With a $200M Valuation, Is This Publicly-Traded Music Livestreamer Really a 'Small Business'?

Robert Ellin
Joshua Blanchard/Getty Images for LiveXLive

Robert Ellin and A.CHAL attend The LiveXLive 2019 Holiday Showcase at The Peppermint Club on Dec. 10, 2019 in Los Angeles.

With several lawsuits and $37 million in annual losses, CEO Rob Ellin’s decision to borrow $2 million from the federal PPP program is coming under scrutiny.

The COVID-19 crisis has battered the live entertainment sector, leading to the cancellation of 50,000 events and billions of dollars in losses. It's also created a rare opportunity for a small sector of companies that currently represent a sliver of the live entertainment industry, but are expected to rapidly grow in the coming months.

Welcome to the world of live streaming, a niche industry that is now highly in demand as fans are forced to stay home and watch concerts on their devices. It's a huge opportunity for LiveXLive, which became publicly traded on the NASDAQ at the end of 2017 and has spent millions on acquisitions like Slacker Radio, developing a streaming and broadcast concert business utilized by companies like Telsa. Last Friday, LiveXLive announced one of its largest purchases to date -- podcast network PodcastOne -- acquired through an all-stock deal valued at $18 million.

That's captured the attention of both investors and investigators from the Treasury Department, who are expected to begin examining the financial records of companies like LiveXLive, which has accepted approximately $2 million from the Paycheck Protection Program meant for small businesses. According to the rules at the time, LiveXLive company officials had likely triggered an automatic audit of the federally-subsidized low-interest loan. One day before the May 14 deadline to return the funds, the Small Business Administration issued a new set of guidelines saying that companies that borrowed less than $2 million (the exact LiveXLive amount was $1,993,500) would qualify for a safe harbor provision certifying eligibility.

To date, nearly 400 publicly traded companies including Nathan’s Famous Hotdogs, a holding company for Burger King franchises and the Maui Land & Pineapple Company have accepted money administered by the Small Business Administration through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was designed to prop up businesses facing potential shutdown from the coronavirus pandemic. So far, more than 40 companies -- among them Ruth’s Chris Steakhouse and Shake Shack -- have indicated they'll return the funds by a May 18 deadline (extended from May 14 to May 18) or risk an audit or investigation by federal authorities.

LiveXLive is not going to return the money it borrowed, a representative for the company helmed by hedge fund manager and LiveXLive chairman and chief executive Robert Ellin tells Billboard, nor does it believe it did anything wrong obtaining PodcastOne weeks later. LiveXLive also plans to apply for a forgiveness program for the loan, according to SEC documents, so that it doesn't have to repay some or all of the money it received.

Small Business or Penny Stock?

Company officials also tell Billboard that LiveXLive meets "the small business definitions set out by the Small Business Administration." According to public filings, LiveXLive has a $200 million market cap, $37 million in annual losses and nearly $6 million in salary and stock options for its chief executive through March of 2019. To many, LiveXLive more closely resembles a penny stock (also known as a microcap company) than a small business, with a low share price (right now about $3.30), high volatility and fluctuating trading volume.

Compared to the other publicly traded companies that accepted PPP funds, LiveXLive isn’t small -- it’s ranked No. 27 out of 410, meaning its market cap is higher than 93% of the public companies that participated in the SBA program, according to data by research firm FactSquared. Within the same group of 27 companies, LiveXLive ranks 25th for the number of people employed.

Officials with LiveXLive say the business also had "economic needs for the loan," according to the language of the CARES Act, at the time it applied.

"Our team is under 100 strong and with this aid, we've been able to keep substantially all of our staff employed," reads a statement provided by LiveXLive officials. "Prior to receiving the government aid, our senior executive leadership agreed to reduce their salaries by 50%."

According to an SEC filing, Ellin’s annual salary of $500,000 has been reduced by 50% through June 30 "in exchange for shares of the Company’s common stock that will vest in full in early calendar year 2021."

"Small Business" -- According to Whom?

How can a publicly traded company run by a hedge fund manager who just signed off on an $18 million acquisition qualify for a small business loan?

According to new guidance issued by the Small Business Administration, starting today (May 14), the answer is yes if the amount is under $2 million. For loans over $2 million, the Treasury Department has been fairly explicit on eligibility -- borrowers "must certify in good faith that their PPP loan request is necessary," Treasury officials wrote in an April 23 memo, "taking into account their current business activity and their ability to access other sources of liquidity," noting "it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith," the guidelines read.

While that may seem clear cut, expect regulators to apply "a rule of reason as to what it means to be able to raise capital elsewhere," says Michael Birnbaum, a former trial lawyer at the U.S. Securities and Exchange Commission, now a partner in the enforcement and investigations group at Morrison & Foerster.

"They don't want people taking money that they can't legitimately say it’s a necessity," Birnbaum says. "But you can be a successful company and still have an urgent need right now, even if you expect to be okay in a year."

What about LiveXLive’s acquisition of PodcastOne for $18 million in stock just weeks after accepting the PPP loan? The cash closing costs could be approximately $1.4 million when compared to the all stock purchase of Slacker Radio in 2018.

Attorney and author Alan Gassman says SBA officials might take issue with acquisitions made by companies receiving PPP money, saying, "The bigger issue is going to be how companies use the money. If suddenly we have a miraculous recovery and are making more money than ever and are viewed as a fat cat, people might start pointing fingers at you. And then a prosecutor finds another reason to go after you for something else and they throw this on top of it."

Until the U.S. Supreme Court weighs in, "we're going to have a lot of uncertainty caused by this statute which was hastily drafted by Congress, probably in the middle of the night, when they weren't thinking very far ahead," Gassman says. The notion that a company could just sell some more stock without securities lawyers, documentation and projections and then shop for investors is unrealistic, he adds.

"And who the heck is going to buy the stock of a small struggling company right now?" Gassman asks.

Large companies also have access to investment banks and private equity firms that smaller companies don’t. More than $10 million in LiveXLive debt is via unsecured convertible notes held by Trinad Capital, which is managed and co-owned by Ellin.

Since 2014, Trinad has loaned LiveXLive $8.1 million in exchange for eight one-year promissory notes that have been extended multiple times, with interest rates increasing from 6% to 7.5%, accruing $800,000 in interest. From 2011 to 2017, LiveXLive also paid Trinad $30,000 a month for management services.

"I would think that the SBA position will be that they have access to hedge funds and should not be applying for PPP money," Gassman tells Billboard, noting he also doubts the SBA has authority to investigate a hedge fund or any shareholders of companies that accepted a PPP loan.

But there is an agency that can -- the Securities and Exchange Commission, which is making a sweep of publicly traded companies that accepted PPP money, according to Think Advisor.

While the details of that sweep are still trickling out,

Birnbaum says the SEC often uses interdepartmental data from agencies like the Treasury Department forits own enforcement efforts.

"They're going to look at public disclosures and expect people to be truthful and candid based on what they knew at the time," Birnbaum says. "If you're telling Treasury, 'I need these funds, and they're necessary to my continuing operations,' you don't want to simultaneously be telling your investors, 'We expect robust growth,' and then have to clarify, 'I only meant that if I was getting the PPP funds.'"

Venues Left Behind

Finding the funding to defend against a federal lawsuit might be as difficult as finding a lawyer -- LiveXLive has had multiple attorneys quit defending lawsuits on the company’s behalf and as of early February still owed a $200,000 judgment to law firm Manatt, Phelps & Phillips and $1.1 million in unpaid bills to Latham & Watkins. In the four years since it was launched, LiveXLive has been linked to 10 lawsuits filed by investors, broadcast partners, festivals and venues the company has worked with or purchased streaming rights from.

Those same festivals and venues now face an existential crisis from the spread of the coronavirus that causes COVID-19, indefinitely shutting down the entire live music industry.

While companies like LikeXLive and other businesses that support the live music industry have qualified for PPP funds, venue operators, festival organizers and concert promoters have largely been shut out of federal aid "designed for businesses that will potentially be able to return to normal business operations in the coming weeks and months," wrote Dayna Frank, owner of First Avenue in Minneapolis, in an open letter to congressional leaders on April 22.

"Without federal funding, thousands of independent venues will not survive to see the day when our doors can open to the public again," writes Frank, board president of the newly formed National Independent Venue Association.

Officials with LiveXLive say they have supported artists affected by the COVID crisis, streaming over performances from 936 artists and streaming the Music Lives 48-hour global music festival with more than 50 million tuning it. Company officials also said the $2 million was used strictly to support payroll, but didn’t produce any documentation showing their ability to pay employees would have been materially affected if they hadn't received the money.

"The problem with the PPP is that companies didn’t have to show hardship, so a lot of people got loans that didn’t really them, while small businesses like independent promoters and venues are not getting the help they need to survive," said Steve Sternschein with Heard Presents which book and own several venues in Austin. "We're stuck in this flip-flop situation where companies that have relatively small losses are benefiting the most while those who have lost everything have been left out in the cold."

UPDATE: This story has been updated to include new safe harbor rules for companies that borrowed less than $2 million through the PPP program. Billboard has updated the story with the exact amount of money ($1,993,500) LiveXLive had borrowed from the program meant for small businesses.

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