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:
(Exact name of registrant as specified in its charter)
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| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
n/a
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The |
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
the preceding 12 months (or for such shorter period that the registrant is required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
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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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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No
As of February 13, 2023, there were
LIVEONE, INC.
TABLE OF CONTENTS
| Page | |||
| PART I — FINANCIAL INFORMATION | 1 | ||
| Item 1. | Financial Statements | 1 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 2 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 23 | |
| Item 4. | Controls and Procedures | 24 | |
| PART II — OTHER INFORMATION | 25 | ||
| Item 1. | Legal Proceedings | 25 | |
| Item 1A. | Risk Factors | 25 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33 | |
| Item 3. | Defaults Upon Senior Securities | 33 | |
| Item 4. | Mine Safety Disclosures | 33 | |
| Item 5. | Other Information | 33 | |
| Item 6. | Exhibits | 34 | |
| Signatures | 36 | ||
i
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
1
LIVEONE, INC.
Condensed Consolidated Balance Sheets
(Unaudited, in thousands, except share and per share amounts)
| December 31, | March 31, | |||||||
| 2022 | 2022 | |||||||
| (Audited) | ||||||||
| Assets | ||||||||
| 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 | ||||||||
| Bridge Loan | ||||||||
| Deferred revenue | ||||||||
| Derivative liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Senior secured convertible notes, net | ||||||||
| Unsecured convertible notes, net - related party | ||||||||
| Senior secured revolving line of credit, net | ||||||||
| 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-1
LIVEONE, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except share and per share amounts)
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue: | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Product development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Impairment of intangibles | ||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on extinguishment of debt | ( | ) | ||||||||||||||
| Forgiveness of PPP loans | ||||||||||||||||
| Other income (expense) | ( | ) | ( | ) | ||||||||||||
| Total other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before provision for (benefit from) income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for (benefit from) income taxes | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-2
LIVEONE, 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 | ||||||||||||||||||||||||||||
| Issuance of shares pursuant to restricted stock units | ||||||||||||||||||||||||||||
| Issuance of shares for modification of debt instruments | ||||||||||||||||||||||||||||
| Issuance of shares for settlement of earnout | ||||||||||||||||||||||||||||
| Issuance of shares for settlement of accrued expenses | ||||||||||||||||||||||||||||
| Treasury stock purchases | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Common Stock | Additional Paid in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Vested employee restricted stock units | ||||||||||||||||||||
| Interest paid in kind | - | |||||||||||||||||||
| Exercise of employee stock options | ||||||||||||||||||||
| Shares issued for CPS acquisition | ||||||||||||||||||||
| Shares issued for Gramophone acquisition | - | - | ||||||||||||||||||
| Purchase price adjustment in connection with CPS acquisition | - | |||||||||||||||||||
| Unsecured convertible note premium | - | |||||||||||||||||||
| Shares issued on amendment of unsecured and secured convertible notes | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-3
LIVEONE, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
| Nine Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in 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 | ( | ) | ( | ) | ||||
| Settlement of accrued expenses | ( | ) | ||||||
| Impairment of fixed assets | ||||||||
| Impairment of intangibles | ||||||||
| Forgiveness of PPP Loans | ( | ) | ||||||
| Loss on extinguishment of debt | ||||||||
| Debt conversion expense | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Other assets | ||||||||
| Deferred revenue | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Other liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Acquisition of Gramophone | ( | ) | ||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Purchases of intangible assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Repayment of note payable | ( | ) | ( | ) | ||||
| Proceeds from PodcastOne bridge loan | ||||||||
| Payment of notes payable – related party | ( | ) | ||||||
| Payments on capital lease liability | ( | ) | ||||||
| Purchase of treasury stock | ( | ) | ||||||
| Proceeds from exercise of employee stock options | ||||||||
| Proceeds from drawdown on senior secured revolving line of credit | ||||||||
| Proceeds from notes payable – related party | ||||||||
| Net cash 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 | $ | $ | ||||||
| Fair value of | $ | $ | ||||||
| Fair value of | $ | $ | ||||||
| Fair value of | $ | $ | ||||||
| Fair value of | $ | $ | ||||||
| Forgiveness of PPP loan | $ | $ | ||||||
| Fair value of warrant and derivative liability issued with debt instruments | $ | $ | ||||||
| Fair value of shares issued in connection with CPS acquisition | $ | $ | ||||||
| Fair value of | $ | $ | ||||||
| Fair value of unsecured convertible note premium | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-4
LIVEONE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended December 31, 2022 and 2021
Note 1 — Organization and Basis of Presentation
Organization
LiveOne, 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 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 nine months ended December 31, 2022. The results for the nine months ended December 31, 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 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 2022 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-5
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.
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
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 Form 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 membership 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 December 31, 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 $
F-6
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.
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 debt 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.
F-7
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.
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.
F-8
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 has occurred
before the receipt of goods or services, a receivable is recorded. Barter revenue for the three months ended December 31, 2022 and 2021
was $
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 December 31, 2022 and March 31, 2022 was less than $
F-9
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 tickets 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.
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 December 31, 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.
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.
F-10
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 nine months ended December 31, 2022 and 2021 (in thousands):
| 2022 | 2021 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and cash equivalents and restricted cash | $ | $ | ||||||
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 December 31, 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. On December 31, 2022, the Company had one customer that made up
The Company’s accounts receivable at December 31, 2022 and March 31, 2022 is as follows (in thousands):
| December 31, | 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.
F-11
Notes Payable – Paycheck Protection Program (“PPP”) 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 $
Debt with Warrants
In accordance with ASC Topic 470-20-25, when the Company issues debt with warrants, the Company treats the warrants as a debt discount, recorded as a contra-liability against the debt, and amortizes the balance over the life of the underlying debt as interest expense in the consolidated statements of operations. The offset to the contra-liability is recorded as either a liability or within equity in the Company’s consolidated balance sheets depending on the accounting treatment of the warrants. The Company determines the value of the warrants using an appropriate valuation method, including a Black-Scholes or Monte-Carlo Simulation. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statements of operations. The debt is treated as conventional debt.
Convertible Debt – Derivative Treatment
When the Company issues debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative, as follows: (a) one or more underlyings, typically the price of our common stock; (b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; (c) no initial net investment, which typically excludes the amount borrowed; and (d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the scope exception for certain contracts involving an issuer’s own equity. The scope exception applies if the contract is both (a) indexed to its own stock; and (b) classified in stockholders’ equity in its balance sheet.
If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using the Monte Carlo Method upon the date of issuance. If the fair value of the convertible debt derivative is higher than the face value of the convertible debt, the excess is immediately recognized as interest expense. Otherwise, the fair value of the convertible debt derivative is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount of the debt. The convertible debt derivative is revalued at the end of each reporting period and any change in fair value is recorded as a gain or loss in the statement of operations. The debt discount is amortized through interest expense over the life of the debt.
F-12
Debt Modifications and Extinguishments
When the Company modifies or extinguishes debt, it first evaluates whether the modification qualifies as a troubled debt restructuring (TDR) under ASC Topic 470-60, which requires debt modifications to be evaluated if (1) the borrower is experiencing financial difficulty, and (2) the lender grants the borrower a concession. If a TDR is determined not to have occurred, the Company evaluates the modification in accordance with ASC Topic 470-50-40, which requires modification to debt instruments to be evaluated to assess whether the modifications are considered “substantial modifications”. A substantial modification of terms is accounted for like an extinguishment.
If there is a conversion feature within the debt instrument, the Company evaluates whether the conversion feature should be bifurcated under ASC 815 as a derivative. If the Company believes the embedded conversion feature has no fair value on the date of issuance (measurement date) and the embedded conversion feature has no beneficial conversion feature, the embedded conversion feature does not meet the criteria in ASC 470-50-40-10 or 470-20-25 and the issuance of the convertible debt is considered a modification, and not an extinguishment that would require the recognition of a gain or loss. If the Company determines the change in fair value of the derivative meets the criteria for substantial modification under ASC 470 it will treat the modification as extinguishment and recognize a loss from debt extinguishment.
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.
F-13
Note 3 — Revenue
The following table represents a disaggregation of revenue from contracts with customers for the three and nine months ended December 31, 2022 and 2021 (in thousands):
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
| 2022 | 2021 | 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.
For the three months ended
December 31, 2022 and 2021, one customer accounted for
The following table summarizes the significant changes in deferred revenue balances during the nine months ended December 31, 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 December 31, 2022 | $ | |||
F-14
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 | $ | |||
Contingent consideration
Goodwill resulted from acquisition as it is intended to augment and diversify the Company’s reportable segments. 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.
The following table summarizes the fair value of the assets acquired and liabilities 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 $
F-15
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 reportable segments. 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 acquired and liabilities 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 | $ | |||||||
The fair value of the assets
acquired includes accounts receivable of $
F-16
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 reportable segments. 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 acquired and liabilities 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 | $ | |||||||
F-17
The fair value of the assets
acquired includes accounts receivable of $
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 and nine months ended December 31, 2021 as if the acquisition of Gramophone had been completed on April 1, 2021 (in thousands, except per share data).
Three Months Ended (unaudited) | ||||
| Revenues | $ | |||
| Net loss | ( | ) | ||
| Net loss per share – basic and diluted | $ | ( | ) | |
| Nine Months Ended December 31, 2021 (unaudited) | ||||
| 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 acquired 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 $
F-18
Note 5 — Property and Equipment
The Company’s property and equipment at December 31, 2022 and March 31, 2022 was as follows (in thousands):
| December 31, | 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 $
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 nine months ended December 31, 2022 (in thousands):
| Goodwill | ||||
| Balance as of March 31, 2022 | $ | |||
| Acquisitions | ||||
| Balance as of December 31, 2022 | $ | |||
Indefinite-Lived Intangible Assets
The following table presents the changes in the carrying amount of indefinite-lived intangible assets for the nine months ended December 31, 2022 (in thousands):
| Tradenames | ||||
| Balance as of March 31, 2022 | $ | |||
| Acquisitions | ||||
| Impairment losses | ||||
| Balance as of December 31, 2022 | $ | |||
Finite-Lived Intangible Assets
The Company’s finite-lived intangible assets were as follows as of December 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 | ||||||||||||
| Customer lists | ||||||||||||
| Total | $ | $ | $ | |||||||||
F-19
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 | $ | $ | $ | |||||||||
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 three months) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ | ||||
Note 7 — Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31, 2022 and March 31, 2022 were as follows (in thousands):
| December 31, | March 31, | |||||||
| 2022 | 2022 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued revenue share | ||||||||
| Accrued sales tax payable | ||||||||
| Accrued liabilities | ||||||||
| Lease liabilities, current | ||||||||
| $ | $ | |||||||
F-20
Note 8 — Notes Payable
| December 31, | March 31, | |||||||
| 2022 | 2022 | |||||||
| Promissory Note – related party | $ | $ | ||||||
| SBA loan | ||||||||
| Less: Current portion of Notes payable | ( | ) | ( | ) | ||||
| Notes payable | $ | $ | ||||||
Promissory Note – Related Party
Effective as of September
2022, the Company’s subsidiary issued a promissory note in the amount of $
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-21
Note 9 — PodcastOne Bridge Loan
PodcastOne’s Private Placement
On July 15, 2022 (the “Closing
Date”), PodcastOne completed a private placement offering (the “PC1 Bridge Loan”) of PodcastOne’s unsecured convertible
notes with an original issue discount of
The Company also agreed (i)
not to effect a Qualified Financing or a Qualified Event, as applicable, unless immediately following such event the Company owns no less
than
The Company further agreed
to register the shares of its common stock issuable upon conversion of the PC1 Notes and exercise of the PC1 Warrants in connection with
a Qualified Financing or a Qualified Event. If the Company does not file such registration statement on or prior to April 15, 2023, the
Company shall be required to prepay $
As part of the PC1 Bridge
Loan, the Company purchased $
Warrants
The PC1 Warrants are classified
as liabilities as they represent an obligation to deliver a variable number of shares of common stock in the future and are therefore
required to be initially and subsequently measured at fair value each reporting period. The Company recorded a warrant liability in the
amount of $
The fair value of the PC1 Warrants is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo simulation” modeling, incorporating the following inputs:
| December 31, 2022 |
||||
| Expected dividend yield | % | |||
| Expected stock-price volatility | % | |||
| Risk-free interest rate | % | |||
| Simulated share price | $ | |||
| Exercise price | $ | |||
Total unrealized gains of
$
F-22
Redemption Features
The Company determined that
the redemption features associated with the PC1 Bridge Loan meet the accounting definition of an embedded derivative that must be separated
from the PC1 Bridge Loan and initially and subsequently be reported as a liability (“the Redemption Liability”) and measured
at fair value. The fair value of the Redemption Liability was determined using a Monte Carlo simulation model using three scenarios (1)
redemption prior to the initial maturity date (
The fair value of the redemption features are measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo simulation” modeling, incorporating the following inputs:
| December 31, 2022 |
||||
| Simulations | ||||
| Expected stock-price volatility | % | |||
| Risk-free interest rate | % | |||
| Conversion price | $ | |||
| Stock price | $ | |||
The fair value of the Redemption
Liability of $
The resulting discount from
the OID, underwriting fees, PC1 Warrants, and embedded Redemption Liability derivative of $
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 $
Interest expense with respect
to the PC1 Bridge Loan for the three and nine months ended December 31, 2022 was $
Note 10 — Unsecured Convertible Notes
Unsecured Convertible Notes – Related Party
The Company’s unsecured convertible notes payable at December 31, 2022 and March 31, 2022 were as follows (in thousands):
| December 31, 2022 | March 31, 2022 | |||||||
| Unsecured Convertible Notes - Related Party | ||||||||
| 8.5% Unsecured Convertible Note - Due July 1, 2024 | $ | $ | ||||||
| 8.5% Unsecured Convertible Notes - Due July 1, 2024 | ||||||||
| Less: Discount | ( | ) | ||||||
| Net | ||||||||
| Less: Unsecured Convertible Notes, Current | ||||||||
| Unsecured Convertible Notes, Net, Long-term | $ | $ | ||||||
F-23
The Company incurred interest
expense of $
As of December 31, 2022 and
March 31, 2022,
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. At December 31, 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.
Between October 27, 2017 and December 18, 2017, the Company issued nine unsecured convertible notes payable to Trinad Capital for aggregate total principal amount of $1.1 million and were charged an 8.5% interest rate. The notes were due on various dates through December 31, 2018 and were extended to May 31, 2023. As of December 31, 2022 and March 31, 2022, $0.3 million and $0.3 million of accrued interest was included in the principal balance, respectively.
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
In July 2022, the Company
entered into an amendment with Trinad Capital pursuant to which the maturity date of all of the Trinad Notes was extended to July 1, 2024,
and in consideration of such extension, the Company issued to Trinad Capital
F-24
The Company may not redeem any of the Trinad Notes prior to maturity without Trinad Capital’s consent.
In February 2023, the Trinad
Notes along with accrued interest thereunder were exchanged for the Company’s Series A Preferred Stock (as defined below) in addition
to
Unsecured Convertible Promissory Note
On February 5, 2020,
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 11 — Senior Secured Convertible Notes
The Company’s senior secured convertible notes at December 31, 2022 and March 31, 2022 were as follows (in thousands):
| December 31, 2022 | March 31, 2022 | |||||||
| Senior Secured Convertible Notes | $ | $ | ||||||
| Less: Discount | ( | ) | ( | ) | ||||
| Net | ||||||||
| Less: Current Portion, accrued interest | ||||||||
| Senior Secured Convertible Notes, long-term | $ | $ | ||||||
F-25
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 $
The Company evaluated the May 2021 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.
The Company and the Purchaser also entered into a Registration Rights Agreement, dated as of the Closing Date (the “RRA”), which granted the Assignees “demand” and “piggyback” registration rights to register the shares of Common Stock issuable upon the conversion of the Notes and the Shares (collectively, the “Registrable Securities”) with the SEC for resale or other disposition. Pursuant to the RRA, the Company filed a resale Registration Statement on Form S-3 on October 14, 2020, and it was declared effective by the SEC on October 21, 2020. The Company also agreed to keep the initial Registration Statement continuously effective until the earliest to occur of (i) the date on which all of the Registrable Securities registered thereunder have been sold and (ii) the date on which all of the Registrable Securities covered by such Registration Statement may be sold without volume restriction pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”).
F-26
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.
In
July 2022,
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.
The Company evaluated the July
2022 Amendments and determined that it was not required to be accounted for as troubled debt restructuring under ASC 470-60, Troubled
Debt Restructurings by Debtors. The Company also determined that the Amendments were not required to be accounted for as an extinguishment
under ASC 470-50, Debt – Modifications and Extinguishment. The Company recorded the debt as a modification and recorded the derivative
associated with the conversion feature as a derivative. The Company determined the value of the derivative to be $
F-27
The Company recorded $
The Company was in compliance with all debt covenants associated with their senior secured convertible debt as of December 31, 2022.
In February 2023, the Harvest
Notes were exchange for the Company’s Series A Preferred Stock, in addition to
Note 12 — 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 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 $
In July 2022, the Company extended
the maturity date of its revolving credit facility to
The principal balance under
the Revolving Credit Facility as of December 31, 2022 was $
Note 13 — Related Party Transactions
As of December 31, 2022 and
March 31, 2022, the Company had unsecured convertible Trinad Notes outstanding which were issued to Trinad Capital as described in Note
10 – Unsecured Convertible Notes. In February 2023, the Trinad Notes along with accrued interest were converted into Series A Preferred
Stock in addition to
During the nine months ended
December 2022, a subsidiary of the Company issued a promissory note in the amount of $
Note 14 — 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 $
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Operating lease costs for nine months ended December 31, 2022 and 2021 consisted of the following (in thousands):
| Nine Months Ended December 31, | ||||||||
| 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 | December 31, 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 operating lease liabilities are included in accounts payable and accrued liabilities and lease liabilities non-current in the accompanying condensed consolidated balance sheets.
Maturities of operating lease liabilities as of December 31, 2022 were as follows (in thousands):
| For Years Ending March 31, | ||||
| 2023 (remaining three 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-29
Note 15 — Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands):
| December 31, 2022 | March 31, 2022 | |||||||
| Contingent consideration from Gramophone acquisition | $ | $ | ||||||
| Accrued royalties | ||||||||
| Total other long-term liabilities | $ | $ | ||||||
Note 16 — 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 December 31, 2022, the Company is obligated under agreements with Content Providers and other contractual obligations to make guaranteed payments as follows: $2.0 million for the fiscal year ending March 31, 2023, $1.3 million for the fiscal year ending March 31, 2024, $0.6 million for the fiscal year ending March 31, 2025 and $0.3 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 of time is the period 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, which included payments to be made in common stock. 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 December 31, 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.
On August 4, 2022, the Company
entered into a settlement agreement with a certain music partner attributed to past royalties owed. The Company issued
F-30
Employment Agreements
The Company’s CEO has
agreed to forgive his salary of $
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
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 alleged 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. On October 13, 2022, the court entered a judgment against the defendants
for the amount of
During each of the quarters ended December 31, 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.
F-31
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 17 — Employee Benefit Plan
Effective March 2019, 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 18 — Stockholders’ Equity
Issuance of Restricted Shares of Common Stock for Services to Consultants and Vendors
During the nine months ended
December 31, 2022, the Company has $
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-32
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.
In February 2023 the Company
issued its Series A Preferred Stock in exchange for the outstanding Harvest Notes and Trinad Notes (See Note 21 – Subsequent Events).The
Series A Preferred Stock is convertible at any time at a holder’s option into shares of the Company’s common stock, at
a price of $
Stock Repurchase Program
In December 2020, the Company
announced that its board of directors has authorized the repurchase up to
F-33
Note 19 — Business Segment and Geographic Reporting
The Company determined its operating segments in accordance with ASC 280, “Segment Reporting” (“ASC 280”).
Beginning in the second quarter of fiscal 2023, management has determined that the Company has two operating segments (Audio Group and Media Group). As a result of the PC1 Bridge Loan and the potential for a spin-off of PodcastOne the Company’s chief operating decision maker (“CODM”) began to make decisions based on two operating segments of the business (Audio and Media). The Company’s reporting segments reflects the manner in which its CODM reviews results and allocates resources. The CODM reviews operating segment performance exclusive of: share-based compensation expense, amortization of intangible assets, depreciation, and other expenses (including legal fees, expenses, and accruals) related to acquisitions, associated integration activities, and certain other non-cash charges. As a result, the segment information for the prior periods has been recast to confirm with the current period presentation.
The Company’s two operating segments are also consistent with its internal organizational structure, the way the Company assesses operating performance and allocates resources.
Customers
The Company has one external
customer within their audio segment that accounts for more than
Geographic Information
The Company’s operations are based in the United States. 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.
We manage our working capital on a consolidated basis. Accordingly, segment assets are not reported to, or used by, our management to allocate resources to or assess performance of our segments, and therefore, total segment assets and related depreciation and amortization have not been presented.
The following table presents the results of operations for our reportable segments for the three and nine months ended December 31, 2022 and 2021:
| Three Months Ended December 31, 2022 | ||||||||||||
| Audio | Media | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Three Months Ended December 31, 2021 | ||||||||||||
| Audio | Media | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | |||||
F-34
| Nine Months Ended December 31, 2022 |
||||||||||||
| Audio | Media | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Net income (loss) | $ | $ | ( |
) | $ | ( |
) | |||||
| Nine Months Ended December 31, 2021 |
||||||||||||
| Audio | Media | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Net income (loss) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
Note 20 — 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):
| December 31, 2022 | ||||||||||||||||
| Fair | Hierarchy Level | |||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets: | ||||||||||||||||
| Prepaid expenses - common stock issued subject to market adjustment at settlement | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration liability from Gramophone acquisition | $ | $ | $ | $ | ||||||||||||
| Warrant liability on PodcastOne bridge loan | ||||||||||||||||
| Bifurcated embedded derivative on PodcastOne bridge loan | ||||||||||||||||
| Bifurcated embedded derivative on senior unsecured convertible note payable | ||||||||||||||||
| 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 | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
F-35
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 | $ | |||
| Embedded derivative and warrant issued in connection with PodcastOne bridge loan | ||||
| 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 December 31, 2022 | $ | |||
Bifurcated embedded derivative on secured convertible notes payable and unsecured convertible notes payable
The fair value of the bifurcated embedded derivatives on secured convertible notes payable and unsecured convertible notes payable was determined using the following significant unobservable inputs:
| December 31, | 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 would 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):
| December 31, 2022 | ||||||||||||||||
| Carrying | Hierarchy Level | |||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Secured convertible notes payable, net | $ | $ | $ | $ | ||||||||||||
| Unsecured convertible notes payable related party, net | ||||||||||||||||
| PodcastOne bridge loan | ||||||||||||||||
| March 31, 2022 | ||||||||||||||||
| Carrying | Hierarchy Level | |||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Secured convertible notes payable, net | $ | $ | $ | $ | ||||||||||||
| Unsecured convertible notes payable related party, net | ||||||||||||||||
F-36
The fair values of financial instruments not included in these tables are estimated to be equal to their carrying values as of December 31, 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:
| December 31, | March 31, | |||||||
| 2022 | 2022 | |||||||
| 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 December 31, 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 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 and CPS 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 on the balance sheet date.
Note 21 — Subsequent Events
Harvest Notes and Trinad Notes Exchange for Series A Preferred Stock
On February 3, 2023 (the “Effective
Date”),
F-37
The Series A Preferred Stock
is convertible at any time at a Holder’s option into shares of the Company’s common stock, at a price of $
The Company may, at its option
(the “Optional Redemption Right”), on or before the Mandatory Redemption Date (as defined herein), purchase up to $
Pursuant to the Exchange Agreements,
the Company agreed that at any time that any of the shares of Series A Preferred Stock issued to the Harvest Funds are outstanding, (i)
to directly or through its
F-38
In consideration for entry
into the Exchange Agreements and the Holders’ willingness to forego certain rights to common stock of the Company previously agreed
by the parties, the Company issued to the Harvest Funds an aggregate of
The Company further agreed, on or prior to the date that is 45 days after the consummation of any Qualified Offering and in any event no later than July 15, 2023, to prepare and file with the SEC a Registration Statement on Form S-3 (or such other form as applicable) covering the resale under the Securities Act of all the shares of the Company’s common stock underlying the Series A Preferred Stock (including any dividends paid in kind) issued to the Harvest Funds and the Harvest Shares. The Company shall use its commercially reasonable best efforts to cause such registration statement to be declared effective promptly thereafter on or before 60 days after the filing of such registration statement (or if the SEC issues any comments with respect to such registration statement, on or before 120 days after the filing of such registration statement).
Legal Settlement
On February 3, 2023, the Company and SX entered into an agreement to settle the dispute between the parties with respect to SX’s complaint filed in the U.S. District Court, Central District of California, against the Company and Slacker, and related court judgement entered against the defendants on October 13, 2022, pursuant to which the Company agreed to make certain monthly payments to SX for a period of 24 months and certain other payments in the event the Company obtains additional financing(s), unless the Company repays the judgment amount earlier pursuant to the terms of the agreement, and SX agreed not to take any action to enforce such judgment, so long as the defendants are not in default under the agreement.
F-39
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 and nine months ended December 31, 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, special dividend, distribution or transaction, including the proposed special dividend and spin-out of PodcastOne or its pay-per-view business, the timing of the consummation of such proposed event, including the risks that a condition to consummation of such proposed event would not be satisfied within the expected timeframe or at all or that the consummation of any proposed financing, acquisition, spin-out, special dividend, distribution or transaction, the timing of the consummation of such proposed event will not occur; PodcastOne’s and/or Slacker’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; uncertain and unfavorable 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 LiveOne 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 our Series A Preferred Stock; our compliance with the covenants in our debt agreements; our intent to repurchase shares of our common stock from time to time under our announced stock repurchase program and the timing, price, and quantity of repurchases, if any, under the program 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.
2
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 December 31, 2022 and 2021, we reported revenue of $27.3 million and $32.9 million, respectively. For the nine months ended December 31, 2022 and 2021, we reported revenue of $74.1 million and $93.6 million, respectively. We have one external customer that accounted for more than 10% of its revenue during the three and nine months ended December 31, 2022 and 2021, respectively. Such customer is an original equipment manufacturer (the “OEM”) who provides premium Slacker service in all of their new vehicles. In the three months ended December 31, 2022 and 2021, total revenue from the OEM was $11.4 million and $8.4 million, respectively. In the nine months ended December 31, 2022 and 2021, total revenue from the OEM was $32.1 million and $23.0 million, respectively.
Key Corporate Developments for the Quarter Ended December 31, 2022
We ended the December 31, 2022 quarter with approximately 1,900,000 paid members on our music platform, up from approximately 1,594,000 at December 31, 2021, representing 10% annual growth. Included in the total number as of December 31, 2022 and 2021 are certain members which are the subject of a contractual dispute. We are currently not recognizing revenue related to these members.
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 nine months ended December 31, 2022 was comprised of 52% from paid customers’ membership, 35% from advertising (which includes PodcastOne), 11% 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.
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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.
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).
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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.
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 December 31, 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 25% 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 December 31, 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 increased and 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 membership 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. In addition, partially due to the effects of COVID-19 on our on-premise in-person festival and events business, during quarter ended December 31, 2022, we have strategically opted to delay any new live tentpole or pay-per-view events until our fiscal year ending March 31, 2024.
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.
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Consolidated Results of Operations
Three Months Ended December 31, 2022, as compared to Three Months Ended December 31, 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 December 31, | Three Months Ended December 31, | |||||||
| 2022 | 2021 | |||||||
| Revenue: | $ | 27,309 | $ | 32,895 | ||||
| Operating expenses: | ||||||||
| Cost of sales | 19,362 | 27,666 | ||||||
| Sales and marketing | 1,608 | 3,466 | ||||||
| Product development | 1,035 | 1,657 | ||||||
| General and administrative | 4,535 | 8,550 | ||||||
| Amortization of intangible assets | 1,343 | 1,524 | ||||||
| Total operating expenses | 27,883 | 42,863 | ||||||
| Loss from operations | (574 | ) | (9,968 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense, net | (2,220 | ) | (1,052 | ) | ||||
| Other expense | 257 | (811 | ) | |||||
| Total other expense | (1,963 | ) | (1,863 | ) | ||||
| Loss before provision for (benefit from) income taxes | (2,537 | ) | (11,831 | ) | ||||
| Provision for (benefit from) income taxes | 11 | (40 | ) | |||||
| Net loss | $ | (2,548 | ) | $ | (11,791 | ) | ||
| Net loss per share – basic and diluted | $ | (0.03 | ) | $ | (0.15 | ) | ||
| Weighted average common shares – basic and diluted | 85,585,117 | 78,188,050 | ||||||
The following table sets forth the depreciation expense included in the above line items (in thousands):
| Three Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Depreciation expense | ||||||||||||
| Cost of sales | $ | 31 | $ | 18 | 72 | % | ||||||
| Sales and marketing | 49 | 45 | 9 | % | ||||||||
| Product development | 565 | 744 | -24 | % | ||||||||
| General and administrative | 285 | 114 | 150 | % | ||||||||
| Total depreciation expense | $ | 930 | $ | 921 | 1 | % | ||||||
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The following table sets forth the stock-based compensation expense included in the above line items (in thousands):
| Three Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Stock-based compensation expense | ||||||||||||
| Cost of sales | $ | 203 | $ | 116 | 75 | % | ||||||
| Sales and marketing | (64 | ) | 118 | -154 | % | |||||||
| Product development | 136 | (375 | ) | 136 | % | |||||||
| General and administrative | 447 | 2,269 | -80 | % | ||||||||
| Total stock-based compensation expense | $ | 722 | $ | 2,128 | -66 | % | ||||||
The following table sets forth our results of operations, as a percentage of revenue, for the periods presented:
| Three Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | 100 | % | 100 | % | ||||
| Operating expenses | ||||||||
| Cost of sales | 71 | % | 84 | % | ||||
| Sales and marketing | 6 | % | 11 | % | ||||
| Product development | 4 | % | 5 | % | ||||
| General and administrative | 17 | % | 26 | % | ||||
| Amortization of intangible assets | 5 | % | 5 | % | ||||
| Total operating expenses | 102 | % | 131 | % | ||||
| Loss from operations | -2 | % | -30 | % | ||||
| Other income (expense) | -7 | % | -6 | % | ||||
| Loss before income taxes | -9 | % | -36 | % | ||||
| Income tax provision | - | % | - | % | ||||
| Net loss | -9 | % | -36 | % | ||||
Revenue
Revenue was as follows (in thousands):
| Three Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Membership services | $ | 13,354 | $ | 10,698 | 25 | % | ||||||
| Advertising | 8,498 | 8,541 | -1 | % | ||||||||
| Merchandising | 4,825 | 6,442 | -25 | % | ||||||||
| Sponsorship and licensing | 76 | 1,194 | -94 | % | ||||||||
| Ticket/Event | 556 | 6,020 | -91 | % | ||||||||
| Total Revenue | $ | 27,309 | $ | 32,895 | -17 | % | ||||||
Membership Revenue
Membership revenue increased $2.7 million, or 25%, to $13.4 million for the three months ended December 31, 2022, as compared to $10.7 million for the three months ended December 31, 2021. The increase was primarily as a result of paid membership growth with our largest OEM customer.
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Advertising Revenue
Advertising revenue remained constant at $8.5 million for the three months ended December 31, 2022, as compared to $8.5 million for the three months ended December 31, 2021. There was no material change between the comparative periods as no significant changes to the business were noted.
Merchandising Revenue
Merchandising revenue decreased $1.6 million, or 25%, to $4.8 million for the three months ended December 31, 2022, as compared to $6.4 million the three months ended December 31, 2021 due to a reduction in demand from both retail partners and our direct to consumer business.
Sponsorship and Licensing
Sponsorship and licensing revenue decreased by $1.1 million, or 94%, to $0.1 million for the three months ended December 31, 2022, as compared to $1.2 million for the three months ended December 31, 2021. The decrease was the result of fewer events compared to the prior year period.
Ticket/Event
Ticket/Event revenue decreased $5.5 million, or 91%, to $0.6 million for the three months ended December 31, 2022, as compared to $6.0 million for the three months ended December 31, 2021, driven by a reduction in the number of events held compared to the prior year. Most significantly the Spring Awakening Music Festival was held in the prior year period with no comparable event in the current year period.
Cost of Sales
Cost of sales was as follows (in thousands):
| Three Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Membership Services | $ | 8,176 | $ | 6,545 | 25 | % | ||||||
| Advertising | 7,756 | 6,590 | 18 | % | ||||||||
| Production and Ticketing | (26 | ) | 10,170 | -100 | % | |||||||
| Merchandising | 3,456 | 4,361 | -21 | % | ||||||||
| Total Cost of Sales | $ | 19,362 | $ | 27,666 | -30 | % | ||||||
Membership
Membership cost of sales increased by $1.6 million, or 25%, to $8.2 million for the three months ended December 31, 2022, as compared to $6.6 million for the three months ended December 31, 2021. The increase was due to an increase in members added compared to the two periods.
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Advertising
Advertising cost of sales increased $1.2 million, or 18%, to $7.8 million for the three months ended December 31, 2022, as compared to $6.6 million for the three months ended December 31, 2021. The increase was due to an increase in the cost of content.
Production and Ticketing
Production cost of sales decreased $10.2 million, or 100%, to a credit of $0.03 million for the three months ended December 31, 2022, as compared to $10.2 million for the three months ended December 31, 2021. The decrease was primarily due to a reduction in events and settlements with vendors for previous amounts owed.
Merchandising
Merchandising cost of sales decreased $0.9 million, or 21%, from $4.4 million for the three months ended December 31, 2022, as compared to $3.5 million for the three months ended December 31, 2021 due to the corresponding decrease in revenue.
Other Operating Expenses
Other operating expenses were as follows (in thousands):
| Three Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Sales and marketing expenses | $ | 1,608 | $ | 3,466 | -54 | % | ||||||
| Product development | 1,035 | 1,657 | -38 | % | ||||||||
| General and administrative | 4,535 | 8,550 | -47 | % | ||||||||
| Amortization of intangible assets | 1,343 | 1,524 | -12 | % | ||||||||
| Total Other Operating Expenses | $ | 8,521 | $ | 15,197 | -44 | % | ||||||
Sales and Marketing Expenses
Sales and Marketing expenses decreased $1.9 million, or 54%, to $1.6 million for the three months ended December 31, 2022, as compared to $3.5 million for the three months ended December 31, 2021, primarily driven by a decrease in events held in the current quarter compared to the prior quarter.
Product Development
Product development expenses decreased $0.6 million, or 38%, to $1.0 million for the three months ended December 31, 2022, as compared to $1.7 million for the three months ended December 31, 2021, partially driven by increased capitalized software costs as more time was spent on internal software development in the current quarter as compared to the same period in the prior year. In addition, there was a $0.4 million reduction in stock compensation expense compared to the prior year.
General and Administrative
General and administrative expense decreased $4.0 million, or 47%, to $4.5 million for the three months ended December 31, 2022, as compared to $8.6 million for the three months ended December 31, 2021, largely due to a decrease in share-based compensation of $3.2 million and salaries of $1.2 million, partially driven by the reduction of corporate personnel. In addition, the Company recorded credits as a result of settling accrued expenses with certain vendors.
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Amortization of Intangible Assets
Amortization of intangible assets decreased $0.2 million, or 12%, to $1.3 million for the three months ended December 31, 2022, as compared to $1.5 million for the three months ended December 31, 2021, as there were no significant changes to the intangible asset balances year over year.
Total Other Expense
Total other expense was as follows (in thousands):
| Three Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Total other expense | $ | (1,963 | ) | $ | (1,863 | ) | 5 | % | ||||
Total other expense increased $0.1 million, or 5%, to $2.0 million expense for the three months ended December 31, 2022, as compared to $1.9 million expense for the three months ended December 31, 2021. The increase is primarily attributed to interest expense attributed to accretion of interest on our debt discounts and change in fair value of warrants and derivatives primarily related to the PC1 Bridge Loan.
Nine Months Ended December 31, 2022, as compared to Nine Months Ended December 31, 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):
| Nine Months Ended December 31, | Nine Months Ended December 31, | |||||||
| 2022 | 2021 | |||||||
| Revenue: | $ | 74,063 | $ | 93,586 | ||||
| Operating expenses: | ||||||||
| Cost of sales | 48,487 | 74,654 | ||||||
| Sales and marketing | 6,334 | 10,814 | ||||||
| Product development | 3,892 | 5,990 | ||||||
| General and administrative | 11,220 | 27,173 | ||||||
| Impairment of intangible assets | 1,356 | - | ||||||
| Amortization of intangible assets | 4,098 | 4,547 | ||||||
| Total operating expenses | 75,387 | 123,178 | ||||||
| Loss from operations | (1,324 | ) | (29,592 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense, net | (5,793 | ) | (3,180 | ) | ||||
| Forgiveness of PPP loans | - | 2,511 | ||||||
| Loss on extinguishment of debt | - | (4,321 | ) | |||||
| Other income (expense) | 2,523 | (528 | ) | |||||
| Total other expense, net | (3,270 | ) | (5,518 | ) | ||||
| Loss before provision for (benefit from) income taxes | (4,594 | ) | (35,110 | ) | ||||
| Provision for (benefit from) income taxes | 15 | (32 | ) | |||||
| Net loss | $ | (4,609 | ) | $ | (35,078 | ) | ||
| Net loss per share – basic and diluted | $ | (0.05 | ) | $ | (0.45 | ) | ||
| Weighted average common shares – basic and diluted | 84,009,003 | 77,670,598 | ||||||
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The following table provides the depreciation expense included in the above line items (in thousands):
| Nine Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Depreciation expense | ||||||||||||
| Cost of sales | $ | 85 | $ | 42 | 102 | % | ||||||
| Sales and marketing | 144 | 119 | 21 | % | ||||||||
| Product development | 1,903 | 2,032 | -6 | % | ||||||||
| General and administrative | 642 | 499 | 29 | % | ||||||||
| Total depreciation expense | $ | 2,774 | $ | 2,692 | 3 | % | ||||||
The following table provides the stock-based compensation expense included in the above line items (in thousands):
| Nine Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Stock-based compensation expense | ||||||||||||
| Cost of sales | $ | 836 | $ | 610 | 37 | % | ||||||
| Sales and marketing | 72 | 1,794 | -96 | % | ||||||||
| Product development | 267 | 258 | 3 | % | ||||||||
| General and administrative | 1,731 | 9,397 | -82 | % | ||||||||
| Total stock-based compensation expense | $ | 2,906 | $ | 12,059 | -76 | % | ||||||
The following table provides our results of operations, as a percentage of revenue, for the periods presented:
| Nine Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | 100 | % | 100 | % | ||||
| Operating expenses | ||||||||
| Cost of sales | 65 | % | 80 | % | ||||
| Sales and marketing | 9 | % | 12 | % | ||||
| Product development | 5 | % | 6 | % | ||||
| General and administrative | 15 | % | 29 | % | ||||
| Impairment of intangibles assets | 2 | % | - | % | ||||
| Amortization of intangible assets | 6 | % | 5 | % | ||||
| Total operating expenses | 102 | % | 132 | % | ||||
| Loss from operations | -2 | % | -32 | % | ||||
| Other income (expense) | -4 | % | -6 | % | ||||
| Loss before income taxes | -6 | % | -38 | % | ||||
| Income tax provision | - | % | - | % | ||||
| Net loss | -6 | % | -38 | % | ||||
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Revenue
Revenue was as follows (in thousands):
| Nine Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Membership services | $ | 38,226 | $ | 29,660 | 29 | % | ||||||
| Advertising | 26,138 | 25,286 | 3 | % | ||||||||
| Merchandising | 8,507 | 13,058 | -35 | % | ||||||||
| Sponsorship and licensing | 389 | 6,498 | -94 | % | ||||||||
| Ticket/Event | 803 | 19,084 | -96 | % | ||||||||
| Total Revenue | $ | 74,063 | $ | 93,586 | -21 | % | ||||||
Membership Services Revenue
Membership services revenue increased $8.6 million, or 29%, to $38.2 million during the nine months ended December 31, 2022, as compared to $29.7 million during the nine months ended December 31, 2021, which was primarily as a result of membership growth with our largest OEM customer.
Advertising Revenue
Advertising revenue increased by $0.9 million, or 3%, to $26.1 million during the nine months ended December 31, 2022, as compared to $25.3 million during the nine months ended December 31, 2021, which is primarily attributed to our growth in PodcastOne over the period.
Merchandising Revenue
Merchandising revenue decreased by $4.6 million, or 35%, to $8.5 million from $13.1 for the nine months ended December 31, 2022, as compared to the nine months ended December 31, 2021, primarily due to a reduction in demand from both retail partners and our direct to consumer business.
Sponsorship and licensing
Sponsorship and licensing revenue decreased by 94% to $0.4 million during the nine months ended December 31, 2022, as compared to $6.5 million for the nine months ended December 31, 2021, a decrease of $6.1 million, primarily driven by the sponsorship and licensing revenues earned related to the Social Gloves event held during the nine months ended December 31, 2021 with no comparable event held during the current year.
Ticket/Event Revenue
Ticket/Event revenue decreased $18.3 million, or 96%, to $0.8 million for the nine months ended December 31, 2022, as compared to $19.1 million for the nine months ended December 31, 2021.The decrease was due to PPV and Spring Awakening Music Festival ticket fees along with production revenues earned related to the Social Gloves event held during the nine months ended December 31, 2022 with no comparable event held during the current year comparable period.
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Cost of Sales
Cost of sales was as follows (in thousands):
| Nine Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Membership | $ | 21,264 | $ | 19,194 | 11 | % | ||||||
| Advertising | 21,803 | 23,203 | -6 | % | ||||||||
| Production and Ticketing | (524 | ) | 23,706 | -102 | % | |||||||
| Merchandising | 5,944 | 8,551 | -30 | % | ||||||||
| Total Cost of Sales | $ | 48,487 | $ | 74,654 | -35 | % | ||||||
Membership
Membership cost of sales increased $2.1 million, or 11%, to $21.3 million for the nine months ended December 31, 2022, as compared to $19.2 million for the nine months ended December 31, 2021. The increase was in line with the higher membership revenues noted above.
Advertising
Advertising cost of sales decreased $1.4 million, or 6%, to $21.8 million for the nine months ended December 31, as compared to $23.2 million for the nine months ended December 31, 2021. The decrease was primarily attributed to a reduction in revenue share paid to partners.
Production and Ticketing
Production cost of sales decreased $24.2 million, or 102%, to a credit of $0.5 million for the nine months ended December 31, 2022, as compared to $23.7 million for the nine months ended December 31, 2021. The decrease was primarily due to production costs of approximately $6.2 million related to the Social Gloves event held during the nine months ended December 31, 2021 along with a reduction in the number of events in the current period compared to the prior year. In addition, the Company settled past amounts owed for vendors, therefore credits were recorded during the current period.
Merchandising
Merchandising cost of sales decreased $2.6 million, or 30%, from $5.9 for the nine months ended December 31, 2022, as compared to $8.6 million for the nine months ended December 31, 2021 which is line with the revenue reduction noted above.
Other Operating Expenses
Other operating expenses were as follows (in thousands):
| Nine Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Sales and marketing expenses | $ | 6,334 | $ | 10,814 | -41 | % | ||||||
| Product development | 3,892 | 5,990 | -35 | % | ||||||||
| General and administrative | 11,220 | 27,173 | -59 | % | ||||||||
| Impairment of intangibles | 1,356 | - | 100 | % | ||||||||
| Amortization of intangible assets | 4,098 | 4,547 | -10 | % | ||||||||
| Total Other Operating Expenses | $ | 26,900 | $ | 48,524 | -45 | % | ||||||
Sales and Marketing Expenses
Sales and marketing expenses decreased $4.5 million, or 41%, to $6.3 million for the nine months ended December 31, 2022, as compared to $10.8 million for the nine months ended December 31, 2021. The decrease was largely due to lower salaries and wages of $2.0 million and stock-based compensation of $2.5 million along with reduced marketing spend driven by less events in the current year period.
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Product Development
Product development expenses decreased $2.1 million, or 35%, to $3.9 million for the nine months ended December 31, 2022, as compared to $6.0 million for the nine months ended December 31, 2021. The decrease was primarily due to headcount reductions.
General and Administrative
General and administrative expenses decreased $15.9 million, or 59%, to $10.8 million for the nine months ended December 31, 2022, as compared to $27.2 million for the nine months ended December 31, 2021. The decrease was largely due to a decrease in share-based compensation of $7.7 million and salaries and benefits of $8.3 million, primarily driven by the reduction of corporate personnel.
Impairment of Intangible Assets
Impairment of intangible assets increased $1.4 million, or 100%, to $1.4 million for the three months ended December 31, 2022, as compared to none for the nine months ended December 31, 2021, which is attributed to the impairment of intangible assets of React Presents acquisition, see Note 6 – Goodwill and Intangible Assets.
Amortization of Intangible Assets
Amortization of intangible assets decreased by $0.4 million, or 10%, to $4.1 million for the nine months ended December 31, 2022, as compared to $4.5 million for the nine months ended December 31, 2021. The increase can be attributed to changes to the intangible assets year over year for the Gramophone acquisition.
Total Other Expense, net
Total other expense, net was as follows (in thousands):
| Nine Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Total other expense, net | $ | (3,270 | ) | $ | (5,518 | ) | -41 | % | ||||
Total other expense, net decreased $2.2 million, or 41%, to $3.3 million for the nine months ended December 31, 2022, as compared to $5.5 million expense for the nine months ended December 31, 2021. The decrease was due to an increase in other income of $3.8 million from the prior year period as a result of the settlement of an acquisition earnout in the current period partially offset by increased interest expense primarily attributable to accretion of interest on our debt discounts related to the PC1 Bridge loan in the current period.
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 and intangible asset 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.
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The following table sets forth the reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP financial measure for the three and nine months ended December 31, 2022 and 2021 (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 December 31, 2022 | ||||||||||||||||||||||||||||
| Operations - Audio | $ | 205 | $ | 2,170 | $ | 348 | $ | 606 | $ | 1,774 | $ | - | $ | 5,103 | ||||||||||||||
| Operations - Other | (600 | ) | 239 | 78 | (175 | ) | (265 | ) | 11 | (712 | ) | |||||||||||||||||
| Corporate | (2,153 | ) | 6 | 296 | 73 | 454 | - | (1,324 | ) | |||||||||||||||||||
| Total | $ | (2,548 | ) | $ | 2,415 | $ | 722 | $ | 504 | $ | 1,963 | $ | 11 | $ | 3,067 | |||||||||||||
| Three Months Ended December 31, 2021 | ||||||||||||||||||||||||||||
| Operations - Audio | $ | 1,218 | $ | 2,181 | $ | 2 | $ | 43 | $ | 264 | $ | - | $ | 3,708 | ||||||||||||||
| Operations - Other | (5,604 | ) | 254 | 266 | 32 | 5 | (41 | ) | (5,088 | ) | ||||||||||||||||||
| Corporate | (7,405 | ) | 10 | 1,860 | 486 | 1,594 | 1 | (3,454 | ) | |||||||||||||||||||
| Total | $ | (11,791 | ) | $ | 2,445 | $ | 2,128 | $ | 561 | $ | 1,863 | $ | (40 | ) | $ | (4,834 | ) | |||||||||||
| Net Income (Loss) | Depreciation and Amortization | Stock-Based Compensation | Non- Recurring Acquisition and Realignment Costs | Other (Income) Expense | (Benefit) Provision for Taxes | Adjusted EBITDA | ||||||||||||||||||||||
| Nine Months Ended December 31, 2022 | ||||||||||||||||||||||||||||
| Operations - Audio | $ | 5,473 | $ | 6,267 | $ | 1,422 | $ | 862 | $ | 991 | $ | - | $ | 15,015 | ||||||||||||||
| Operations - Other | (4,056 | ) | 2,097 | 247 | (146 | ) | 130 | 27 | (1,701 | ) | ||||||||||||||||||
| Corporate | (6,026 | ) | 17 | 1,237 | (1,244 | ) | 2,149 | (12 | ) | (3,879 | ) | |||||||||||||||||
| Total | $ | (4,609 | ) | $ | 8,381 | $ | 2,906 | $ | (528 | ) | $ | 3,270 | $ | 15 | $ | 9,435 | ||||||||||||
| Nine Months Ended December 31, 2021 | ||||||||||||||||||||||||||||
| Operations - Audio | $ | (5,314 | ) | $ | 6,490 | $ | 2,543 | $ | 150 | $ | 668 | $ | - | $ | 4,537 | |||||||||||||
| Operations - Other | (5,228 | ) | 714 | 1,053 | 279 | (333 | ) | (41 | ) | (3,556 | ) | |||||||||||||||||
| Corporate | (24,536 | ) | 26 | 8,463 | 1,219 | 5,183 | 9 | (9,636 | ) | |||||||||||||||||||
| Total | $ | (35,078 | ) | $ | 7,240 | $ | 12,059 | $ | 1,648 | $ | 5,518 | $ | (32 | ) | $ | (8,655 | ) | |||||||||||
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The following table sets forth the reconciliation of Contribution Margin to Revenue, the most comparable GAAP financial measure for the three and nine months ended December 31, 2022 and 2021 (in thousands):
| Three Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue: | $ | 27,309 | $ | 32,895 | ||||
| Less: | ||||||||
| Cost of sales | (19,362 | ) | (27,666 | ) | ||||
| Amortization of developed technology | (964 | ) | (964 | ) | ||||
| Gross Profit | 6,983 | 4,265 | ||||||
| Add back amortization of developed technology: | 964 | 964 | ||||||
| Contribution Margin | $ | 7,947 | $ | 5,229 | ||||
| Nine Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue: | $ | 74,063 | $ | 93,586 | ||||
| Less: | ||||||||
| Cost of sales | (48,487 | ) | (74,654 | ) | ||||
| Amortization of developed technology | (2,892 | ) | (2,892 | ) | ||||
| Gross Profit | 22,684 | 16,040 | ||||||
| Add back amortization of developed technology: | 2,892 | 2,892 | ||||||
| Contribution Margin | $ | 25,576 | $ | 18,932 | ||||
Business Segment Results
Three Months Ended December 31, 2022, as compared to Three Months Ended December 31, 2021
Audio Group Operations
Our Audio Group Operations operating results were, and discussions of significant variances are, as follows (in thousands):
| Three Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Revenue | $ | 21,952 | $ | 19,084 | 15 | % | ||||||
| Cost of Sales | 15,932 | 13,109 | 22 | % | ||||||||
| Sales & Marketing, Product Development and G&A | 3,945 | 3,761 | 5 | % | ||||||||
| Intangible Asset Amortization | 1,211 | 1,330 | -9 | % | ||||||||
| Operating Income (Loss) | 864 | 884 | -2 | % | ||||||||
| Operating Margin | 4 | % | 5 | % | -15 | % | ||||||
| Adjusted EBITDA* | $ | 5,103 | $ | 3,708 | 38 | % | ||||||
| Adjusted EBITDA Margin* | 23 | % | 19 | % | 20 | % | ||||||
| * | See “—Non-GAAP Measures” above for the definition and reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin. |
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Revenue
Revenue increased $2.9 million, or 15%, during the three months ended December 31, 2022, primarily due to increased membership revenue as a result of increased membership growth with our largest OEM customer.
Operating Income
Operating income remained constant at $0.9 million for the three months ended December 31, 2022 and 2021 as the increase in revenue was offset by the increase in cost of sales.
Adjusted EBITDA
Adjusted EBITDA increased by $1.4 million, or 38%, to $5.1 million for the three months ended December 31, 2022, as compared to $3.7 million for the three months ended December 31, 2021. This was largely due to the increased contribution margin and lower operating expenses, described above.
Media Group Operations
Our Media Group Operations operating results were, and discussions of significant variances are, as follows (in thousands):
| Three Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Revenue | $ | 5,357 | $ | 13,811 | -61 | % | ||||||
| Cost of Sales | 3,430 | 14,765 | -77 | % | ||||||||
| Sales & Marketing, Product Development and G&A | 1,538 | 3,758 | -59 | % | ||||||||
| Intangible Asset Amortization | 132 | 194 | -32 | % | ||||||||
| Operating Income (Loss) | $ | 257 | $ | (4,905 | ) | -105 | % | |||||
| Operating Margin | 5 | % | -36 | % | -113 | % | ||||||
| Adjusted EBITDA* | $ | (712 | ) | $ | (5,088 | ) | -86 | % | ||||
| Adjusted EBITDA Margin* | -13 | % | -37 | % | -64 | % | ||||||
| * | See “—Non-GAAP Measures” above for the definition and reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin. |
Revenue
Revenue decreased $8.5 million, or 61%, to $5.4 million during the three months ended December 31, 2022, as compared to $13.8 million for the three months ended December 31, 2021, primarily due to decrease in events which took place in the prior year including the Spring Awakening Music Festival.
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Operating Loss
Operating loss decreased by $5.2 million to income of $0.3 million for the three months ended December 31, 2022 from a loss of $4.9 million for the three months ended December 31, 2021, as a result of the decrease in revenue being offset by the decrease in expenses due to a reduction in staff and credits due to settlements of payables made during the quarter.
Adjusted EBITDA
Adjusted EBITDA loss decreased by $4.4 million, or 86%, to $0.7 million loss for the three months ended December 31, 2022, as compared to $5.1 million loss for the three months ended December 31, 2021. This was largely due to the increased contribution margin and 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 December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Sales & Marketing, Product Development and G&A | $ | 1,694 | $ | 5,946 | -72 | % | ||||||
| Operating Loss | $ | (1,694 | ) | $ | (5,946 | ) | -72 | % | ||||
| Operating Margin | N/A | N/A | N/A | % | ||||||||
| Adjusted EBITDA* | $ | (1,324 | ) | $ | (3,454 | ) | -62 | % | ||||
| * | See “—Non-GAAP Measures” above for the definition and reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin. |
Operating Loss
Operating loss decreased $4.3 million, or 72%, to $1.7 million for the three months ended December 31, 2022, as compared to $5.9 million for the three months ended December 31, 2021 largely as a result of decreased salaries and wages of $1.4 million due to the reduction of corporate personnel and increased stock-based compensation of $3.3 million.
Adjusted EBITDA
Adjusted EBITDA increased $2.1 million, or 62%, to a loss of $1.3 million for the three months ended December 31, 2022, as compared to a loss of $3.5 million for three months ended December 31, 2021. The increase was largely due to the decrease in cash based operating costs related to salaries and wages.
Nine Months Ended December 31, 2022 as compared to Nine Months Ended December 31, 2021
Audio Group Operations
Our Audio Group Operations operating results were, and discussions of significant variances are, as follows (in thousands):
| Nine Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Revenue | $ | 63,939 | $ | 54,778 | 17 | % | ||||||
| Cost of Sales | 43,067 | 40,403 | 7 | % | ||||||||
| Sales & Marketing, Product Development and G&A | 11,976 | 12,212 | -2 | % | ||||||||
| Intangible Asset Amortization | 3,639 | 3,989 | -9 | % | ||||||||
| Operating Income (Loss) | 5,257 | (1,826 | ) | 388 | % | |||||||
| Operating Margin | 8 | % | -3 | % | 347 | % | ||||||
| Adjusted EBITDA* | $ | 15,015 | $ | 4,537 | 231 | % | ||||||
| Adjusted EBITDA Margin* | 23 | % | 8 | % | 184 | % | ||||||
| * | See “—Non-GAAP Measures” above for the definition and reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin. |
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Revenue
Revenue increased $9.2 million, or 17%, during the nine months ended December 31, 2022, primarily due to increased membership revenue of $8.0 million as a result of membership growth with our largest OEM customer, an increase in advertising revenue of $1.2 million as a result of slowing growth.
Operating Income
Operating income increased $7.1 million, or 388%, to $5.3 million for the nine months ended December 31, 2022, as compared to a loss of $1.8 million for the nine months ended December 31, 2021, as a result of the $6.3 million increase in revenue as noted above offset by a decrease in expense as a result of credits earned through settlements of amounts owed to vendors and reductions in salaries.
Adjusted EBITDA
Adjusted EBITDA increased by $10.5 million, or 231%, to $15.0 million for the nine months ended December 31, 2022, as compared to $4.5 million for the nine months ended December 31, 2021. This was largely due to the increased contribution margin and lower operating expenses, described above.
Media Group Operations
Our Media Group Operations operating results were, and discussions of significant variances are, as follows (in thousands):
| Nine Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Revenue | $ | 10,124 | $ | 38,808 | -74 | % | ||||||
| Cost of Sales | 5,420 | 34,461 | -84 | % | ||||||||
| Sales & Marketing, Product Development and G&A | 5,606 | 12,510 | -55 | % | ||||||||
| Intangible Asset Amortization | 1,815 | 558 | 225 | % | ||||||||
| Operating Income (Loss) | (2,717 | ) | (8,720 | ) | -69 | % | ||||||
| Operating Margin | -27 | % | -22 | % | -19 | % | ||||||
| Adjusted EBITDA* | $ | (1,701 | ) | $ | (3,556 | ) | 52 | % | ||||
| Adjusted EBITDA Margin* | -17 | % | -9 | % | 83 | % | ||||||
| * | See “—Non-GAAP Measures” above for the definition and reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin. |
Revenue
Revenue decreased $28.7 million, or 74%, during the nine months ended December 31, 2022, as compared to $38.8 million for the nine months ended December 31, 2021, primarily due to a reduction in the number of events held compared to the prior year period, including Social Gloves and Spring Awakening Music Festival. There was also a reduction demand from both retail partners and our direct to consumer business which impacted our merchandise compared to the prior year.
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Operating Loss
Operating loss decreased by $6.0 million, or 69%, to $2.7 million during the nine months ended December 31, 2022, as compared to a $8.7 million loss for the nine months ended December 31, 2021, as a result of the decreased contribution margin compared to the prior year period partially offset by decreases in expenses due to a reduction in staff and credits due to settlements of payables made during the nine months compared to the prior year.
Adjusted EBITDA
Adjusted EBITDA increased by $1.9 million, or 52%, to a loss of $1.7 million loss for the three months ended December 31, 2022, as compared to $3.6 million for the nine months ended December 31, 2021. This was largely due to the decrease in contribution margin offset by lower operating expenses, described above.
Corporate expense
Our Corporate expense results were, and discussions of significant variances are, as follows (in thousands):
| Nine Months Ended December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Sales & Marketing, Product Development and G&A | $ | 3,864 | $ | 19,046 | -80 | % | ||||||
| Operating Loss | $ | (3,864 | ) | $ | (19,046 | ) | -80 | % | ||||
| Operating Margin | N/A | NA | N/A | % | ||||||||
| Adjusted EBITDA* | $ | (3,879 | ) | $ | (9,636 | ) | 60 | % | ||||
| * | See “—Non-GAAP Measures” above for the definition and reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin. |
Operating Loss
Operating loss decreased $15.2 million, or 80%, to $3.9 million for the nine months ended December 31, 2022, as compared to $19.0 million for the nine months ended December 31, 2021 largely as a result of decreased salaries and wages of $3.4 million due to the reduction of corporate personnel, a reduction of $3.2 million in legal and accounting fees and a decrease in stock-based compensation of $6.6 million.
Adjusted EBITDA
Adjusted EBITDA increased $5.8 million, or 60%, to a loss of $3.9 million for the nine months ended December 31, 2022, as compared to a loss of $9.6 million for nine months ended December 31, 2021. The increase was largely due to the decrease in cash based operating costs related to salaries and wages.
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Liquidity and Capital Resources
Current Financial Condition
As of December 31, 2022, our principal sources of liquidity were our cash and cash equivalents, including restricted cash balances in the amount of $8.5 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 12 – Senior Secured Revolving Line of Credit to our condensed consolidated financial statements) and drew down aggregate advance amounts of $7.0 million. In July 2022, PodcastOne completed the PC1 Bridge Loan (as defined below) raising gross proceeds of $8,035,000, of which we purchased $3,000,000 of (excluding the OID (as defined below)). As of December 31, 2022, we had notes payable balance of $0.5 million, $5.9 million in aggregate principal amount of unsecured convertible notes, secured convertible notes with aggregate principal balances of $15.0 million, $5.8 million PC1 Bridge Loan 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 $218.5 million and cash used of $4.6 million from operating activities for the nine months ended December 31, 2022 and had a working capital deficiency of $19.7 million as of December 31, 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 “PC1 Bridge Loan”) of its unsecured convertible notes with an original issue discount of 10% (the “OID”) in the aggregate principal amount of $8,838,500 (the “PC1 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. In connection with the sale of the PC1 Notes, the Purchasers received warrants (the “PC1 Warrants”) to purchase a number of shares of PodcastOne’s common stock, par value $0.00001 per share (See Note 9 – PodcastOne Bridge Loan). As part of the PC1 Bridge Loan, we purchased $3,000,000 (excluding the OID) worth of PC1 Notes.
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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 de