Lytus Technologies Holdings - LYT
The IPO of red flags
Sometimes the red flags in IPO prospectuses are just so overpowering that you gotta just wonder how some of these deals ever get done. If you have some time and happen to browse through the prospectus of recent IPO Lytus Technologies (LYT) I think you will see what I’m referring to.
Brought to us by the folks over at Spartan Capital Securities (check out WBEV, PIXY, or LTBR for other offerings) and Pacific Century Securities (where LYT is prominently featured on their services page), this is a great example of one of those companies that should just never have gone public.
The business. LYT is an Indian-based and operated company that claims to have “over 8 million active users” (though only 1.8M accounts) for their streaming/telecasting services along with a budding telemedicine services business that they hope to partner with local health centers throughout the country. So they fancy themselves as something of an Indian version of Netflix, Teladoc, and regular old cable operator all rolled into one, which is likely how they are being portrayed to investors. The only problem, of course, is that LYT was formed as a holding company to acquire interests in all of these businesses, most of them from related parties to boot, and with very little in terms of assets or revenues. Remind me again why these things are allowed to list their shares on US exchanges?
Telehealth – On October 30, 2020, the company acquired 75% of something called Gllobal Health Sciences, Inc., which was essentially a shell company. They give no price. “GHSI was formed in 2020 and had no business operations prior to our acquisition. The Company will conduct its telemedicine business in the U.S. through GHSI.”
Streaming/Telecasting – “On March 19, 2020, the Company, Lytus Technologies Private Limited (“Lytus India”), Mr. Nimish Pandya, our CEO’s brother, and Mr. Girish Podar, the shareholders of Lytus India, entered into a share purchase agreement, pursuant to which the Company acquired 15,000 shares, representing all of the equity share capital of Lytus India for a purchase price of Rs.150,000 (approximately $2,000).
Cable TV – “On February 21, 2020, Lituus Technologies Limited (“LTL”), a BVI company, DDC CATV Network Private Limited (“DDC”), and all of the shareholders of DDC (the “DDC Shareholders”) entered into a share purchase agreement, pursuant to which LTL acquired 4,900 shares, representing 49% of the outstanding equity share capital of DDC for an aggregated purchase price of Rs.19,208,000 (approximately $255,000). In addition, the acquisition of the majority of DDC’s equity involved our CEO, Dharmesh Pandya, who was then also the CEO of LTL, and Jagjit Singh Kohli, who was appointed as our director on April 1, 2020.”
So for a grand total of something under $260K they managed to purchase interests in each of their 3 main businesses, and 2 of those are from related parties, the CEO and his brother. Would it be a shocker if GHSI turned out to be owned or started by another related party? Of course not.
Which at today’s price of something over $30 a share and maybe 37M or so shares outstanding, that’s worth a solid $1.2B even in today’s market. Not too shaby.
Reachnet. Of those 3 businesses, only the Cable TV business appears to have any type of paid customer base with their “8M active users”, but once again, that customer base was purchased back in 2019 from something called “Reachnet,” and even that deal has yet to actually close. It appears that back in 2019 Reachnet was looking to divest their retail customer base, which Lytus India was happy to scoop up; Lytus pays Reachnet 61% of any revenues they collect from these retail customers, while Reachnet supplies the network and equipment. The only problem, of course, is that Lytus didn’t have the $59M in funds necessary to close the deal, and apparently has yet to make any payments to Reachnet as part of the deal, but is hoping to use $3.7M of these proceeds as something of a downpayment to get it done. They hope to tap the market for $32M to sell some notes while the rest will come from giving Reachnet over $23M from what they claim to be current receivables they are owed.
“Under the terms of the agreement with Reachnet, the Company was also scheduled to receive ‘Other Receivables’ due of approximately $ 35.6 million as of March 31, 2021 ($18 million as of March 31, 2020) from Reachnet, as reflected in its books of accounts. The COVID-19 lockdown has delayed the settlement of this accounts receivable under its contract with Reachnet. The Company expects that this settlement will be implemented as soon as possible, upon the relaxation of COVID-19 restrictions in India. Upon such settlement and upon resumption of normal operations, the company expects to have sufficient available cash to be able to meet its current liabilities associated with the business. Refer to Note 3A on Other Income/Application of IFRS 15.”
Lytus makes reference throughout the prospectus that they, not Reachnet, actually “own” these customers, which I guess is how they can put together a set of financials and claim revenues for something that they have yet to pay for even though it has been 3 years since the original agreement was made. One day they hope to basically upsell those retail customers for streaming services or their telemedicine dreams in order to garner more revenues, but first they have to close the deal.
“Under the terms of the customer acquisition agreement (the “Customer Acquisition Agreement”) between Reachnet and Lytus Technologies Private Limited (“Lytus India”) dated June 20, 2019, these approximately 1.8 million customers legally belong to Lytus India.”
“The Company has acquired all subscribers of Reachnet for a lumpsum consideration and with the condition that the Company will have control and unconditional entitlement rights over the revenues generated from or related to these subscribers.”
“In light of the above, the Company has 100% control of and 100% entitlement rights over the revenues accruing and arising to the Company from its subscribers. Reachnet has no control, ownership or entitlement rights over revenue generated from the Company’s subscribers.
Yet Lytus hasn’t paid Reachnet a single dime as of this filing.
Revenues. Revenues from services, coming in at $1.9M for the trailing 12 months through March 31st, are pretty minimal. They supply a 9 month comparison through year-end 2021 vs. 2020, and revenues are actually down 20%. But they do have this “other income” line item where they supposedly get an additional $14.6M in 2021 revenues, and is supposedly related to their “streaming” offering related to Reachnet. Tell me if this revenue breakdown timeline makes any sense.
“This streaming segment in ‘Other Income’ generated approximately $15.7 million for the period March 16, 2020 (date of inception) through March 31, 2020, approximately $14.65 million for the year ending March 31, 2021 and approximately $10.84 million for the interim nine-month period ended December 31, 2021. “
So from March 16th ,2020 to March 31st, 2020, this “other income” generated $15.7M in revenues, but for the next entire year through March 31st, 2021, it generated only $14.65M? Supposedly IFRS 15 works that way, while GAAP, naturally, would not. Regardless, how they can even count this as revenue is beyond me since the deal with Reachnet has yet to close as of these dates, but whatever.
Financing. The company has used some pretty expensive financing in the last year just to get to this point, since Reachnet is withholding all of the receivables being collected from the customers which as of yet have not been purchased.
“The Bridge Financing was closed on July 15, 2021, and the Company received gross proceeds of $880,000. The Company issued the Bridge Units in reliance upon the exemption from registration contained in Section 4(2) and Rule 506 under the Securities Act.”
“On February 3, 2022, the Company and the Investor entered into a maturity date extension agreement, pursuant to which the maturity date of the Notes was extended to the earlier of June 1, 2022 or a Qualified IPO (the “Extension”). As cure for its maturity date default and in consideration for the extension of the maturity date of the Notes, the Company agreed to issue to the Investor $250,000 worth of its common shares or the equivalents at a per share price equal to the offering price in the Qualified IPO immediately prior to the closing of such Qualified IPO.”
“On June 6, 2022, the Company and the Investor entered into a second maturity date extension agreement, pursuant to which the parties extended the maturity date of the Notes to the earlier of June 17, 2022 or the consummation of a Qualified IPO and, as cure for its maturity date default and in consideration for the second extension of the maturity date of the Notes, agreed that the Company will (i) pay to the Investor the $250,000 owed under the Extension in cash instead of common shares and (ii) pay to the Investor an additional $100,000 in cash.”
So their investor lent them $880K for what was supposed to be a 6 month term, or basically to get them through to their IPO. There was a 12% original issue discount, so $1M face amount. In exchange, they were granted options on 500K shares of stock in any IPO plus some other pledges for company assets should things go wrong. After 6 months, when the IPO had yet to happen, they got a pledge for $250K worth of additional common shares at the offering price, and since the IPO was delayed yet again, they paid the $250K in cash out of the IPO proceeds and gave them an extra $100K in cash for the trouble. So for less than a year, the investor will get $1.35M back in cash along with an option to buy 500K shares of stock at somewhere around the offering price plus the original 7% interest rate on that note, but they have to wait 6 months post any IPO to exercise those options. That investor must be frantically trying to figure out how to hedge that deal right about now and pocket an extra $15M or so.
Boilerplate warnings. Some of the standard boilerplate warnings, including of course the “going concern.”
“Our independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a “going concern.””
“Our approximately 8 million user base is based on a calculation of our 1.8 million paid home subscribers multiplied by an industry average of 4.4 users per household in India and the assumptions we used to determine these figures may not be accurate. Assumptions that may not be accurate.”
“ We may not be successful in pursuing strategic partnerships and acquisitions, and future partnerships and acquisitions may not bring us anticipated benefits.’
Expectations. Their future revenues are dependent upon being able to charge their current people more, and they are counting on subscription fees to return to some form of normal. At $1.80 per month per subscriber times the 1.84M subscribers, you get maybe $10M in quarterly revenues. Once Reachnet is out of the picture, let’s see if they can keep them.
“Upon ending of the COVID-19 lockdown, the Company expects to be able to carry out its operations in the normal course of business and generate a minimum of Rs.130 ($1.8) as streaming subscription fee from its approximately 1.8 million customer connections per month, as prescribed by the Telecom Regulatory Authority of India guidelines. We believe this would enable the Company to improve its cash position significantly.”
Management and auditors. Dharmesh Pandya is the founder and CEO. A Harvard educated lawyer who worked on setting up enough foreign tech companies and their subsidiaries to get a taste for where the real money is made. Now he owns 85% of money-losing Lytus Technologies and has a current (at this moment) net worth over $1B. A dummy he is not. His brother, however, apparently was not invited to go along for the ride. Longtime mentor Jagjit Singh Hodli, however, was, since he is apparently some sort of cable visionary in India. Their auditors are Paris Kreit & Chiu, a local firm down here, and an auditor for some small crappy public companies which probably comes from their sponsorship of the crap-fest known as the Roth Capital conference.
Financials. Saying your company has $89.5M in assets looks and sounds pretty impressive, until you take a peek at where those assets are. $38.5M is in the form of “goodwill and intangibles” and comes from the as-yet-not-quite-closed-but-almost-there Reachnet transaction, which they are already writing down. Then, of course, there are those pesky $47.6M in “other receivables” being held by Reachnet until said deal is closed. I’m sure Reachnet will be happy to pay those out expeditiously. That’s $86.1M of the total. The other $3.4M? Only $344K in cash and $720K in trade receivables, which, if you add the numbers up, is kinda odd. At March 31st, 2021, the company supposedly had $35.6M in “other receivables” and $395.5K in “trade receivables” or about $36M in total. So “other receivables” went up $12M in the 9 months to the end of December, while trade receivables rose about $325K in those same 9 months. The income statement for those same 9 months shows “other income” of $10.835M and “total revenues” of $1.122M or $11.958M combined. That number happens to be less than the rise in receivables. And the rise in “trade receivables?” That came despite a 20% decline in revenues. Needless to say, this has all been pretty horrible for cash flow, which show operating cash flows as a negative number and in decline.
It's a recent IPO, only 2.6M shares were sold, plus the 391K shares in the greenshoe, so maybe a total of 3M shares are actually out there somewhere. Happy hunting.