The most popular artists on the app were bossa nova legends Antonio Carlos Jobim, Vinicius de Moraes, and Elis Regina.
The roster made for a sensual playlist — but it was another red flag that things were askew at Akazoo, a Nasdaq-listed digital music service, according to managing partner Gabriel Grego of Quintessential Capital Management.
Akazoo claims to focus on streaming local talent in emerging markets like Brazil, Russia, Poland, and Indonesia. But Grego found the list of most popular streaming on the company’s Brazilian app, part of presentation filed with the Securities and Exchange Commission filing, suspicious.
After all, these bossa nova icons, wildly popular decades ago, were long dead.
“I happen to be familiar with Brazilian music,” says Grego, who speaks Portuguese. The notion that Antonio Carlos Jobin would be the most frequently streamed artist in Brazil today is akin to, say, having Frank Sinatra grabbing that top position on Spotify.
“I saw it and thought ‘This is ridiculous’,” says Grego. “I think it was a poorly executed deception.”
On Monday, Grego’s fund published a scathing research report on Akazoo, including his observations of the Brazilian roster, at the same time disclosing Quintessential’s short position in the company.
Among other things, the report said that Akazoo’s service was not available in most of the 25 countries it highlighted in filings and investor presentations. The number of users it claimed was likely vastly overstated, as were revenue and profit, Quintessential alleged.
Accounting metrics suggested similar deception, according to the report. The company’s staff included former employees of dubious, now delisted companies, and Akazoo’s corporate headquarters in London were probably nonexistent, the report argued.
Company shares — already pounded by the Covad-19 fueled bear market — fell 12.3 percent on Monday and a further 10.3 percent on Tuesday, to $1.99.
Quintessential’s profits on its bearish bets are likely larger than those numbers imply, since he opened his short position some two months ago, in February. Akazoo shares closed at $5.09 on January 31.
A spokesperson for Akazoo did not respond to an email seeking comment.
Today, the company announced that it had formed a special committee of independent directors to investigate Quintessential’s allegations, which has retained the law firm of Latham & Watkins LLP to assist it.
“Akazoo has no reason to believe the accuracy of this report,” the company said in a statement.
The Akazoo campaign, given the target company’s modest profile and diminutive market capitalization, is no juggernaut by any stretch, even for Quintessential, which has paltry assets under management of less than $100 million, according to investors. But it does underscore some truisms in the world of financial chicanery.
To paraphrase — fraud, like history, may not repeat itself. But it rhymes.
Akazoo, formerly a unit of a controversial company named InternetQ Group, was spun off last September in a reverse merger — a move that can be a red flag, because it avoids the scrutiny of a traditional initial public offering. It claims 44 million users, including 5.5 million paying subscribers, and revenue of $140 million, growing at a double-digit rate.
The company’s users, however, were generating a paltry number of app reviews, Grego found. Quintessential’s figures showed Akazoo had 500 users per review — versus rivals like Spotify, Pandora, and Sound Cloud, where the average was roughly 50 or fewer users per review. Were Akazoo’s users just reticent to give their opinions, or were they far fewer in number than the company claimed?
Surprisingly, reviews of the Akazoo app were often written by company employees themselves, using their own names, including a senior solutions architect and head of program delivery, according to the presentation.
Akazoo headcount had declined to 26 in 2018 from 45 in 2016. Yet revenues per employee were astronomically higher than those of rivals, Quintessential alleged.
On a visit to what he thought was the company’s headquarters in London, Grego said he learned from the receptionist at the co-working space, similar to a WeWork location, that Akazoo management had begun packing up long before and that no one from the company remained. (Grego believes the Akazoo headquarters were relocated to Athens, at InternetQ’s offices).
While the company was posting solid net income figures for three straight years, Quintessential calculated a $4 million annual cash burn rate. Akazoo was spending $11 million for intangible assets, and accounts receivable were soaring — often a sign that a company’s revenue is illusory.
By Quintessential’s calculations the company had paid virtually no corporate taxes in four years.
Grego used global contacts in a series of attempts to open streaming Akazoo accounts in the various counties it purported to operate in. They were unable to do so in either Russia or Brazil, two of its purportedly largest markets, and received a message reading: “For now, our service is not available in your country. Please check back, you never know.”
In fact, Quintessential and its contacts were only able to open accounts in five countries: Greece, Cyprus, Poland, Malaysia, and Indonesia. Akazoo claimed to operate in 25.
Grego wrapped up his report with a zinger. He cited the music profile of an Akazoo director who helped found the company, Panagiotis Dimitropoulos, apparently a fan of alternative rock band Jane’s Addiction. His top two songs were “End to the Lies” and “Been Caught Stealing”.
“Panagiotis,” the Quintessential report declares. “It’s time to come clean.”
