Equity Report by Quintessential Capital Management
Saturday, April 18, 2020
QCM is SHORT Akazoo (Nasdaq: SONG)
This report reflects the opinions and projections of Quintessential Capital Management ("QCM") as of the date of publication, which is subject to change without notice at any time following the date of issue. QCM does not represent that any opinion or projection will be realized. While the information presented in this report is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented in this report or its attachments. All information provided in this report is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security.
QCM is SHORT the stock of Akazoo S.A., but QCM's economic interest is subject to change without notice.
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The information presented in this report is supplemented by footnotes, which identify QCM's sources, assumptions, estimates, and calculations. The information contained herein should be reviewed in conjunction with the footnotes.
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Quintessential Capital Management (QCM) has completed its in-depth investigation into Akazoo S.A., a Luxembourg-domiciled company recently listed on Nasdaq through a reverse merger. After a meticulous collection and analysis of information, we came to the opinion that Akazoo is likely a "castle of cards", a scheme conceived by management to enrich themselves at the expense of shareholders. Akazoo claims to be a successful multinational music streaming company, whose size in terms of revenue, profits and users would rival industry giants such as Pandora or Tidal. In this report, we will share with you overwhelming evidence suggesting that Akazoo may be just a tiny, loss-making company based in Greece with negligible user base and sales. We fear that Akazoo’s accounts, which have been audited by a tier-2 firm, may in fact hide serious irregularities or worse. Akazoo counts no more than 26 employees, a large portion of which have recently worked at other proven frauds (e.g. Globo Plc) or suspected frauds (Velti). We also have serious suspicions about possible breaches in copyrights, possible money laundering and other instances of corporate wrongdoing. Given the gravity of the allegations against Akazoo, we believe that the company is destined for a catastrophic collapse and its equity is correspondingly worthless.
QCM is short the shares of Akazoo S.A.
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Quintessential and its goals
We are an American hedge fund based in New York. Our main activity consists in identifying, investigating and exposing catastrophic corporate situations in publicly traded companies, such as fraud, criminal conduct or failed business models.
We use state-of-the-art investigative techniques and only act after acquiring a critical amount of overwhelming evidenceto substantiate our claims. Since 2015, we have completed eight activist campaigns exposing various dishonest companies with a 100% success rate. In July 2019, our in-depth report named “A Parmalat in Bologna” has led to the collapse of the Italian €1.1b-unicorn Bio-on S.p.A. and the arrest of the executives involved, charged with fraud and market manipulation.
In May 2018 our campaign against the Greek giant "Folli Follie" led to the collapse and de-listing of the company in just three weeks, as well as the uncovering of a multibillion-dollar fraud (the perpetrators are currently facing criminal prosecution). In December 2018, our action against Aphria, a Canadian cannabis company with a market capitalization of more than USD 4 billion, led to the immediate collapse of the stock and to the dismissal of the entire board of directors. In 2015 our report entitled "A Greek Parmalat" on Globo Plc led to the immediate collapse of the stock, bankruptcy of the company and the resignation of the executives involved, who promptly admitted their guilt.
We are a commercial enterprise and we work for profit. However, we firmly believe in the moral character of our workwhich has the effect of removing dishonest companies from the markets. These "bad apples" take financial and human resources away from legitimate companies and it is important to inform the public as quickly as possible to minimize the number of investors and creditors involved.
Description and historical context
Akazoo is a music streaming company ostensibly based in London (UK) and Luxembourg. The company listed itself on Nasdaq via a reverse merger in September 2019, being formerly part of a Greek company named “InternetQ”. InternetQ used to be listed on the London AIM market until early 2016, when the company was taken private amidst allegations of fraud by a British publication, Shareprophets. Following a few years of relative quiet, InternetQ spun off Akazoo and listed it on the US market through a reverse merger with a cash shell.
Akazoo owns and operates music streaming services. Its flagship service Akazoo Music is a music streaming app like Spotify or Deezer and allows users to listen to unlimited music for a monthly subscription via mobile or internet. The company claims 44m registered users, of which 5.5m paying subscribers and revenue of $140m growing at a compound rate of around 24% a year. According to the company’s SEC filings, 80% of revenue originates directly from consumers, with the remainder derived from partnerships with telecom operators, OEM manufacturers and others. The company claims to operate in 25 countries around the world, especially in emerging markets, where it supposedly caters to the “local taste in music”.
Financial analysis: like for many of our past targets, cash and taxes are missing at Akazoo
In virtually every fraud exposed by QCM in the past (e.g. Folli Follie, Bio-on, Globo) we observed two constant elements: lack of cash generation and little or no taxes. Typically, fraudulent companies inflate their sales and profits by issuing fake invoices to shell companies which are secretly controlled by management. This activity creates a fictitious accounting profit, but since fake sales do not generate any cash, they must be offset by equally fictitious expenses or investments (e.g. capex, intangible assets or M&A). As a result, companies that distort figures in this way, are often left with a large account receivables balance and a negative free cash flow generation which clashes with the claimed accounting profit. In addition to this, companies suspected of fraud typically pay little or no taxes.
This situation echoes what we see at Akazoo, with large discrepancies between earnings and cash flow, sizeable investments in IP and a level of account receivables grossly out of line with its peer group. We also observe with great concern, that Akazoo has paid zero taxes for at least the past four years, despite claiming $21.7m of accounting “profit”.
A questionable accounting profit masks a cash burn of $4m/yr:
Akazoo claims to be spending around $11m/yr in intangible assets:
Account receivables are ballooning:
Akazoo paid zero taxes in four years:
Akazoo Day Sales Outstanding are an outlier compared to its peers:
Numerical analysis suggests that Akazoo may be much smaller than it claims to be
As reported earlier, Akazoo claims sales of $140m, 44m registered users and $5.5m paying subscribers. Because Akazoo’s business model is similar to that of many competing apps in the market (e.g. Pandora, Spotify, Tidal, TuneIn, etc.), one would expect it to score comparably in basic industry ratios. For example, a selection of Akazoo’s competitors shows that there is on average 1 app review for every 31 registered users on Google Play (the Android app store). Other ratios we checked include revenue/employee, subscribers/employee and others. While its competitors exhibit ratios which are similar to one another, Akazoo’s figures tend to be an extreme outlier. For example, Akazoo claims to have over 500 users per review while its competitors on average have about 31. So, either Akazoo’s users are far more reluctant to write reviews or the Company’s user base is a lot smaller than what management has been telling investors. Similar anomalies show up also in the number of likes/followers on social media and in revenue/employee ratio.
In our opinion, these discrepancies strongly suggest that Akazoo may be a far smaller company than it claims to be. By extrapolating the average figures and applying them to Akazoo, we estimate that its users base may be inflated by at least a factor of 10.