Business context and reporting period
This is Loton, Corp.’s unaudited Form 10-Q for the quarter ended June 30, 2016, its fiscal first quarter. The filing describes LiveXLive as its planned live and digital music streaming business and reports a 50% equity-method investment in Obar Camden Holdings Ltd. (OCHL), which operates London’s KOKO venue. The registrant is named Loton, Corp. in the filing; investors should verify the company’s name and corporate history against the filing date.
Financial and operating results
- Revenue: LiveXLive had no operating revenue in either the quarter ended June 30, 2016 or the restated comparable 2015 quarter. The consolidated statement of operations reports no revenue.
- Costs and loss: SG&A rose to $1.085 million from $786,000, which management attributed primarily to higher production costs. Related-party management fees were $90,000 in each period. Net loss increased to $1.804 million from $785,000; basic and diluted loss per share was $0.04 versus $0.02.
- Interest and affiliate earnings: Net interest expense was $712,000, compared with $16,880 of interest income in the restated prior-year quarter. The filing attributes substantial current-period interest expense to debt discount amortization and note-conversion inducements. Equity-method earnings from OCHL were $83,184, versus $74,036. OCHL reported quarterly revenue of $1.660 million and net income of $166,369; these are investee results, not consolidated company revenue.
- Cash flow: Operating cash use was $1.220 million, compared with $628,000. Investing cash use was $19,000. Financing provided $1.279 million, including $1.250 million from common-stock sales, partly offset by $350,000 in repayments of related-party notes. Cash increased $39,715 to $76,613.
- Balance sheet and liquidity: Total assets were $5.435 million, including a $4.973 million OCHL investment. Current liabilities were $3.401 million against current assets of $173,000; the reported working-capital deficit was $3.574 million. Total liabilities were $3.401 million and stockholders’ equity was $2.034 million.
- Debt and related parties: Current liabilities included $1.472 million of related-party notes payable net of discount, $283,515 of related-party accrued interest, a $265,158 note payable, and a $1.0 million related-party services obligation. Trinad Capital, controlled by the company’s executive chairman, was owed $2.879 million principal on senior notes before a $1.407 million valuation discount. The $265,158 note was in default; the $213,331 related-party note receivable was also in default.
- Equity and dilution: The company sold 250,000 shares for $1.250 million and issued warrants exercisable at $0.01 per share. It also issued 103,650 shares valued at $181,125 for services. Warrants outstanding rose to 3,526,377. The filing gives 46,758,057 shares issued and outstanding at June 30, but the cover reports 46,558,057 as of August 13; verify this discrepancy.
Changes, outlook, and material risks
- Comparability: The June 2015 financial statements were restated after the company determined OCHL had been improperly consolidated and should have been accounted for under the equity method, along with correction of other prior errors. The prior-period figures above are restated.
- Going concern and funding: Management and the prior-year auditor identified substantial doubt about the company’s ability to continue as a going concern. Management estimated funds on hand would support operations through December 31, 2016 and was seeking additional financing, primarily equity. There is no assurance financing will be available or acceptable; equity financing could materially dilute shareholders. A further $175,000 was advanced by Trinad after quarter-end.
- Strategy and outlook: Management planned to develop a live music streaming network and leverage KOKO’s brand and relationships, but stated that additional capital was required. The company anticipated substantial losses over the next 12 months; no revenue or profitability guidance was provided.
- Litigation and governance: A shareholder dispute concerning OCHL and its operating subsidiary was pending in the UK. The petitioner sought, among other remedies, a share sale, relief concerning related-party notes, and potentially winding up the entities. A court-approved July 2016 consent order provided for Mr. Ellin’s resignation as a director upon appointment of an independent non-executive director and temporarily restricted certain consent rights. The filing does not quantify the potential financial effect or provide a final resolution.
- Controls: Management concluded disclosure controls were ineffective and identified material weaknesses, including inadequate documentation, insufficient segregation of duties, lack of an independent audit committee, and inadequate financial-close review. The filing states that the latter contributed to the restatement.
- Other unusual item: OCL’s challenge to nearby development planning permission was successful and the permission was quashed; that claim was no longer pending.
Investor verification priorities
- Confirm current cash runway, financing availability, and the assumptions behind management’s December 31, 2016 runway estimate.
- Reconcile the share-count difference between June 30 and August 13 and assess dilution from outstanding low-exercise-price warrants and related-party financing.
- Verify the status, maturity, balances, and default terms of the notes, including the Trinad debt and the defaulted $265,158 note.
- Check developments and potential financial consequences of the OCHL dispute, consent order, and related-party obligations.
- Review the restatement, remediation of material control weaknesses, and the reliability of reporting for the OCHL investment.