Business context and reporting period
This is Loton, Corp.’s Form 10-K for the fiscal year ended March 31, 2016, filed July 19, 2016. The filing is not identified as a LiveOne, Inc. filing, and “2015 Q4” does not match the annual reporting period; confirm the intended issuer and period.
Loton described itself as a holding company developing LiveXLive (LXL), a planned live-music streaming business, and holding a 50% equity-method investment in Obar Camden Holdings Ltd. (OCHL), which owns the KOKO venue business in London. The company reported no revenue from LXL. KOKO’s results are not consolidated; Loton records its share of OCHL earnings.
Financial results and liquidity
| Metric | FY ended March 31, 2016 | FY ended March 31, 2015, restated |
|---|---|---|
| Loton revenue | $0 | $0 |
| Operating expenses | $3.979 million | $3.243 million |
| Loss from operations | $3.979 million | $3.243 million |
| Equity earnings from OCHL | $410,553 | $278,962 |
| Net loss | $3.747 million | $5.610 million |
| Net loss per share | $0.08 | $0.15 |
| Cash used in operating activities | $2.999 million | $947,754 |
SG&A rose $903,119 to $3.619 million, primarily reflecting increased non-cash stock issued for services. Related-party management fees were $360,000, versus $526,660 in the prior year. Prior-year net loss included $2.600 million of warrant compensation expense, contributing to the lower reported loss in 2016.
At March 31, 2016, cash was $36,898; total assets were $5.218 million, including a $4.890 million OCHL investment; total liabilities were $4.988 million; and stockholders’ equity was $230,724. The balance sheet reports current liabilities of $4.877 million and current assets of $52,893, implying a $4.824 million working-capital deficit. Related-party notes payable were $2.784 million, and a $1.000 million management-service obligation remained accrued. Operating cash outflow was largely funded by $2.777 million of financing proceeds.
OCHL reported FY2016 revenue of $6.755 million, gross profit of $5.834 million (about 86% gross margin), operating income of $1.088 million, and net income of $821,105. OCHL’s revenue declined from $7.437 million in FY2015, while net income increased from $557,923. These are investee figures, not Loton consolidated revenue.
Material changes, outlook and risks
- Restatement and non-reliance: The board determined the 2014 merger had been incorrectly accounted for as a reverse acquisition and OCHL had been improperly consolidated. FY2015 was restated to account for OCHL under the equity method and correct other errors. The company said its merger 8-K, FY2015 10-K, and three 2015 quarterly reports should no longer be relied upon; it had not yet determined whether further restatements were needed.
- Going concern: The auditor cited substantial doubt about continued operations because of losses and negative operating cash flows. Management estimated funds on hand would support operations through December 31, 2016 and said additional financing was necessary. No assurance of financing was provided.
- Subsequent financing: After year-end, Loton raised $1.25 million gross from a common-stock-and-warrant sale, received an additional $95,100 related-party advance, and converted $200,000 of convertible notes plus accrued interest into approximately 102,750 shares. Related warrants were also exercised for 200,000 shares. Trinad Capital extended and increased related-party credit facilities; extensions involved warrants exercisable at $0.01.
- OCHL control and litigation: Loton owns 50% and shares governance with Oliver Bengough; most material decisions require both parties’ consent. Bengough’s May 2016 petition sought, among other relief, a share sale, challenges to related-party notes, and potentially winding up OCHL/OCL. Interim relief allowed Bengough to run OCL subject to Ellin’s approval of expenditures above $15,000. The company denied the allegations. The filing described a July 28–29, 2016 hearing as scheduled.
- Business outlook: LXL planned to monetize through subscriptions and advertising, but required substantial capital and upfront payments for streaming rights. The filing gave no quantified revenue, earnings, or cash-flow guidance.
- Controls and governance: Management found disclosure controls and internal control over financial reporting ineffective, citing lack of documented procedures, inadequate segregation of duties, no independent audit committee, and insufficient financial-reporting review; the latter contributed to the restatement. The company had only four full-time employees as of year-end and disclosed significant reliance on related parties.
- Other risks: The filing cites financing and dilution risk, competition, dependence on key personnel and relationships, user/adoption uncertainty for LXL, foreign exchange exposure, venue regulation and safety, and potential litigation and operating disruption.
Most important facts for investors to verify
- Confirm the issuer and reporting period: this filing names Loton, Corp. and covers the year ended March 31, 2016, not a LiveOne, Inc. 2015 Q4 report.
- Review the restated FY2015 statements and determine whether the previously non-reliant quarterly reports were subsequently restated or replaced.
- Check the status and outcome of the Bengough/OCHL proceedings, including any effect on shared control, KOKO operations, and the related-party notes.
- Reconcile liquidity disclosures: the balance sheet lists $4.877 million of current liabilities, while some narrative describes $4.988 million as current liabilities; $4.988 million is the reported total liabilities.
- Verify post-year-end financing, note extensions, warrant issuances and exercises, and the resulting dilution and cash runway.
- Assess progress in remediating the material weaknesses and the company’s ability to fund LXL and secure content rights.