This is bad
As we saw in Part I of this series, LIVESTAR ENTERTAINMENT GROUP, INC. (OTCBB: LSTA) has shifted its focus from technology to the nightlife – and more particularly to nightclubs and live events. At least that’s the plan. So far, however, the projects under development remain undeveloped, or in some cases, have been interred.
But not all of them.
Waiting For the Sequel
One project has held LIVESTAR’s attention, and is, in fact, central to the pending offer to acquire the Company. In September 2002 the Company entered into a letter of intent to acquire The Sequel Nightclub, which was, and is, operating in Toronto, Canada.
One year later, LIVESTAR still has not completed this acquisition. It has, however, entered into a consulting relationship with Sequel’s majority owner, Terrence Lall, who can earn up to 5% of the Company’s outstanding common stock in exchange for helping it to develop nightclubs. Approximately 18.3 million shares of LIVESTAR common stock, issued to Mr. Lall and five other consultants, were registered on a Form S-8 filed by the Company on April 10, 2003. That Form S-8 was amended, on July 2, 2003, in order to register 13.75 million shares to be issued to Lall pursuant to an amendment to his consulting agreement.
Mr. Lall (and the other five consultants named in the April 10th Form S-8) have not been the only ones to receive S-8 registered stock from the Company in recent months. On May 28, 2003, the Company filed a Form S-8 registering 14.9 million shares for three additional consultants). And on July 3rd it filed a Form S-8 registering 20 million more shares for a “2003 Outside Consultants Plan.” On July 22nd it amended that Form S-8, renaming the compensation plan the “Amended 2003 Outside Compensation Plan for Consultants and Others.”
On June 10, 2003, the Company stirred up a bit of news about the Sequel transaction, reporting that management had made “significant progress in its quest to acquire The Sequel Nightclub & Lounge.” RRUN’s president, Ray Hawkins, said that financing arrangements were being secured, and expressed confidence that the Company would acquire its first revenue producing venture “imminently.”
Mr. Hawkins did not say how that financing would be arranged, but the Company’s earlier projections suggested that the acquisition would be costly. In its 2002 Form 10-K (filed on April 16, 2003) the Company predicted that it would need $6 million in operational capital in 2003, including $1 million for its first acquisition $1.5 million for the second, and possibly another $1.5 million for a third. As if this were not ambitious enough, the Company said it intended to build two more entertainment establishment, from the ground up, in 2003, at a cost of approximately $1 million each. It also would be working on development of its live event business – which would require substantial additional funds. By the end of June 2003, the Company had revised its timetable, saying it planned to open these venues by the end of 2003 or the first quarter of 2004.
Unfortunately, the Company’s public filings also warned that those ambitious acquisitions and development plans could not go forward without money – and RRun had hardly any cash in the bank. At the end of 2002 it had $32. Three months later the coffers had swelled to $124. By June 2003 the Company’s cash position had deteriorated again – to $64. There was no sign of the necessary funding.
One month after the June 10th press release, the Company had changed its name to LIVESTAR, but the imminent transaction had yet to close. Finally, on August 12, 2003, LIVERSTAR issued a press release announcing a definitive agreement to acquire The Sequel Nightclub. Although the press release claimed that The Sequel was “currently profitable and revenues are expected to increase each year,” financial statements for The Sequel have not yet been made public.
In a Form 8-K filed with the Securities and Exchange Commission on August 11th, LIVESTAR said that it had agreed to acquire The Sequel for consideration valued at $500,000 – consisting of $300,000 in cash and 1 million shares of LIVESTAR’s Convertible Class A Preferred Shares, each of which is convertible into forty shares of LIVESTAR common stock. LIVESTAR promised to register those common shares as soon as possible.
As part of the agreement, The Sequel was required to produce its financial statements for the year ended December 31, 2002, and the six months ended June 30, 2003, no later than August 15, 2003. The deal was scheduled to close on September 29, 2003.
REVERSE MERGER – THE SEQUEL
So it appeared that LIVESTAR was on the brink of closing its first entertainment acquisition – if it could finally come up with the cash. But not so fast. Now it looks as though LIVESTAR is slated to become the acquiree rather than the acquirer – in what, ironically, is starting to look like a sequel to RRun’s reverse-merger acquisition of United Management, Inc.
On August 18th LIVESTAR disclosed that it was “in the final stages of negotiations with a Toronto based entertainment investment group regarding a possible takeover of LIVESTAR. Less than a week later, on August 26th, a press release declared that an agreement had been reached for the TCAL Investment Group - headed by none other than Terry Lall, owner of the Sequel – to acquire 51% of the Company at between 5 cents and 7 cents a share. Suddenly, Mr. Lall had turned from seller to buyer. According to the August 26th press release, Mr. Lall plans major changes for LIVESTAR, including additional management and acquisitions.
In addition, TCAL said it would try to secure $3 million in funding for the Company, and prepare to apply for NASDAQ or American Stock Exchange listing.
But a word of caution would seem appropriate. This is not the first time that LIVESTAR has announced plans to seek funding, and so far the money has not appeared. And, for now at least, the Company does not appear to meet the qualifications for listing on either of those national stock exchanges.
TCAL’s offer came just four days after LIVESTAR revealed that it had paid $3,000 to Empire Research Group, a New Jersey-based consulting firm, to issue a report on the Company. Empire Research, in turn, issued a “Speculative Buy Recommendation” for LIVESTAR stock, at 9 cents a share – which just happens to coincide with the high end of the projected range for the TCAL transaction.
Empire Research, which says it is neither an investment advisor nor a broker-dealer, noted LIVESTAR’s weak financial status, but still believed the Company was a good speculative buy in view of its low market price, low market capitalization (around $700,000 at the time) and plan to acquire its first business – The Sequel. In fact, Empire Research offered its view that the $700,000 market cap was not significantly more than a private company could expect to spend to go public.
Perhaps that theory struck a chord with TCAL. What else would explain the sudden turnaround by Lall, and his desire to acquire a Company with no operating business and just a pocketful of cash.
So far there is only a Memorandum of Understanding between LIVESTAR and TCAL, which either party can cancel on thirty days notice. They have sixty days to negotiate a definitive agreement, which means that this transaction, like so many of the Company’s earlier endeavors, may never be consummated.
Shares to Sell
That lack of certainty has not deterred all investors. On August 11th, the day the Company filed a Form 8-K disclosing its plan to acquire The Sequel, LIVESTAR stock closed at 1.1 cent, on volume of almost 6.8 million shares. Approximately 8 million more shares changed hands the following day, as the stock hit an intraday high of 1.4 cents.
No trading of LIVESTAR shares was reported for the next two weeks. Then, on August 26th, the day the Company revealed TCAL’s takeover bid, almost 100 million shares were traded, and the stock closed at 2.1 cents. The next day, August 27th, volume was approximately 42 million, and shares hit a high of 2.5 cents before closing at 1.3 cents.
Both volume and price have declined steadily since August 27th. On September 15th the stock closed at under one cent, on volume of approximately 2.7 million shares.
So who was buying – and perhaps more importantly, who was selling at the lofty post-announcement prices? Investors can only wonder – and review the Company’s most recent public filings for clues. On September 8th the Company filed a Form S-8 registering 30 million shares for its “Employee Stock Option Plan for the Year 2003.” LIVESTAR did not say which employees would receive shares, or whether any of the stock had been issued.
Then, on September 12th, the Company filed another Form S-8, this time registering 21.4 million shares for the benefit of four consultants, including two attorneys - Gregory Bartko and Gary Henrie.
This was not the first time the Company used Form S-8 to register a shipload of shares. Between March 2002 and July 2003, LIVESTAR registered over 77 million shares for the benefit of various consultants and employees. This represented an overwhelming percentage of the outstanding shares; as of June 30, 2003, approximately 94.8 million shares of LIVESTAR common stock had been issued.
LIVESTAR has not offered any further news on the takeover bid, but on September 17, 2003 the Company announced that it was pursuing yet another acquisition. This time LIVESTAR issued a press release stating that it had “entered into serious acquisition discussions with Manhattan restaurant and lounge of La Jolla, California.” What does the Company mean by “serious?” Do the parties expect to sign an agreement, and if so, when? The press release did not say. It also failed to indicate the terms of the proposed transaction, or say how it planned to finance the deal.
Although the Company claims that the “Manhattan restaurant and lounge” has a “successful 17-year track record of customer satisfaction and profitability,” it did not provide any financial information – audited or otherwise – for the restaurant.
What’s next? We’ll wait for the Sequel.
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AI
