What's up guys and welcome back to wall street millennial on this channel, we cover everything related to socks and investing over the past year, we've made a lot of videos about corporate frauds, many of which went public via spac. Today, we're looking at one of the most blatant and unsophisticated spac scams that nevertheless was able to raise 152 million dollars from investors. We're talking about acazu, the nearly non-existent music streaming company that went public via spec in 2019. On september 11 2019 a spat called digital media acquisition group merged with akazu, taking it public on the nasdaq.

This was before the spat craze of 2020 started, so it didn't get that much media attention. Akazu was a european based company which operated a music streaming service. You can think of them similar to spotify or pandora, while you've probably never heard of them. They claim to have 4.4 million paying subscribers and over 40 million total users in 2018, and this number was rapidly growing.

They operate mostly in south america and southeast asia, so it should be expected that american investors were unfamiliar with them, but in the countries they did operate in they were extremely popular and profitable. They were able to achieve the success by using a hyper local content strategy where they acquire music content locally from each jurisdiction that they operate in, while the bigger streamers, like spotify, mainly offer overrated. Mainstream music akazu could give people niche music that fits with their cultural identity and other things of that nature. They also use cutting edge artificial intelligence and machine learning technology to optimize, pressing bundles and minimize customer churn.

How could you possibly go wrong with such a high-tech and innovative company, and their business strategy was already starting to bear fruit in their financial performance? By 2018, they had 4.4 million paying subscribers, which generated 104 million euros of revenue and 10 million euros of ebitda and based on the prior success of their strategy and the growth of the streaming market. They expected their business to more than double to 10.4 million, paying subscribers and 285 million euros of revenue by 2021 and to make matters even better. They were going public at a cheap valuation of 469 million dollars. That's just two times their 2020 revenue guidance of 231 million dollars this compared favorably to other streaming.

Companies such as 10 cent, music and spotify, which had much higher valuations based on all this information, the investment seemed to be a slam. Dunk investors in the stack approved the deal overwhelmingly partying with 152 million dollars of their hard-earned money. If you do any research on corporate frauds you'll be shocked at how obvious many of them are from the very beginning. One of the most basic responsibilities of a svac sponsor is to perform due diligence on the company.

They are taking public so at the very least, make sure they are not fraudulent. In the case of akazu, the spac sponsor was an experienced industry professional with a master's degree from stanford and an mba from harvard business school investors put their confidence in him to find a high quality acquisition target. From the very beginning, there were obvious red flags as to whether akazu even existed as a real business. Firstly, after some quick searching on the internet, you can find akazu's youtube channel which had a grand total of 32 subscribers and has published two videos over the past.

Eight years for comparison, title which has less paying subscribers than akazu claimed to have has 317 000 subscribers or roughly 10 000 times greater than akazu. Their linkedin profile is equally unimpressive with 5 employees and 658 followers again. This is orders of magnitude smaller than title, which has more than 300 employees and 46 thousand followers. One of these employees was tatiana ostapenko, who was the finance manager for their ukraine office in her linkedin bio? She said she is open for work, which indicates that she is unemployed.

They also ran an instagram page, which has 257 followers much less than you would expect from a large and successful consumer brand. Their latest instagram post was from the summer of 2017, meaning that they hadn't posted anything in the two years leading up to their public debut. Their lackluster social media presence stands in sharp contrast to other music streaming companies who post almost daily to maintain their engagement with their consumers. And finally, if you compare worldwide google search trends of akazu and title you'll find that searches for acazu are so infrequent that they amount to little more than a rounding error when compared to title.

Remember: akazu claims have more than double the number of paying subscribers. As title any amateur investors would have been able to identify these irregularities within a few minutes of google searching. That's why it's shocking that the spac sponsors and investors never raised any questions about them when more than 100 million dollars were on the line, because akazu claimed to operate exclusively outside the us. Conducting primary due diligence would have been difficult.

So, instead of hiring consultants, who could do the due diligence or finding a different acquisition target that was based in the us, the sponsors decide to go through with the deal anyway. Trusting acazu's self-reported numbers at face value, in fact, there's a good chance that akazu decided to go public in the u.s. For this very reason, while the spax sponsors and investors were either unwilling or unable to perform real due diligence, there is a short selling hedge fund called quintessential capital management that was in april 2020. They published a short report where they claimed that akazu was a near total fraud and initiated a price target of zero dollars, even by just analyzing.

Their financial reports quintessential found some irregularities, while akazu claimed to be highly profitable. Their free cash flow was negative, which means they were burning cash, while it's possible to create fake invoices to artificially prop up revenue and net profit. It's much harder to create fake cash, as the auditors will see that the corporate bank account has a lot less money in it than is reported on the balance sheet. For some companies it can be completely legitimate for free cash flow to be less than net income.

If they're investing in capital expenditures such as new factories, but in the case of akazu, they were a music streaming business which shouldn't be that capital intensive. This made their cash burn highly suspicious, to say the least. It's one thing to find some irregularities in the publicly reported financial statements, but to definitively prove that the company is fraudulent. You need some smoking gun primary evidence and, as it turned out quintessential had exactly that.

They hired the app analytics firm mobile action to estimate how often aka zoo's app is downloaded globally. They estimated it was being downloaded at a rate of 40 per month. This is obviously inconsistent with the company's claims of having tens of millions of users and growing at more than 20 percent per year. They also looked at acaze's reviews on the google play store.

The most recent three reviews were from more than a year ago and were all posted by akazu employees. They used vpns to try opening up akkazu accounts in the various countries where they claim to operate, and every country besides greece, cyprus, poland, malaysia and indonesia. The app told them the service was not supported in that country. This is quite curious, as they claimed to have 116 subscriber growth in russia and 254 growth in brazil between 2015 and 2018..

It's hard to imagine how they have subscriber growth when their app isn't even supported in these countries. They further point out that aka zoo, ceo, apostolos zervos, used to be a senior manager at the digital ad company velti in 2013. Velti was involved in an accounting fraud case where it inflated its accounts, receivable by more than 100 million dollars. This ultimately led to its disgrace and delisting from the nasdaq, while aposilos wasn't necessarily involved in the velte fraud.

The fact that the ceo used to work for a fraudulent company provides further circumstantial evidence that akazu itself was a fraud almost immediately after the short report was released. The stock price fell like a rock close to zero dollars. It was de-listed from the nasdaq, and investors lost everything. It appears that the company is no longer operating as its app is no longer available to download, while akazu isn't the biggest fraud we've covered on this channel.

It's certainly one of the most shocking from the very beginning. It was pretty obvious that the company barely even existed, yet they were somehow able to fool a spac sponsor to give them 150 million dollars. There's a perception that institutional investors on wall street are highly sophisticated, but the acazu example, along with many others, show that they are sometimes liable to hand over hundreds of millions of dollars of their investors money while performing negligible due diligence. Alright guys that wraps it up for this video, what do you think about the akazu fraud? Would you have been able to identify the red flags if you were prospective investor? Let us know in the comments section below, if you enjoyed this content, make sure to hit the like button and subscribe.

So you don't miss future uploads. If you want to see more videos like this one check out our playlist on financial fraud, scandals and corporate failures, as always, thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.