My horrified fascination at the ways in which “the PledgeMusic fiasco is weirder than you think” (Part 1, Part 2) — the investor being investigated by the SEC! the mysterious Panamanian seed investor! the loan that makes no sense and the share allotments that never show up in official filings! — left me wondering what I would have done if I’d read their financial statements back when I participated as a fan in a pledge campaign, back in 2015.
The artist’s label was using PledgeMusic for pre-orders, and it was important to me to show up and be counted as a loyal fan — so I can’t believe I would have revealed anything that would have undermined him. But I definitely would have found some things that left me running in circles going “wtf, wtf, wtf?” like a pissed-off chicken, in the privacy of my own home. Now that the chicken shit is all over the barn yard, let’s check out a few mysteries and terrors of PledgeMusic’s financial statements.
Because PledgeMusic was a private company in the UK, its filing requirements were sparse. Early versions of their annual accounts are one step above a scribble on a napkin. However, we can ask questions and make educated guesses. To get here, I spent a lot of time with the Trichordist and Artists Rights Watch articles that you’ll see linked extensively below, as well as with PledgeMusic’s regulatory filings.
- PledgeMusic never turned a profit
- PM’s inner workings are mysterious and expensive
- What are these accounts receivable and payable?
- Who is making the major investments?
- The “going concern” warnings
PledgeMusic never turned a profit
That’s not a guess. It’s right in the financial statements.
“But wait,” you say, “PM submitted an income statement only in its 2013 filing. You don’t have other years. Even that pitch deck from 2018 covers only three years.”
On the balance sheet — the information about assets and liabilities that PledgeMusic was required to file — there’s a line labeled “P&L Reserve.” P&L Reserve (retained earnings in U.S. accounting) is the amount of accumulated profit or loss. Each year, it changes by (net income) minus (dividends).
Let’s compare net income for the two years we’re sure of with change in P&L reserve.
Change in P&L reserve turns out to be an excellent guide to net income. But we’ve got only five years here! Let’s fix that. P&L Reserve is negative in the first report (2009), which isn’t surprising for a start-up. Then look what happens.
Don’t worry that the pitch uses EBITDA — all that accomplishes is giving us a more optimistic result by removing non-cash expenses. The key thing to notice is that every year is negative, for eight years (2010-2017) plus 2009, plus the “look how great the world will be if you invest!” budget for 2018. That’s a solid decade of losses.
The smaller loss for 2018 is meant to convince potential investors that the company has almost reached its inflection point to be profitable — but since it’s declared bankruptcy, we should probably take that number with a big grain of salt.
PM’s inner workings are mysterious and expensive
Let’s start with what little we know for sure: the 2013 income statement.
Let’s walk through this:
- Turnover is PM’s ~15% share of the pledges that come in. This is confirmed by the later pitch deck, which calls this gross profit and provides numbers consistent with an annual growth rate in the 30-40% range.
- Cost of sales should be direct costs involved in signing up artists and reaching fans. It’s so low (less than 10% of turnover) that it’s likely not our biggest concern.
- Administrative expenses cover salaries, rent, keeping the lights on, general marketing, research and development, depreciation… and this is way bigger than turnover. Way, way bigger.
First thing to ask is if there are possibly a lot of non-cash expenses in administrative expenses. The answer seems to be no. Here’s detail from the notes to the annual accounts.
Auditors’ remuneration is most likely in cash, foreign exchange differences are pretty trivial, and directors’ remuneration… well, that might be partly non-cash. And good grief does it explode in 2013. It’s more than 40% of turnover!
But that still leaves us with 1,345,303 GBP for unnamed administrative costs in 2012 and 2,765,766 GBP in 2013 — in both cases, the company is spending more than double its actual revenue on unspecified stuff.
That’s a lot of stuff.
I’m confident these costs aren’t payments to artists, as those came out before we got to turnover at all.
What are they? And why are they so big?
Since we have an estimate of net profit (loss) going forward, and we know that not much happens below operating income on the income statement, I did a back-of-the-envelope model of the income statement for 2014 to 2018, using some loosey-goosey estimates for the small expenses.
From 2016 on, that Pledges (est) number includes some other forms of revenue, which is also why PM’s share of revenue inches higher than 15%. Notice how Administration cost stays larger than PM’s share of revenue until the hypothetical 2018 numbers.
If you nudge the small expenses hither and thither, it won’t change the big conclusion that vague administrative costs were a huge item and weren’t effectively being wrestled under control. (No significant economies of scale! Not a good sign in a company that’s more than a few years old and growing its revenue massively.) If you nudge director remuneration up, yes, administrative costs get smaller — but you’ve got people getting bigger rewards from an unprofitable company. Not a good look. If you nudge director remuneration down, administrative costs get larger.
What is hiding in administrative costs? Why did they grow faster than revenue, all the way through 2015?
What are these accounts receivable and payable?
PledgeMusic’s balance sheet puzzles the hell out of me.
The version in the reports starts as a scribble on a napkin and gets gradually more complex, so I’m going to link my spreadsheet version. The format is a little “off” from U.S. conventions because it was easiest to add fixed assets at the top. Also, there’s a change of fiscal year in 2011 that adds some gentle glitchiness.
Let’s see what’s here.
Fixed assets don’t worry me especially. The investments are in subsidiaries like PledgeMusic USA and PledgeMusic Publishing that, by 2015, were profitable. Intangibles may include branding, music catalog, proprietary software, and goodwill from acquisitions — it’s a smallish number, anyway. Tangible fixed assets are quite large, and this corresponds to when PledgeMusic was acquiring companies and getting excited about fancy offices, so on the face of it, I’m not surprised.
Accounts receivable puzzle me. With retailers, A/R usually means amounts that customers have charged but not yet paid. Is this an amount for non-pledge perks that hadn’t been billed to fans’ credit cards yet? Or was PledgeMusic wholesaling to some retailer? Why does it grow dramatically in 2014, then drop off a cliff? Did they sell something big in 2015? And why is the amount more than half of actual turnover?
Accounts payable also puzzle me. Some of the bills needing to be paid are rent and utilities and whatever. But what’s sitting here, waiting to be paid at the end of the year, after a few million GBP in annual operating expenses, is larger than the company’s entire annual turnover.
If we look at the Notes on the 2016 annual accounts filing, only a modest amount of A/P can be attributed to normal overhead like utilities. Another chunk belongs to “group undertakings,” which may be subsidiaries. The vast majority is… vague.
This feels like the wrong amount of cash for this company’s routine operations. To get a better feel for it, we can look at measures of how cash flows through the business (and we can do it without a cash flow statement!): days sales outstanding and days payables outstanding.
- DSO is (average A/R) divided by (average revenue per day). It turns out to be anywhere from 150 to 350 days, which is absolutely not a normal credit card or merchant account agreement. This could be waiting to charge cards for bonus items as a campaign drags on, except those should be a relatively small portion of the campaign take.
- DPO is (average A/R) divided by (average COGS per day). That led to gigantic nonsense numbers, so I added about 75% of the mysterious “administration” to COGS. This gives a range of about a year. Again, this isn’t normal. This could be holding payments to artists until completion of a campaign, or it could just be the wrong metric.
So let’s try it a different way. Let’s use total pledges as our “revenue” and the 85% COGS as our COGS.
- DSO drops to a bit under 40 days. That feels like a more likely mix of delayed charges for certain items.
- DPO drops to a little under 180 days. That’s pretty close to a normal campaign length.
Does this prove that the numbers on the balance sheet are fan payments for to-be-charged-when-complete items and artist payouts? No. What’s driving me crazy here is that, while attributing these accounts to pledges kind of works, it also feels wrong — if that money was never on the income statement, why would it be on the balance sheet? What is this vast “other” category comprised of?
Who is making the major investments?
One of the mysteries of PledgeMusic is why David Lowery couldn’t find shareholder Joshua Sason of Magna listed as a shareholder. (I mean yes, it’s obvious Sason’s name isn’t on the shareholder list, but why, tho?)
If we look at the change in share premium on the balance sheet, that should tell us the value that was paid in by people buying shares. In 2014, it’s almost 3.9 million GBP, consistent with including a $3 million investment by someone — so where is it in the share tables?
It’s really hard to tell, because there’s a filing that uses the 2013 share count, and there’s a filing that uses the 2015 share count, but I can’t find one in between. Maybe I’m going blind. The way the paperwork reads, it’s possible — but I’m not so blind that I can’t make my own table of shareholders to see what changed during that period.
What we’re looking for is big shareholders who aren’t existing directors of the company. (It’s not unusual for directors to hold stock, so the one who makes the list of biggest change is grayed out.)
Well, hello, mysterious Special Purpose Vehicle.
- Dolan Services is the mysterious Panamanian company already identified in The Trichordist. They’ve been the largest shareholder for a while.
- Philipp Cottier is a Swiss entrepreneur and investor. It’s probably unusual that he’s not the most interesting person in the room, but PledgeMusic seems like the kind of tech innovator/disruptor he’d invest in or sell a company to, so I’m not worried about him right now.
- Beacon Asset Holdings has been the #2 shareholder for a while and is also established as Panamanian (and I don’t know why its holdings are classified as “secondary” either).
- PledgeMusic SPV I is a new investor, romping into the #3 spot for size of holdings. To thicken the plot, in the future, it and Beacon will make a loan to PM while PM is quivering on the brink of disaster.
To cut to the chase, if someone made a major investment in PM around 2014 and got stock for it, PledgeMusic SPV I was at least part of how they did it.
While my first impression of PledgeMusic SPV I was the same as Lowery’s — that it’s a subsidiary of PledgeMusic, because that’s a very normal way to name subsidiary SPVs — I no longer think that’s the case. I think it’s a separately owned LLC that’s named after the company it was designed for investing in. That’s also a thing that happens.
That PledgeMusic SPV I, like PledgeMusic USA, is registered in Delaware doesn’t strike me as sufficient proof that it’s also a subsidiary of PledgeMusic. Companies register in Delaware because of its corporate tax laws and friendly paperwork requirements. PledgeMusic SPV I lists a super-generic registered agent, based in Delaware, while PledgeMusic USA seems to have misplaced its agent, leaving only the ghost of a Santa Clara, California, zip code. Sason’s Magna Equities I is also registered in Delaware, albeit with a different generic registered agent.
Out of morbid curiosity, I poked at the later filings to see if they looked different to me than they did to Lowery (which would be understandable, as looking at these for too long will make your eyes cross).
In an October 2016 update, Dolan Services is still with us and still growing its position, as is Beacon… and PledgeMusic SPV I has become the clear majority shareholder. I can’t prove PledgeMusic SPV I has anything to do with Joshua Sason — but if it doesn’t, then reports of him/Magna gaining a controlling position in 2016 are incorrect.
DejaSet appears to be a technology platform for musicians. They’re the company behind Set.fm, which enables selling live recordings to fans at the show. It’s a pretty neat idea! PM owned Set.fm for a while, about then, so it was presumably a stock-based acquisition — should be pretty routine.
Being obstinate and already having a splitting headache, I took on the last shareholder list that promised updates, dated October 2017. This is when PM starts getting serious about offering B1 Preferred shares (higher priority in liquidation), so the 2017 holdings for major shareholders are split by A (ordinary) and B (preferred). This is interesting.
Beacon and Dolan obtain a chunk of the B1 Preferred offering. PledgeMusic SPV I, while still the biggest shareholder, reduces its holdings, transferring some shares to Sword Rowe (the bank owned by director David Rowe, which will be the collateral holder on that mysterious eleventh-hour loan).
Transworld may be Trans World Entertainment, which owns mall retail music sellers. In 2017, its etailz division entered into a joint venture with an unnamed party to do a non-specific thing about distributing music. If it’s some other Transworld, that’s a needle in a haystack: I can’t find a relevant press release.
The “going concern” warnings
Every annual accounts filing from FY 2013 on includes the “going concern” warning, along with assurances that PledgeMusic can stagger onward for at least a year and a day. Here’s the one from 2016.
In 2013, 2015, and 2016, PledgeMusic had negative equity (so, its liabilities were greater than its assets), which is a form of trading while insolvent.
Trading while insolvent is not a thing you’re supposed to do in the UK. The statement of “oh, we shall have money anon” is apparently sufficient to keep the wolf from the door for a bit, but it’s also possible to investigate whether directors were making appropriate decisions. We don’t know if PledgeMusic continued to trade while insolvent in 2017 and 2018, though since it ended up bankrupt, I know which way I’d bet.
While nothing in this essay constitutes proof that PledgeMusic did anything dubious (it’s possible to be a badly run company in a completely legal, above-board manner), a look into financial statements raises questions about why this company was allowed to stagger along as long as it did — and doesn’t answer questions about where all the money went.
Fantastic sleuthing and analysis! Thank you.
This research is way above the call of duty. Thank you!