Oct 10, 2023 6 min read

Utopia "needs incoming funds" to clear debts

Utopia "needs incoming funds" to clear debts

Senior sources close to the sale by Utopia Music AG of Sentric Music to Believe SA have confirmed that Utopia is waiting for “up to” €7 million in funds to be released from escrow. These funds will be released “on completion of paperwork”, some of which is “reliant on third parties”.

Believe has transferred all funds relating to the acquisition - as was reflected in regulatory filings for the Euronext Paris-listed company - but, as is common practice with corporate finance M&A transactions, a portion of the funds - understood to be “up to 15%” - relating to the purchase were held in escrow.

CMU is told that “everything is on course” to release the money but that there have been some delays to this process - understood to relate to delays by official bodies or third parties providing necessary documentation. The funds were expected to be released in June. As a result, there has been a significant knock-on effect on the finances of Utopia Music AG.

This came to light after Swedish technology news site Breakit reported that a status check with the Kronofogden - Sweden’s official register of debt - shows a new round of mounting debts at Utopia’s Swedish subsidiary, Utopia R&D Tech AB. These debts include money owed to tax authorities in Sweden and abroad, as well as unpaid bills to the company’s landlord and other service providers. These debts, say Breakit, are “over nine million kroner” - so likely somewhere around €800,000.

In the article, a Utopia spokesperson provides a statement which includes the line: “We are waiting for a final payment from a large deal that was closed last spring - the delay of which has created an unfortunate chain reaction with us - which will settle our temporary debts”.

To those familiar with recent events at Utopia it would be immediately obvious that the “large deal that was closed last spring” is likely to be Believe’s acquisition of Sentric.

Utopia’s debts and sale of Sentric

The news site previously reported on 29 Mar 2023 that Utopia Sweden had significant debts registered with the Kronofogden along with nineteen “payment orders” (part of the Swedish debt enforcement process) as well as a bankruptcy petition from Swedish trade union Akavia, representing the interests of employees whose pension premiums had not been paid.

Days later Utopia sold Sentric Music to Believe SA for €47 million in an all-cash transaction. Sometime after this, it appears that the debts at the Swedish company were settled, putting it on a more solid footing.

However, in July CMU discovered that Utopia had called in administrators at its UK and Finnish R&D subsidiaries, leaving many staff unpaid and in “limbo”.

CMU has been able to establish from multiple senior sources close to both sides of the deal that a portion of the funds are held in escrow, pending completion of paperwork by Utopia and third parties.

We are also told that the “significant majority” of funds were paid in tranches in cash, with a “small percentage” of the transaction paid into escrow. This is standard practice in corporate finance and M&A transactions and ensures that both sides of the transaction are motivated to complete all paperwork and associated handover.

While we have not been able to establish an exact figure, we understand that it is probably “a few million” and “not likely to be more” than 15% of the total transaction value of €47 million, so around €7 million.

Where did money from the sale of Sentric go?

Although this provides clarity on one front - that Believe has paid in full for Sentric - it also raises additional questions. By Utopia’s own admission, it is reliant on this money being released from escrow to stabilise its finances, and the fact that the Swedish debt is comparatively small - less than €1 million - paints a stark picture of Utopia’s current finances.

With up to €7 million of the transaction on hold, this means that Utopia has received around €40 million. However, we understand that this sum was paid in tranches - again, normal practice - which fits with statements from employees at Utopia’s defunct UK subsidiary, reported by Eamonn Forde in Music Ally, that “in March, a flurry of money came as a consequence of selling Sentric. Then they made up all of the pension arrears and had just about paid the arrears within the three-month window. But then they fell behind again”.

CMU’s sources confirm that a significant portion of the tranche payments were used to settle legacy debts, leaving little for current operational expenditure - which has led to the mounting debts in Sweden.

It may also raise questions about the processes followed at the UK R&D subsidiary, which provided administrators with its own “statement of affairs” in official paperwork prepared on 15 Aug 2023, showing that the company owed an estimated £6.39 million in debt at the point it had to shut, including a loan of £1.895 million made by Utopia Music AG to its UK subsidiary.

A further £2.5m - says Utopia UK R&D Limited director Ivan Pareja Llarden in the official papers - represents money owed to HMRC which is “PAYE of £2.5 million”.

Although the UK entity, as a limited company and subsidiary - is technically legally separate from the Swiss parent, the fact that some “legacy debts” were settled across the group but not others may result in significant scrutiny of the company’s operations as the administrators move forward.

Utopia’s attempts to reduce costs

Utopia has had a rocky ride over the past year. A company spokesperson says that - as a company in “hypergrowth” and therefore reliant on being able to raise investor cash to support its ambitious plans - it was unduly affected by the global contraction in tech investment.

In late 2021 and early 2022, the company splurged on a series of acquisitions - including Sentric Music - and rapidly scaled its headcount. By all accounts, the company was burning through cash at a rate that sources close to the business now say was “reckless”.

A series of divestments followed - Rostr, Sentric, Absolute all leaving Utopia - and the company saw a string of high profile executive departures, including CEO Markku Mäkeläinen. Alongside this, a series of layoffs saw a huge reduction in headcount from a reported peak of 1200.

CMU believed that there may be as few as 150 people working for Utopia, but has since been able to confirm that current headcount is 181 - a fact reflected by information on LinkedIn which shows 201 people working for the company, some of whom we have been able to confirm have left but not yet updated their LinkedIn profiles.

This “RIF” - or “reduction in force” - process was, says Utopia, part of an overall cost reduction exercise to get the company on a sounder footing. We’ve since been able to establish that operating costs for Utopia have dropped by nearly two thirds since December 2022.

Those 181 people relate to Utopia’s “core” operations and do not include headcount for its distribution businesses.

CMU recently reported that Utopia distribution subsidiary UDS - which acquired the assets of Cinram Novum out of administration, rescuing a significant number of jobs in the process - had faced a cash squeeze, which led to Sony Music and Universal Music placing wide-ranging charges over key assets of the company.

We’ve since been able to establish, based on figures published in the administrator’s report for Cinram Novum and third party industry data, that core staffing and premises costs at UDS are likely to be a minimum of £790,000 a month.

Onward operations and new funding round

The 181 people employed by Utopia’s core business are not likely to come cheap - particularly given that many of the people still with the company came from senior roles in other companies.

As a technology company reliant on hugely in-demand skills - as evidenced by the “Music Intelligence Data Engineer” and “Audio Fingerprinting Data Scientist” roles they are currently hiring - wages are likely to be high.

Datacamp - a leading provider of education and training in data science skills - says that the average salary for a Berlin-based data scientist is €97,496 a year, with Netflix and Meta paying significantly more.

With significant employer costs and benefits on top of salaries, it’s entirely possible that with 181 people on the payroll, Utopia’s staffing costs alone could be well over €2 million a month. Add in other operating costs and it would not be surprising if the company needs in excess of €3 million each month to keep things ticking over.

If Utopia is burning through €3 million or more each month, even after wide-ranging cost-cutting measures, this latest news is unlikely to put paid to questions about the overall financial position of the company.

CMU has been provided documents showing that Utopia Music AG is currently in the midst of a “current funding round”, and the company says that this - plus those cost-cutting measures - will put things on better footing moving forward.

Whether or not Utopia will be able to convince investors to part with a further €50 million to €60 million to give them the amount of cash required to offset ongoing operating costs for another twelve to eighteen months of runway is another question entirely.

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