 million, or 114%, to income of $0.4 million for the three months ended June 30, 2022, as compared to a loss of $3.6 million for the three months ended June 30, 2021, as a result of a decrease in stock compensation expense of $4.3 million, in addition to decreases in operating costs primarily driven by a $15.6 decrease in cost of sales. These decreases were offset by a decrease in revenue of $15.5 million.
Adjusted EBITDA
Adjusted EBITDA increased by $2.0 million, or 167%, to $3.2 million for the three months ended June 30, 2022, as compared to $1.2 million for the three months ended June 30, 2021. This was largely due to lower operating expenses, described above.
Corporate expense
Our Corporate expense results were, and discussions of significant variances are, as follows (in thousands):
| Three Months Ended June 30, |
||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Sales & Marketing, Product Development, and G&A | $ | 83 | $ | 6,404 | -99 | % | ||||||
| Operating Loss | $ | (83 | ) | $ | (6,404 | ) | 99 | % | ||||
| Operating Margin | N/A | N/A | - | % | ||||||||
| Adjusted EBITDA* | $ | (1,231 | ) | $ | (2,949 | ) | -58 | % | ||||
| * | See “—Non-GAAP Measures” above for the definition and reconciliation of Adjusted EBITDA. |
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Operating Loss
Operating loss decreased $6.1 million, or 99%, to $0.1 million for the three months ended June 30, 2022, as compared to $6.4 million for the three months ended June 30, 2021 due to cost reduction initiatives instituted during the quarter ended June 30, 2021 which were continued into the quarter ended June 30, 2022. In addition, the Company recorded $1.6 million in credits due to settling previous amounts owed with vendors.
Adjusted EBITDA
Corporate Adjusted EBITDA* decreased $1.7 million, or 58%, to $(1.2) million for the three months ended June 30, 2022, as compared to $(2.9) million for three months ended June 30, 2021. The decrease was driven by the decrease in the net loss for the corporate segment along with settling amounts owed with vendors for an amount less than originally billed.
Liquidity and Capital Resources
Current Financial Condition
As of June 30, 2022, our principal sources of liquidity were our cash and cash equivalents, including restricted cash balances in the amount of $11.3 million, which primarily are invested in cash in banking institutions in the U.S. The vast majority of our cash proceeds were received as a result of the issuance of our convertible notes since 2014, public offerings, bank debt financing in fiscal year 2018 and the secured convertible debentures financing in June 2018 and February 2019. In June 2021 we entered into a Revolving Credit Facility (See Note 11 – Senior Secured Revolving Line of Credit to our condensed consolidated financial statements) and drew down aggregate advance amounts of $6.0 million. As of June 30, 2022, we had notes payable balance of $0.2 million, $5.9 million in aggregate principal amount of unsecured convertible notes, secured convertible notes with aggregate principal balances of $15.0 million, and a senior secured revolving credit facility with a principal balance of $7.0 million.
As reflected in our condensed consolidated financial statements included elsewhere in this Quarterly Report, we have an accumulated deficit of $212.5 million and cash used of $26,000 from operating activities for the three months ended June 30, 2022 and had a working capital deficiency of $25.7 million as of June 30, 2022. These factors, among others, raise substantial doubt about our ability to continue as a going concern within one year from the date that the financial statements are issued. Our condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to execute our strategy and on our ability to raise additional funds through the sale of equity and/or debt securities via public and/or private offerings.
Our long-term ability to continue as a going concern is dependent upon our ability to increase revenue, reduce costs, achieve a satisfactory level of profitable operations, and obtain additional sources of suitable and adequate financing. Our ability to continue as a going concern is also dependent its ability to further develop and execute on our business plan. We may also have to reduce certain overhead costs through the reduction of salaries and other means and settle liabilities through negotiation. There can be no assurance that management’s attempts at any or all of these endeavors will be successful.
Sources of Liquidity
In July 2022, PodcastOne completed a private placement offering (the “Financing”) of its unsecured convertible notes with an original issue discount of 10% in the aggregate principal amount of $8,838,500 (the “Notes”) to certain accredited investors and institutional investors (collectively, the “Purchasers”), for gross proceeds of $8,035,000 pursuant to the Subscription Agreements entered into with the Purchasers (the “Subscription Agreements”). In connection with the sale of the Notes, the Purchasers received warrants (the “Warrants”) to purchase a number of shares (the “Warrant Shares”) of PodcastOne’s common stock, par value $0.00001 per share (See Note 20 – Subsequent Events). The Notes and the Warrants were issued as restricted securities in a private placement transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). As part of the Financing, we purchased $3 million worth of Notes.
11
Our cash flows from operating activities are significantly affected by our cash-based investments in our operations, including acquiring live music events and festivals rights, our working capital, and corporate infrastructure to support our ability to generate revenue and conduct operations through cost of services, product development, sales and marketing and general and administrative activities. Cash used in investing activities has historically been, and is expected to be, impacted significantly by our investments in business combinations, our platform, and our infrastructure and equipment for our business offerings, and sale of our investments. We expect to make additional strategic acquisitions to further grow our business, which may require significant investments, capital raising and/or acquisition of additional debt in the near and long term. Over the next twelve to eighteen months, our net use of our working capital could be substantially higher or lower depending on the number and timing of new live festivals and paid members that we add to our businesses.
Subject to applicable limitations in the instruments governing our outstanding indebtedness, we may from time to time repurchase our debt, including the unsecured convertible notes, in the open market, through tender offers, through exchanges for debt or equity securities, in privately negotiated transactions or otherwise.
In the future, we may utilize additional commercial financings, bonds, debentures, lines of credit and term loans with a syndicate of commercial banks or other bank syndicates and/or issue equity securities (publicly or privately) for general corporate purposes, including acquisitions and investing in our intangible assets, music equipment, platform and technologies. We may also use our current cash and cash equivalents to repurchase some or all of our unsecured convertible notes, and pay down our debt, in part or in full, subject to repayment limitation set forth in the credit agreement. Management plans to fund its operations over the next twelve months through the combination of improved operating results, spending rationalization, and the ability to access sources of capital such as through the issuance of equity and/or debt securities. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. We filed a new universal shelf Registration Statement on Form S-3 (the “New Shelf S-3”) with the SEC, which was declared effective by the SEC on February 17, 2022. Under the New Shelf S-3, we have the ability to raise up to $150.0 million in cash from the sale of our equity, debt and/or other financial instruments.
Sources and Uses of Cash
The following table provides information regarding our cash flows for the three months ended June 30, 2022 and 2021 (in thousands):
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash (used in) provided by operating activities | $ | (26 | ) | $ | 832 | |||
| Net cash used in investing activities | (785 | ) | (1,103 | ) | ||||
| Net cash (used in) provided by financing activities | (997 | ) | 6,210 | |||||
| Net change in cash, cash equivalents and restricted cash | $ | (1,808 | ) | $ | 5,939 | |||
Cash Flows Provided by Operating Activities
For the three months ended June 30, 2022
Net cash used in our operating activities of $26,000 primarily resulted from our net income during the period of $1.3 million, which included non-cash charges of $1.3 million largely comprised of depreciation and amortization, stock-based compensation, change in fair value of contingent consideration and amortization of debt discount. The remainder of our sources of cash used in operating activities of $(2.7) million was from changes in our working capital, primarily from timing of accounts receivable, accounts payable and accrued liabilities, accrued royalties, and deferred revenue.
For the three months ended June 30, 2021
Net cash provided by our operating activities of $0.8 million primarily resulted from our net loss during the period of ($8.1) million, which included non-cash charges of $4.9 million largely comprised of depreciation and amortization, stock-based compensation, and amortization of debt discount. In addition, our net loss during the period included non-cash income comprised of $(2.5) million comprised of a gain on forgiveness of PPP loans. The remainder of our sources of cash provided by operating activities of $4.0 million was from changes in our working capital, primarily from timing of accounts receivable, accounts payable, and deferred revenue.
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Cash Flows Used In Investing Activities
For the three months ended June 30, 2022
Net cash used in investing activities of $0.8 million was primarily due to the $0.8 million cash used for the purchase of capitalized internally developed software costs during the quarter ended June 30, 2022.
For the three months ended June 30, 2021
Net cash used in investing activities of $1.1 million was primarily due to the $1.0 million cash used for the purchase of capitalized internally developed software costs during the quarter ended June 30, 2021.
Cash Flows Provided by Financing Activities
For the three months ended June 30, 2022
Net cash used in financing activities of $1.0 million was due to the repurchase of common stock under the Company’s share repurchase program of $1.0 million.
For the three months ended June 30, 2021
Net cash provided by financing activities of $6.2 million was primarily due to proceeds from the drawdown on the revolving line of credit of $6.0 million and proceeds from employee stock options of $0.3 million, partially offset by payments on capital lease liabilities of ($0.1) million.
Debt Covenants
As of June 30, 2022, we were in full compliance with all covenants.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Interim Chief Financial Officer, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this Quarterly Report, we carried out an evaluation (the “Evaluation”), under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, as a result of the material weaknesses identified in our 2022 Form 10-K, our Chief Executive Officer and Interim Chief Financial Officer concluded that as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were not effective.
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Limitations of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to reasonably ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well designed and operated, can provide only reasonable assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports. Inherent limitations to any system of disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or overriding of such controls by one or more persons. In addition, we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, and our system of controls may therefore not achieve its desired objectives under all possible future events.
Changes in Internal Control over Financial Reporting
We continue to be in the process of implementing changes, as more fully described in our 2022 Form 10-K, to our internal control over financial reporting to remediate the material weaknesses as described in our 2022 Form 10-K.
There have been no changes in our internal control over financial reporting, during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
CEO and CFO Certifications
Exhibits 31.1 and 31.2 to this Quarterly Report are the Certifications of our Chief Executive Officer and Interim Chief Financial Officer, respectively. These Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act (the “Section 302 Certifications”). This Item 4 of this Quarterly Report, which you are currently reading, is the information concerning the Evaluation referred to above and in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are from time to time, party to various legal proceedings arising out of our business. Certain legal proceedings in which we are involved are discussed in Note 15 - Commitments and Contingencies, to the condensed consolidated financial statements included elsewhere in this Quarterly Report, and are incorporated herein by reference. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
Item 1A. Risk Factors.
We have set forth in Item 1A. Risk Factors in our 2022 Form 10-K, risk factors relating to our business and industry, our acquisition strategy, our company, our subsidiaries, our technology and intellectual property, and our common stock. Readers of this Quarterly Report are referred to such Item 1A. Risk Factors in our 2022 Form 10-K for a more complete understanding of risks concerning us. Except as set forth below, there have been no material changes in our risk factors since those published in our 2022 Form 10-K.
Risks Related to Our Business and Industry
We rely on one key customer for a substantial percentage of our revenue. The loss of our largest customer or the significant reduction of business or growth of business from our largest customer could significantly adversely affect our business, financial condition and results of operations.
Our business is dependent, and we believe that it will continue to depend, on our customer relationship with Tesla, which accounted for 43% of our consolidated revenue for the three months ended June 30, 2022, and 18% of our consolidated revenue for the three months ended June 30, 2021. Our existing agreement with Tesla governs our music services to its car user base in North America, including our audio music streaming services. If we fail to maintain certain minimum service level requirements related to our service with Tesla or other obligations related to our technology or services, Tesla may terminate our agreement to provide them with such service. Tesla may also terminate our agreement for convenience at any time. If Tesla terminates our agreement, requires us to renegotiate the terms of our existing agreement or we are unable to renew such agreement on mutually agreeable terms, no longer makes our music services available to Tesla’s car user base, becomes a native music service provider, replaces our music services with one or more of our competitors and/or we experience a significant reduction of business from Tesla, our business, financial condition and results of operations would be materially adversely affected.
In addition, a significant amount of the subscription revenue we generate from Tesla is indirectly subsidized by Tesla to its customers, which Tesla is not committed to carry indefinitely, including the ability to terminate and/or change our music services for convenience at any time. Should our subscription revenue services no longer be subsidized by and/or made available by Tesla to its customers or if Tesla reclassifies or renegotiates with us the definition of a paid subscriber or demands credit for past subscribers that no longer meet such requirement, there can be no assurance that we will continue to maintain the same number of paid subscribers or receive the same levels of subscription service revenue and subscription revenue may substantially fluctuate accordingly. There is no assurance that we would be able to replace Tesla or lost business with Tesla with one or more customers that generate comparable revenue. Furthermore, there could be no assurance that our revenue from Tesla continues to grow at the same rate or at all. Any revenue growth will depend on our success in growing such customer’s revenues on our platform and expanding our customer base to include additional customers.
Tesla has also integrated Spotify Premium to the car’s in-dash touchscreen for its Model S, Model X and Model 3 vehicles. Tesla owners now have access to our music streaming services, Spotify and TuneIn natively. There is no assurance that our music streaming services will be available in every current and/or future Tesla model. Furthermore, our current and future competitors like Spotify, Apple Music, Tesla (if it becomes a native music service provider) and others may have more well-established brand recognition, more established relationships with, and superior access to content providers and other industry stakeholders, greater financial, technical and other resources, more sophisticated technologies or more experience in the markets in which we compete. If we are unable to compete successfully for users against our competitors by maintaining and increasing our presence and visibility, the number of users of our network may fail to increase as expected or decline and our advertising sales, subscription fees and other revenue streams will suffer.
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In addition, we have derived, and we believe that we will continue to derive, a substantial portion of our revenues from a limited number of other customers. Any revenue growth will depend on our success in growing our customers’ revenues on our platform and expanding our customer base to include additional customers. If we were to lose one or more of our key customers, there is no assurance that we would be able to replace such customers or lost business with new customers that generate comparable revenue, which would significantly adversely affect our business, financial condition and results of operations.
We have incurred significant operating and net losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.
As reflected in our accompanying condensed consolidated financial statements included elsewhere herein, we have a history of losses, incurred significant operating and net losses in each year since our inception. As of June 30, 2022, we had an accumulated deficit of $212.5 million and a working capital deficiency of $25.7 million. We anticipate incurring additional losses until such time that we can generate significant increases to our revenues, and/or reduce our operating costs and losses. To date, we have financed our operations exclusively through the sale of equity and/or debt securities (including convertible securities). The size of our future net losses will depend, in part, on the rate of future expenditures and our ability to significantly grow our business and increase our revenues. We expect to continue to incur substantial and increased expenses as we grow our business. We also expect a continued increase in our expenses associated with our operations as a publicly-traded company. We may incur significant losses in the future for a number of other reasons, including unsuccessful acquisitions, costs of integrating new businesses, expenses, difficulties, complications, delays and other unknown events. As a result of the foregoing, we expect to continue to incur significant losses for the foreseeable future and we may not be able to achieve or sustain profitability.
Our ability to meet our total liabilities, as reported in the accompanying condensed consolidated balance sheets, and to continue as a going concern, is dependent on our ability to increase revenue, reduce costs, achieve a satisfactory level of profitable operations, obtain additional sources of suitable and adequate financing and further develop and execute on our business plan. We may never achieve profitability, and even if we do, we may not be able to sustain being profitable. As a result of the going concern uncertainty, there is an increased risk that you could lose the entire amount of your investment in our company, which assumes the realization of our assets and the satisfaction of our liabilities and commitments in the normal course of business.
Risks Related to Our Indebtedness
We may not have the ability to repay the amounts then due under the senior credit facility, Harvest Notes and/or convertible notes at maturity.
At maturity, the entire outstanding principal amount of the senior secured notes, Harvest Notes and convertible notes will become due and payable by us. As of June 30, 2022, $26.9 million of our total indebtedness (excluding interest and unamortized debt discount and debt issuance costs) is due in fiscal 2025, and $0.1 million thereafter.
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Our failure to repay any outstanding amount of the Harvest Notes or convertible notes would constitute a default under such indentures. A default would increase the interest rate to the default rate under the Harvest Notes or the maximum rate permitted by applicable law until such amount is paid in full. A default under the Harvest Notes or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the Harvest Notes or convertible notes or make cash payments thereon. Furthermore, upon the occurrence and during the continuation of any event of default, the agent, for the benefit of the holders of the Harvest Notes, shall have the right to, among other things, take possession of our and our subsidiaries’ assets and property constituting the collateral thereunder and the right to assign, sell, lease or otherwise dispose of all or any part of the collateral. We do not have the right to prepay the Harvest Notes prior to their maturity.
Our debt agreements contain restrictive and financial covenants that may limit our operating flexibility, and our substantial indebtedness may limit cash flow available to invest in the ongoing needs of our business.
We have a significant amount of indebtedness. Our total outstanding consolidated indebtedness as of June 30, 2022 was $27.1 million, net of fees and discounts. While we have certain restrictions and covenants with our current indebtedness, we could in the future incur additional indebtedness beyond such amount. Our existing debt agreements with senior facility lender and the holders of the Harvest Notes contain certain restrictive covenants that limit our ability to merge with other companies or consummate certain changes of control, make certain investments, pay dividends or repurchase shares of our common stock, transfer or dispose of assets, or enter into various specified transactions. We therefore may not be able to engage in any of the foregoing transactions unless we obtain the consent of the holders of the Harvest Notes or terminate our existing debt agreements. Our debt agreements also contain certain financial covenants, including maintaining a minimum cash amount at all times and achieving certain financial covenants and are secured by substantially all of our assets. There is no guarantee that we will be able to generate sufficient cash flow or sales to meet the financial covenants or pay the principal and interest under our debt agreements or to satisfy all of the financial covenants. We may also incur significant additional indebtedness in the future.
Our substantial debt combined with our other financial obligations and contractual commitments could have other significant adverse consequences, including:
| ● | requiring us to dedicate a substantial portion of cash flow from operations to the payment of interest on, and principal of, our debt, which will reduce the amounts available to fund working capital, capital expenditures, product development efforts and other general corporate purposes; |
| ● | increasing our vulnerability to adverse changes in general economic, industry and market conditions; |
| ● | obligating us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing; |
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| ● | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and |
| ● | placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options. |
We intend to satisfy our current and future debt service obligations with our existing cash and cash equivalents and funds from external sources, including equity and/or debt financing. However, we may not have sufficient funds or may be unable to arrange for additional financing to pay the amounts due under our existing debt. Funds from external sources may not be available on acceptable terms, if at all. In the event of an acceleration of amounts due under our debt instruments as a result of an event of default, including upon the occurrence of an event that would reasonably be expected to have a material adverse effect on our business, operations, properties, assets or condition or a failure to pay any amount due, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any accelerated payments.
If we do not comply with the provisions of the senior credit facility and the Harvest Notes, our lenders may terminate their obligations to us and require us to repay all outstanding amounts owed thereunder.
The senior credit facility and the Harvest Notes contain provisions that limit our operating activities, including covenant relating to the requirement to maintain a certain amount cash (as provided in the senior credit facility loan agreement) and of Free Cash (as defined in the Harvest Notes). If an event of default occurs and is continuing, the lenders may among other things, terminate their obligations thereunder and require us to repay all amounts thereunder. As of June 30, 2022, we were in full compliance with these covenants.
Risks Related to Our Company
We depend upon third-party licenses for sound recordings and musical compositions and other content and an adverse change to, loss of, or claim that we does not hold any necessary licenses may materially adversely affect our business, operating results and financial condition.
To secure the rights to stream sound recordings and the musical compositions embodied therein, we enter into license agreements to obtain licenses from rights holders such as record labels, aggregators, artists, music publishers, performing rights organizations, collecting societies and other copyright owners or their agents, and pay substantial royalties or other consideration to such parties or their agents around the world. Though we work diligently in our efforts to obtain all necessary licenses to stream sound recordings and the musical compositions embodied therein, there is no guarantee that the licenses available to us now will continue to be available in the future at rates and on terms that are favorable or commercially reasonable or at all. The terms of these licenses, including the royalty rates that we are required to pay pursuant to them, may change as a result of changes in our bargaining power, changes in the industry, changes in the laws and regulations, or for other reasons. Increases in royalty rates or changes to other terms of these licenses may materially impact our business, operating results, and financial condition.
We enter into license agreements to obtain rights to stream sound recordings, including from the major record labels that hold the rights to stream a significant number of sound recordings, such as Universal Music Group, Sony Music Entertainment, Warner Music Group and SoundExchange, as well as others. If we fail to obtain these licenses, the size and quality of its catalog may be materially impacted and its business, operating results and financial condition could be materially harmed.
We generally obtains licenses for two types of rights with respect to musical compositions: mechanical rights and public performance rights. With respect to mechanical rights, for example, in the United States, the rates we pay are, to a significant degree, a function of a ratemaking proceeding conducted by an administrative agency called the Copyright Royalty Board. The rates that the Copyright Royalty Board set apply both to compositions that we license under the compulsory license in Section 115 of the Copyright Act of 1976 (the “Copyright Act”), and to a number of direct licenses that we have with music publishers for U.S. rights, in which the applicable rate is generally pegged to the statutory rate set by the Copyright Royalty Board. The most recent proceeding before the Copyright Royalty Board (the “Phonorecords III Proceedings”) set the rates for the Section 115 compulsory license for calendar years 2018 to 2022. The Copyright Royalty Board issued its initial written determination on January 26, 2018. The rates set by the Copyright Royalty Board may still be modified if a party appeals the determination and are also subject to further change as part of future Copyright Royalty Board proceedings. If any such rate change increases, our sound recordings and musical compositions license costs may substantially increase and impact our ability to obtain content on pricing terms favorable to us, and it could negatively harm our business, operating results and financial condition and hinder our ability to provide interactive features in our services, or cause one or more of our services not to be economically viable. Based on management’s estimates and forecasts for the next two fiscal years, we currently believe that the proposed rates will not materially impact our business, operating results, and financial condition. However, the proposed rates are based on a variety of factors and inputs which are difficult to predict in the long-term. If Slacker’s business does not perform as expected or if the rates are modified to be higher than the proposed rates, its content acquisition costs could increase and impact its ability to obtain content on pricing terms favorable to us, which could negatively harm Slacker’s business, operating results and financial condition and hinder its ability to provide interactive features in its services, or cause one or more of Slacker’s services not to be economically viable.
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In the United States, public performance rights are generally obtained through intermediaries known as performing rights organizations (“PROs”), which negotiate blanket licenses with copyright users for the public performance of compositions in their repertory, collect royalties under such licenses, and distribute those royalties to copyright owners. The royalty rates available to Slacker today may not be available to it in the future. Licenses provided by two of these PROs, the American Society of Composers, Authors and Publishers (“ASCAP”) and Broadcast Music, Inc. (“BMI”), cover the majority of the music we stream and are governed by consent decrees relating to decades old litigations. In 2019, the U.S. Department of Justice indicated that it was formally reviewing the relevance and need of these consent decrees. Changes to the terms of or interpretation of these consent decrees up to and including the dissolution of the consent decrees, could affect our ability to obtain licenses from these PROs on reasonable terms, which could harm its business, operating results, and financial condition. In addition, an increase in the number of compositions that must be licensed from PROs that are not subject to the consent decrees, or from copyright owners that have withdrawn public performance rights from the PROs, could likewise impede Slacker’s ability to license public performance rights on favorable terms. As of June 30, 2022, we owed $16.9 million in aggregate royalty payments to such PROs.
In other parts of the world, including Europe, Asia, and Latin America, we obtain mechanical and performance licenses for musical compositions either through local collecting societies representing publishers or from publishers directly, or a combination thereof. We cannot guarantee that its licenses with collecting societies and its direct licenses with publishers provide full coverage for all of the musical compositions we make available to our users in such countries. In Asia and Latin America, we are seeing a trend of movement away from blanket licenses from copyright collectives, which is leading to a fragmented copyright licensing landscape. Publishers, songwriters, and other rights holders choosing not to be represented by collecting societies could adversely impact our ability to secure favorable licensing arrangements in connection with musical compositions that such rights holders own or control, including increasing the costs of licensing such musical compositions, or subjecting us to significant liability for copyright infringement.
With respect to podcasts and other non-music content, we produce or commission the content itself or obtain distribution rights directly from rights holders. In the former scenario, we employ various business models to create original content. In the latter scenario, we and/or PodcastOne negotiates license directly with individuals that enable creators to post content directly to our service after agreeing to comply with the applicable terms and conditions. We are dependent on those who provide content on our service complying with the terms and conditions of our license agreements as well as the PodcastOne Terms and Conditions of Use. However, we cannot guarantee that rights holders or content providers will comply with their obligations, and such failure to do so may materially impact our business, operating results, and financial condition.
There also is no guarantee that we have all of the licenses we need to stream content, as the process of obtaining such licenses involves many rights holders, some of whom are unknown, and myriad complex legal issues across many jurisdictions, including open questions of law as to when and whether particular licenses are needed. Additionally, there is a risk that rights holders, creators, performers, writers and their agents, or societies, unions, guilds, or legislative or regulatory bodies will create or attempt to create new rights that could require us to enter into license agreements with, and pay royalties to, newly defined groups of rights holders, some of which may be difficult or impossible to identify.
Even when we are able to enter into license agreements with rights holders, we cannot guarantee that such agreements will continue to be renewed indefinitely. For example, from time to time, our license agreements with certain rights holders and/or their agents may expire while we negotiate their renewals and, per industry custom and practice, we may enter into brief (for example, month-, week-, or even days-long) extensions of those agreements or provisional licenses and/or continue to operate on an at will basis as if the license agreement had been extended, including by our continuing to make music available. During these periods, we may not have assurance of long-term access to such rights holders’ content, which could have a material adverse effect on its business and could lead to potential copyright infringement claims.
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It also is possible that such agreements will never be renewed at all. The lack of renewal, or termination, of one or more of our license agreements, or the renewal of a license agreement on less favorable terms, also could have a material adverse effect on its business, financial condition, and results of operations.
The success of our business and operations depends, in part, on the integrity of our systems and infrastructures, as well as affiliate and third-party computer systems, Wi-Fi and other communication systems. System interruption and the lack of integration and redundancy in these systems and infrastructures may have an adverse impact on our business, financial condition and results of operations.
System interruption and the lack of integration and redundancy in the information systems and infrastructures, both of our own systems and other computer systems and of affiliate and third-party software, Wi-Fi and other communications systems service providers on which we rely, may adversely affect our ability to operate websites, process and fulfill transactions, respond to listener inquiries and generally maintain cost-efficient operations. Such interruptions could occur by virtue of natural disaster, malicious actions such as hacking or acts of terrorism or war, or human error. In addition, the loss of some or all of certain key personnel could require us to expend additional resources to continue to maintain our software and systems and could subject us to systems interruptions.
Although we maintain up to date information technology systems and network infrastructures for the operation of our businesses, techniques used to gain unauthorized access to private networks are constantly evolving, and we may be unable to anticipate or prevent unauthorized access to our systems and data.
Risks Related to Our PodcastOne Business
Minimum guarantees required under certain of PodcastOne’s podcast license agreements may limit our operating flexibility and may adversely affect our business, operating results, and financial condition.
Certain of PodcastOne’s podcast license agreements contain minimum guarantees and/or require that we make minimum guarantee payments. Such minimum guarantees related to our content acquisition costs are not always tied to our revenue and/or listener growth forecasts (e.g., number of listeners), or the number of podcasts used on our service. We may also be subject to minimum guarantees to rights holders with respect to certain strategic partnerships we enter into that may not produce all of the expected benefits. Accordingly, our ability to achieve and sustain profitability and operating leverage on our service in part depends on our ability to increase our revenue through increased sales of premium service and advertising sales on terms that maintain an adequate gross margin. The duration of our license agreements for podcast content that contain minimum guarantees is frequently between one and two years. If our forecasts of acquisition or retention of listeners consuming our podcast content do not meet our expectations or the number of our listeners consuming our podcast content decline significantly during the term of our license agreements, our expectations for return on minimum guarantees may not be met and/or our margins may be materially and adversely affected. To the extent we do not maintain or increase the number of listeners consuming our podcast content or advertising sales do not meet our expectations, our business, operating results, and financial condition could also be adversely affected as a result of such minimum guarantees. In addition, the fixed cost nature of these minimum guarantees may limit our flexibility in planning for, or reacting to, changes in our business and the market segments in which we operate.
We rely on estimates of the market share of streaming content owned by each content provider, as well as our own user growth and forecasted advertising revenue, to forecast whether such minimum guarantees could be recouped against our actual content acquisition costs incurred over the duration of the license agreement. To the extent that this revenue and/or market share estimates underperform relative to our expectations, leading to content acquisition costs that do not exceed such minimum guarantees, our margins may be materially and adversely affected.
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PodcastOne relies heavily on its Content Management System (“CMS”), and the failure of CMS to operate effectively could adversely affect its business.
PodcastOne relies heavily on its CMS. PodcastOne utilizes a combination of its proprietary CMS technology and third-party technology. Its business substantially depends on its CMS which allows us to manage its podcasts and content offer listeners access to their favorite podcasts. We cannot be sure that PodcastOne’s CMS technology or any enhancements or other modifications it makes in the future to its or accompanying third-party technology or integration of such third-party technology will perform as intended. Future enhancements and modifications to its CMS technology could consume considerable resources. If PodcastOne is unable to successfully develop, maintain and enhance its CMS technology in a timely and efficient manner, its ability to attract and retain listeners may be impaired. In addition, if its CMS technology or that of third parties it utilizes in its operations fails or otherwise operates improperly, its ability to attract and retain listeners may be impaired. Any such inability or failure could have an adverse effect on our business, results of operations and financial condition.
PodcastOne relies on key members of its management and the loss of their services or investor confidence in them could adversely affect its success, development and financial condition.
PodcastOne’s success depends, to a large degree, upon certain key members of its management, particularly Kit Gray, its President, Aaron Sullivan, its interim Chief Financial Officer, and Sue McNamara, its Head of Sales. Mr. Gray has extensive knowledge about PodcastOne’s business and its operations, and the loss of Mr. Gray, Mr. Sullivan or Ms. McNamara or any other key member of its senior management may have a material adverse effect on its business and operations. PodcastOne does not currently maintain a key-person insurance policy for Mr. Gray or any other member of its management. PodcastOne’s executive team’s expertise and experience in acquiring, integrating and growing businesses, particularly those focused on podcasts and content providers, have been and will continue to be a significant factor in its growth and ability to execute its business strategy. The loss of any of its executive officers could slow the growth of its business or have a material adverse effect on its business, results of operations and financial condition.
PodcastOne’s corporate culture has contributed to its success, and if it cannot successfully maintain its culture as it assimilates new employees, it could lose the innovation, creativity and teamwork fostered by its culture.
PodcastOne is undergoing growth in its business, including in its employee headcount. A significant portion of its management team has been with PodcastOne since inception. We expect that significant additional hiring will be necessary to support its strategic plans. This rapid influx of new team members from different business backgrounds may make it difficult for us to maintain our corporate culture. We believe PodcastOne’s culture has contributed significantly to its ability to attract and retain talent, to acquire podcast content and to innovate and grow successfully. If its culture is negatively affected, its ability to support its growth and innovation may diminish.
PodcastOne relies on integrations with advertising platforms, demand-side platforms (“DSPs”), proprietary platforms and ad servers, over which it exercise very little control.
PodcastOne’s business depends on its ability to integrate its content with a variety of third-party advertising platforms, DSPs, proprietary platforms and ad services. PodcastOne is able to make its podcasts available on other popular podcasting platforms such as Apple, Amazon, Spotify and wherever podcasts are heard, allowing PodcastOne’s listeners to utilize such platforms to listen to its podcasts. PodcastOne has also formed partnerships with advertising platforms to integrate its podcasts with their software and product offerings, allowing its advertisers to utilize its solutions wherever they purchase or place an ad. For example, PodcastOne relies on integration with Apple and Spotify in order to provide its podcasts through their platforms. Apple or Spotify may determine to only host shows that are proprietary to them, which would have a significant effect on PodcastOne’s ability to offer its podcasts to larger group of listeners and would materially adversely affect its business, results of operations and financial condition. Some of these integration partners have significant market share in the segment in which they operate. To date, PodcastOne has relied on written contracts and other arrangements to govern its relationships with these partners. However, these are subject to change by such providers from time to time and in many instances the provider may choose to terminate these contracts without cause and with short notice periods. Many of these agreements are short term with automatic renewal provisions, and there can be no assurances that such providers will agree to renew their agreements with us. Moreover, such providers may choose to stop integrating with PodcastOne’s podcasts and may unilaterally stop providing PodcastOne us with data necessary to its business if they acquire a competitor which provides podcasting services similar to PodcastOne’s or if they begin to deliver podcasts similar to PodcastOne’s on their own. PodcastOne cannot assure you that its existing podcast partners and integration partners will continue to, or that potential new podcast partners or integration partners will agree to, integrate PodcastOne’s podcasts into their podcast offerings or services. Such integrations may not be replaceable, and so loss of any such integrations could materially impact our business and PodcastOne’s results of operations and we may lose listeners.
PodcastOne’s business and revenues could also be affected by social issues or disruptions. For example, if there is public disapproval or boycotting of a specific podcasting platform, such as Spotify or other podcasting platform, PodcastOne’s ability to optimize ad placement or to forecast listener metrics may be impacted based on unforeseen trends or events.
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PodcastOne’s revenue model depends in part on high impression volumes, the growth of which may not be sustained.
PodcastOne generates revenue by charging a cost per thousand impressions (“CPM”) based on the volume of purchased digital ads that it measures on behalf of these customers. If the volume of impressions PodcastOne measures does not continue to grow or decreases for any reason, its business will suffer. For example, if digital ad spending remains constant and PodcastOne’s advertiser customers transition to higher CPM ad inventory, overall impression volumes may decrease, which may result in fewer impressions for PodcastOne to verify and a corresponding decline in its revenues. PodcastOne cannot assure you that growth in volume of impressions will be sustained. If PodcastOne’s customers adjust their buying patterns or alter their preference to higher CPM ad inventory, its business, financial condition, and results of operations may be harmed.
PodcastOne’s advertising sales depend on how its listener data is collected and how advertisers select their ad listener targeting in the future.
PodcastOne’s advertising sales depend on how its listener data is collected and how advertisers select their ad listener targeting in the future. Advertiser spending varies based on their desire to target certain categories of listeners and supporting listener data. If PodcastOne’s advertisers determine to target different listeners or shift their ad spending towards different listener categories, PodcastOne’s business, financial condition, and results of operations may be harmed.
Risks Related to Our Intended Spin-Out of PodcastOne as a Separate Public Company
We may be unable to complete the Spin-Out of PodcastOne as a Separate Public Company, and we may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Out.
We believe that as a result of the intended spin-out of PodcastOne as an independent publicly-traded company (the “Spin-Out”), PodcastOne will be able to, among other things, better focus its financial and operational resources on its specific business, implement and maintain a capital structure designed to meet its specific needs, design and implement corporate strategies and policies that are targeted to its business, more effectively respond to industry dynamics and create effective incentives for its management and employees that are more closely tied to its business performance. We also believe that the Spin-Out will result in significant benefits to our Company and our stockholders as a result of unlocking the value we believe that PodcastOne has as a standalone publicly-traded company. However, we cannot assure you that we will be able to complete the Spin-Out due to many factors outside of our control.
In addition, by separating from LiveOne, PodcastOne may be more susceptible to market fluctuations and have less leverage with its talent, customers, vendors and other service providers, and PodcastOne may experience other adverse events. In addition, we may be unable to achieve some or all of the benefits that we expect PodcastOne to achieve as an independent company in the time we expect, if at all. The completion of the Spin-Out will also require significant amounts of our management’s time and effort, which may divert management’s attention from operating and growing our business.
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PodcastOne’s common stock may not be eligible for listing on any national securities exchange.
PodcastOne’s common stock is not currently quoted or listed on any national securities exchange, marketplace or any other over-the-counter market, and may never be quoted or listed in the future. We intend to apply to have PodcastOne’s common stock on a national securities exchange as soon as we are eligible to do so following the preparation, filing and consummation of applicable steps and documents. However, we cannot assure you that PodcastOne will meet the initial listing standards of any other national securities exchange at any time in the future. In addition, even if PodcastOne does obtain such a listing, there can be no assurance that it will be able to maintain such listing in the future. As a result, PodcastOne’s investors may find it difficult to buy or sell or obtain accurate quotations for its common stock, and its shares may be less attractive for margin loans and for investment by larger financial institutions. These factors may have an adverse impact on the trading and price of our common stock.
Our and PodcastOne’s debt agreements contain provisions requiring the consent of third parties and certain conditions to be satisfied in connection with the Spin-Out. If these consents are not obtained or such conditions are not satisfied, we may be in breach of such agreements and we may not be able to consummate the Spin-Out.
Our and PodcastOne’s debt agreements contain provisions that require the consent of third parties and for certain conditions to be satisfied in connection to the Spin-Out. For example, we agreed not to effect any Qualified Financing or Qualified Event (each as defined in PodcastOne’s offering documents with respect to its completed private placement of its unsecured convertible notes), as applicable, unless (i) PodcastOne’s post-money valuation at the time of the Qualified Event is at least $150 million, and (ii) immediately following such event we own no less than 66% of PodcastOne’s equity, unless in either case otherwise permitted by the written consent of the holders of the majority in principal of such notes (excluding our Company) and our senior lenders, as applicable. Failure to obtain such consents on commercially reasonable and satisfactory terms, or at all, may cause us to be in breach of such agreements and we may not be able to consummate the Spin-Out.
The risks described above do not necessarily comprise of all those associated with our intended Spin-Out.
Risks Related to the Ownership of Our Common Stock
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plan and any acquisition agreement, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity and/or convertible securities, our stockholders may experience substantial dilution. We may sell or otherwise issue our common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell or issue our common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent issuances. These issuances may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders. We may pay for future acquisitions with additional issuances of shares of our common stock as well, which would result in further dilution for existing stockholders.
Pursuant to our 2016 Equity Incentive Plan (as amended, the “2016 Plan”), there are 17,600,000 shares of our common stock reserved for future issuance to our employees, directors and consultants. If our board of directors elects to issue additional shares of our common stock, stock options, restricted stock units and/or other equity-based awards under the 2016 Plan, as amended, our stockholders may experience additional dilution, which could cause our stock price to fall.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuance of Unregistered Securities
Other than as set forth below and as reported in our Current Reports on Form 8-K, there have been no other sales or issuances of unregistered securities during the period covered by this Quarterly Report that were not registered under the Securities Act.
During the three months ended June 30, 2022, we issued 135,270 shares of our common stock valued at $0.6 million to various consultants. We valued these shares at prices between $0.76 and $0.81 per share, the market price of our common stock on the date of issuance.
We believe the offers, sales and issuances of the securities described above were made in reliance on the exemption from registration contained in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder and involved a transaction by an issuer not involving any public offering. Each of the recipients of securities in any transaction exempt from registration either received or had adequate access, through employment, business or other relationships, to information about us.
During the three months ended June 30, 2022, we issued 102,500 restricted stock units to various employees and consultants. We valued these restricted stock units at $0.81 per share, the market price of our common stock on the date of issuance. The shares of our common stock underlying these awards were registered on our Registration Statements on Form S-8, filed with the SEC on August 24, 2021 and November 12, 2019.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|
Period |
(a) of shares (or purchased |
(b) price paid |
(c) of publicly announced plans or programs |
(d) number (or approximate dollar value) of shares | |||||||||||
| April 1, 2022 – April 30, 2022 | 82,899 | $ | 0.7388 | 82,899 | 1,917,101 shares | ||||||||||
| May 1, 2022 – May 31, 2022 | 542,314 | $ | 0.6866 | 542,314 | 1,374,787 shares | ||||||||||
| June 1, 2022 – June 30, 2022 | 561,008 | $ | 0.9549 | 561,008 | 694,561 shares | ||||||||||
| Total (April 1, 2022 - June 30, 2022) | 1,186,221 | $ | 0.8171 | 1,186,221 | 694,561 shares | ||||||||||
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
In August 2022, we issued 414,137 shares of our restricted common stock at a price of $2.10 per share to a former stockholder of PodcastOne as full repayment of such party’s pro rata share of the earnout amount due under the Stock Purchase Agreement, dated as of May 7, 2020, entered into by us with PodcastOne and the other parties thereto.
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Item 6. Exhibits.
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| † | Management contract or compensatory plan or arrangement. |
| £ | Certain confidential information has been omitted or redacted from these exhibits that is not material and would likely cause competitive harm to the Company if publicly disclosed. |
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LIVEONE INC. | ||
| Date: August 15, 2022 | By: | /s/ Robert S. Ellin |
| Robert S. Ellin | ||
| Chief Executive Officer and Chairman | ||
| (Principal Executive Officer) | ||
| Date: August 15, 2022 | By: | /s/ Aaron Sullivan |
| Aaron Sullivan | ||
Interim Chief Financial Officer and Executive Vice President (Interim Principal Financial Officer and Interim Principal Accounting Officer) | ||
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