TTSA - Following the money

Since the video footage TTSA has released doesn't seem to display any genuinely anomalous behavior, its time to take a look at some of their content that actually does: their investment counters.

Some background

To The Stars Academy of Arts and Science Inc., commonly known as TTSA, began to collect investments through equity crowdfunding on their website on October 10, 2017. They are selling their Class A Common Stock for $5 apiece with a minimum investment of $200. Their Offering Circular states the tangible net book value per share is $0.003, so the selling price is around 1500 times the book value, which, as an investment, makes it pretty insane.

Their site has also showed counters for the number of investors and total dollar amount they have gathered. While the investment process is handled by FundAmerica and their technology, it seems almost certain those counters are not updated automatically from those systems, but manually by someone close to the TTSA.

Investment chart

Here's a chart that shows how those counter values have progressed over time:

That data was collected from the archived versions at the Internet Archive plus snapshots saved by myself. The orange line and left y axis figures show the dollar amounts and the blue line and right y axis show the number of investors. Dollar amounts end on April 5, as they were removed from the TTSA page at that time. The number of investors also hasn't changed since that time until the current moment (May 1).

Obviously the chart displays some rather anomalous behavior, instead of the sort of smooth progress one might expect. Disregarding those anomalies, for most of the time the average investment sum seems to have been around $500.

Anomalous events

Here's a closer look at those anomalous moments:

Date	Investors	Money	Remarks
2017-10-18	801	376028
2017-10-23	877	488623	+$75,000 relative to average investments
2017-10-26	918	522389	This was the day Tom Delonge was on Joe Rogan Experience
2017-10-27	975	1773259	+$1,200,000 relative to average investments
2017-10-28	1149	1638777	-$200,000 relative to average investments
2017-12-22	2566	2260697
2017-12-22	2583	1663595	Odd huge reduction to dollar sum
2017-12-23	2589	906416	Another odd huge reduction to dollar sum
2017-12-23	2596	2266069	Sum returns close to what it was
2017-12-25	2656	2285459
2017-12-25	0	0	Counters showing zero for several days
2017-12-28	0	0
2017-12-29	2420	2298245	236 investors disappear but dollar amount stays almost same
2018-01-04	2532	2333477
2018-01-04	2873	57203	Odd temporary changes to both figures
2018-01-05	2548	2337382
2018-01-20	2613	2393654	TTSA announces ”We are closing escrow soon”
2018-02-15	2816	2520443
2018-02-15	2811	2420643	-$100,000 relative to average investments
2018-03-13	2969	2543189
2018-03-16	2980	2480114	-$70,000 relative to average investments
2018-03-20	2955	2536343	Undo previous
2018-03-27	2940	2537438
2018-04-03	2969	2458088	-$100,000 relative to average investments
2018-04-05	2969	-	Dollar amount is removed from page
2018-04-10	2969	-	TTSA announces ”First round of escrow has officially closed”

Basically there seems to be at least an extra million that appeared around the time of the Joe Rogan interview and later on several occasions some of that money has been removed from the counter. But why?

One possibility would be that someone made multiple large (~$100,000) investments at that time, since there haven't been any later investments of anywhere close to those sums later, but cancelled those several months later. Another possibility is that the sum was inflated to build momentum and lure in more investments, which seems like a more logical fit for the data, considering how those have for example curiously happened at similar points when the counter went a bit over $2,5 million. It would also explain why the counter was taken off from the page, as there wouldn't be enough time to make all that excess disappear at that rate before the current investment period ends on September 29, 2018. If that is the case, it might constitute misleading investors in a way that might be of interest to the SEC as well.

Escrow

So how much of that money is actually real with completed investment processes? Here's an interesting clue:

After you complete the ‘Invest Now’ process and send funds, your funds will be held in escrow (meaning we can't access it) until we conduct a “closing”. A Closing will occur: 1) when we meet the minimum requirement of $1m in cleared funds and 2) once a month thereafter.  Once your investment funds are part of a Closing, you will receive a letter from our transfer agent, ComputerShare, including an account statement documenting your securities. The letter will provide instructions on how to set up your profile on ComputerShare. All of your contracts will be hosted on ComputerShare at your portfolio screen.
-- TTSA FAQ, archived version from April 11, 2018

That part in bold was removed after they announced their "first round of escrow has officially closed". So that should have happened after they had collected their first million in cleared funds, yet their counter has been over two million since November, and it was already almost 2.4 million in January when they announced they are "closing escrow soon". That seems to indicate only abount a million of that is real cleared money.

How that money will be used?

So what sort of results should the investors expect to see for all that money? Here's what the TTSA Offering Circular has to say:

If the offering size were to be less than $5 million and above the $1 million minimum, TTS AAS would adjust its use of proceeds by reducing planned growth of employee headcount, reducing operational costs, and slowing down projects or not making investment in projects. The company is also required under the loan to Our Two Dogs, Inc. to repay 10% of the net proceeds from funds raised in this offering, up to $400,000 in this scenario.
-- TTSA Offering Circular

Not much, it seems. But where would that first million go then? Let's start with the details of that above loan:

In April 2017 TTS and Our Two Dogs, Inc. (“OTD”), an entity owned by Tom DeLonge, entered into a $500,000 note agreement. The note reflects a $300,000 loan dating from April 1, 2016 and $200,000 to be provided in 2017. The note was amended on August 10, 2017 to provide for $300,000 to be provided in 2017, making the note agreement a total of $600,000. The note bears interest at 6% per annum and is due on December 31, 2018. In addition, the holder can require the note to be repaid prior to maturity in amount equal to 10% of the net proceeds from any third party debt or equity financing. As of December 31, 2016, the balance of the note was $300,000 with accrued interest of $13,512 due under the note. OTD is owned by The DeLonge Family Trust (99%) and Chloe the Dog, LP (1%) (another entity beneficially owned by Mr. DeLonge).
-- TTSA Offering Circular

Notice how that dates back to the time before the TTSA even existed. Apparently DeLonge gave loans between his entertainment businesses to cover the losses one (that is now a TTSA subsidiary) is making. So he gave a loan to himself, and expects investors to pay it back, with interest, which alone should amount to ~$80,000 at the end of this year, which is when those loans are fittingly due, right after the current investment period ends.

Some claim there's no such thing as a free lunch, but that just seems to be even better. It's like moving money from your left pocket to your right, using all that money, and then others fill your right pocket with even more money than you spent, after which you move it back to your left pocket.

It's noteworthy that the entertainment business was supposed to be the moneymaking part of the TTSA that funds research and spaceships and whatnot, or at least that's how many seem to believe, but in reality that business seems to have operated on a loss for quite some time already:

As a result of the foregoing factors, the company’s net loss from operations was $422,670 in 2016, a 31% increase from losses of $322,912 in 2015.
-- TTSA Offering Circular

And the situation doesn't seem to have improved in 2017 either:

Cash used in operating activities was $151,651 for the six months ended June 30, 2017, as compared to cash provided by operating activities of $18,014 for the six months ended June 30, 2016. The change was primarily due to higher net loss, partially offset by higher non-cash expenses.
-- TTSA semiannual report

It's hard to benefit from that sort of unprofitable business, unless you can make deals like this between your own companies, and have one of them funded by someone else:

We are required to pay a minimum royalty guarantee of $100,000 each calendar year. Under a Licensing Agreement, we are required to pay royalty payments to Tom DeLonge, Mr. Handsome, LLC, and Good In Bed Music, ASCAP (see “Intellectual Property”, “Liquidity and Capital Resources”, and “Interest of Management and Others in Certain Transactions”). If total royalty payments in any given calendar year are less than $100,000, we have agreed to pay any shortfall such that the annual minimum royalty paid under the Licensing Agreement will be $100,000. This means that we will have to pay this amount even when we have limited revenues, and this could materially reduce our earnings in any year. Failure to pay the minimum royalty guarantee could lead to termination of the Licensing Agreement, and termination of the Licensing Agreement could result in legal and financial harm to the company.
-- TTSA Offering Circular

That funding part though is one lunch that is not free:

We expect that the expenses of the offering will be approximately $250,000 if the minimum number of shares are sold in this offering and approximately $6,500,000 if the maximum number of shares are sold in this offering.
-- TTSA Offering Circular

So by collecting money by selling stock that has a book value close to that of toilet paper, they are actually causing expenses as high as 25% of all that is collected, by their own estimates.

Let's summarize what those alone mean by the end of this year:

Past loans + interests (2016-2018): ~$680,000
Minimum royalties (2017-2018): $200,000
Expected offering expenses: $250,000

That's $1,130,000 already, which might be close to what they have actually gathered so far. No wonder their minimum target was a million.

Let's highlight what that actually means in terms of number of investors needed to cover each of those expenses from that initial $1,130,000:

The chart on the left shows the number of average $500 investors, and the right one shows how many minimum investment investors would be needed for those same sums. As far as I can see, all that money and all those contributions from all those investors goes to the benefit of DeLonge and his other businesses, apart from the offering expenses that go just for the collection that money. And after all that, the total combined ownership for all those investors of the company would be a fraction of a percentage, between 0.2% and 0.3%. According to the Offering Circular, those shares they bought for $5 would be worth $0.02, in terms of tangible net book value, and it looks like that doesn't even take all their expenses into account.

Future

But maybe the future is brighter?

We have an accumulated deficit at June 30, 2017 of $26,248,900. We expect to incur substantial expenses and generate continued operating losses until we generate revenues sufficient to meet our obligations. At June 30, 2017, the Company had cash of $70,784. The Company is currently raising additional funds through a Regulation A offering to finance its operations.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses from operations and has an accumulated deficit at June 30, 2017 of $26,248,900. These factors raise doubt about the Company’s ability to continue as a going concern.
-- TTSA semiannual report

Oh dear, doesn't look too good. Hopefully they have some gullible investors ready to rescue them in the future as well. The majority of those huge deficits are most likely caused by those shares and options they have given to themselves and their advisors, as if those were free, which they pretty much have been for them, unlike to the investors. They are pretty much just mocking their investors with acts like that. I'm not familiar with those bookkeeping practices and if those are typically recorded like that.

If they have continued to make similar kinds of losses in 2017 and 2018, they would be on target to need closer to two million just to get to the zero level. And based on the above, it looks like they don't actually have that yet.

If they had actually wanted to fund research with entertainment, as many still seem to believe, they could have simply made a fresh start as a new non-profit without all these shady connections to existing businesses. Then they would have been free to donate some money to that non-profit from those other businesses, if they actually made money. Others would have similarly been able to make such donations if they wanted to support the cause, with possibilities to tax deductions and less overhead. But it seems pretty apparent why it wasn't done like that. A new business would had to start from zero, now they can start from -$26,248,900, and counting, due to being stuck with old businesses causing losses.

Word from the CEO

In any case, reaching the million dollar mark was very significant for the TTSA, since it meant they reached at least their minimum target, and the project can continue. Surely the TTSA and their leadership is now committed and working hard to provide their hopeful investors what they have promised, right? Here's what their CEO had to say soon after that funding was secured:

This dude is coming back. Time to make music a priority again. @angelsandairwaves @tothestarsofficial
-- Tom DeLonge on Facebook April 20, 2018

It's incredible how all this happens so openly.

Update 2018-05-12

TTSA annual financial report for fiscal year 2017 has been published and it confirms that the real amount they have gathered is only just above a million:

During 2017, the company commenced the Regulation A Offering to raise additional capital to fund ongoing operations. As of April 2018, the company has raised approximately $1,090,000 under this Regulation A Offering, receiving net proceeds of approximately $800,000 in March 2018 and $150,000 in April 2018. There is also currently an additional $86,000 of pending funds held by the escrow agent, subject to investor verifications and funds clearance; some or all of these funds may become available to the company at a future date. The company anticipates additional funds to be raised under the Regulation A Offering through the end of the 12-month qualification period which expires in September 2018, but the amount of these additional funds cannot be presently determined.

It also confirms they have continued to make big losses:

The company is a business that has not yet generated profits and has sustained net losses of $30,665,436 and $422,670 during the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, the company had net operating loss tax carry forwards of approximately $1,620,000 that may be offset against future taxable income through 2036. To date, revenues have not been sufficient to fund operations. Thus, until we can generate sufficient cash flows to fund operations, we are dependent on raising additional capital through debt and/or equity transactions.

Operating expenses in 2017 amounted to $31,217,801 compared to $1,001,531 in 2016. The largest component of the 2017 operating expense was the newly recognized stock-based compensation expense of $29,535,799. This amount is an estimate and relates to compensation given as stock-based awards, including stock options and restricted stock grants and is measured at fair value on the date of grant and recognized over the associated vesting periods. Without the stock-based compensation expense, our operating expenses in 2017 amounted to $1,682,002, which is an increase of $680,471 over the equivalent expense for the previous year.

And are now funding their operations with loans and capital contributed by OTD:

Also during the year ended December 31, 2017, the company obtained several short-term merchant loans totaling $240,000 with several lenders to be used to fund operations. These loans included origination fees totaling $17,480, ranging from 3.4% to 13%, of the amounts advanced. These loans are secured by expected future sales transactions of the company. During the year ended December 31, 2017, the company made payments of the origination fees and loan principal totaling $173,280. At December 31, 2017, the amounts owed under these arrangements was $84,200. These loans contain various financial and non-financial covenants. As of December 31, 2017, the company was in compliance with these covenants. The company continues to be in compliance with these covenants.

Subsequent to December 31, 2017, the company obtained additional merchant loans with similar terms as noted in the above paragraph totaling approximately $96,000 with several lenders to be used to fund operations.

During the year ended December 31, 2017, the company received advances of monies totaling $511,414 (the “Advances”) from Our Two Dogs, Inc. (“OTD”), an entity owned by Tom DeLonge, for working capital needs. The Advances didn't bear interest and were due on demand. During 2017, at OTD’s election, $463,414 of the Advances were treated as contributed capital and reclassified to additional paid-in-capital, with the remaining amount of the Advances of $48,000 due and payable to OTD as of December 31, 2017. During 2016, Advances made by OTD under the same arrangement and reclassified to additional paid-in-capital totaled $189,226, which included $6,042 of Advances reclassified from the 2015 year.

The maturity date of that $600,000 loan from OTD was extended by a year:

In April 2018, and with an effective date as of December 31, 2017, the Note with OTD was further amended to extend the Maturity Date to December 31, 2019, and to replace the provision regarding repayment of 10% of the net proceeds from any third party debt or equity financing from required to optional. All other terms and conditions on the Note as amended in August 2017 continue to apply.

The $100,000 minimum royalty to DeLonge was not paid yet but is marked as owed to him:

For the year ended December 31, 2017, the $100,000 due the DeLonge Parties for these royalties had not been paid and are included within Amounts Due Related Party on the accompanying consolidated financial statements.

Additionally, the investor count on the TTSA front page has finally been updated as well. It has decreased from 2969 to 2488, so it seems there were almost 500 investors who were either fake or cancelled their investments.