Description

Summary

LiveXLive Media is a broken business model BK-candidate short with 12-month 60%+ downside driven by (1) inevitable resolution of its’ solvency crisis through equity raises, which must be net of significant past due-accrued royalty prepayment hurdles, likely resulting in forced NTM raises equivalent to ~25-50% of its’ current market cap and (2) a material scale-back of its’ key customer relationship (this customer is ~60% LTM total sales; sales exclusive of this single customer are declining at an accelerating y/y rate of  -15/17/21/27% y/y in CY1/2/3/4Q19).

This opportunity exists because of Sellside cheerleading (9/9 buy ratings from the whole gang: Roth, Ladenburg, Maxim, HC Wainwright, ThinkEquity, AGP, JMP, Spartan, DA Davidson) and beta from the recent market rally, with shares rallying 90%+ from mid-March 2020 lows. Sellside bulls argue that COVID will benefit the business, though I believe this view is sorely misguided.

I believe takeout risk is negligible. LIVX trades in-line with a pure-play market leader (LIVX at 3x EV/NTM Sales, SPOT at 2.8x), despite existential business threats.

Background

LiveXLive Media is a music streaming subscription service business (subscription revenue is 92% LTM sales; $35m) which also sells advertising on their platform (6%; $2m) and licenses out music festivals internationally (1%; $0.5m). LIVX looks to differentiate itself from other music subscription platforms by focusing on live streaming music events (though note that most music festivals are livestreamed on YouTube for free). LIVX RTO’d into a “3D Design Studio” in 2017, acquired another music streamer (Slacker, $50m) and consolidated the platforms in May 2019. LIVX reports 820k paid subs as of CY4Q19.

Solvency Crisis

Here’s the set-up: LIVX has $18m convertible debt with May-Jun 2021 maturities ($13m at 12.75% + $5m at 7.5%; struck at $10), a cash balance of $14m and WC deficit of $24m at YE19, and *normalized* estimated FCF of ~-$5m/quarter.

LIVX’s historical burn of *only* -$2.5m/quarter is understated by 2x driven by unsustainable refusal to pay suppliers, notably the record company licensors of the music on LIVX’s streaming platform. Over the LTM, payable and accrued royalty growth has provided an $11m cash benefit (note the rest of WC ~nets) into FCF of -$11m. 3-mo DPO has fully doubled since CY2Q18 to ~255 days at YE19.

Exhibit. 3-mo and 9-mo Days Payable Outstanding

There is very poor disclosure surrounding these payables. There are <10 references to accounts payable in each of the Qs and Ks, none of which describe 99%+ of the contents (there’s a disclosure about an immaterial amount of stock owed to consultants in there). Because of the lack of disclosure, it’s hard to tell when this exactly reverses. However, given the magnitude of the issue I believe it’s imminent and is already to some extent unwinding. In CY3Q19 LIVX entered several arrangements for their past-due accrued royalties (these are to the record companies) whereby they would cumulatively pay an average of ~$1.1m/quarter until $10m outstanding was paid in full, where LIVX must pay-out these suppliers in the event of an equity raise. There was $8.7m outstanding at YE19, of which $5.8m is current. What’s interesting is that despite these payments, accounts payable and accrued royalties still provided a $6m cash benefit in the CY4Q19 quarter (compared with FCF of -$1.4m), meaning that LIVX has further strained other suppliers.

Liquidity is also further pressured by litigation overhangs, including $300k past-due balance related to 2015 payables which were converted into a 6% 1-year note that has been extended (and missed) twice. Note that these payables were to their former attorneys and LIVX won’t be able to play the same games with the licensors of their content, who can pull the plug as needed. They also have outstanding lawsuits related to a FY18 event from which one party is seeking $26m in damages.

To cover the past-due accrued royalties prepayment hurdle ($8.7m), their WC deficit ($24m), and a year of FCF coverage (~$20m), LIVX would need to raise $53m, or 53% of the market cap. Note that LIVX also needs to be able to pay off their $18m of May-Jun 2021 notes, which go current in CY2Q20. Precarious indeed.

Material Scale-back of Key Customer Relationship Impairs “Growth Story”

Tesla pre-installs LIVX’s Slacker Plus (the mid-tier paid offering) in their vehicles. Management and Sellside shy away from this so you’d never guess by listening in on their calls, but this business represents ~60% of LTM revenue and offsets accelerating decline in the remainder of the business (you know, selling non-subsidized subscriptions), where sales ex-Tesla sales y/y declines are accelerating to -15/17/21/27% in CY1/2/3/4Q19). Incredibly, because management does not reference the Tesla/Non-Tesla revenue split, they have never offered an explanation for why their non-subsidized sales are collapsing and the topic hasn’t been covered by Sellside. A look through LIVX music streaming product reviews offers the only evident explanation: consumers do not like this product and higher quality alternatives are cheap.

Exhibit. LIVX Tesla, Non-Tesla Revenues and Y/Y Growth Rate

LIVX-Tesla sales have helped hide the decaying non-subsidized business; however, even prior to the recent apparent culling of the LIVX-Tesla relationship, LIVX-Tesla sales had begun decelerating y/y to 169/127/93/52% in CY1/2/3/4Q19 leading into a flattened consolidated topline.

Tesla introduced Spotify into its’ vehicles in the Sep 2019 V10 software update. In October 2019, Tesla restated the user manual, changing “Tesla also provides you with a complimentary Streaming Personal Radio account for four years” to “Tesla may provide account credentials for some internet radio and music streaming services”. Just after these events, many posts and comments appeared on Tesla forums expressing that Tesla appears to be phasing out subsidized premium Slacker (owned by LIVX) as users have had issues accessing Slacker post-Spotify integration or getting locked out and, when inquiring, being told that the subscription was only for 1 year. This is of course based on anecdotes of Tesla customer service. However, I view the magnitude of posts on this topic as not coincidental and likely indicative that LIVX is part of the TLSA cost-cutting strategy. Note that Tesla can eliminate the agreement at any time and, for sake of scenario analysis, if the “1-year subscription” rule was retroactively applied to already-sold cars, this would mean approximately ~91k cars (TSLA CY4Q18 deliveries) would have rolled-off at last quarter (~10% of LIVX’s total userbase).

Further, COVID impacts the LIVX-Tesla relationship doubly: the economic shutdown increases the likelihood of more aggressive cost-cutting measures and has also caused large declines in auto sales (LIVX new subscribers/revenues). To the second point, the recent double-digit y/y declines in US auto sales are well-covered, from which Tesla will likely not be immune.

There are also more general arguments to be made about a Tesla “demand cliff”, which helps the LIVX short thesis but is far from needed for this trade to work.

Relevant links:

https://forums.tesla.com/forum/forums/tesla-slacker-subscription-only-good-1-year

https://teslamotorsclub.com/tmc/threads/slacker-downgraded-to-free-slacker.176812/

https://forums.tesla.com/forum/forums/slacker-problems 

Recent Events

LIVX acquired React Presents in Feb 2020, which I believe was to help obfuscate these issues and provide a dumb “but it’s revenue growth, dude” bull thesis. React Presents puts on several music festivals per year and was spun out of the 2016 SFX bankruptcy. The LIVX PR, which came on the same day as last quarter earnings, stated that they acquired $15m in CY19 revenues. LIVX paid $2m, financed via an 8% $2m Feb 2022 convertible (struck at $4.50). This does seem like it could have been cheap at first glance. However, note that React Presents appears to have continued to unwind post-SFX spin, with 5 of their 7 music festivals either cancelled or transferred in the last two years. Even in early Feb 2020 (at time of acquisition) the remaining festival websites weren’t updated for the 2020 events. However, despite the global pandemic, one (hosted in June) has since begun accepting ticket sales. LIVX has still yet to cancel nor reschedule this event (Spring Awakening, Chicago). This of course is negative for near-term liquidity-driven catalysts as this must have provided some working capital (also note the Force Majeure clause does not entitle these sales to a refund).

It’s my opinion that these assets were acquired to help reframe the story and provide the appearance of topline growth to help raise capital. The plan was also to give concert-goers freemium LIVX subscriptions, so the acquisition would help CAC and grow the base. These assets are distressed likely even FCF detractors, as implied by management commentary on the earnings call (best management could do was not “give color” on operating margin “but we  plan on generating synergy so expect to be EBITDA accretive out of the gate”).

Additionally, note that LIVX took a $2m 1% Apr 2022 PPP loan on Apr 13th, 2020, which also offsets near-term liquidity issues. Like other public companies taking advantage of these emergency loans, they are facing pressure to return the funds.

Conclusion

Given the solvency concerns as well as issues with both the Tesla and non-Tesla business, I’m happy to pay the ~10% borrow while waiting for this idea to work. I’m comfortable betting that things will fall apart in the next 1-4 quarters. The worst thing about this trade is the liquidity, which has typically been ~$300k/day.

LIVX has guided $38-40m CY20 sales (an aspirational 0.3% y/y growth at midpoint), though Sellside thinks they’re being coy and sees them beating by 15% to hit $45m in sales. The company is valued at 3x EV/NTM Sales, compared with SPOT at 2.8x (which is growing 20% y/y).

Catalyst

Catalysts: (1) Equity raise, (2) Tesla and non-Tesla issues becoming apparent through (3) earnings / FY guide given next Q.

Risks: (1) Liquidity worsens through trade lifetime, (2) tight float at 46% with 10% short interest could get squeeze-y if story materially changes, (3) LIVX gets bankrolled by CEO and ~36% LIVX owner Robert Ellin’s Trinad Capital – note they also own the $5m note -- though AUM is ~$44m (Link), (4) management has talked about doing another acquisition and recently adjusted comp so they’d get paid if one went through.